A.M. Best Affirms Ratings of Unum Group and Its Core U.S. Subsidiaries

A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a” of the core U.S. life/health insurance subsidiaries of Unum Group (Unum) (headquartered in Chattanooga, TN)(NYSE:UNM). Concurrently, A.M. Best has affirmed the ICR of “bbb” of Unum, as well as all existing debt securities issued by the organization. The outlook for all ratings is stable. (See below for a complete listing of the companies and ratings.)

The rating affirmations reflect Unum’s strong franchise, solid capitalization, diversified earnings sources and favorable operating performance despite the slow-growing U.S. economy. Partially offsetting these positive factors are the weak performance in the company’s closed block of long-term care (LTC) policies and above-average exposure to below investment grade bonds relative to the industry. A.M. Best recognizes that Unum’s LTC business, which has experienced margin pressures from pricing issues and the persistent low rate environment that continues to act as an earnings headwind, represents a significant portion of Unum’s capital.

Despite the sluggish economy, the enterprise continues to generate steady operating results on the strength of its Unum U.S., Colonial Life and Unum UK operations. The group has experienced favorable trends in premiums and benefit ratios, which speak well to Unum’s pricing discipline and its ability to produce consistent cash flows. In the United States, Unum’s disability line continues to benefit from a well-diversified liability profile based on industry segments. The Colonial Life segment also continues to be a stable contributor to overall earnings, reporting strong return-on-equity metrics. At Unum UK, its leading rank in income protection and completion of group life repricing has positioned the operation for profitable growth and maintenance of strong returns. Moreover, Unum’s investment portfolio provides a somewhat stable source of income due to manageable levels of impairments.

Although Unum’s closed block has contributed modestly to earnings over the past two years, the reset of assumptions for the LTC block driven by low interest rates will impact 2014 GAAP results, and to a lesser extent, statutory results at First Unum, the group’s key New York subsidiary. A.M. Best believes that Unum will be able to absorb the charges without materially impacting its capital position. A.M. Best’s analysis includes the business reinsured to the former Bermuda subsidiary that was redomesticated to Vermont at year-end 2013. Although management’s philosophy to return “excess” capital to shareholders, largely through share repurchase, has caused the capital cushion at some of its subsidiaries to fluctuate, A.M. Best believes the group’s prospective risk-adjusted capital position will remain appropriate for its ratings.

Moreover, with total debt-to-capital at roughly 25%, strong interest coverage and over $500 million of holding company cash and marketable securities at Sept. 30, 2014, Unum has excellent financial flexibility. Unum has roughly $5.8 billion of net unrealized capital gains in its bond portfolio, with modest exposure to structured securities and real estate-related investments. A.M. Best will continue to monitor the group’s holdings in public below investment grade bonds, as well as its modest increases in private placements and commercial mortgages. A.M. Best believes Unum benefits from being a major player in these asset classes, which allows it to maintain good underwriting standards.

A.M. Best believes that a positive rating action is unlikely for Unum in the near to medium term. Factors that could lead to a negative rating action include sustained periods of higher-than-expected claims incidence, duration or severity; or a considerable decline in operating performance or risk-adjusted capitalization relative to A.M. Best’s expectations.

The FSR of A (Excellent) and the ICRs of “a” have been affirmed with a stable outlook for the following core U.S. subsidiaries of Unum Group:

• Unum Life Insurance Company of America
• Provident Life and Accident Insurance Company
• The Paul Revere Life Insurance Company
• Colonial Life & Accident Insurance Company
• First Unum Life Insurance Company
• Provident Life and Casualty Insurance Company

The FSR of B++ (Good) and the ICR of “bbb” have been affirmed with a stable outlook for The Paul Revere Variable Annuity Insurance Company, a non-core subsidiary of Unum Group.

The ICR of “bbb” has been affirmed with a stable outlook for Unum Group.

The following debt ratings have been affirmed with a stable outlook:

Unum Group—
-- “bbb” on $350 million 7.125% senior unsecured notes, due 2016
-- “bbb” on $200 million 7.00% senior unsecured notes, due 2018
-- “bbb” on $400 million 5.625% senior unsecured notes, due 2020
-- “bbb” on $250 million 6.75% senior unsecured notes, due 2028
-- “bbb” on $200 million 7.25% senior unsecured notes, due 2028
-- “bbb” on $250 million 7.375% senior unsecured notes, due 2032
-- “bbb” on $250 million 5.75% senior unsecured notes, due 2042
-- “bbb” on $350 million 4.00% senior unsecured notes, due 2024

UnumProvident Finance Company plc—
-- “bbb” on $400 million 6.85% senior unsecured debentures, due 2015

Provident Financing Trust I—
-- “bb+” on $300 million 7.405% capital securities, due 2038

The following indicative debt ratings under the shelf registration have been affirmed with a stable outlook:

Unum Group—
-- “bbb” on senior unsecured
-- “bbb-” on subordinated
-- “bb+” on preferred stock

UnumProvident Financing Trust II and III—
-- “bb+” on preferred securities

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

• Analyzing Insurance Holding Company Liquidity
• A.M. Best’s Liquidity Model for U.S. Life Insurers
• A.M. Best's Perspective on Operating Leverage
• Equity Credit For Hybrid Securities
• Insurance Holding Company and Debt Ratings
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.