|[September 30, 2013]
Fitch Affirms Unum Group's Ratings; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed Unum Group Inc.'s (NYSE:UNM) holding company
ratings, including the senior debt rating at 'BBB', as well as the
Insurer Financial Strength (IFS) ratings of all domestic operating
subsidiaries at 'A'. The Rating Outlook is Stable. See below for a
complete listing of all ratings.
KEY RATING DRIVERS
The rating rationale includes 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 weak 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 been favorable relative to the
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. The company reported pretax
operating earnings within this unit of $64.8 million in the first half
2013, down modestly from $68.8 million for the same period in 2012.
During the first half of 2013, UNM repurchased $194 million of its
shares, down from $300 million for the same period 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 24% at June 30, 2013. 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 totaled $597 million at June 30, 2013, down from $805 million
at year-end 2012. UNM's risk-based capital of its U.S. insurance
subsidiaries was estimated at 39% at June 30, 2013, which is at the
high end of management's near- to intermediate-term target of 375%-400%.
Key rating triggers that could lead to an upgrade include:
-- Improved general economic conditions including 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 falling 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
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';
--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' (August 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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