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STATE OF MAINE
DEPARTMENT OF PROFESSIONAL & FINANCIAL REGULATION
BUREAU OF INSURANCE

 

BACKGROUND AND PROCEDURAL HISTORY

This matter is before the Superintendent of Insurance as a result of the filing on January 1, 1999 of an application by Provident Companies, Inc. and Hugh O. Maclellan, Jr. (hereinafter, the "Applicants"). The application seeks the approval, pursuant to 24-A M.R.S.A. §§222 and 3476, of the Applicants’ plan to acquire control of UNUM Life Insurance Company of America (hereinafter, "UNUM Life") by merger of Provident Companies, Inc. (hereinafter, "Provident") with UNUM Corporation (hereinafter, "UNUM"), the ultimate holding company for UNUM Life. Following the merger, Provident will be the surviving corporation and will be renamed UNUMProvident Corporation. After the acquisition of control, UNUMProvident will directly own all of the issued and outstanding common stock of UNUM Holding and will indirectly own 82.72% and directly own 17.28% of the issued and outstanding common stock of UNUM Life.

Immediately prior to the effective time of the merger and resulting acquisition of control, there will be a reclassification and conversion of each share of common stock of Provident then issued and outstanding into 0.73 of a share of Provident common stock. At the effective time, there will be a conversion of each share of common stock of UNUM issued and outstanding immediately prior to the effective time (excluding shares held by UNUM or Provident other than shares held on behalf of third parties) into one share of UNUMProvident common stock. At the effective time, the shares of Provident common stock will not be further affected but will thereafter be shares of UNUMProvident common stock. Provident stockholders will receive only a whole number of shares of UNUMProvident common stock and will be entitled to receive a cash payment for any fractional shares arising from the reclassification and merger.

Following the filing of the application, a Notice of Pending Proceeding and Prehearing Conference was published twice in the five daily newspapers in the State of Maine as well as the Wall Street Journal (Asian edition) and the Financial Times of London. The Superintendent of Insurance issued his First Discovery Request on February 2, 1999. On February 4, 1999, a request for intervention was received from Jason Adkins, Esq. on behalf of George E. Ginther and Niagara Financial Services Incorporated (hereinafter, "Niagara"). The law firm of Troutman and Sanders filed a request for intervention on behalf of Alan E. Serby on February 8, 1999.

The first prehearing conference was held, as scheduled, on February 8, 1999. On February 17, 1999, the Superintendent appointed a Bureau of Insurance Staff Advocacy Panel to assist in the review of this transaction.¹ The Advocacy Panel was granted full party status and charged with the responsibility of obtaining information sufficient for the Superintendent to make a reasoned and fair decision. A telephone conference was scheduled for February 17, 1999 to consider the pending Motions for Intervention. At the request of counsel for Mr. Ginther and Niagara, however, the conference was rescheduled to February 24, 1999. After consideration of the arguments presented during the February 24^th telephone conference, the Superintendent denied the pending requests for intervention. See Order Denying Intervention issued March 2, 1999.

¹The members of the Advocacy Panel appointed by the Superintendent were Nancy Johnson, Deputy Superintendent, Joel Thomsen, Director of Financial Examination, Lisa Nelson, Examiner in Charge, and Richard Diamond, F.S.A., Life & Health Actuary

A second prehearing conference was noticed on March 16, 1999. The conference was held, as scheduled, on March 26, 1999. On April 15, 1999, a request for intervention was filed by Jason Adkins, Esq. on behalf of Frederick C. Berry, Jr. Intervenor status was granted Mr. Berry on April 23, 1999. That same day, a Notice of Hearing was issued establishing the hearing date as June 21, 1999. All parties requested that the date of the hearing be changed. After a conference of counsel at which oral argument was taken regarding the date for hearing, the Superintendent rescheduled the hearing for June 14, 1999 with June 15 and 16 reserved, if needed. An Amended Notice of Hearing was issued April 29, 1999.

The Superintendent received additional requests for intervention from Dr. John Bussell, Dr. Judy Morris and Dr. Letantia Bussell on May 12, 13, 14, and 18, 1999, respectively. Requests were received from Debra L. Fisher and Dr. Steven Grahek on May 18, 1999. All five requests were granted. In granting the requests, the Superintendent ordered the Intervenors to coordinate their efforts and make single, comprehensive filings. The coordination was required in order to avoid repetition and undue delay.

