Fitch Ratings has affirmed Unum Group Inc.'s (NYSE:UNM) holding company
ratings, including the senior debt rating at 'BBB'. In addition, Fitch
has affirmed 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
Today's affirmation follows UNM's announcement that it expects to report
an after tax GAAP reserve increase of between $400 million and $500
million in the fourth quarter of 2014 related to the company's runoff
long-term care (LTC) business. The reserve charge was largely driven by
lower-than-expected interest rates, and also reflects the company's
updated assumptions concerning emerging claims experience and progress
on premium rate increases.
Fitch views this LTC reserve charge as a credit negative. The rating
action reflects Fitch's view that the LTC reserve charge is manageable
in relation to the company's earnings and capital.
Fitch's primary concern is the potential for future reserve charges
given uncertainty around the future direction of interest rates and
future claims experience. Fitch notes that the statutory charge of
approximately $150 million was limited to the LTC business written out
of UNM's New York domiciled insurance subsidiary, which accounts for 20%
of UNM's LTC business. Statutory reserves associated with the company's
non-NY LTC business were not impacted by this announcement.
UNM's ratings continue to reflect UNM's strong operating performance in
its ongoing businesses; 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 good diversification. The ratings also consider the impact
of the low interest rate environment on the UNM's ongoing businesses,
competitive challenges in the company's core U.S. disability business,
and ongoing profit challenges in the its U.K. business.
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 has been strong, and will continue to support the
current rating. Operating margins in UNM's U.S. disability business have
held up well through recent challenging conditions, particularly in
comparison 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 two years, which has helped support the
company's overall profitability.
After experiencing significant challenges in 2011 and 2012, UNM U.K.'s
operating income has shown improvement thus far in 2014. Much of the
improvement reflects the implementation of rate increases beginning in
2011, particularly on its U.K. group life business, as well as claims
management initiatives and a repositioning of the business to reduce
focus on the large case market. As expected, the unit's persistency
experienced a significant decline as a result of the rate increases,
which combined with a 50% quota-share reinsurance treaty on its group
life business effective Jan. 1, 2013, created a significant decline in
premium income. Premium income has begun to grow again in 2014.
UNM's financial leverage was 24% at Sept. 30, 2014. Fitch considers the
company's debt service capacity to be strong for the rating level with
GAAP earnings based interest coverage of 8.7x through the first three
quarters of 2014. Holding company liquidity, including an intermediate
holding company, totaled $720 million at Sept. 30, 2014. UNM reported
consolidated risk-based capital of its U.S. insurance subsidiaries of an
estimate 400% at Sept. 30, 2013, which is essentially unchanged from
year-end 2013 and 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' (September 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=953675
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Copyright Business Wire 2014