Unum Group Retained at Neutral

Unum Group ( UNM - Analyst Report ) continues to benefit from a declining benefit ratio, reduced investment losses, improved customer satisfaction ratings and a disciplined approach to underwriting. The company possesses a strong capital position and scores strongly with the credit rating agencies.

However, sluggish economic recovery will delay new business accrual, exerting pressure on premium growth. Also, low interest rates are expected to impact investment income and reserving practices. We thus retain our “Neutral” recommendation on the company.

Over the past few years, the company’s conservative pricing and reserving practices have contributed to its improved overall profitability. Its return on equity has remained above the industry median for the past couple of years. Management intends to continue with its disciplined underwriting approach, which we believe will keep the company out of trouble and pave the path for long term growth.

A solid balance sheet and adequate liquidity have helped Unum to increase dividend by 13.5% during May 2011, marking Unum’s third consecutive year of quarterly dividend increase. During the second quarter, Unum Group spent $146.1 million to buy back 5.7 million shares. As of June 30, 2011 the company had approximately $774.8 million remaining under its $1.0 billion share repurchase authorization. This further reflects the company’s strong competitive position with respect to its capital.

Recently, Standard & Poor's Ratings Services upgraded the outlook to “positive” from “stable” on Unum Group. The upgraded outlook reflects Unum Group’s increased diversification, solid operating performance and statutory capital in excess of regulatory requirement.

On the flip side, weak performance at Unum U.K. weighed on the overall performance of the company. The segment posted lower operating income as well as higher benefit ratio attributable to higher inflation on claim reserves associated with policies containing an inflation linked benefit feature, a lower level of claim resolutions in Group LTD.

Also, At Colonial Life, higher benefit ratio somewhat offset the growth in premium income. Also, lower premium income resulted in a decline in Individual Disability closed block operating income. Since the growth in sales and premium is dependent on economic improvement and employment growth, we do not expect much improvement till the economy rebounds to its historical highs.

Looking forward, for 2011, Unum Group expects operating income per share to grow in the range of 6% to 12%.

The Zacks Consensus Estimate for third-quarter 2011 is 75 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.96 per share and $3.32 per share.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Chattanooga, Tennessee, Unum Group was created following the June 1999 merger of Provident Companies Inc. and Unum Corporation. Along with disability insurance, the company provides long-term care insurance, life insurance, employer- and employee-paid group benefits and related services. The company competes with AFLAC Inc. ( AFL - Analyst Report ) , CIGNA Corporation ( CI - Analyst Report ) and Lincoln National Corp. ( LNC - Analyst Report ) .