Overview -- Unum Group's
operating performance has exceeded its peers'. The company has also increased its diversification and maintained very strong capital.
-- 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 in the next 12-24 months.
Rating Action On Oct. 9, 2012, Standard & Poor's Ratings Services raised its long-term counterparty credit rating on Unum Group to 'BBB' from 'BBB-'. At the same time, we raised our long-term counterparty credit and financial strength ratings on Unum's U.S. operating subsidiaries (see ratings list) to 'A' from 'A-'. We also revised the group status of Colonial Life & Accident Insurance Co. to core from strategically important. The counterparty credit and financial strength ratings on Unum's strategically important U.K. subsidiary, UNUM Ltd., remain unchanged at 'A-' with a stable outlook.
Key factors supporting the upgrade include Unum's stable operating performance, improved diversification through supplemental and voluntary product sales, and maintained statutory capital that is in excess of the rating. For the past several years the company's operating performance has exceeded its peers'. Pretax GAAP operating earnings (which exclude realized gains 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 to decline slightly in 2012 to $1.2 billion-$1.3 billion, primarily because of worse-than-expected claims experience in the company's U.K. operations. For 2013, we expect earnings to increase moderately.
Unum has diversified its operations in recent years, primarily through supplemental and voluntary product sales. The share of consolidated premium income from Unum's U.S. supplemental and voluntary products and its Colonial Life & Accident subsidiary, which sells voluntary products through an agency distribution channel, has grown each year since 2004. They constituted 29% of premium income in 2010, up from 22% in 2007 and 18% in 2004. Conversely, Unum U.S.'s group income protection business (long- and short-term disability insurance), which had exhibited historical earnings volatility, saw its share of 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 year since 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 in excess of the rating, based on our model.
For year-end 2012, we expect Unum's sales to reflect continued economic and payroll weakness, but to improve by about 6% from 2011 levels. We expect the company's pretax operating income to be $1.1 billion-$1.3 billion, which is slightly less than 2011 earnings. We expect Unum to maintain a strong balance sheet with high-quality assets, very strong capitalization, and moderate debt. If the company meets our expectations, EBITDA interest coverage will be 8x-10x, with an adjusted debt-to-total capital ratio around 25%. We also expect the company to maintain capitalization at the operating companies at a level in excess of the ratings.
Nevertheless, the still-weak economy could make it difficult for Unum to achieve growth and could lead to an increase in disability insurance claims. Unum still has significant exposure to elevated disability claims, although not to the same extent as it had in the past.
The stable outlook indicates the limited potential for an upgrade in the next 12-24 months. It reflects our expectation that Unum will continue to produce consistent operating results and diversify its business profile, while maintaining capitalization in excess of the rating. We expect the rating to be somewhat constrained by the still-weak economy, which could result in reduced growth or increased disability insurance claims incidence. We could lower the ratings if these conditions lower earnings to less than $1 billion or reduce capitalization to a level commensurate with the rating and the company is not willing or able to compensate with offsetting changes in financial management policy.
Related Criteria And Research
-- Methodology For Assessing U.S. Insurers' Capital Adequacy Beyond The Financial Crisis, May 31, 2011
-- Holding Company Analysis, June 11, 2009
-- Analysis Of North American Life Insurance Operating Performance, May 13, 2009
-- Evaluating Insurers' Competitive Position, April 22, 2009
Ratings List Upgraded To From Unum Group Senior Unsecured BBB BBB- Provident Financing Trust I Preferred Stock BB+ BB
UnumProvident Finance Company plc
Senior Unsecured BBB BBB- Upgraded; Outlook Action To From Colonial Life & Accident Insurance Co. UNUM Life Insurance Co. of America Provident Life & Accident Insurance Co. Paul Revere Life Insurance Co. First UNUM Life Insurance Co. Counterparty Credit Rating Local Currency A/Stable/-- A-/Positive/-- Financial Strength Rating Local Currency A/Stable/-- A-/Positive/-- Unum Group Counterparty Credit Rating Local Currency BBB/Stable/-- BBB-/Positive/--
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)