Unum Group 2010 Q3 SEC Filing Summary
Business Context and Reporting Period
Unum Group is a provider of disability, life, long-term care, accident, sickness, and voluntary employee-benefit products in the United States and United Kingdom. Its principal segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, with comparisons to the corresponding 2009 periods.
Financial Performance and Key Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $2,527.9 million | $2,517.5 million | $7,600.1 million | $7,594.4 million |
| Premium income | $1,850.2 million | $1,861.1 million | $5,563.2 million | $5,609.8 million |
| Net investment income | $618.4 million | $579.6 million | $1,861.2 million | $1,750.9 million |
| Income before tax | $326.5 million | $334.6 million | $995.8 million | $996.4 million |
| Net income | $220.8 million | $221.1 million | $660.3 million | $653.2 million |
| Diluted EPS | $0.68 | $0.66 | $2.00 | $1.97 |
| Net income margin | Approximately 8.7% | Approximately 8.8% | Approximately 8.7% | Approximately 8.6% |
| Operating cash flow | Not separately provided | Not separately provided | $913.8 million | $853.6 million |
- Total revenue was broadly flat year over year, while premium income declined modestly and investment income increased 6.7% in the quarter and 6.3% year to date.
- Total benefits and expenses were $2,201.4 million in the quarter and $6,604.3 million year to date, up 0.8% and 0.1%, respectively.
- Before-tax operating income excluding realized investment gains and losses was $325.4 million in the quarter and $998.6 million year to date, compared with $319.7 million and $958.8 million in the prior-year periods.
- Unum US operating income increased 3.9% in the quarter and 8.4% year to date. Colonial Life operating income increased 5.8% and 4.1%, respectively. Unum UK operating income declined 15.1% in the quarter and 14.8% year to date in local currency.
- Consolidated benefit ratio increased to 85.8% in the quarter and 85.1% year to date, compared with 84.1% and 84.2% in 2009.
Balance Sheet, Debt, Liquidity, and Capital
- Total assets were $59.05 billion at September 30, 2010, compared with $54.48 billion at December 31, 2009. Stockholders’ equity was $8.92 billion, compared with $8.50 billion.
- Total investments were $47.72 billion, including $41.75 billion of fixed maturity securities. The portfolio had a net unrealized gain of approximately $5.11 billion on fixed maturity securities.
- Cash and bank deposits were $78.6 million at September 30, 2010. Cash and marketable securities held by Unum Group and intermediate holding companies were approximately $1.027 billion, compared with $915 million at year-end 2009.
- Long-term debt was $2.661 billion and short-term debt was $225.1 million. The short-term debt consisted of 7.625% senior notes due March 2011.
- In September 2010, Unum issued $400 million of unsecured senior notes due 2020 bearing a fixed 5.625% interest rate. Net proceeds were expected to support repayment of senior notes due March 2011 and general corporate purposes.
- Consolidated debt-to-capital leverage increased to 26.5% from 24.8% at year-end 2009. Excluding non-recourse debt and associated capital, leverage was 23.3%, compared with 20.5%.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 410%, compared with 382% at year-end 2009.
- Operating cash flow increased to $913.8 million year to date. Investing activities used $842.9 million, while financing activities used $63.9 million.
Material Changes Versus the Prior Comparable Period
- Premium income declined 0.6% in the quarter and 0.8% year to date, primarily reflecting unemployment, lower salary and employment growth, competitive pricing, and weaker sales in parts of Unum US and Unum UK.
- Investment income improved because of higher invested asset levels and higher bond call premiums. Net realized investment results deteriorated to a $2.8 million loss year to date from a $37.6 million gain in 2009.
- Other-than-temporary impairment losses on fixed maturity securities were $10.4 million year to date, versus $160.1 million in the prior-year period.
- The embedded derivative in a modified coinsurance arrangement produced a $3.7 million realized loss year to date, versus a $208.1 million gain in 2009, creating significant volatility in reported investment results.
- Unum UK’s benefit ratio rose to 65.3% year to date from 52.6%, driven by unfavorable disability risk results, inflation-linked benefit reserve volatility, and unfavorable group-life claims experience.
- Unum US sales increased 3.0% in the quarter but declined 8.8% year to date. Voluntary-benefit sales increased 26.8% in the quarter and 17.1% year to date.
- Unum repurchased approximately 15.2 million shares for $327.5 million during the first nine months and increased the quarterly dividend from $0.0825 to $0.0925 per share.
- Interest and debt expense increased 26.2% in the quarter and 13.0% year to date, reflecting higher outstanding debt.
Guidance, Outlook, Risks, and Unusual Items
- Management expected marginal year-over-year premium growth in Unum US during the fourth quarter of 2010 and into 2011, with gradual improvement as employment and wages recover.
- Management expected Unum US group-disability benefit ratios to remain fairly level through the remainder of 2010, with slight improvement in 2011, and expected future margin improvement at a slower pace than in 2009.
- Unum UK management maintained a cautious outlook for premium growth and expected margins to remain favorable but below 2009 levels because of competitive pricing and adverse claims experience.
- Colonial Life was expected to maintain strong profit margins, although its benefit ratio was expected to be somewhat elevated relative to favorable 2009 levels.
- The Individual Disability–Closed Block was expected to continue declining as the business runs off, with potential volatility in claims resolution, reserves, and investment income.
- Key risks include unemployment and consumer confidence, claim incidence and recovery rates, reserve adequacy, low interest rates, credit spreads, investment impairments, liquidity of securities, foreign exchange, rating-agency actions, regulatory restrictions on subsidiary dividends, reinsurer performance, litigation, and changes in tax or accounting rules.
- The company recorded a $10.2 million non-cash tax charge in the first quarter related to healthcare legislation and a $2.7 million tax benefit in the third quarter from a U.K. tax-rate change.
- Unum had a $148.8 million legally binding unfunded commitment to tax-credit partnerships, approximately $83.6 million of commitments to private-equity partnerships, and a $98.7 million aggregate minimum obligation under a new office lease, plus $14.1 million of leasehold-improvement commitments.
- Pending litigation and regulatory matters could materially affect results or cash flows in a particular period, although management believed the ultimate effect would not be material to financial position after reserves and indemnification.
- The company stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Reconcile GAAP net income with management’s non-GAAP operating income and assess the effect of realized investment gains, impairments, and the modified-coinsurance derivative.
- Monitor Unum UK claims and benefit ratios, particularly inflation-linked long-term-disability reserves and group-life claims.
- Assess whether employment, wage, persistency, and sales trends support the expected return to premium growth.
- Review the March 2011 debt maturity, refinancing or repayment plans, and the effect of the 2020 senior-note issuance on leverage and interest expense.
- Evaluate the quality, duration, credit ratings, unrealized losses, and liquidity of the investment portfolio, including below-investment-grade securities.
- Track statutory capital, subsidiary dividend capacity, insurer financial-strength ratings, and any rating-agency or regulatory actions.
- Review developments in litigation, regulatory investigations, tax positions, pension funding, and partnership commitments.
- Confirm subsequent-period results because the filing states that interim results are not necessarily indicative of full-year performance.