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July 17 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Unum Group Inc.'s (NYSE:UNM) holding company ratings, including the senior debt rating at 'BBB'. In addition, Fitch affirms 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
The rating rationale includes the following: 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 stagnant 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 favorable relative 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 year and a half, which has helped support the company's overall profitability.
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. While these measures appear to have halted deterioration in the unit's operating profitability, persistency has suffered, particularly in the U.K. group life segment.
During 2013, UNM repurchased $319 million of its shares, down from $501 million 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 25% at March 31, 2014. 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, including an intermediate holding company, totaled $820 million at March 31, 2014. UNM reported consolidated risk-based capital of its U.S. insurance subsidiaries 403% at Dec. 31, 2013, which is at the high end of management's near to intermediate term target of 375% - 400%.
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'.