Unum Group 2014 Second-Quarter Form 10-Q Summary
Business context and reporting period
Unum Group is an insurance holding company and a leading provider of disability insurance in the United States and United Kingdom. It also offers group life, accidental death and dismemberment, voluntary, supplemental, cancer, critical illness, and long-term care products. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared primarily with the corresponding 2013 periods. The company states that interim results are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $2,653.5 million | $2,601.9 million | $5,264.6 million | $5,226.7 million |
| Premium income | $1,943.6 million | $1,905.8 million | $3,882.1 million | $3,836.7 million |
| Net investment income | $629.1 million | $626.1 million | $1,241.6 million | $1,247.2 million |
| Income before tax | $346.5 million | $311.5 million | $673.0 million | $615.3 million |
| Net income | $242.5 million | $218.6 million | $471.4 million | $431.2 million |
| Diluted EPS | $0.94 | $0.82 | $1.82 | $1.61 |
| Operating income before tax | $335.2 million | $311.1 million | $656.8 million | $619.5 million |
| After-tax operating income | $234.8 million | $218.5 million | $460.5 million | $434.1 million |
Operating revenue increased 1.5% in the second quarter and 0.6% for the first six months, while total revenue increased 2.0% and 0.7%, respectively. Net income rose 10.9% in the quarter and 9.3% year to date. The company reported consolidated benefit ratios of 85.1% for the quarter and 84.6% year to date, compared with 87.2% and 86.3% in the prior-year periods.
Financial position, cash flow, debt, and liquidity
- Total assets were $62.2 billion at June 30, 2014, compared with $59.4 billion at December 31, 2013. Stockholders’ equity increased to $9.2 billion from $8.7 billion, helped by $376.9 million of other comprehensive income.
- Investments totaled $51.6 billion, including $44.9 billion of fixed maturity securities. The portfolio had $6.0 billion of net unrealized gains, up from $4.1 billion at year-end, primarily because of lower U.S. Treasury rates.
- Cash provided by operating activities was $725.8 million for the first six months, compared with $448.3 million in 2013. Investing activities used $562.0 million, principally reflecting purchases of fixed maturity securities. Financing activities used $145.9 million.
- Cash and bank deposits were $112.0 million at June 30. Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $616 million, compared with $514 million at year-end. Management stated that domestic resources were sufficient for expected liquidity needs over the next 12 months.
- Short-term debt was $57.4 million and long-term debt was $2.8 billion. The company issued $350 million of 4.00% unsecured senior notes due 2024 and retired $145 million principal amount of 6.85% notes, paying a $13.2 million make-whole amount.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 401%, compared with 405% at December 31, 2013.
Material changes versus the prior comparable period
- Unum US operating income increased 2.2% in the quarter and 1.8% year to date. Premium income increased 2.3% and 1.7%, and the segment benefit ratio improved to 70.4% and 70.3% from 72.0% and 71.4%.
- Unum UK operating income increased 8.3% in local currency in the quarter and 8.6% year to date. Its benefit ratio improved materially to 74.0% and 72.1% from 84.2% and 76.7%, although sales declined 11.3% in the quarter and 6.9% year to date in pounds.
- Colonial Life operating income increased 5.9% in the quarter and 5.6% year to date, with premium income growth of 2.9% and 3.0% and generally stable risk results.
- Closed Block operating income increased 26.0% in the quarter and 16.7% year to date. Premium income declined as expected as the closed blocks run off, while long-term care risk results improved.
- Operating income benefited from favorable claim experience across most principal segments. The company also cited higher sales in Unum US and Colonial Life, technology investments, and higher acquisition-related expenses.
- Interest and debt expense increased because of the new senior notes and the early debt retirement. The company recorded a $13.1 million hedge gain associated with the debt redemption and a $13.2 million early-retirement cost.
- The company repurchased 5.8 million shares for approximately $200 million during the first six months and paid $75.7 million in dividends. Approximately $529.9 million remained under the $750 million repurchase authorization.
Guidance, outlook, risks, contingencies, and unusual items
Management expects year-over-year premium growth during the remainder of 2014 and intends to protect margins through pricing, risk management, expense efficiency, and continued investment in infrastructure and employees. For Unum US group disability, management expected the full-year 2014 benefit ratio to be slightly below 2013 levels. Colonial Life expected sales and premium growth to continue, with a 2014 benefit ratio generally consistent with 2013 excluding a prior-year reserve increase for unclaimed death benefits. Closed Block revenue is expected to decline over time as the business winds down, although long-term care rate increases may provide additional premium income.
- Low interest rates and tightening credit spreads are pressuring investment yields, reserve discount rates, and margins.
- Claims experience remains sensitive to incidence, recovery, mortality, morbidity, unemployment, consumer confidence, medical developments, and policy persistency.
- Long-term care and individual disability reserves may be affected by changes in mortality, morbidity, interest rates, persistency, and claim resolution assumptions.
- The company faces regulatory, tax, litigation, reinsurance, cyber-security, foreign currency, investment credit, derivative counterparty, and financial-strength-rating risks.
- One commercial mortgage loan with a carrying value of $18.1 million was more than 30 days past due after defaulting on restructured payment terms. Management believed the underlying property value exceeded the loan balance; the allowance for credit losses was $4.5 million.
- Unum remains involved in litigation and regulatory inquiries, including unclaimed death benefit and long-term care inflation-protection matters. Management believes the ultimate outcome of pending matters, after reserves and indemnification, should not materially affect financial position, but adverse results could materially affect a particular period.
- The First Circuit overturned a $12.1 million damages judgment and $1.3 million prejudgment interest award in the Merrimon retained-asset-account case; judgment was entered in Unum’s favor.
- The filing states that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether premium growth and segment operating income continue, particularly in Unum US group disability and Unum UK.
- Whether low interest rates continue to reduce investment yields and reserve discount rates, and the resulting effect on margins.
- Development of long-term care and individual disability claims, reserves, rate increases, and persistency.
- Progress and remaining authorization under the share repurchase program relative to statutory capital and liquidity needs.
- Debt-service requirements, rating-agency outlooks, and the effect of the new senior notes and debt retirement.
- Changes in litigation, unclaimed-property examinations, regulatory investigations, and related reserves.
- The credit quality and liquidity of the fixed maturity portfolio, including the $1.8 billion fair value of securities in unrealized loss positions and the $3.4 billion below-investment-grade portfolio.