Unum Group 2012 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unum Group is an insurance holding company operating primarily in the United States and United Kingdom. It is a leading provider of disability insurance and also offers group benefits, life insurance, voluntary benefits, accident, sickness, cancer and critical illness products. Reporting segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the same periods of 2011, and was filed November 1, 2012.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $2,628.0 million | $2,545.6 million | $7,857.2 million | $7,673.2 million |
| Premium income | $1,929.4 million | $1,881.2 million | $5,778.9 million | $5,625.7 million |
| Net investment income | $619.2 million | $629.2 million | $1,872.2 million | $1,885.0 million |
| Net realized investment gain (loss) | $21.3 million | $(23.9) million | $31.6 million | $(12.3) million |
| Income before tax | $320.4 million | $288.7 million | $926.8 million | $950.6 million |
| Net income | $230.2 million | $202.0 million | $660.5 million | $653.2 million |
| Diluted EPS | $0.83 | $0.68 | $2.32 | $2.13 |
| After-tax operating income | $224.0 million | $223.1 million | $662.5 million | $677.2 million |
Q3 net income margin was approximately 8.8%, compared with 7.9% in the prior-year quarter. Nine-month net income margin was approximately 8.4%, compared with 8.5% in the prior-year period. Consolidated benefit ratios were 87.4% in Q3 and 87.1% for nine months, versus 86.9% and 85.8%, respectively, in the comparable periods.
- Net cash provided by operating activities increased to $953.8 million for the first nine months of 2012 from $788.7 million.
- Net cash used in investing activities was $869.9 million, compared with $141.0 million, primarily reflecting increased purchases of fixed maturity securities.
- Net cash used in financing activities was $146.9 million, compared with $649.0 million, reflecting lower share repurchases partly offset by new debt issuance.
- Cash and bank deposits were $53.6 million at September 30, 2012, compared with $116.6 million at December 31, 2011.
- Holding-company cash and marketable securities were approximately $762 million, compared with $756 million at year-end 2011.
- Total assets were $62.1 billion, compared with $59.6 billion at December 31, 2011. Stockholders’ equity was $8.7 billion, compared with $8.2 billion.
- Short-term debt was $458.3 million, consisting of securities lending transactions. Long-term debt was $2.8 billion.
- Consolidated debt-to-total-capital leverage was 30.5%, compared with 28.7% at year-end 2011; excluding specified non-recourse and securities-lending debt, leverage was 25.2%, compared with 23.5%.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 407%, compared with 405% at December 31, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue increased 3.2% in Q3 and 2.4% for the first nine months, driven primarily by premium growth. Premium income increased 2.6% and 2.7%, respectively.
- Net income increased 14.0% in Q3 but only 1.1% year to date. The nine-month result was below income before tax in 2011 because of lower investment income and higher benefits and reserves, partly offset by favorable realized investment results and lower income tax expense.
- Realized investment results improved from losses of $23.9 million in Q3 2011 and $12.3 million year to date to gains of $21.3 million and $31.6 million. The 2012 gains included $19.7 million and $28.7 million, respectively, from the embedded derivative in a modified coinsurance arrangement.
- After-tax operating income declined 2.2% for the first nine months, despite higher diluted EPS due primarily to substantial share repurchases.
- Unum US operating income increased 3.4% in Q3 and 4.2% year to date. Colonial Life operating income increased 3.0% and 0.4%, respectively.
- Unum UK operating income declined 19.5% in Q3 and 28.9% year to date in local currency, reflecting lower investment income, less favorable risk results and persistency pressure from premium rate increases.
- Closed Block operating income declined 16.9% in Q3 and 28.4% year to date, principally due to unfavorable long-term care risk results and the expected runoff of closed businesses.
- The company adopted ASU 2010-26 on deferred acquisition costs retrospectively. The adoption reduced stockholders’ equity by $459.5 million as of January 1, 2011 and reduced previously reported 2011 nine-month net income by $7.6 million.
- Unum issued $250.0 million of 5.75% unsecured senior notes due 2042 in August 2012. It repurchased 18.6 million shares for $400.5 million during the first nine months and had approximately $650 million remaining under its $750 million authorization.
Guidance, Outlook, Risks and Unusual Items
Management intends to pursue disciplined top-line growth in selected markets, expense management and sustainable capital generation and deployment. It expects continued marginal year-over-year premium growth through the remainder of 2012 and into 2013, while employment levels, wages, unemployment and competitive conditions remain constraints. Unum US expects its 2012 group disability benefit ratio to be generally consistent with 2011, subject to claim incidence and discount-rate changes. Unum UK expects near-term pressure from premium rate increases and is exiting certain group life product lines; management expects fourth-quarter benefit ratios and profit margins to be generally consistent with the first nine months, with profitability benefits from rate increases emerging over time. Colonial Life expects strong margins and a benefit ratio generally consistent with the first nine months.
- Primary insurance risks include adverse changes in claim incidence, recovery rates, mortality, morbidity, persistency, reserve assumptions and unemployment-related claims experience.
- Low interest rates, declining investment yields, credit spreads, securities prices, bond calls and mortgage-backed-security prepayments may pressure investment income and asset-liability matching.
- The fixed maturity portfolio had a fair value of $44.7 billion and net unrealized gains of approximately $7.3 billion. Below-investment-grade securities had a fair value of $3.2 billion and are subject to higher default and liquidity risk.
- The company reported no exposure to subprime mortgages, Alt-A loans, collateralized debt obligations or direct sovereign debt of Greece, Ireland, Italy, Portugal and Spain; it did have $634.0 million of fixed maturity securities issued by entities domiciled in those countries.
- Legally binding unfunded commitments included $112.2 million for tax-credit partnerships and $5.6 million for transferable state tax credits. Additional non-binding commitments totaled $315.2 million for private placements, private equity partnerships and commercial mortgage loans.
- Pending litigation, regulatory inquiries and unclaimed-property investigations could materially affect results or cash flows in a particular period, although management believes they should not materially affect consolidated financial position after reserves and indemnification.
- The Quebecor World dismissal was affirmed on appeal by the district court, but the plaintiff filed a further appeal. A retained-asset-account class action remains in discovery concerning damages and class-member notice.
- Derivative contracts include rating-related termination provisions. The company’s current net derivative credit exposure was $9.8 million, while derivative liabilities subject to credit-related contingent features had a fair value of $182.5 million.
Most Important Facts for Investors to Verify
- Reconcile GAAP net income with after-tax operating income and assess how much of earnings growth depended on realized investment gains and the modified coinsurance embedded derivative.
- Evaluate the sustainability of premium growth and benefit ratios, particularly in Unum US group disability, Unum UK group life and disability, and the Closed Block long-term care business.
- Monitor investment yield compression, unrealized gains and losses, below-investment-grade exposure, European corporate holdings and mortgage-loan impairments.
- Assess leverage after the 2042 senior-note issuance, securities-lending debt and continued share repurchases, together with holding-company liquidity and statutory capital.
- Review the retrospective deferred-acquisition-cost accounting change when comparing 2012 results with prior filings.
- Track litigation, regulatory examinations, unclaimed-property matters, reinsurance counterparty performance and potential restrictions on dividends from insurance subsidiaries.