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Fitch Ratings reiterated the Issuer Default Rating (IDR) of Unum Group Inc. (UNM - Analyst Report) at 'BBB+.' Concurrently, the rating agency affirmed the Insurer Financial Strength (IFS) of the domestic operating units at ‘A.’ It also affirmed the senior debt ratings at ‘BBB.’ The outlook for all the ratings remains stable.
The rating affirmations came on the back of continued solid operational results, a dominant position in the U.S. employee benefits market, and strong capital position as well as liquidity.
Fitch Ratings believe Unum’s continued solid results will cushion its premium growth and operating margins as it will remain constrained due to soft macro environment and competition weighing on them. The rating agency noted that the U.S. disability business has reported better operating margins than that of its peers.
However, the performance at Unum U.K. remains soft. Nevertheless, Unum intends to improve the performance of this business through improving claims management, rebalancing its business mix and pricing actions that include rate increases.
According to Fitch Ratings, deploying capital in buying back shares is more desirable. Unum, in the first half bought back $300 million shares. The rating agency expects the company to continue repurchasing shares and its operating earnings to fund it. As such, the financial leverage will not be affected.
Unum’s financial leverage for the second quarter end stood at 23%. Also, with interest coverage at 10x, the company’s debt service capacity is also satisfactory. However, liquidity at second-quarter end declined 25% from the 2011-end level. Risk-based capital ratio of 404% exceeded management's short-term target of 375%–400%.
Recently, Unum Group reported second-quarter operating income of 79 cents per share, missing the Zacks Consensus Estimate by 3 cents. Earnings improved almost 4% year over year.
The company experienced soft results at Unum UK, Colonial Life Segment and the Closed Block that led to weaker numbers in the quarter. However, solid performances at Unum US was a partial offset. Lower share count due to share repurchases buoyed the bottom line.
Fitch ratings stated that it might consider a rating upgrade if Unum is able to achieve long-term earnings growth in the range of 5%-8%, interest coverage moves ahead of 12x-14x, statutory maximum allowable dividend coverage of interest expense is at 8x, risk-based capital ratio is higher than 400% and financial leverage remains below 20%.
However, the ratings will be subject to downgrades if interest coverage falls below 8x, statutory maximum allowable dividend interest expense coverage falls below 4x, U.S. group disability benefit ratio moves above 87%, cash balance falls lower than $250 million, U.S. risk-based capital ratio falls below 350% and financial leverage moves above 25%.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. Unum scores strongly with the rating agencies. We believe the company’s strong ratings scores will help retain investor confidence and help it to write more businesses going forward, thereby augmenting the results.
We retain our long term Neutral recommendation on Unum Group. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term. AFLAC Inc. (AFL - Analyst Report) and Lincoln National Corporation (LNC - Analyst Report), its closest competitors, also share a Zacks #3 Rank.