A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit ratings of "a" of the core U.S. life/health insurance subsidiaries of Unum Group, headquartered in Chattanooga. Concurrently, A.M. Best has affirmed the ICR of "bbb" of Unum, as well as all existing debt securities issued by the organization. The outlook for all ratings is stable. See below for a complete listing of the companies and ratings.
The rating affirmations reflect Unum's strong franchise, solid capitalization, diversified earnings sources and favorable operating performance. In addition, the investment portfolio provides a somewhat stable source of income due to manageable levels of impairments. Partially offsetting these positive factors are the somewhat weaker performances in Unum UK and in the long-term care business. A.M. Best recognizes that Unum's closed block of business, which has experienced margin pressures from pricing issues and the persistent low rate environment that continues to act as an earnings headwind, continues to represent a significant portion of Unum's capital.
Unum's consolidated premium growth in 2013 was flat compared with 2012, but earnings have improved somewhat, driven by a more favorable benefit ratio and strong expense management. The improved benefit ratio reflects a small increase in paid incidence for group long-term disability, which was more than offset by strong recoveries. In the United States, Unum's disability line continues to benefit from a well-diversified liability profile based on industry segments. In addition, the Colonial Life segment also continues to be a stable contributor to overall earnings, reporting strong return on equity metrics. Finally, the closed block provided a modest positive contribution to earnings in 2012 and 2013 after a significant reported loss in 2011, said officials.
Unum UK continues to underperform as sales have fallen in each of the past four years and premiums have remained flat. Rate actions taken continue to stress revenue growth and persistency. However, risk has been mitigated somewhat through the increased utilization of reinsurance in that segment. With respect to overall sales growth, A.M. Best expects Unum's U.S. business to continue to face the headwinds of a sluggish U.S. economy and elevated unemployment. Also, as previously noted, the extended period of low interest rates may pressure operating earnings through lower new money yields and in-force product pricing assumptions. The organization has implemented pricing actions that A.M. Best believes will further improve operating results in the near to intermediate future. At Colonial Life, management will need to monitor and improve upon the upward trend in the benefit ratio.
Over the past several years, Unum has maintained its consolidated risk-adjusted capitalization primarily through positive operating results. Management's philosophy to return "excess" capital to shareholders has caused the capital cushion at some of its subsidiaries to fluctuate periodically; however, A.M. Best believes the group's prospective risk-adjusted capital position will remain appropriate for its ratings. Moreover, with total debt-to-capital at roughly 25 percent, strong interest coverage and just under $800 million of holding company cash and marketable securities at Sept. 30, Unum has excellent financial flexibility. A.M. Best notes that in December 2013, Unum finalized the re-domestication of its Bermuda captive company, UnumProvident International Limited. In order to satisfy U.S. reserve requirements for this entity, Unum will likely utilize a portion of its holding company cash. As of Sept. 30, the investment portfolio had roughly $4.4 billion of net unrealized capital gains in its bond portfolio, with modest exposure to structured securities and real estate-related investments. A.M. Best will continue to monitor modest increases in private placements and commercial real estate and believes Unum benefits from being a major player in these asset classes, which allows it to maintain good underwriting standards.
A.M. Best believes that Unum's ratings are well positioned at their current levels in the near to medium term. Factors that could lead to negative rating actions include sizable statutory reserve charges; sustained periods of higher than expected claims incidence, duration or severity; or a considerable decline in operating performance or risk-adjusted capitalization relative to A.M. Best's expectations.
The FSR of A (Excellent) and ICRs of "a" have been affirmed for the following core U.S. subsidiaries of Unum Group:
-- Unum Life Insurance Company of America
-- Provident Life and Accident Insurance Company
-- The Paul Revere Life Insurance Company
-- Colonial Life & Accident Insurance Company
-- First Unum Life Insurance Company
-- Provident Life and Casualty Insurance Company
The FSR of B++ (Good) and ICR of "bbb" have been affirmed for The Paul Revere Variable Annuity
Insurance Company, a non-core subsidiary of Unum Group.
The following debt ratings have been affirmed:
Unum Group--
-- "bbb" on $350 million 7.125% senior unsecured notes, due 2016
-- "bbb" on $200 million 7.00% senior unsecured notes, due 2018
-- "bbb" on $400 million 5.625% senior unsecured notes, due 2020
-- "bbb" on $250 million ($165.8 million outstanding) 6.75% senior unsecured notes, due 2028
-- "bbb" on $200 million 7.25% senior unsecured notes, due 2028
-- "bbb" on $250 million ($39.5 million outstanding) 7.375% senior unsecured notes, due 2032
-- "bbb" on $250 million 5.75% senior unsecured notes, due 2042
UnumProvident Finance Company plc--
-- "bbb" on $400 million ($296.5 million outstanding) 6.85% senior unsecured debentures, due 2015 (fully and unconditionally guaranteed by Unum Group)
Provident Financing Trust I--
-- "bb+" on $300 million ($226.5 million outstanding) 7.405% capital securities, due 2038
The following indicative debt ratings under shelf registration have been affirmed:
Unum Group--
-- "bbb" on senior unsecured
-- "bbb-" on subordinated
-- "bb+" on preferred stock
UnumProvident Financing Trust II and III--
-- "bb+" on preferred securities
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology .
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