Unum CEO Says Junk Bonds ‘Too Hot’

Watjen says returns on high-yield not equal to risk; buys utility debt instead.

Unum Group Chief Executive Officer Thomas Watjen is shying away from adding junk bonds to the insurer’s investment portfolio after yields plummeted.

“There are times like now maybe where high-yield gets too hot,” Watjen, whose company holds about $40 billion of fixed- maturity securities, said today in an interview at Bloomberg headquarters in New York. “You just can’t get enough return in the sector to justify investing, given the risk parameters of that asset class.”

Yields on speculative-grade debt tumbled to a record low of 7.19 percent in May before rising to 7.45 percent as of July 22, according to Bank of America Merrill Lynch index data. That compares with an average borrowing cost of 12.6 percent on similarly rated companies two years earlier, the data show.

Unum, the largest U.S. disability insurer, has about 7 percent of fixed-maturity assets in junk debt. The Chattanooga, Tennessee-based company’s portfolio is composed mainly of corporate bonds, including about $9.7 billion of debt issued by utilities as of March 31, compared with $8.8 billion at the end of 2009. Watjen said he favors utilities because they present the right value and duration for Unum.

“We’re happy with both the credit quality of the utility space in general, and obviously as an issuer they tend to be issuing bonds that are more consistent with our asset-liability management needs,” Watjen said. “That’s why you see it growing a little bit.” Disability insurers buy bonds with maturities of 20 or 30 years to fund claims payments decades into the future.

 

‘Awful Lot of Money’
High-yield borrowers have been selling debt at the fastest pace ever during the past two years, as the Federal Reserve’s record monetary stimulus pushes investors toward riskier assets while creating lower borrowing costs. High-yield, high-risk, or junk, borrowers are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

“There’s an awful lot of money chasing too few quality investments,” Watjen said.

Speculative-grade issuance has reached $187.2 billion this year compared with about $130.2 billion the same period in 2010. Sales in all of last year were about $287 billion, according to data compiled by Bloomberg.

Unum slipped 25 cents to $25.30 at 4:15 p.m. in New York Stock Exchange composite trading. The firm has gained 4.5 percent this year, compared with the 7.6 percent fall of the 24- company KBW Insurance Index.

Unum has reported increases in earnings-per-share in three straight quarters. The company is buying back stock as a U.S. unemployment rate of more than 9 percent crimps the insurer’s ability to add policyholders and increase revenue.

“We’re still waiting to see some signs of improvement, but that obviously hasn’t been the case,” Watjen said of hiring in the U.S. “Unfortunately, the top line is a struggle for us and our whole industry, actually.”

 

 

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