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Staying Neutral on Unum Group

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We retain our Neutral recommendation on Unum Group (UNM - Free Report) given the low interest rate environment, weak results at Unum U.K. and disappointing sales at Colonial Life. Also, the current Zacks Consensus Estimate for the second quarter is pegged at 77 cents, representing a slight year-over-year increase of 2.7%. Unum is scheduled to release its second quarter earnings on August 1 after the bell.

Counting on the positives, Unum is ranked as the leading disability income writer and the second-largest writer of voluntary business in the United States. Over the past few years, the company’s conservative pricing and reserving practices have contributed towards improving its overall profitability.

Its trailing twelve-month return on equity (ROE) of 3.2% is ahead of its peers, 1.3% of Lincoln National Corp. (LNC - Free Report) and a negative ROE of 1.91% of SeaBright Holdings Inc. . It expects its operating income per share to grow in the band of 6–12%. Management remains focused on moving to a mix of businesses with higher growth and stable margin.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investors’ confidence in the stock as well as maintaining creditworthiness in the market. Unum scores strongly with the rating agencies.

Recently, A.M. Best Co. reiterated issuer credit ratings (ICR) of “bbb” for Unum Group with a stable outlook. The credit rating agency also affirmed financial strength rating (FSR) of A (Excellent) with a stable outlook. We believe, the company’s strong ratings scores will keep investors’ optimism afloat and help it to write more business going forward, thereby augmenting the results.

Unum Group has consistently enhanced shareholders value through dividend increases and share buybacks. During the first quarter of 2012, Unum Group spent $175.2 million to buy back 7.5 million shares and is left with approximately $349.7 million remaining under its $1.0 billion share repurchase authorization.

The Board of Directors approved a dividend payment of $0.13 per share, representing a hike of 23.8% year over year. Following the dividend hike, cumulative dividend increase since 2007 has been more than 73%. Its dividend yield of 2.23% is also better than that of its nearest peers Cigna Inc. (CI - Free Report) with a yield of 0.9% and Lincoln National Corp. with yield of 1.52%. The yield is also significantly ahead of the industry average of 1.95%.

On the flip side, results at Unum U.K. have remained soft over the last few quarters and the first quarter was no exception. The company expects competitive pricing coupled with a difficult macro environment to continue to weigh on premium growth.

Also, sales in the Colonial Life continue to disappoint with lower-than-expected figures. The segment continues to post declining operating income. Benefit ratio was also higher in the first quarter.

A low interest rate environment and the ongoing unemployment scenario remain as headwinds to the company’s operations coupled with the stricter credit spread for some of the preceding quarters. The company recorded a non-operating retirement-related loss of $7.6 million in the reported quarter and management anticipates these losses to continue for the rest of 2012.

The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates slight downward pressure on the stock over the near term.

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