Fitch Affirms Unum Group's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Unum Group Inc.'s UNM holding company ratings, including the senior debt rating at 'BBB'. In addition, Fitch has affirmed the Insurer Financial Strength (IFS) ratings for of all of UNM's domestic operating subsidiaries at 'A'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Today's affirmation follows UNM's announcement that it expects to report an after tax GAAP reserve increase of between $400 million and $500 million in the fourth quarter of 2014 related to the company's runoff long-term care (LTC) business. The reserve charge was largely driven by lower-than-expected interest rates, and also reflects the company's updated assumptions concerning emerging claims experience and progress on premium rate increases.

Fitch views this LTC reserve charge as a credit negative. The rating action reflects Fitch's view that the LTC reserve charge is manageable in relation to the company's earnings and capital.

Fitch's primary concern is the potential for future reserve charges given uncertainty around the future direction of interest rates and future claims experience. Fitch notes that the statutory charge of approximately $150 million was limited to the LTC business written out of UNM's New York domiciled insurance subsidiary, which accounts for 20% of UNM's LTC business. Statutory reserves associated with the company's non-NY LTC business were not impacted by this announcement.

UNM's ratings continue to reflect UNM's strong operating performance in its ongoing businesses; conservative investment portfolio; solid capital and liquidity at both the insurance subsidiary and holding company levels; the company's leadership position in the U.S. employee benefits market; and good diversification. The ratings also consider the impact of the low interest rate environment on the UNM's ongoing businesses, competitive challenges in the company's core U.S. disability business, and ongoing profit challenges in the its U.K. business.

The Stable Outlook reflects Fitch's belief that while UNM's premium growth and operating margins continue to be challenged by the weak economic environment and competitive market conditions, the company's overall profitability has been strong, and will continue to support the current rating. Operating margins in UNM's U.S. disability business have held up well through recent challenging conditions, particularly in comparison to the company's peers. The company has been experiencing an improving trend in the benefit ratio of its core U.S. group disability income business over the past two years, which has helped support the company's overall profitability.

After experiencing significant challenges in 2011 and 2012, UNM U.K.'s operating income has shown improvement thus far in 2014. Much of the improvement reflects the implementation of rate increases beginning in 2011, particularly on its U.K. group life business, as well as claims management initiatives and a repositioning of the business to reduce focus on the large case market. As expected, the unit's persistency experienced a significant decline as a result of the rate increases, which combined with a 50% quota-share reinsurance treaty on its group life business effective Jan. 1, 2013, created a significant decline in premium income. Premium income has begun to grow again in 2014.

UNM's financial leverage was 24% at Sept. 30, 2014. Fitch considers the company's debt service capacity to be strong for the rating level with GAAP earnings based interest coverage of 8.7x through the first three quarters of 2014. Holding company liquidity, including an intermediate holding company, totaled $720 million at Sept. 30, 2014. UNM reported consolidated risk-based capital of its U.S. insurance subsidiaries of an estimate 400% at Sept. 30, 2013, which is essentially unchanged from year-end 2013 and is at the high end of management's near to intermediate term target of 375% - 400%.

RATING SENSITIVITIES

The key rating triggers that could lead to an upgrade include:

--Improved general economic conditions including a growth in employment, salaries and disposable income which enable UNM to achieve its long-term target of 5%-7% annual earnings growth on its core operations.

--GAAP earnings-based interest coverage over 12x and statutory maximum allowable dividend coverage of interest expense over 5x.

--U.S. risk-based capital ratio above 400% and run-rate financial leverage below 20%.

Key rating triggers that could lead to a downgrade include:

--Deterioration in financial results that includes an increase in the U.S. group disability benefit ratio over 87%, GAAP earnings-based interest coverage falling below 8x, and statutory maximum allowable dividend interest expense coverage falling below 3x.

--Any additional reserve strengthening charges in the near term.

--Holding company cash falls below management's target of approximately 1x fixed charges (interest expense plus common stock dividend), or roughly $290 million.

--U.S. risk-based capital ratio below 350% and financial leverage above 25%.

Fitch affirms the following ratings with a Stable Outlook:

Unum Group Inc.

--Issuer Default Rating (IDR) at 'BBB+';

--7.125% senior notes due Sept. 30, 2016 at 'BBB';

--7% senior notes due July 15, 2018 at 'BBB';

--5.625% senior notes due Sept. 15, 2020 at 'BBB';

--4.00% senior notes due March 15, 2024 at BBB;

--7.25% senior notes due March 15, 2028 at 'BBB';

--6.75% senior notes due Dec. 15, 2028 at 'BBB';

--7.375% senior notes due June 15, 2032 at 'BBB';

--5.75% senior notes due Aug. 15, 2042 at 'BBB'.

Provident Financing Trust I

--7.405% junior subordinated capital securities at 'BB+'.

UnumProvident Finance Company plc

--6.85% senior notes due Nov. 15, 2015 at 'BBB'.

Unum Group members:

Unum Life Insurance Company of America

Provident Life & Accident Insurance Company

Provident Life and Casualty Insurance Company

The Paul Revere Life Insurance Company

The Paul Revere Variable Annuity Insurance Company

First Unum Life Insurance Company

Colonial Life & Accident Insurance Company

--IFS at 'A'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (September 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=953675

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