We retain our Neutral recommendation on Unum Group (UNM) following a soft result at Unum U.K., higher debt burdens on the company and low interest rate environment. The accident and health insurers presently carries a Zacks Rank #3 (Hold).
Why the Retention?
Results at Unum U.K. have remained soft over the last few quarters, resulting from waning premium income. This, in turn, was due to the company’s engagement in reinsurance agreements effective Jan 2013, to cede a portion of its group life business to other insurance companies.
The company has also been experiencing higher debt burdens in recent years. This increase has translated into deterioration of the debt-to-capital ratio for the company along with an increase in interest and debt expenses. Unum Group should continue to service its debt uninterruptedly else creditworthiness might be dented going forward.
Low interest rate environment pose another headwind for the company.
Nevertheless, counting on the positives, Unum is ranked as the leading disability income writer and the second-largest writer of voluntary business in the United States. Despite the turmoil in the U.S. economy, Unum reported favorable operating results across majority of its insurance entities, especially across the U.S segment.
Unum expects its operating income per share to grow in the higher end of 0–6% for full year 2013. Management remains focused on moving to a mix of businesses with higher growth and stable margins.
Unum Group has consistently enhanced shareholders value through dividend increases and share buybacks. Its new $750 million buyback program is expected to boosts its bottom¬line. With respect to dividend increase, the board approved an 11.5% hike in quarterly dividend on July, 2013, marking the fifth consecutive year of dividend hike. This further reflects the company’s strong liquidity position.
With regard to earnings performance, the company delivered positive surprises in the last four quarters with an average beat of 3.5%. We expect the trend to continue, driven by the company’s strengths, when it reports its fourth-quarter 2013 results. The Zacks Consensus Estimate for the fourth quarter of 2013 and for the full-year 2014 are currently pegged at 85 cents per share and $3.53 per share respectively.
Other Stocks to Consider
Among the other better-ranked insurers Amtrust Financial Services, Inc. (AFSI) with a Zacks Rank #1 (Strong Buy), and Amerisafe, Inc. (AMSF) and ACE Ltd. (ACE), both with a Zacks Rank #2 (Buy), are worth considering.