We have retained our Neutral recommendation on Unum Group (UNM). Overall growth in premium income and favorable expense management will likely be offset by soft results in the Unum U.K. and the Closed Block segments. Continued low interest rate environment is also expected to affect the results adversely. The accident and health insurance provider carries a Zacks Rank # 3 (Hold).
Although Unum Group’s operating income revived from a significant deterioration in 2011, the Unum U.K. and the Closed Block segment reported a decline in operating income in 2012. Moreover, the company reported a decline in operating revenues in its Colonial Life segment in 2012. Sales in the Unum U.K. segment were also a drag for the company.
Benefit ratio of the Unum U.K. segment and the Colonial Life segment deteriorated as well. Adverse risk results in group life and slightly less favorable group disability risk results led to a deterioration of the benefit ratio of the U.K. segment in 2012. On the other hand less favorable risk results in the life, cancer and critical illness lines of business led to the deterioration in the Colonial Life segment.
Although the company has sound investment strategy, net investment income suffered due to low asset levels, lower proportion of assets invested at long-term interest rates and tax-credit partnerships.
Counting on the positives, Unum’s major operating segments – Unum U.S. and Colonial Life reported solid numbers in 2012, raising the company expectation to 0–6% for full year 2013.
Further, Unum continues to increase shareholder value through dividend payouts and share repurchases. In 2012, Unum Group bought back 23.6 million shares for $500.6 million according to its expectation of deploying $500 million for share buybacks that year. This totaled to a deployment of $2 billion for share repurchases over the past 5 years. Additionally, the board approved a dividend payment of 13 cents per share in Apr 2013 representing a 23.8% hike year over year. The company also scores strongly with the credit rating agencies.
However, competitive pricing environment in U.K. coupled with premium rate increases and a difficult macroeconomic situation will likely weigh on premium growth in the U.K. segment. Additionally, the company’s operations are expected to be affected adversely by the low interest rate environment and the ongoing unemployment scenario.
Other Stocks to Consider
Among others from the industry, Amerisafe Inc. (AMSF) carries a favorable Zacks Rank #1 (Strong Buy) while Employers Holdings Inc. (EIG) and Stancorp Financial Group Inc. (SFG) carry a Zacks Rank #2 (Buy).
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