We retain our Neutral recommendation on Unum Group (UNM - Free Report) as lower-than-expected performance in the company’s U.K. division, low interest rate environment and increasing debt burden overshadow the positives. This accident and health insurer carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Results at Unum U.K. have remained soft over the last few quarters. This decline resulted from a waning premium income in the segment owing to the company’s engagement in reinsurance agreements effective Jan 2013, to cede a portion of its group life business to other insurance companies. The reinsurance agreements are expected to continue pressurizing group life premium income and benefit payments through 2013. The company is also witnessing an increasing benefit ratio.
The company is also experiencing higher debt burdens in recent years with deterioration in debt-to-capital ratio. The increasing debt burden has thereby resulted in an increase in interest and debt expenses. Unum Group should continue to service its debt uninterruptedly, else creditworthiness might be dented.
Nevertheless, counting on the positives, Unum is solidly positioned as a disability income writer and writer of voluntary business in the United States. Over the past few years, the company’s conservative pricing and reservation practices have contributed towards improving its overall profitability.
Two of the major operating segments of Unum, namely Unum US and Colonial Life, have been reporting increased operating income for the past few years. Unum expects its operating income per share to grow in the band of 0–6% for full year 2013.
Unum Group has consistently enhanced shareholders value through dividend increases and share buybacks. During the first six months of 2013, Unum bought back 7.3 million shares for $193.5 million and is left with $356.6 million under its $750 million share repurchase program approved in Jul 2012. With respect to dividend, its new payout of 58 cents which annually yields 1.90%, also scores better than the industry average of 1.59%.
With regard to earnings performance, the company delivered positive surprises in the last four quarters with an average beat of 3.5%. We expect the trend to continue, driven by the company’s strengths, when it reports its third-quarter 2013 results. The Zack Consensus estimate for the third quarter is currently pegged at 82 cents, translating to a year-over-year increase of nearly 2%.
Other Stocks to Consider
Other better-placed accident and health insurance providers Employers Holdings, Inc. (EIG - Free Report) with a Zacks Rank #1 (Strong Buy), and AFLAC Inc. (AFL - Free Report) and ACE Ltd , each with a Zacks Rank #2 (Buy), are worth considering.