A third prehearing conference was held on May 27, 1999 to address various motions, requests, and responses. The numerous discovery and procedural requests filed in this proceeding, along with the Orders issued relative to the motions and requests, are part of the record and are on the file at the Bureau of Insurance.

The hearing was held, as scheduled, on June 14 and 15, 1999. As provided for in the Notice of Hearing, the first two hours of the hearing were reserved for public comment and participation. Provident, UNUM, and the Bureau of Insurance Advocacy Panel appeared at and participated in the hearing. None of the Intervenors, personally or through counsel or other representative, appeared at or participated in the hearing.²

²Dr. Judy Morris appeared during the public comment period and gave an unsworn statement but left the premises prior to the evidentiary portion of the hearing. Jason Adkins, Esq. appeared prior to the public comment period. Mr. Adkins left the premises before the public comment period commenced.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Superintendent of Insurance is required by 24-A M.R.S.A. §222 (7)(A) to hold a hearing on an application for approval of the acquisition and control of a domestic insurance company within thirty days of the filing of the application. An application is considered "filed" once it has been deemed "complete" by the Superintendent. After receiving a recommendation of completeness from the Advocacy Panel, the Superintendent found the pending application complete as of June 3, 1999.

After the conclusion of the hearing on the application for approval, the Superintendent is required to issue a decision on the application within thirty days. In making his decision, the Superintendent shall approve any acquisition unless he finds that:

1. After the change of control, the domestic insurer could not satisfy the requirements for the issuance of a certificate of authority according to requirements in force at the time of the issuance, or last renewal or continuation of its certificate of authority to do the insurance business which it intends to transact in this State;
2. The effect of the purchase, exchange, merger of a controlling person of the insurer, or other acquisitions of control may be substantially to lessen competition in insurance in this State or tend to create a monopoly therein; or would violate the laws of this State or of the United States relating to monopolies or restraints of trade;
3. The financial condition of an acquiring person is such as would jeopardize the financial stability of the insurer or prejudice the insurer or its policyholders;
4. The plans or proposals which the acquirer has to liquidate the insurer, to sell its assets or to merge it with any person, or to make any other major change to its business or corporate structure or management, is unfair or prejudicial to its policyholders;
5. The competence, experience and integrity of those persons who would control the operation of the insurer indicate that it would not be in the interest of policyholders or the public to permit them to do so;
6. Any party to an agreement to merge with a domestic insurer is not itself an insurer; or
7. The acquisition of control would tend to affect adversely the contractual obligations of the domestic insurer or its ability and tendency to render services in the future to its policyholders and the public.

In addition to the requirements of 24-A M.R.S.A. §222 (7)(A), the Superintendent shall not approve the change of control if he finds:

1. That the proposed new owners are not qualified by character, experience and financial responsibility to control and operate the insurer or cause the insurer to be operated in a lawful and proper manner; or
2. That as a result of the proposed change of control the insurer may not be qualified for a certificate of authority under §407 (ownership, management); or
3. That the interests of the insurer or other stockholders of the insurer or policyholders would be impaired through the proposed change of control; or
4. That the proposed change of control would tend materially to lessen competition, or to create a monopoly, in a business of insurance in this State or elsewhere.

See 24-A M.R.S.A. §3476.

At the hearing held on June 14 and 15, 1999, the Superintendent accepted evidence and arguments for the Applicants and the Bureau of Insurance Staff Advocacy Panel. The Intervenors voluntarily chose not to present any testimony or documentary evidence at the hearing. Nonetheless, the Superintendent entered the prefiled testimony of Intervenors Berry, Bussell and Morris into the record as hearing officer exhibits in order to have some of the information produced by the Intervenors in the record.

OVERVIEW OF TRANSITION AND INTEGRATION

Since the merger was announced in November 1998, UNUM and Provident have been engaged in an effort to prepare the transition from two separate corporate enterprises into a form that, operationally speaking, will function as one integrated entity. The responsibility for overall transitional strategy and ongoing transition oversight has been vested in a Policy Group comprised of six senior executives.³ A fundamental goal of the transition project is to identify the "best practices" of either organization as the standard for the new entity. UNUM’s basic operational structure will be organized around functions or "centers of expertise" such as finance, investments, underwriting, claims, product management and customer services rather than on a product line basis as is currently the case. Applicants’ Exhibit 17, pp. 11-14. UNUM and Provident have determined to enter into a General Services Agreement and an Investment Advisory Agreement. Applicants’ Exhibits 10 and 11 provide agreements between Provident and the Paul Revere Life Insurance Company analogous to those to be utilized in this transaction. For example, processing of benefit claims will be handled on an integrated basis regardless of whether a claim is made under a group or individual insurance policy of Provident Life and Accident Insurance Company, Paul Revere Life Insurance Company or UNUM Life Insurance Company of America and investments for all insurers in the group will be handled by Provident Investment Management, LLC.

