A.M. Best Rates Unum Notes

Unum Group’s (UNM - Analyst Report) $350 million notes were rated ‘bbb’ by A.M. Best with a stable outlook on Monday. The notes were issued on Sep 25. 

The rating action by A.M. Best reflects Unum’s debt to capitalization ratio which stands at 18.5%, fairly below its target range of 25%. Post this issue the leverage ratio will stand at 20.6% and continue to be at comfortable levels. On Jun 30, 2009, after giving effect to this offering, the company had a total debt of $2,645.6 million on total capital of $10.124 million. The company has maintained its ability to pay fixed charges with the ratio standing at 5.6X in 2008 compared to 5.7X in 2007. 

The company intends to use the proceeds from the notes for general corporate purposes, including the potential buyback of common stock and repayment of debt. 

Interest will be payable on the notes on Mar 30 and Sep 30 every year. The notes carry a coupon interest of 7.125%. The first interest payment will be made on Mar 30, 2010. The notes will mature on Sep 30, 2016; would be denominated as senior unsecured debt obligations of Unum Group. 

The rating agency also acknowledges continuing favorable operating performance by the company and market niche in employee benefit segment. Unum Group has also maintained adequate capitalization. On the negative side the company’s disability segment continues to be affected by the current recessionary conditions. 

During August, Unum Group reported second quarter operating earnings of 65 cents per share, unchanged relative to the prior-year quarter. Though the company has been able to maintain a strong capital position with risk-based capital ratio at 340% , we think that deteriorating economic and employment scenario will restrict earnings growth. Hence, we recommend a Neutral rating on the shares.