A.M. Best Affirms Ratings of Unum Group and Its Core U.S. Subsidiaries

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit ratings (ICR) of “a” of the core U.S. life/health insurance subsidiaries of Unum Group (Unum) (headquartered in Chattanooga, TN) [NYSE: UNM]. 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 capitalization, good profitability and generally favorable operating trends, despite the impact of the weakened economic environment on its core operations. The group’s operating segments—Unum U.S., Colonial Life and Unum U.K.—have reported modest sales growth over the past 12 months; however, this was offset by pressure on inforce premiums, driven by the impact of economic conditions on consumer trends and increased competition within its core market. A.M. Best notes that Unum’s core business lines are generating strong earnings and cash flows, with returns exceeding industry medians. Moreover, A.M. Best believes capital is being deployed in an efficient and prudent manner as the enterprise maintains sound risk-adjusted capital ratios at its operating companies.

Unum’s strong franchise in the United States is anchored by its leading position in the group disability market and supplemented by its top-three rankings in group life and voluntary benefits. Its core group disability segment recently reported a loss ratio that was relatively flat compared to the prior year (84.6% versus 84.4 % at year-end 2010), despite a slight uptick in claims incidence during the second half of 2011, which was consistent with some of Unum’s competitors. The Unum U.K. business, which markets group long-term disability, life and supplemental coverages, also reported somewhat unfavorable disability experience over the past few quarters due to lower levels of claim resolutions. Colonial Life, the group’s worksite benefits segment, reported good growth in premiums driven by sales growth in its core offerings. Persistency within all segments continues to be generally favorable, reflecting the group’s ability to retain quality business.

Unum’s recent strategic decision to exit the marketing of its group long-term care (LTC) business, placing it into closed block status with its individual LTC and other run-off lines, resulted in significant charges relating to reserve strengthening and deferred acquisition cost impairment. On a GAAP basis, net income was significantly impacted in the fourth quarter of 2011; however, there was no statutory impact. At year-end 2011, reserves related to closed-block business represented over 45% of Unum’s total reserves. A.M. Best will continue to closely monitor the closed block for any additional reserve strengthening or other related charges, which could negatively impact operating results or risk-adjusted capitalization.

Over the past several years, Unum has maintained its consolidated risk-adjusted capitalization primarily though favorable operating results. While the capital cushion at some of its subsidiaries fluctuates periodically as it is deployed through share repurchase or other means, A.M. Best believes the group’s prospective risk-adjusted capital position will remain appropriate for its ratings. Moreover, with total debt-to-capital below 25%, interest coverage exceeding 8 times and over $750 million of cash and marketable securities at the holding company as of December 31, 2011, Unum has excellent financial flexibility. Additionally, the organization has over $5 billion of unrealized capital gains in its bond portfolio with modest exposure to structured securities and real estate-related investments.

A.M. Best expects that Unum will continue to be challenged to grow total premium income as long as the U.S. economy continues to be sluggish and unemployment rates remain high. Also, the extended period of low interest rates continues to inhibit operating earnings somewhat as new money yields are depressed.

A.M. Best believes that Unum is well positioned at its current ratings in the near term.

Factors that could lead to negative rating actions include sizable statutory reserve charges associated with Unum’s recent exit from the group LTC business or a considerable decline in operating income or 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 ICR of “bbb” has been affirmed for 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 6.75% senior unsecured notes, due 2028-- “bbb” on $200 million 7.25% senior unsecured notes, due 2028-- “bbb” on $250 million 7.375% senior unsecured notes, due 2032

UnumProvident Finance Company plc—-- “bbb” on $400 million 6.85% senior unsecured notes, due 2015

Provident Financing Trust I—-- “bb+” on $300 million 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. Key criteria utilized include: “Understanding BCAR for Life/Health Insurers”; “Rating Members of Insurance Groups”; “A.M. Best’s Perspective on Operating Leverage”, “Assessing Country Risk”; and “Risk Management and the Rating Process for Insurance Companies.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com

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