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Rating Action:

Moody’s downgrades Unum’s ratings; outlook changed to negative

04 May 2020

NOTE: On May 07, 2020, the press release was corrected as follows: At the end of the debt list, an outlook action was added for Unum Insurance Company. Revised release follows .

New York , May 4, 2020 – Moody's Investors Service has downgraded the debt ratings of Unum Group (Unum, NYSE: UNM) to Baa3 from Baa2 and the insurance financial strength (IFS) ratings of Unum Life Insurance Company of America and Unum's other insurance subsidiaries to A3 from A2. Moody's also lowered the senior secured debt rating from Baa1(sf) to Baa2(sf) of Northwind Holdings, LLC (Northwind), a Delaware limited liability company wholly-owned by Unum. The outlook on Unum and its affiliates was changed to negative from stable

The rating downgrade reflects the announcement by the company that it will strengthen its long-term care statutory reserves by $2.1 billion over the next seven years, which will cause a strain on holding company liquidity, notwithstanding the suspension in share repurchases. The negative outlook reflects our view that there will be weakening profitability and statutory capital generation in the next 12-18 months resulting from coronavirus and the related economic shock.

See below for a complete listing of affected entities and ratings.

RATINGS RATIONALE

Ratings Rationale – Unum Group and its life insurance subsidiaries

The downgrades of Unum's debt and IFS ratings incorporate the significant long-term care strengthening in relation to Unum's statutory total adjusted capital of approximately $5 billion, excluding Northwind Holdings, LLC and Unum International. The charge stems from reducing actuarial assumptions relating to interest rates, mortality and morbidity.

The negative outlook reflects Moody's expectation that the coronavirus-related economic downturn will weigh on earnings because of the impact from lower interest rates, reduced premium income, higher lapses, elevated defaults and ratings migration in the near-term. Unum's long-term care business is adversely impacted by the current low interest rate environment, which reduces the company's investment portfolio returns supporting long-term care reserves and makes them susceptible to additional charges over the life of the business. To support its long-term care business, we estimate Unum will need to contribute half or more of its statutory dividend capacity (around $1 billion in 2020) for at least the next several years.

Additionally, we expect the slow-down in the economic environment, including high unemployment levels and an expectation of lower US GDP to weaken premium growth and result in higher than expected lapses in the company's group business. While we generally view Unum's asset quality as sound, the company does have an above average level of Baa-rated bonds (50% of total bonds) and below-investment grade bonds (8% of total bonds), which exposes them to rating migration and elevated defaults in the current environment and weaken capital adequacy. All these considerations will weaken the ability of Unum's dividend paying insurance subsidiaries to provide excess capital to the holding company to service fixed expenses and strengthen long-term care reserves in the near-term.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The insurance industry has been one of the sectors affected by the shock given the coronavirus outbreak and resulting slowdown in business activity. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Unum's life insurance subsidiaries of the breadth and severity of the shock, and the deterioration in credit quality it has triggered.

Rating Rationale - Northwind Holdings

Moody's said that the downgrade of the ratings of Northwind reflect association with Unum and its life operating entities that have reinsured the individual disability policies to Northwind Reinsurance Company (Northwind Re). The deal performance is in line with our expectations of the underlying reinsurance cash flows, including the performance of the invested assets backing the liabilities and the current outstanding notes ($65 million as of 31 March 31 2020), which have been paying down as expected and are expected to be fully paid by first half of 2021.

Northwind Holdings is the shareholder of Northwind Re, a special purpose captive reinsurance company domiciled in Vermont. Northwind Re was set up for the sole purpose of executing reinsurance agreements with the following Unum subsidiaries: Provident Life and Accident Insurance Company, Paul Revere Life Insurance Company, and Unum Life Insurance Company of America to facilitate the funding of capital supporting a closed block of both active and disabled life reserves.

