Fitch Ratings has affirmed Unum Group Inc.'s (NYSE:UNM) holding company
ratings, including the senior debt rating at 'BBB'. In addition, Fitch
affirms the Insurer Financial Strength (IFS) ratings for of all of UNM's
domestic operating subsidiaries at 'A'. The Rating Outlook is Stable. A
full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating rationale includes the following: UNM's overall operating
performance, which has remained strong despite continued adverse global
economic conditions; conservative investment portfolio; solid capital
and liquidity at both the insurance subsidiary and holding company
levels; the company's leadership position in the U.S. employee benefits
market; and increased diversification. Offsetting these positives are
Unum U.K.'s somewhat stagnant recent results and continued challenges
UNM faces in managing its run-off long-term care book of business,
particularly in the current low interest rate environment.
The Stable Outlook reflects Fitch's belief that while UNM's premium
growth and operating margins continue to be challenged by the weak
economic environment and competitive market conditions, the company's
overall profitability will continue to support the current rating.
Operating margins in UNM's U.S. disability business have held up better
than Fitch's expectations, and they have favorable relative to the
company's peers. The company has been experiencing an improving trend in
the benefit ratio of its core U.S. group disability income business over
the past year and a half, which has helped support the company's overall
profitability.
While Unum U.K. results have shown deterioration, particularly within
the group life segment, the company has taken steps to improve results
going forward including implementing significant rate increases and
claims management improvements while reducing its focus on the large
case market. Unum U.K. also entered into a 50% coinsurance arrangement
effective Jan. 1, 2013 designed to reduce earnings volatility and
capital requirements. While these measures appear to have halted
deterioration in the unit's operating profitability, persistency has
suffered, particularly in the U.K. group life segment.
During 2013, UNM repurchased $319 million of its shares, down from $501
million in 2012. Fitch's expectation is that further share repurchases
will be funded through operating earnings to mitigate the impact on
financial leverage and the capitalization of the operating subsidiaries.
Further, Fitch generally views measured stock repurchase as a more
prudent use of capital than acquisitions or premium growth in a soft
rate environment.
UNM's financial leverage was 25% at March 31, 2014. Fitch considers the
company's debt service capacity to be strong for the rating level with
GAAP earnings based interest coverage of 9.5x in 2013. Holding company
liquidity, including an intermediate holding company, totaled $820
million at March 31, 2014. UNM reported consolidated risk-based capital
of its U.S. insurance subsidiaries 403% at Dec. 31, 2013, which is at
the high end of management's near to intermediate term target of 375% -
400%.
RATING SENSITIVITIES
The key rating triggers that could lead to an upgrade include:
--Improved general economic conditions including a growth in employment,
salaries and disposable income which enable UNM to achieve its long-term
target of 5% - 7% annual earnings growth on its core operations.
--GAAP earnings-based interest coverage over 12x and statutory maximum
allowable dividend coverage of interest expense over 5x.
--U.S. risk-based capital ratio above 400% and run-rate financial
leverage below 20%.
Key rating triggers that could lead to a downgrade include:
--Deterioration in financial results that includes an increase in the
U.S. group disability benefit ratio over 87%, GAAP earnings-based
interest coverage falling below 8x, and statutory maximum allowable
dividend interest expense coverage falling below 3x. --Any additional
reserve strengthening charges in the near term;
--Holding company cash falls below management's target of approximately
1x fixed charges (interest expense plus common stock dividend), or
roughly $290 million.
--U.S. risk-based capital ratio below 350% and financial leverage above
25%.
Fitch affirms the following ratings with a Stable Outlook:
Unum Group Inc.
--Issuer Default Rating (IDR) at 'BBB+';
--7.125% senior notes due Sept. 30, 2016 at 'BBB';
--7% senior notes due July 15, 2018 at 'BBB';
--5.625% senior notes due Sept. 15, 2020 at 'BBB';
--4.00% senior notes due March 15, 2024 at BBB;
--7.25% senior notes due March 15, 2028 at 'BBB';
--6.75% senior notes due Dec. 15, 2028 at 'BBB';
--7.375% senior notes due June 15, 2032 at 'BBB'
--5.75% senior notes due Aug. 15, 2042 at 'BBB'.
Provident Financing Trust I
--7.405% junior subordinated capital securities at 'BB+'.
UnumProvident Finance Company plc,
--6.85% senior notes due Nov. 15, 2015 at 'BBB'.
Unum Group members:
Unum Life Insurance Company of America
Provident Life & Accident Insurance Company
Provident Life and Casualty Insurance Company
The Paul Revere Life Insurance Company
The Paul Revere Variable Annuity Insurance Company
First Unum Life Insurance Company
Colonial Life & Accident Insurance Company
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (November 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840198
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