Overview-- Unum Group's
operating performance has exceeded its peers'. Thecompany has also increased its diversification and maintained very strongcapital.
-- We are raising our long-term credit ratings on Unum Group and its U.S.operating subsidiaries.
-- The stable outlook indicates the limited potential for an upgrade inthe next 12-24 months.
Rating ActionOn Oct. 9, 2012, Standard & Poor's Ratings Services raised its long-termcounterparty credit rating on Unum Group to 'BBB' from 'BBB-'. At the sametime, we raised our long-term counterparty credit and financial strengthratings on Unum's U.S. operating subsidiaries (see ratings list) to 'A' from'A-'. We also revised the group status of Colonial Life & Accident InsuranceCo. to core from strategically important. The counterparty credit andfinancial strength ratings on Unum's strategically important U.K. subsidiary,UNUM Ltd., remain unchanged at 'A-' with a stable outlook.
Rationale
Key factors supporting the upgrade include Unum's stable operatingperformance, improved diversification through supplemental and voluntaryproduct sales, and maintained statutory capital that is in excess of therating. For the past several years the company's operating performance hasexceeded its peers'. Pretax GAAP operating earnings (which exclude realizedgains and losses and special charges) were $1.3 billion in 2010 and 2011,which is in excess of the rating level. We expect operating earnings todecline slightly in 2012 to $1.2 billion-$1.3 billion, primarily because ofworse-than-expected claims experience in the company's U.K. operations. For2013, we expect earnings to increase moderately.
Unum has diversified its operations in recent years, primarily throughsupplemental and voluntary product sales. The share of consolidated premiumincome from Unum's U.S. supplemental and voluntary products and its ColonialLife & Accident subsidiary, which sells voluntary products through an agencydistribution channel, has grown each year since 2004. They constituted 29% ofpremium income in 2010, up from 22% in 2007 and 18% in 2004. Conversely, UnumU.S.'s group income protection business (long- and short-term disabilityinsurance), which had exhibited historical earnings volatility, saw its shareof consolidated premium income decline each year since 2004. It dropped to 27%in 2011 from 29% in 2007 and 34% on 2004. Consolidated total adjusted capital(including the asset valuation reserve) for Unum U.S. has increased every yearsince 2007, and it reached $3.8 billion at year-end 2011, which was a 2%increase from $3.7 billion in 2010. The company's capital adequacy is inexcess of the rating, based on our model.
For year-end 2012, we expect Unum's sales to reflect continued economic andpayroll weakness, but to improve by about 6% from 2011 levels. We expect thecompany's pretax operating income to be $1.1 billion-$1.3 billion, which isslightly less than 2011 earnings. We expect Unum to maintain a strong balancesheet with high-quality assets, very strong capitalization, and moderate debt.If the company meets our expectations, EBITDA interest coverage will be8x-10x, with an adjusted debt-to-total capital ratio around 25%. We alsoexpect the company to maintain capitalization at the operating companies at alevel in excess of the ratings.
Nevertheless, the still-weak economy could make it difficult for Unum toachieve growth and could lead to an increase in disability insurance claims.Unum still has significant exposure to elevated disability claims, althoughnot to the same extent as it had in the past.
Outlook
The stable outlook indicates the limited potential for an upgrade in the next12-24 months. It reflects our expectation that Unum will continue to produceconsistent operating results and diversify its business profile, whilemaintaining capitalization in excess of the rating. We expect the rating to besomewhat constrained by the still-weak economy, which could result in reducedgrowth or increased disability insurance claims incidence. We could lower theratings if these conditions lower earnings to less than $1 billion or reducecapitalization to a level commensurate with the rating and the company is notwilling or able to compensate with offsetting changes in financial managementpolicy.
Related Criteria And Research
-- Methodology For Assessing U.S. Insurers' Capital Adequacy Beyond TheFinancial Crisis, May 31, 2011
-- Holding Company Analysis, June 11, 2009
-- Analysis Of North American Life Insurance Operating Performance, May13, 2009
-- Evaluating Insurers' Competitive Position, April 22, 2009
Ratings ListUpgradedTo FromUnum GroupSenior Unsecured BBB BBB-Provident Financing Trust IPreferred Stock BB+ BB
UnumProvident Finance Company plc
Senior Unsecured BBB BBB-Upgraded; Outlook ActionTo FromColonial Life & Accident Insurance Co.UNUM Life Insurance Co. of AmericaProvident Life & Accident Insurance Co.Paul Revere Life Insurance Co.First UNUM Life Insurance Co.Counterparty Credit RatingLocal Currency A/Stable/-- A-/Positive/--Financial Strength RatingLocal Currency A/Stable/-- A-/Positive/--Unum GroupCounterparty Credit RatingLocal Currency BBB/Stable/-- BBB-/Positive/--
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)
((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))