Moody's ratings of securities that are insured by a financial guarantor are maintained at a level equal to the higher of a) the rating of the guarantor or b) the published underlying rating. The Baa2(sf) rating of the notes reflects this modified "credit substitution" approach and is now equal to the underlying rating of the notes without incorporating the benefit of a financial guaranty policy provided by MBIA Insurance Corporation (MBIA, insurance financial strength at Caa1; developing outlook).

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, there is limited upward pressure on Unum's rating in the near term. A combination of the following drivers could lead us to return the outlook on Unum and its affiliates to stable: 1) stable long term care benefit ratios with no anticipated reserve increase in the near-term; 2) sustained consolidated NAIC risk-based capital (RBC) ratio (company action level or CAL) of at least 350%; 3) adjusted financial leverage remains below 30%; and 4) consistent earnings coverage and cash flow coverage ratios are maintained at over 7x and 5x, respectively.

A combination of the following factors could lead us to change the outlook on Northwind back to stable: 1) change to stable outlook on Unum and its other insurance subsidiaries; 2) continued pay down of principal in line with target amortization; 3) actuarial experience exceeding expectations; and 4) CAL RBC ratio consistently above 200%.

Conversely, the following could result in a downgrade of Unum's IFS and debt ratings: 1) deterioration of long-term care experience or actual/anticipated GAAP or statutory reserve increase greater than $1 billion; 2) sustained consolidated CAL RBC ratio falls below 325%; 3) adjusted financial leverage exceeds 35%; or 4) earnings coverage and cash flow coverage ratios fall below 6x and 4x, respectively.

The following could result in a downgrade of Northwind's debt ratings: 1) downgrade of Unum's IFS and debt ratings; 2) pay down of principal less than targeted amortization; 3) actuarial experience falls below expectations; and 4) CAL RBC ratio consistently below 200%.

The following ratings have been downgraded:

Unum Group: senior unsecured debt rating to Baa3 from Baa2; backed senior unsecured debt rating to Baa3 from Baa2; junior subordinated debt rating to Ba1(hyb) from Baa3(hyb); senior unsecured shelf rating to (P)Baa3 from (P)Baa2; subordinate shelf rating to (P)Ba1 from (P)Baa3; junior subordinate shelf rating to (P)Ba1 from (P)Baa3; preferred shelf rating to (P)Ba2 from (P)Ba1; and preferred shelf non-cumulative rating to (P)Ba2 from (P)Ba1.

Unum Life Insurance Company of America: IFS rating to A3 from A2.

First Unum Life Insurance Company: IFS rating to A3 from A2;

Colonial Life & Accident Insurance Company: IFS rating to A3 from A2;

Unum Insurance Company: IFS rating to A3 from A2;

Paul Revere Life Insurance Company: IFS rating to A3 from A2

Provident Life and Accident Insurance Co.: IFS rating to A3 from A2

Provident Financing Trust I: backed preferred stock rating to Ba1(hyb) from Baa3(hyb)

Northwind Holdings, LLC: underlying senior secured rating to Baa2(sf) from Baa1(sf); senior secured rating to Baa2(sf) from Baa1(sf)

Outlook actions:

..Issuer: Unum Group

....Outlook, Negative from Stable

..Issuer: Unum Life Insurance Company of America

....Outlook, Negative from Stable

..First Unum Life Insurance Company

....Outlook, Negative from Stable

..Colonial Life & Accident Insurance Company

....Outlook, Negative from Stable

..Paul Revere Life Insurance Company

....Outlook, Negative from Stable

..Provident Life and Accident Insurance Co.

....Outlook, Negative from Stable

..Provident Financing Trust I

....Outlook, Negative from Stable

..Northwind Holdings, LLC

....Outlook, Negative from Stable

..Unum Insurance Company

....Outlook, Negative from Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Unum is a life insurance holding company headquartered in Chattanooga, Tennessee. As of December 31, 2019, the company reported total assets of $67 billion and total shareholders' equity of $10.0 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Manoj Jethani
VP-Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

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