Still Neutral on Unum Group

We retain our Neutral recommendation on Unum Group (UNM - Analyst Report) owing to the lackluster performance at Unum U.K. and at Colonial Life.

Results at Unum U.K. had remained soft over the last few quarters and the third quarter was no exception. Unfavorable risk experience in group long-term disability due primarily to an increase in the average size and severity of new claims weighed on the third quarter results.

Going forward, UNUM Group expects competitive pricing, coupled with a difficult macro environment, to continue to weigh on premium growth. Also, the company expects the benefit ratio in 2011 to be unfavorable compared with 2010. For 2012, the company has guided sales growth at 6-10%, premium growth of 0-3%, earnings per share growth of 0-3% and return on equity growth of 18-20%.

 At Colonial Life also, less favorable risk outcome in the accident, sickness, and disability product line and in cancer and critical illness line weighed  on the third quarter results. For 2011, the company expects benefit ratio to be higher than 2010. For 2012, the company guided sales growth of 6-10%, premium growth of 4-5%, earnings per share growth of 0-3% and return on equity growth of 16-17%.

Counting on the positives, 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.

The company expects to deliver return on equity in the 11-12% range in 2012. Also, the company experienced strong growth in its target markets with Unum US voluntary benefit business registering a strong sales 15.7% growth in the third quarter.

Moreover, Unum Group has consistently enhanced its shareholders value through dividend increase and share buybacks. Unum Group spent $250.2 million to buy back 11.1 million shares in the third quarter with $254.7 million remaining under its $1.0 billion share repurchase authorization.

The company expects about $500 worth of share buybacks in 2012. This further reflects the company’s strong competitive position with respect to its capital. Its dividend yield of 1.96% is also better than its nearest peers Cigna Inc. (CI - Analyst Report) (0.9%) and Lincoln National Corp. (LNC - Analyst Report) (1.6%).

In its third quarter earnings conference call, Unum Group guided operating income per share to grow in the range of 6% to 12%.

The Zacks Consensus Estimate for fourth-quarter 2011 is 76 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $2.94 per share and $3.22 per share.

The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward 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.

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Read the full analyst report on CI

Read the full analyst report on LNC