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 overall 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 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. The U.S. group disability insurance benefit ratio, the biggest driver of UNM's overall benefit ratio, has increased slightly in 2011. The increase was due to a higher level of volatility in the company's new claim incidence and the reduction in the discount rate on new claims due to the continued low interest rate environment. Nonetheless Fitch believes UNM's profitability remains better than its peers. UNM UK's results have shown significant deterioration over the past two years. In response, UNM UK has implemented rate increases and claims management improvements, both of which should improve profitability going forward.
Fitch believes UNM's investment portfolio is well-positioned to ride out the credit market volatility largely due to a reduction in credit exposure and better interest rate risk management over the last several years. UNM reported after-tax realized losses from sales and write-downs of $12.3 million during the first nine months of 2011. UNM's fixed income portfolio was in a $5.7 billion net unrealized gain position at Sept. 30, 2011.
During the first nine months of 2011 UNM repurchased approximately $620 million of its shares. Fitch's expectation is that further share repurchases will be funded through operating earnings and will not increase financial leverage or affect 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.
Financial leverage was 21.8% on Sept. 30, 2011. 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 10x. Holding company liquidity totaled $647 million at Sept. 30, 2011 down from approximately $1 billion at year-end 2010.
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%-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.
--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 4x.
--A reserve strengthening charge greater than $200 million;
--Holding company cash falls below management's target of approximately 1x fixed charges (interest expense plus common stock dividend), or roughly $250 million.
--U.S. risk-based capital ratio below 350% and an increase in 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 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
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