We have retained our Neutral recommendation on Unum Group (UNM) as weak operating performance at Unum U.K. and the corporate segment coupled with low interest rate environment are likely to weigh on the positives of the company. This financial services company currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Over the past few quarters the operating performance of Unum U.K. segment has been declining due to waning premium income. Decline in premium income resulted from the company’s engagement in reinsurance agreements to cede a portion of its group life business to other insurance companies. These agreements are expected to pressurize group life premium income in the upcoming period also, thereby weakening operating income further.
Additionally poor performance at the Corporate segment and declining net investment income is expected to weigh on the company’s overall performance in the upcoming term. Variability in interest rates on floating rate assets and instability in bond call premiums are expected to stress net investment income of the Closed Block segment.
Nevertheless, favorable operating results at Unum U.S. and the Colonial Life segment are worth appreciating. Additionally the strong investment strategy of the company that constitutes strategic asset purchases including private placements, commercial mortgage loan and below-investment grade bonds is expected to help the company improve its overall business performance.
Further, Unum continues to enhance shareholder value through regular dividend payouts and share buybacks. Since the fourth quarter of 2007, the company has deployed an aggregate amount of $2.3 billion for share repurchases which has reduced its share count by 26%. Additionally in May 2013, Unum announced an 11.5% hike in its dividend which marks the fifth consecutive year of dividend hike. The company also scores strongly with the rating agencies.
However, low interest rate environment and the ongoing unemployment scenario remain a matter of concern for the company.
Unum has managed to deliver positive earnings surprise in all the last four quarters with an average beat of 3.9%.
Other Stocks to Consider
Among other financial service providers, Employers Holdings Inc. (EIG) and CNO Financial Group Inc. (CNO) carry a favorable Zacks Rank #1 (Strong Buy) while Cigna Corp (CI) carries a Zacks Rank #2 (Buy) and are worth considering.
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