Fitch Ratings reiterated the Issuer Default Rating (IDR) at 'BBB+' and senior debt rating at 'BBB' of Unum Group (UNM - Free Report) . Concurrently, the rating agency reiterated the Insurer Financial Strength (IFS) at ‘A’ of the company’s operating subsidiaries. The ratings carry a stable outlook.
The rating affirmations were based on the company’s dominant position in the U.S. employee benefits market, wide array of offerings, continued solid operational results, conventional investment portfolio, and sufficient capital and liquidity. Nevertheless, soft results at Unum UK and headwinds from a sustained low interest rate environment in managing the run-off long-term care book of business dwarfed the positives.
Though Unum UK is experiencing weak results in the group life segment, the company has implemented a rate increase focusing on effective claims management. Also, to lower earnings volatility and capital requirements, Unum UK inked a 50% coinsurance agreement, in effect from Jan 1, 2013.
The stable outlook accounts for headwinds from the soft macro environment and stiff competition to premium growth and margin expansion. However, Fitch noted that Unum’s U.S. disability business has delivered operating margins that exceed its benchmark as well as its peers.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence on the stock as well as maintaining creditworthiness in the market. We believe that the company’s strong score with the credit rating agencies will help it write more business going forward.
Fitch stated that the ratings might be upgraded if Unum achieves 5%–7% earnings growth in the long-term, interest coverage is more than 12x with statutory maximum allowable dividend coverage of interest expense over 5x, risk-based capital ratio moves above 400% and financial leverage stays below 20%.
However, the ratings might downgrade if the U.S. group disability benefit ratio moves over 87%, interest coverage falls below 8x, statutory maximum allowable dividend interest expense coverage slides below 3x, risk-based capital ratio moves below 350%, financial leverage crosses 25% or cash balance falls below $290 million. Additionally, ratings might face downward movement if the company incurs reserve strengthening charges in the near term.
Unum Group presently carries a Zacks Rank #3 (Hold). Insurers XL Group plc (XL - Free Report) and Cincinnati Financial Corp. (CINF - Free Report) carry a Zacks Rank #1 (Strong Buy), while Employers Holdings, Inc. (EIG - Free Report) carries a Zacks Rank # 2 (Buy) and appear impressive.