³The policy group consists of three current UNUM employees, James F. Orr, Elaine D. Rosen and Robert Crispin and three current Provident employees, J. Harold Chandler, Dean Copeland, and Thomas R. Watjen. See Applicants’ Exhibit # 17.

Once the Policy Group decided to pursue an integrated approach, underlying project teams were established in each operational area to develop the structural details necessary to carry out the objectives. Generally, this has led since November 1998 to a progressively more detailed "blueprint" of what the UNUMProvident group of companies will look like, including the development of company policies and procedures and decisions on personnel retention. Testimony was provided at hearing that UNUM and Provident are "right on schedule" with respect to those arrangements that need to be in place on or prior to what the companies refer to as "customer day one" (30 days after the closing of the merger). Transcript of 6/14/99 hearing at 173-174; Applicants’ Exhibit #17.

The proposed post merger changes in operational structures also include a number of personnel decisions. The record indicates that the companies anticipate the elimination of approximately 1,600 positions before December 31, 2000, but also anticipate the addition of 500 positions in the claims area during the same period. It is represented that a large percentage of the staff reduction will be accomplished through attrition and early retirement and that layoffs will be minimal. Applicants’ Exhibit # 18

The manner in which UNUM and Provident propose to integrate the companies is relevant to a number of the statutory standards to be considered by the Superintendent. Based upon the evidence adduced at the hearing, the Superintendent’s analysis of the statutory standards is as follows:

1. Whether, after the change in control, UNUM Life can satisfy the requirements for the continuance of its certificate of authority to do the insurance business which it intends to transact in Maine.⁴

   ⁴This standard encompasses both the first standard under 24-A M.R.S.A. §222(7) and under 24-A M.R.S.A. §3476.

   UNUM Life currently is authorized in the State of Maine to transact the following lines of insurance: life (including credit life), health (including credit health), variable annuity, workers compensation, and aircraft (all perils). No evidence has been presented to show that any aspect of the proposed acquisition will affect UNUM Life’s ability to continue to satisfy the requirements for its certificate of authority.

2. Whether the effect of the merger of Provident and UNUM and the resulting acquisition of control of UNUM Life may be to lessen substantially competition in insurance in Maine or tend to create a monopoly therein, or would violate the laws of Maine or the United States related to monopolies or restraints of trade; or would tend materially to lessen competition, or to create any monopoly in a business of insurance in Maine or elsewhere. ⁵

   ⁵This standard encompasses both the second standard under 24-A M.R.S.A. §222 (7) and the fourth standard under 24-A M.R.S.A. §3476.

   The Applicants presented the testimony of Dr. Monica G. Noether, Vice President with Charles River Associates, an economic consulting firm in Boston, Massachusetts. Dr. Noether testified that her charge on behalf of the Applicants was to "assess the likely competitive effects the merger would have and to outline findings in the report" which had been submitted as evidence. See June 14, 1999 transcript, page 145, lines 14-18.

   In any antitrust analysis the initial determinations to be made are: what is the relevant geographic market and what is the relevant product market. In Dr. Noether’s opinion, the correct geographic market is a national market. The basis for her conclusion is her belief that nationally significant insurance companies are "registered in all states" and that state licensing requirements are similar. Applicants’ Exhibit #20. Further, Dr. Noether pointed out that premiums for both individual and group disability insurance are generally established nationally. No evidence contradicting Dr. Noether’s assessment of the geographic market was presented. On the contrary, evidence was presented indicating the United States Federal Trade Commission (FTC), in conducting its review, utilized a national market.⁶ The Superintendent finds the relevant geographic market to be a national market.

   ⁶The United States Federal Trade Commission undertook a review of the proposed merger of UNUM and Provident based upon the FTC’s belief the merger could be in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. §18, and Section 5 of the Federal Trade Commission Act, 15 U.S.C. §45. A copy of the FTC Complaint In the Matter of Provident Companies, Inc. and UNUM Corporation was admitted into evidence as Advocacy Panel Exhibit #19.

