Unum Group 2016 Q3 SEC Filing Summary
Business context and reporting period
Unum Group is an insurance holding company providing disability, life, accident, sickness, voluntary, dental, vision, and related employee-benefit products primarily in the United States and United Kingdom. The filing is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2016, compared with the same periods of 2015. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $2,763.3 million | $2,657.8 million | $8,250.0 million | $8,008.9 million |
| Premium income | $2,089.4 million | $2,020.8 million | $6,258.5 million | $6,044.6 million |
| Net investment income | $611.4 million | $612.1 million | $1,841.1 million | $1,844.8 million |
| Income before tax | $332.1 million | $298.9 million | $976.5 million | $921.7 million |
| Net income | $236.0 million | $203.8 million | $683.4 million | $641.0 million |
| Diluted EPS | $1.01 | $0.83 | $2.88 | $2.57 |
| After-tax operating income | $231.3 million | $223.0 million | $693.8 million | $670.4 million |
Total revenue increased 4.0% in the quarter and 3.0% year to date; net income increased 15.8% and 6.6%, respectively. Net income margins were approximately 8.5% in both periods. After-tax operating income per diluted share was $0.99 in the quarter and $2.93 year to date, compared with $0.91 and $2.69, respectively.
- Unum US operating income increased 5.6% in the quarter and 6.0% year to date. Premium income increased 5.9% and 5.6%; the benefit ratio improved to 69.4% and 69.3% from 69.8% and 69.7%.
- Unum UK operating income in local currency increased 1.9% in the quarter and 4.6% year to date, although reported dollar results were affected by sterling weakness. The benefit ratio increased to 71.8% and 70.0% from 67.8% and 68.0%.
- Colonial Life operating income increased 3.5% in the quarter and 1.2% year to date. Premium income increased 6.3% and 5.5%; benefit ratios were 51.6% and 51.2%.
- Closed Block operating income increased 3.2% in the quarter and 4.3% year to date. Long-term-care interest-adjusted loss ratios increased to 93.8% and 91.8% from 89.9% and 86.9%.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $754.9 million for the first nine months, down from $999.4 million in 2015. Investing cash used was $520.6 million, and financing cash used was $259.3 million.
- Cash and bank deposits declined $25.0 million year to date to $87.9 million at September 30, 2016.
- Total assets were $63.9 billion, compared with $60.6 billion at December 31, 2015. Total stockholders’ equity was $9.36 billion, compared with $8.66 billion.
- Fixed-maturity securities were $46.3 billion at fair value, with net unrealized gains of approximately $6.7 billion, versus $3.7 billion at year-end 2015.
- Long-term debt was $3.02 billion, compared with $2.45 billion at year-end 2015; short-term debt declined to zero from $352.0 million. The company issued $600.0 million of senior notes in May and repaid $350.0 million of notes at maturity in September.
- The $400.0 million revolving credit facility was extended to March 2021. No borrowings were outstanding at September 30, although $2.1 million of letters of credit had been issued.
- Unum Group and intermediate holding companies held approximately $598 million of fixed-maturity securities, short-term investments, and cash, excluding amounts committed for subsidiary contributions. Management stated that domestic resources were sufficient for expected liquidity requirements for the next 12 months.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 395%.
Material changes and unusual items
- On August 1, 2016, Unum acquired Starmount, a dental and vision insurer and third-party administrator, for $140.1 million plus up to $10.0 million of contingent consideration. The acquisition generated approximately $111.0 million of goodwill and was not expected to materially affect 2016 results.
- Net realized investment gain was $11.0 million in Q3 2016 versus a $26.6 million loss in Q3 2015. Year-to-date net realized investment loss was $4.2 million versus $41.1 million in 2015.
- There were no fixed-maturity other-than-temporary impairment losses in Q3 2016, compared with $9.4 million in Q3 2015. Year-to-date impairments increased to $30.5 million from $22.0 million, primarily due to energy-sector securities.
- The embedded derivative in a modified coinsurance arrangement produced a $9.7 million realized gain in Q3 and a $14.3 million gain year to date, compared with losses of $27.3 million and $33.2 million in the comparable 2015 periods.
- Accumulated other comprehensive income increased to $450.7 million from $16.1 million at year-end 2015, primarily because of higher unrealized gains on fixed-maturity securities, partly offset by foreign-currency and reserve-related effects.
- The company repurchased 9.4 million shares for approximately $300 million in the first nine months and paid $136.2 million of dividends. Approximately $598.6 million remained under the $750 million repurchase authorization.
Guidance, outlook, commentary, and risks
Management expected year-over-year premium growth in 2016, generally favorable full-year Unum US group-disability benefit ratios, and continued favorable Colonial Life sales and premium trends. Management also expected full-year Colonial Life benefit ratios to be generally consistent with 2015. The filing does not provide a consolidated earnings-per-share forecast.
- Persistently low interest rates are pressuring investment yields, profit margins, and potentially reserve adequacy. Management expects meaningful benefit from higher interest rates and improving employment, payrolls, and wage growth.
- Brexit may reduce near-term U.K. growth, weaken sterling translation, increase investment-market volatility, and cause volatility in U.K. solvency ratios. Management did not expect a material increase in impairments or defaults.
- Long-term-care and other closed-block results remain sensitive to mortality, morbidity, claim duration, recoveries, rate increases, persistency, discount rates, and reserve assumptions. Quarterly volatility may continue.
- Energy-sector holdings remain exposed to low oil and gas prices, downgrades, and impairments. Management stated that potential losses were expected to remain manageable.
- Other risks include insurance claim experience, investment defaults and credit spreads, regulatory and tax changes, litigation, reinsurance counterparty performance, cyberattacks, technology execution, foreign exchange, ratings downgrades, and availability of liquidity.
- General claim litigation is expected to be immaterial after reserves, but an adverse punitive-damages outcome could materially affect a particular period. Unclaimed-property investigations and regulatory matters could require additional payments or penalties.
Important facts for investors to verify
- Whether low interest rates continue to reduce investment yields and pressure reserve adequacy and operating margins.
- Development of long-term-care loss ratios, reserve assumptions, rate increases, and claim-resolution experience.
- Energy-sector credit performance, other-than-temporary impairments, and the composition and quality of the $46.3 billion fixed-maturity portfolio.
- Effects of Brexit, sterling movements, U.K. sales, benefit ratios, and solvency ratios.
- Integration, product growth, and contingent consideration related to the Starmount acquisition.
- Future capital deployment, share repurchases, dividends, subsidiary dividend capacity, and debt-service requirements.
- Pending litigation, unclaimed-property examinations, regulatory inquiries, and potential losses not currently accrued.