Unum Group — FY2011 Form 10-K Summary
Business context and reporting period
Unum Group is a U.S.- and U.K.-based insurance holding company and a leading provider of disability insurance. Its principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. The filing covers the fiscal year ended December 31, 2011, with comparative information for 2010 and 2009. The company had approximately 9,400 employees at year-end.
Effective December 31, 2011, long-term care and other products no longer actively marketed were reclassified into the Closed Block segment; prior periods were restated for comparability.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $10,278.0 million | $10,193.2 million | +0.8% |
| Premium income | $7,514.2 million | $7,431.4 million | +1.1% |
| Net investment income | $2,519.6 million | $2,495.5 million | +1.0% |
| Net realized investment gain/(loss) | $(4.9) million | $24.7 million | Unfavorable |
| Income before tax | $257.2 million | $1,331.3 million | −80.7% |
| Net income | $235.4 million | $886.1 million | −73.4% |
| Diluted EPS | $0.78 | $2.71 | −71.2% |
| Operating income after tax | $896.8 million | $880.6 million | +1.8% |
| Operating cash flow | $1,193.7 million | $1,196.8 million | −0.3% |
| Total assets | $60,179.0 million | $57,307.7 million | +5.0% |
| Stockholders’ equity | $8,577.0 million | $8,944.4 million | −4.1% |
Reported results were heavily affected by fourth-quarter reserve and deferred acquisition cost charges. Excluding the long-term care and individual disability charges and other specified items, after-tax operating income increased from $880.6 million to $896.8 million.
Segment performance
- Unum US: Operating income increased 6.6% to $819.8 million. Premium income rose 1.0% to $4,296.0 million, sales increased 9.9%, and the benefit ratio improved to 72.5% from 73.4%.
- Unum UK: Operating income declined 8.0% in reported dollars to $192.0 million and 11.5% in local currency. Premium income rose 5.7% in dollars, while the benefit ratio increased to 71.8% from 67.0%; sales declined 15.9% in dollars and 18.8% in pounds.
- Colonial Life: Operating income was essentially flat at $282.1 million. Premium income grew 5.5% to $1,135.3 million, but the benefit ratio worsened to 51.9% from 49.7%.
- Closed Block: Reported operating loss was $921.5 million versus $117.6 million of income in 2010, primarily because of $573.6 million of long-term care reserve strengthening, $183.5 million of individual disability reserve strengthening, and a $289.8 million long-term care DAC impairment. Excluding these charges, the segment’s before-tax operating income ratio was 9.0%.
Material changes and unusual items
- Long-term care reserves increased by $573.6 million after updated discount rate, mortality, morbidity, and termination assumptions. Long-term care reserves totaled approximately $5.4 billion after the charge.
- Individual disability closed-block claim reserves increased by $183.5 million due primarily to longer life expectancy among older, long-duration claimants. Related reserves totaled approximately $11.9 billion after the charge.
- Long-term care DAC of $289.8 million was deemed unrecoverable and written off.
- The charges reduced 2011 net income by approximately $561.2 million for long-term care and $119.3 million for individual disability, after tax.
- A final IRS settlement reduced 2011 income tax by $41.3 million and generated approximately $17.5 million of pretax interest income. The company expected a cash refund of approximately $60.0 million in 2012.
- The company repurchased 25.4 million shares for $619.9 million and paid $121.0 million of dividends. Cash and marketable securities at holding companies declined to approximately $756 million from $1.2 billion.
- Fourth-quarter 2011 net loss was $425.4 million, or $(1.45) per diluted share, primarily because of the reserve and DAC charges.
Debt, capital, liquidity, and investments
- Long-term debt was $2,570.2 million and short-term debt was $312.3 million at December 31, 2011. The short-term balance consisted entirely of securities lending agreements.
- Consolidated debt to total capital was 27.6%, compared with 25.9% in 2010. Excluding non-recourse debt and securities lending debt, leverage was 22.4%, compared with 22.8%.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 405%, compared with 398% in 2010. Management stated that subsidiary capital levels exceeded regulatory and longer-term requirements.
- Net cash provided by operating activities was $1,193.7 million. Investing activities used $410.3 million and financing activities used $720.4 million.
- Investments totaled $49.2 billion, including $42.5 billion of fixed maturity securities. The portfolio had $5.8 billion of net unrealized gains at year-end, compared with $3.5 billion in 2010.
- Other-than-temporary impairment losses on fixed maturity securities were $19.9 million, compared with $15.9 million in 2010.
- Reinsurance recoverable was $4,854.6 million. Fourteen reinsurers represented approximately 92% of the balance and were rated A or better by A.M. Best or substantially collateralized.
Guidance, outlook, risks, and contingencies
Management expects to pursue disciplined growth in selected markets, sustainable capital generation, and capital deployment during 2012. The near-term outlook remains cautious because unemployment, wage growth, competitive pricing, and consumer confidence continue to pressure premium and sales growth. Management expects marginal Unum US premium growth, modest Colonial Life growth, and continued pressure on Unum UK sales and premiums. Group disability and group life price increases were planned in the U.S. and U.K. to address claims and pricing conditions.
- The company expects the Closed Block to decline over time as policies run off, although approved long-term care rate increases may increase premium income beginning in 2012.
- Long-term care remains the most significant reserve risk. Management estimated that adverse changes in assumptions could require approximately $340 million of additional reserves, after considering potential future rate increases.
- Reasonably possible aggregate assumption changes could alter Unum US group disability claim reserves by approximately $200 million and Closed Block individual disability claim reserves by approximately $240 million.
- Key risks include sustained low interest rates, adverse morbidity or mortality, longer claim durations, reserve inadequacy, investment defaults and impairments, competition, regulatory and tax changes, rating downgrades, litigation, cyber incidents, reinsurer insolvency, and restrictions on subsidiary dividends.
- Solvency II requirements applicable to Unum UK were expected to take effect January 1, 2014; the eventual capital and disclosure impact was not yet determinable.
- The company faced litigation and regulatory matters, including retained asset account litigation, unclaimed-property examinations, and inquiries concerning life insurance beneficiaries. Management stated that ultimate material adverse effects on financial position were not expected, but acknowledged that individual matters could materially affect results or cash flows in a period.
- Adoption of revised DAC accounting guidance in the first quarter of 2012 was expected to reduce stockholders’ equity retrospectively by approximately $459 million as of January 1, 2011. The filing estimated restated 2011 net income of approximately $284.2 million, subject to the disclosed accounting effects.
Most important facts for investors to verify
- Whether long-term care claim incidence, mortality, persistency, termination, and investment-yield assumptions develop consistently with the revised reserves.
- Whether further reserve strengthening is required for long-term care or the individual disability closed block.
- The effect of long-term interest rates and investment portfolio yields on reserve adequacy, net investment income, and unrealized gains.
- Actual 2012 premium growth, sales, persistency, benefit ratios, and pricing actions in Unum US, Unum UK, and Colonial Life.
- The impact of DAC accounting adoption and any other accounting changes on reported earnings, equity, and comparability.
- Holding-company liquidity after share repurchases, dividends, debt service, pension contributions, and potential capital contributions to insurance subsidiaries.
- Reinsurance collectibility, subsidiary dividend capacity, RBC ratios, rating agency actions, and the ultimate resolution of litigation and regulatory inquiries.