   The second inquiry is to define a relevant product market. Dr. Noether concluded the most relevant product market relative to this merger is all privately-sponsored long term disability insurance. Dr. Noether testified that all private disability insurance is the appropriate product market for several reasons. First, she believes the demarcation between individual and group disability products has been "blurring" as movement is made toward integrating products. Additionally, Dr. Noether stated people who historically have purchased individual disability policies, such as doctors and attorneys, are now becoming employees and have access to group policies. Self-employed persons, according to Dr. Noether, often purchase policies through professional groups.

   On cross-examination, Dr. Noether agreed that the FTC defined the relevant product market as individual disability but, for the reasons indicated above, she disagreed with that conclusion. In discussing the individual marketplace during cross-examination, Elaine Rosen, President of UNUM Life, also testified that there is a blurring of the individual and group disability markets. Unlike Dr. Noether, however, Ms. Rosen sees the blurring resulting from employees, who previously were part of a group, now working in partnerships, sole proprietorships, or in consulting roles.

   The Superintendent is not persuaded that all private disability is the relevant product market for analysis of the pending merger. Based upon the inconsistencies between Dr. Noether’s and Ms. Rosen’s testimony, as well as the conclusion of the FTC, the Superintendent finds the relevant product market to be individual disability insurance.

   After considering the relevant geographic and product markets, the next step in the Federal Merger Guidelines is to calculate overall market concentration utilizing the Herfindahl-Hirschman Index (the "HHI"). Since the Superintendent finds the relevant product market to be all individual disability, it is Dr. Noether’s calculation for that line of business that is given the greatest weight. Dr. Noether calculated the HHI resulting in a figure of 1,349. That number is within the "moderately concentrated" range. The FTC, on the other hand, found the relevant markets to be "highly concentrated" as calculated under the HHI. See Advocacy Panel Exhibit #19 (FTC Complaint).

   Whether the markets are found to be moderately or highly concentrated, the next step in the merger guideline analysis is to assess the ease of entry into the market. Dr. Noether’s assessment was that as long as the product market is profitable, "there is no shortage of potential entrants into the market." See Prefiled Testimony of Dr. Monica Noether, Applicants’ Exhibit #20. The existence of companies currently writing some disability insurance coupled with existing companies selling complementary products formed, in part, the basis for Dr. Noether’s opinion. Moreover, Dr. Noether relied upon her perception, as noted previously, that the distinction between individual and group products is "blurring". This results in what she described as a "dynamic" market.

   The complaint of the FTC, however, states barriers to entry and expansion in the relevant markets do exist. The FTC notes that the merger of UNUM and Provident will result in a substantial amount of individual disability claims data being possessed by the surviving corporation. UNUMProvident will have little incentive to share such data since it can be used by existing competitors to expand and by potential competitors to enter the market. Thus, the FTC has entered into a consent agreement with UNUM and Provident requiring UNUMProvident to supply specified data at the request of the Society of Actuaries, the National Association of Insurance Commissioners, or its designee. The consent agreement is still in the public comment period.

   The Superintendent is skeptical as to Dr. Noether’s assertions that the merger of UNUM and Provident is not likely to affect ease of entry into the market. It is more likely that entry, as well as expansion, could be stifled through the refusal of UNUMProvident to share pertinent data. The Superintendent finds the remedy to the potential barrier fashioned by the FTC appropriate. Thus, the standard regarding competition is met by operation of the FTC Consent Agreement and Order. The Applicants, and ultimately UNUMProvident, are required to notify the Superintendent in writing of any changes made to the consent agreement and to file a copy of the final consent order and agreement issued by the FTC. Further, UNUMProvident shall notify the Superintendent in writing any time it is requested to provide individual disability claims data pursuant to the FTC Order.

3. Whether the financial condition of the Applicants is such as would jeopardize the financial condition of UNUM Life or prejudice the interest of policyholders.

   Provident Insurance Companies’ total capital and surplus as of December 31, 1997 was $1.4 billion. By the end of 1998, total capital and surplus increased 3.6% to $1.45 billion. The company’s net income before dividends for 1997 was (redacted). In 1998, this amount grew to (redacted), which represents an increase of (redacted) over the one year period. Provident Insurance Companies paid dividends of $111.9 million in 1997 and $136.9 million in 1998. Net income after dividends was (redacted) for 1997 and (redacted) for 1998. See Advocacy Panel Exhibit #24. Provident Insurance Companies’ capital and surplus position, profitability, and dividends demonstrate that the companies are not in such financial condition as would jeopardize the financial condition of UNUM Life or prejudice the interests of the policyholders. This is further evidenced by Provident Insurance Companies receipt of ratings categorized as excellent by the primary rating organizations. Applicants’ Exhibit 16, 18.

