AM Besthas revised the outlooks to negative from stable and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of "a" of the core U.S. life/health insurance subsidiaries of Unum Group (Unum) (headquartered in Chattanooga, TN) [NYSE: UNM]. Concurrently, AM Best has revised the outlook to negative from stable and affirmed the Long-Term ICR of "bbb" and the Long-Term Issue Credit Ratings (Long-Term IR) of Unum. (See below for a complete listing of the life/health subsidiaries and Long-Term IRs.)
In addition, AM Best has affirmed the FSR of A- (Excellent) and the Long-Term ICRs of "a-" of Unum Insurance Company (Unum Insurance) and Starmount Life Insurance Company (Starmount). Both companies are domiciled in Portland, ME. The outlook of these Credit Ratings (ratings) remains stable.
The ratings of the core U.S. life/health insurance subsidiaries of Unum reflect their balance sheet strength, which AM Best categorizes as strong, as well as their strong operating performance, favorable business profile and appropriate enterprise risk management.
The negative outlooks reflect the unfavorable impact of statutory reserve strengthening for the organization's closed long-term care (LTC) block of business, as well as the impact of the unfavorable economic conditions on Unum's investment portfolio and operating results. Unum is bolstering its reserves by establishing a $2.1 billion premium deficiency reserve (PDR), which will be accrued over the next seven years based on an agreement Unum reached with its primary regulator in Maine. Unum last did a reserve strengthening in 2018; however, that was only booked on a GAAP basis. The PDR is expected to be funded through operating cash flows, but to shore up liquidity, Unum has suspended its share repurchase program for 2020, which is mostly funded by dividends from the insurance entities.
Additionally, AM Best notes the company does have exposure to below investment grade bonds and commercial mortgage loans, as well as a large portion of NAIC Class 2 bonds. Below investment grade fixed income securities represents 8% of invested assets; approximately one half of fixed income securities are NAIC 2-rated. Additionally, Unum has a large portfolio of commercial mortgage loans, totaling $2.4 billion, or 6% of invested assets. Decline in the credit quality of these fixed-income assets is AM Best's primary concern.
Unum's strong balance sheet strength historically has been supported through the organization's profitability and the favorable performance of its investment portfolio. Unum has reported strong operating results from its core ongoing insurance operations with steady premium growth over the past five years. Loss ratios and persistency have also been relatively stable. However, while operating performance is anticipated to remain favorable, there is the expectation that it will moderate over the near term due to economic pressure from the COVID-19 pandemic on Unum's employer groups and individual members. Investment income has shown incremental declines due to the persistent low interest rate environment, a trend that is expected to continue as interest rates are at record lows.
The insurance operation's liquidity is mainly supported by favorable operating cash flows. Additional financial flexibility is derived from holding company cash and investments, which totaled $1.03 billion at March 31, 2020, a $600 million revolving credit facility and access to Federal Home Loan Bank borrowings. Unum has manageable financial leverage of approximately 27%, including its new $500 million senior unsecured note issue. Interest coverage was strong at eight times for year-end 2019.
Unum is a market leader in the majority of its core product lines, with a diverse nationwide distribution network. The company has good diversity of earnings across its product portfolio, has expanded offerings with the introduction of new products, and the expansion of its dental business and through its international businesses. Unum actively seeks innovation to grow its business and differentiate itself in the market. Unum's enterprise risk management program is well-developed and incorporated into strategy and financial planning for the organization.
The ratings of Unum Insurance reflect its balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management. Unum Insurance began marketing new products for the organization over the past two years reporting material premium growth. Unum Insurance offers pricing and product flexibility to its parent.
The ratings of Starmount reflect its balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management. Starmount is Unum's core dental and vision benefits entity. The company's product portfolio is distributed under the Unum brand by Unum's nationwide distribution network. Starmount also underwrites and administers dental products offered by its affiliate, Colonial Life & Accident Insurance Company. Strong premium growth has been reported over the past two years. However, operating performance remains unfavorable as the organization grows these lines of business. Unum continues to support Starmount's growth strategy through capital contributions.
The FSR of A (Excellent) and the Long-Term ICRs of "a" have been affirmed with the outlooks revised to negative from stable for the following core U.S. life/health 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 following Long-Term IR has been assigned with a negative outlook:
Unum Group— -- "bbb" on $500 million 4.50% senior unsecured notes, due 2025
The following Long-Term IRs have been affirmed with the outlooks revised to negative from stable:
Unum Group— -- "bbb" on $400 million 5.625% senior unsecured notes, due 2020-- "bbb" on $350 million 4.00% senior unsecured notes, due 2024-- "bbb" on $275 million 3.875% senior unsecured notes, due 2025-- "bbb" on $250 million 6.75% senior unsecured notes, due 2028-- "bbb" on $200 million 7.25% senior unsecured notes, due 2028-- "bbb" on $400 million 4.00% senior unsecured notes, due 2029-- "bbb" on $250 million 7.375% senior unsecured notes, due 2032-- "bbb" on $250 million 5.75% senior unsecured notes, due 2042-- "bbb" on $250 million 5.75% senior unsecured notes, due 2042-- "bbb" on $450 million 4.50% senior unsecured notes, due 2049-- "bb+" on $300 million 6.25% junior subordinated notes, due 2058
Provident Financing Trust I— -- "bb+" on $300 million 7.405% capital securities, due 2038
The following indicative Long-Term IRs under the shelf registration have been affirmed with the outlooks revised to negative from stable:
Unum Group— -- "bbb" on senior unsecured-- "bbb-" on subordinated-- "bb+" on preferred stock
Unum Group Financing Trust I and II—-- "bb+" on preferred securities
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