Unum Group (UNM) recently received financial strength rating of A (Excellent) and issuer credit ratings of “a” by A. M. Best. Simultaneously, Unum and the existing debt securities issued by the organization received ICR of “bbb” rating. The outlook for the ratings remains stable.
Even though the U. S. economy slowed down, the ratings reflect the accident and health insurers’ solid franchise capitalization along with varied sources of earnings and positive operating performances. However, these factors have been partially offset by unsteady performance in the company’s closed block of long-term care (“LTC”) policies and above-average exposure to below investment grade bonds as compared to the industry.
According to A. M. Best, Unum’s LTC business, which has been experiencing margin pressure from pricing issues and the consistently low rate environment continues to act as an earnings headwind.
Unum Group however continues to generate solid operating results on the back of its Unum U.S., Colonial Life and Unum UK segments despite the sluggish economy. A positive trend in premiums and benefit ratios reflects the company’s strong pricing strategy and the ability to generate steady cash flows. Unum’s disability line in the U.S continues to benefit from an industry segments-based well-diversified liability profile. Additionally, the Colonial Life segment continues to contribute steadily to overall earnings along with providing strong return-on-equity metrics. Unum UK, maintaining its leading rank in income protection and completion of group life repricing, is well-positioned for strong growth and profitable returns. Unum’s investment portfolio also offers a stable source of income with impairments being managed efficiently.
The company’s 2014 GAAP results and to a lesser extent the statutory results at the group’s key New York subsidiary – First Unum – are expected to be affected by new assumptions for the LTC block driven by low interest rates despite modest contributions to earnings over the past two years. A. M. Best also believes in the company’s ability to take the charges without affecting its capital position. The analysis involves the business reinsured to the former Bermuda subsidiary that was redomesticated to Vermont at 2013 year-end.
A.M. Best also believes that the company’s anticipated risk-adjusted capital position will remain appropriate for its ratings even though Unum Group strives to share excess capital with its shareholders in the form of share repurchases. This has resulted in the formation of a capital cushion for some of its subsidiaries.
As of Sep 30, 2014, a total debt-to-capital of around 25%, the holding company’s cash and marketable securities worth $500 million and solid interest coverage reflect the company’s outstanding financial flexibility. With limited exposure to structured securities and real estate-related investments, Unum Group possesses net unrealized capital gains of $5.8 billion in its bond portfolio.
Going forward A. M. Best will continue to observe the company's holdings in public below investment grade bonds, and its modest increase in private placements and commercial mortgages. The rating agency also believes that Unum Group benefits from being a major player in the asset classes, which allows it to generate good underwriting standards.
However, Unum Group is unlikely to witness a rating upgrade in the upcoming period. But higher-than-expected claims incidence, duration or severity, or a considerable decline in operating performance or risk-adjusted capitalization would result in witnessing a rating downgrade.
Currently, Unum Group carries Zacks Rank #3 (Hold).
Other Stocks to Consider
Better-ranked stocks include Employers Holdings, Inc. (EIG), Amerisafe, Inc. (AMSF) and AmTrust Financial Services, Inc. (AFSI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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