   During the hearing, the Advocacy Panel presented a report prepared by the firm of Arthur Andersen LLP, which the Advocacy Panel had retained to assist it in this proceeding. Arthur Andersen’s risk based capital standards analysis of Provident Life projected their RBC ratio, as of December 31, 1998, (redacted) (the RBC ratio is defined as the adjusted capital to the company action level).⁷ See Advocacy Panel Exhibit #24. In its report, Arthur Andersen concludes that this level is (redacted).

   ⁷Risk Based Capital as indicated in the Arthur Andersen report "represents a dynamic approach to regulatory measurement of capital adequacy of life and health insurers". RBC is the amount of capital needed to absorb the financial, underwriting and investment risks assumed by an insurer.

   Provident Insurance Companies will incur approximately (redacted) of the pre-tax merger-related charges in 1999. These expenses are comprised of employee related expenses such as severance costs, restricted stock costs and outplacement costs, early retirement offers, and exit costs for duplicate facilities and asset abandonment. See Advocacy Panel Exhibit #24. Other than the merger-related expenses, Provident will incur an insignificant amount of expense to compensate shareholders for cash in lieu of fractional shares in the amount of less than $750,000. These amounts will be paid out of existing cash on hand. See Applicants’ Exhibit #17.

   Pre-tax merger-related expenses for 1999 for UNUM Insurance Companies’ total (redacted) of the total expenses. See Advocacy Panel Exhibit 24. These expenses are consistent with the expense categories Provident insurance companies are expected to incur.

   Total pre-tax merger-related expenses for UNUMProvident are expected to be (redacted) for 1999. (redacted) are incurred at the combined entity level and include investment banking, legal, and accounting fees. The rest of the expenses are allocated between UNUM insurance companies and Provident insurance companies. Expected savings for UNUM America are (redacted) and (redacted) for Provident Life for a total of (redacted) pre-tax merger savings for 1999. These savings are expected to (redacted) in 2000 and (redacted) in 2001. See Advocacy Panel Exhibit #24. However, given the inherent variability in projections of this nature, it will be necessary to monitor the projected expenses and savings to actual results.

   Once the merger is consummated, approximately 58% of the UNUMProvident shares are expected to be owned by former UNUM stockholders while 42% will be owned by former Provident stockholders. See Applicants’ Exhibit #4. UNUMProvident Insurance Companies’ total capital and surplus, exclusive of merger costs and savings would have been (redacted) as of December 31, 1998. Net income after dividends would have been(redacted).

   As previously stated, Provident insurance companies have received ratings denoted as excellent from the primary rating organizations. UNUM insurance companies ratings are denoted as superior. The ratings have been placed under review due to the pending merger. It is anticipated that the ratings of UNUMProvident will fall between the excellent and superior categories. See Applicants’ Exhibits #16, 17, and 18.

   Although the record supports a finding that the financial condition of the Applicants does not jeopardize the financial stability of UNUM or prejudice the interest of UNUM’s policyholders, the record does not contain a consolidated business plan for the combined companies.

4. Whether the Applicants have any plans or proposals to liquidate UNUM Life, to sell its assets or to merge it with any person, or to make any other major change in its business or corporate structure, or management which are unfair or prejudicial to policyholders.

   Provident Companies and Hugh O. Maclellan, Jr. state in their Form A Application that, "The Applicants have no present plans or proposals to have the Acquired Insurer declare any extraordinary dividends, to liquidate the Acquired Insurer, to sell the Acquired Insurer’s assets (other than such sales of assets as may be contemplated in the ordinary course of the Acquired Insurer’s business) or to merge the Acquired Insurer with any person or persons or to make any material change in the Acquired Insurer’s business operations or corporate structure or management of the Acquired Insurer (other than what is described above)." Applicants’ Exhibit #1.

   In his prefiled testimony, J. Harold Chandler, Chairman, President and Chief Executive Officer of Provident Companies, states, "We have no plans to merge UNUM Life into any Provident Companies or vice versa." Applicants’ Exhibit #16 page 16.

