Business & Finance
Business and Finance
Business and Finance
Thu, December 23, 2010
Wed, December 22, 2010 
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.
The rating rationale includes UNM's operating performance which has remained strong despite a weak global economy; 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 from the United Kingdom and worksite products.
The Stable Outlook reflects Fitch's belief that while UNM's premium growth will continue to be challenged in 2011, the company will continue to produce stable operating results across its targeted segments. Additionally, Fitch believes statutory net operating gains will cushion capitalization from potential credit-related investment losses and continue to support improvements achieved in holding company financial flexibility.
UNM reported net income of $660 million through the first nine months of 2010, up slightly from $653 million during the same period in 2009. While premiums were down in 2009 and thus far in 2010, operating margins remain strong across UNM's three operating segments (Unum US, Unum UK and Colonial Life).
Over the past several years, UNM has made significant progress in addressing key challenges focused on margin expansion in the U.S. group disability segment. Despite current recessionary economic conditions, the shift in the business mix, improved claims management and focus on pricing discipline together have given rise to improvements in the benefit ratio for this segment. For the three months ending Sept. 30, 2010, the group disability income benefits ratio was 85%, down almost 100 basis points from the same period in 2009, and almost 500 basis points from the same period in 2008. In addition, persistency has remained stable in all segments and performance has been strong from targeted segments in the U.K. and Colonial and supplemental and voluntary benefits in the U.S.
Fitch believes UNM's investment portfolio is well-positioned to ride out the credit downturn largely due to a reduction in credit exposure and better interest rate risk management over the last several years. Fitch notes the company's strategy to focus on fixed income sectors that are counter/non-cyclical and less sensitive to the U.S. and U.K. economies because they support liabilities characterized as economically sensitive (group disability) and long duration (individual disability and long-term care). UNM reported after-tax realized losses from sales and write-downs of $1.5 million during the first nine months of 2010 (compared to $231 million for the full year 2009). UNM's fixed income portfolio was in a $5.1 billion net unrealized gain position at Sept. 30, 2010, up from $2 billion at Dec. 31, 2009.
Fitch believes statutory net operating gains will cushion capitalization from potential credit-related investment losses and continue to support improvements achieved in holding company financial flexibility. UNM reported consolidated statutory total adjusted capital (TAC) on U.S. operating companies of $3.9 billion, and an NAIC risk based capital (RBC) of 410% on Sept. 30, 2010.
Equity-credit-adjusted leverage was 19.9% on Sept. 30, 2010. Fitch considers UNM's debt service capacity as being adequate for the rating level and expects run-rate, GAAP earnings based interest coverage to remain near 10 times (x). Holding company liquidity totaled $1 billion at Sept. 30, 2010, up from $915 million at year-end 2009.
Key rating drivers for UNM's ratings 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%-8% annual earnings growth on its core operations.
--GAAP earnings-based interest coverage over 12x-14x and statutory maximum allowable dividend coverage of interest expense at 8x.
--Sustained maintenance of operating company capital relative to current target of 375%-400% U.S. RBC, target 225% of UK Pillar I capital and run-rate financial leverage meaningfully below management's targeted 25% level.
Key rating drivers for UNM's ratings 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 4x.
--A reserve strengthening charge greater than $200 million;
--Holding company cash falling below management's target of approximately 1x fixed charges (interest expense plus common stock dividend), or roughly $270 million.
--A sustained drop from the company's short-term target 375%-400% U.S. RBC and long-term target of 350% U.S. RBC, target 225% of UK Pillar I capital and an increase in financial leverage above management's targeted 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';
--7.625% senior notes due March 1, 2011 at 'BBB';
--7% senior notes due July 15, 2018 at 'BBB';
--5.625% senior notes due 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'.
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 ]'
Related Research:
--'Insurance Rating Methodology' (Aug. 16, 2010);
--'Life Insurance Rating Methodology' (March 24, 2010).
Applicable Criteria and Related Research:
Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766 ]
Life Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285 ]
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