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Unum

(UNM) - Get Report

, the largest U.S. disability insurer, appears to be a healthy company.

Citigroup

(C) - Get Report

reiterated its "buy" recommendation of Unum last week while the government said it would provide bailout money to weaker insurers.

Fitch Ratings

a week earlier affirmed Unum's ratings with a positive outlook.

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Despite these reassurances, investors are concerned about the Chattanooga, Tenn.-based insurance company's financial performance linked to disability claims and reserves. And its business practices have tarnished the company's reputation.

Under the leadership of James F. Orr, Unum was rocked by scandals over the treatment of policyholders filing claims for disabilities. (Orr is now chairman of the Rockefeller Foundation as well as the compensation committee at

American International Group

(AIG) - Get Report

.)

Unum in 2005 reached a settlement with 49 states over allegations that it unfairly canceled or denied coverage to disabled customers. The insurer also suffered a setback by selling underpriced policies to professionals. Unum recently lost an appeal against a lower court finding that it had "arbitrarily" refused to pay a claim for disability benefits to a policyholder. As a result, the company's reputation hasn't improved.

Barron's

, the weekly financial-news magazine, reported in early March that Unum depletes its reserves to show higher profits. Reserves are adjusted annually to take into account pending claims and actuarial estimates of future claims.

"

Barron's

article is full of inaccuracies," says Jim Sabourin of Unum's corporate communications department, as a response to a request for information from TheStreet.com. "This is the third negative and highly speculative article in four years based on emotion rather than facts or logic."

Underestimating reserves would show up as losses if a company's forecasts are wrong. Of course, cutting payouts to claimants could offset those losses.

SNL Financial

has reported that Kevin McCarthy, head of Unum's U.S. unit, said during the insurer's first-quarter conference call that fewer workers may file disability claims during the recession.

Total reserves increased by $223 million in 2008 from a year earlier, though they're down $30 million since 2006. Policy reserves have fallen 4.5% since 2007. Reserves as a percentage of equity came to an unusually low 5.9%, compared with 12.3% for Unum's peer group.

The surplus available to policyholders was down by $96 million between 2007 and 2008, but the biggest movement was a drop of $573 million from 2006 to 2008. With the profits recorded each year, this is a massive depletion in capital and reserves.

Unum CEO Thomas Watjen told investors on the first-quarter call that he's "comfortable" with the company's capital position and the flexibility implied by its current capital ratios. Maybe he hasn't noticed that cash has dropped from $199 million in December 2007 to $50 million on March 31, 2009.

Nonetheless, the company's Provident Life and Accident unit requires $33.6 million and Paul Revere Life needs $2.1 million to meet TheStreet.com Ratings' capital estimates for all policyholder claims during an extended, severe recession. Unum's other five insurers exceed the required capitalization targets.

Unum's stock has risen 10% in the past month, half that of the

S&P 500

life insurance index. Its price-to-earnings ratio is 6.37 compared with 9.16 for the industry group.

Unum has a dividend yield of 1.79%, below the 2.43% of

MetLife

(MET) - Get Report

and 3.17% of

Allstate

(ALL) - Get Report

.

The price-to-book ratio, excluding impairment accounting for certain investments, is 75.4%, higher than MetLife's 70.9%,

Genworth's

(GNW) - Get Report

17.5% and

Hartford's

(HIG) - Get Report

31.2%.

Unum's earnings are either too good to be true or the company has its act together. The insurer's stock was upgraded to a B-minus, or "buy," by TheStreet.com last week. Investors may not want to give the company the benefit of the doubt, though.

To be sure, money will be made by betting on a rebound in insurers. But why not just buy shares of MetLife?

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.