   In addition, Thomas Ros Watjen states in his prefiled testimony, "The proposed merger does not involve any plans to liquidate UNUM Life, to sell its assets or merge it with any entity (other than sales or dispositions in the ordinary course of business) or to make any major change in its business or corporate structure or management that would be unfair or prejudicial to policyholders of UNUM Life." Applicants’ Exhibit #17, p. 25. The affect of the significant changes to structure and management on policyholders is discussed below.

   5. Whether the competence, experience and integrity of the Applicants would not be in the interest of policyholders or the public to control the operation of UNUM Life. Whether Applicants’ are qualified by character, experience and financial responsibility to control and operate UNUM Life or cause to be operated in a lawful and proper manner.

   The Applicants contend that they have demonstrated compliance with these standards through the testimony of Thomas Ros Watjen and Applicants Exhibits 1 (at Tabs 14-16) and Exhibits #2, 3 and 4. This evidence provides biographical affidavits for Mr. Maclellan, executive officers and senior managers contemplated for UNUMProvident. This evidence also demonstrates that experienced managers have been selected by the Policy Group and are in place for all major operating units or divisions of UNUMProvident.

   Nothing in the evidence or testimony suggests other than that UNUMProvident has assembled a management team qualified by many years of education, training and experience in the insurance business and in other industries to operate the UNUMProvident Companies. No challenge or assertion to such a finding has been proffered by the Advocacy Panel. No credible, sworn testimony or evidence that calls into question the qualifications and integrity of the individuals who will operate UNUMProvident has been presented. Therefore, the Superintendent finds that the Applicants have satisfied the requirements of 24-A M.R.S.A. §222(7)(A)(5).

5. 6. Whether any party to an agreement to merge with a domestic insurer is not itself an insurer.

   Inasmuch as this transaction represents an agreement to merge two holding companies and does not reflect a merger with a domestic insurer, this standard does not apply.

6. Whether the proposed acquisition of control by merger would tend to affect adversely UNUM Life’s contractual obligations or its ability and tendency to render services in the future to its policyholders and to the public. Whether the interests of UNUM Life, its stockholders or policyholders would be impaired through the proposed change of control.

   It is clear from the testimony the Applicants and UNUM contemplate that, as a result of the merger, there will be significant changes in many operational areas of UNUM that may be described as having policyholder implications. The issue for the Superintendent, however, is not simply whether change will occur, but rather whether or not that change will be detrimental to policyholders.

   UNUM not only contends that the transition will not be detrimental to policyholders, but postulates a scenario wherein policyholders will greatly benefit from the transaction. See Applicants’ Exhibits #4 (at pp. 2, 38-41) and #19 (at pp. 12-16); Transcript of June 14, 1999 hearing at pp. 95-98; 104-105, and 160-166. During cross-examination, Elaine Rosen noted that the first and foremost benefit to policyholders was a "strong, highly-competitive insurance company." She then described how UNUMProvident will be able to provide a broader, more competitive product portfolio for broader markets, enhanced services for return to work and return to life activities, expanded customer service and expanded claims service. Transcript of June 14, 1999 hearing at pp. 160-161.

   In her prefiled testimony, Ms. Rosen identified the "guiding principles" of UNUMProvident’s disability claims process. Specifically, Ms. Rosen testified that four [sic] fundamental objectives support these principles: "integrity in all of our decisions, providing high quality customer service, coordinating a return to work, return to life focus, and fully integrating all of the claims activity for those customers who chooses to purchase multiple products." Applicants’ Exhibit 19 at 14 and 15. Ms. Rosen went on to verify that UNUMProvident will "implement the best practices in all that we do to support these key guiding principles." Id.

   On the other hand, Counsel for the Bureau of Insurance Advocacy Panel, in his opening statement, noted "the intervenors have some doubts about any benefit to policyholders from this proposed merger, and the Advocacy Panel believes that considerable work needs to be done, particularly by Provident Life, in the way that complaints and claims are handled and policyholders are treated. The panel is concerned that the needs and rights of policyholders may fall victim to the vigorous return-to-work philosophy developed by Provident Life and to be the cornerstone of the UNUMProvident’s integrated claims operation. In particular, the Panel wonders whether return-to-work plans may require seeking appropriate treatment that has not been recommended by the claimant’s care providers and is not covered by a claimant’s health insurance." Transcript of June 14, 1999 hearing at p. 72.

   Counsel continued that " (t)he Panel, by letter dated June 11, 1999 expressed its opinion that there did not appear to be any reasons to preclude the merger from going forward. Nevertheless, the Panel has recommended that the Superintendent…undertake a market conduct examination to evaluate the impact of the integration on policyholders and claimants." Id at 72-73.

   Arthur Andersen, at the request of the Advocacy Panel, performed a limited scope review of Provident’s complaint and claims handling practices excluding the Paul Revere Companies. Areas reviewed included claims and complaint handling, appeal procedures, customer service, compliance audits, and a review of market conduct examinations conducted during the last five years. Arthur Andersen also reviewed trends relating to complaints, appeals, reopened claims, and lawsuits filed for both UNUM and Provident in recent years. Exhibit A to Advocacy Panel Exhibit #24. The Andersen report notes several areas of concern with aspects of Provident’s compliance program with respect to market conduct and claims issues. Advocacy Panel Exhibit #24 at 54-63; Exhibits A-D and Confidential Exhibit E to Advocacy Panel Exhibit #24.

   While Arthur Andersen does not suggest that any of the concerns noted are sufficient to create an impediment to the merger, it did recommend a market conduct examination of UNUMProvident within 12-18 months of the merger. The report also contains a list of ten specific recommendations. Advocacy Panel Exhibit #24 at p. 63. The Applicants did not dispute any of the findings and recommendations of the Andersen report.

   While the Advocacy Panel directed various questions regarding market conduct and claims issues to the Applicants’ witnesses during cross-examination, no substantial evidence was developed at the hearing which would support a finding that the merger would be detrimental to policyholders in terms of UNUM’s ongoing ability to fulfill its contractual obligations to policyholders.⁸

   ⁸Prefiled testimony was submitted by Intervenors Frederick C. Berry, Jr., John and Letantia Bussell, M.D.s, and Judy Morris, M.D. Hearing Officer Exhibits 1,2 and 3, respectively. While all of the testimony asserts improper claims practices by either UNUM or the Provident companies, Mr. Berry and Drs. Bussell did not appear at hearing to aver to their testimony. Dr. Morris read an unsworn statement into the record during the public comment portion of the hearing, but declined to be placed under oath or to be subject to cross-examination. She also was not present at the appropriate time in the hearing to aver to her prefiled testimony for reasons described elsewhere in this decision. While unsworn comments may be placed on the record of proceeding, they may not serve, under Maine law, as a basis for decision by the Superintendent. 5 M.R.S.A. Section 9057.

FAIRNESS TO SHAREHOLDERS

Title 24-A M.R.S.A. Section 3476 (2)(C) provides that the Superintendent shall not approve a proposed change of control of a domestic insurer if he finds that "the interests of the insurer or other stockholders of the insurer or policyholder would be impaired through the proposed change of control." With respect to the question of the fairness of the merger to shareholders of UNUM, the Merger Agreement provides that at the effective time of the merger, each share of UNUM common stock that is owned by Provident or UNUM (and in each case not held on behalf of third parties) shall automatically be canceled and retired and cease to exist, and no consideration shall be delivered for any such shares. With respect to all other shares of UNUM common stock, the Merger Agreement contemplates a "one for one" stock swap of UNUM common stock for UNUMProvident common stock. UNUM retained the firm of Morgan Stanley & Co., Inc. as its financial advisor in connection with the merger and related transactions. On November 22, 1998 Morgan Stanley provided a written opinion that, based upon and subject to terms and conditions expressed in its opinion, the transaction contemplated by the Merger Agreement is fair from a financial point of view to holders of shares of UNUM common stock. Appendix F to Applicants’ Exhibit #4.

A special meeting of stockholders of UNUM Corporation has been scheduled for June 30, 1999. The purpose of this special meeting is for the stockholders to consider and vote upon the proposed Agreement and Plan of Merger. A Form S-4 Registration Statement regarding this matter has been accepted for filing by the United States Securities and Exchange Commission. This Registration Statement sets forth substantial information to be provided to shareholders regarding the transaction.

Insofar as the opinion expressed by Morgan Stanley in its November 22, 1998 letter is uncontroverted on the record and UNUM has satisfied SEC requirements, the Superintendent finds no basis to conclude that the transaction is unfair to shareholders of UNUM.

CONCLUSIONS OF LAW

After having reviewed the record in this proceeding, the Superintendent concludes that the Applicants have met the standards of 24-A M.R.S.A. §§222 and 3476. The Superintendent is concerned that certain aspects of the integration and operation of the merged companies require specific regulatory oversight. Therefore, the proposed acquisition of control of UNUM Life of America by merger of UNUM Corporation and Provident Companies, Inc. should be approved with certain conditions.

ORDER

The application of Provident Companies, Inc. and Hugh O. Maclellan, Jr. to acquire UNUM Life of America by merger of Provident Companies, Inc. and UNUM Corporation is hereby APPROVED subject to the following conditions:

1. UNUMProvident Corporation:
   1. Shall file a consolidated business plan with the Superintendent by December 31, 1999, for the period 2000-2002;
   2. Shall file with the Superintendent a dividend plan for UNUMProvident Corporation prior to the declaration of any dividends, but no later than December 31, 1999. Such dividend plan may be included in the consolidated business plan;
   3. Shall notify the Superintendent in writing of any changes made to the Consent Agreement entered into with the FTC as well as the FTC Consent Order;
   4. Shall notify the Superintendent in writing any time it is requested to provide individual disability claims data pursuant to the FTC Order; and
   5. Shall prepare and file with the Superintendent written claims procedures and appeals procedures manuals and a written plan specifying which procedures will be instituted to enhance market compliance. In light of the uncontested Arthur Andersen report, the Superintendent expects the plan to include those items identified in the report. The plan and manuals shall be filed no later than 6 months from the issuance of this decision and order. Nothing contained in this condition limits the Superintendent’s ability to call a market conduct examination at any time.
2. UNUM Life Insurance Company of America:
   1. In its statutory quarterly reports to the Superintendent shall identify, quantify, and track actual merger savings and expenses and compare the actual savings and expenses to the estimates provided in the UNUM Life business plan filed as Applicants’ Exhibit # 14;
   2. Shall file with the Superintendent quarterly updates on UNUM Life progress with respect to its plans on the claims inventory as well as a status each quarter on the claims integration activities and reserves. These reports shall also include a claims litigation status report;
   3. In its second quarter statutory report for 1999, shall file with the Superintendent an analysis of its change in GAAP and statutory disability life reserves interest rate assumptions, such analysis to include a report of the actual effect of the change on investment strategy;
   4. Shall file a copy of a custodial agreement between itself and the custodian of UNUM Life’s corporate securities along with affidavits evidencing ownership of the securities any time UNUM Life changes its existing custodial arrangements; and
   5. Shall obtain approval of the Superintendent as is required by 24-A M.R.S.A. §3415, prior to borrowing any funds supported by a surplus debenture.
3. General Conditions:
   1. When conducting an examination of UNUM Life, the Bureau of Insurance, or its designees, shall be given complete access to the accounts, records, documents, and transactions pertaining to or affecting the affairs of UNUM Life whether in the possession of UNUM Life or UNUMProvident. Nothing in this condition affects the prohibition contained in 24-A M.R.S.A. §3408 against removing all or a material part of the records or assets of UNUM Life from Maine.
   2. To the extent Bureau staff or the Bureau’s consultants or designees are required to examine records in a location other than Portland, Maine, the Bureau of Insurance shall be reimbursed the actual cost of such examination.
   3. The Applicants shall file with the Superintendent any decisions and/or orders of other state, federal or foreign regulatory entities with respect to this transaction.
   4. Provident and UNUM shall submit independent audit opinions concerning the qualification of the merger for the pooling of interests method of accounting.
   5. Provident and UNUM shall submit legal opinions from their counsel upon their issuance regarding the qualification of the tax-free reorganization.

NOTICE OF APPEAL RIGHTS

This Decision and Order is a final agency action of the Superintendent of Insurance within the meaning of the Maine Administrative Procedure Act. It is appealable to the Superior Court in the manner provided in 24-A M.R.S.A. §236, 5 M.R.S.A. § 11001, et seq. and M.R. Civ. P. 80C. Any party to the hearing may initiate an appeal within thirty days after receiving this notice. Any aggrieved non-party whose interests are substantially and directly affected by this Decision and Order may initiate an appeal within forty (40) days of the issuance of this decision. There is no automatic stay pending appeal; application for stay may be made in the manner provided in 5 M.R.S.A. §11004.

PER ORDER OF THE SUPERINTENDENT OF INSURANCE

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