Business context and reporting period
Unum Group filed its Form 10-K for the fiscal year ended December 31, 2009, with quarterly data for the fourth quarter. The company is a major provider of disability insurance in the United States and United Kingdom, with complementary life, long-term care, accident, sickness, and voluntary benefits products. Its principal segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $10,091.0 million | $9,982.3 million | 1.1% |
| Premium income | $7,475.5 million | $7,783.3 million | (4.0%) |
| Net investment income | $2,346.6 million | $2,389.0 million | (1.8%) |
| Net realized investment gain | $11.7 million | $(465.9) million | Improved |
| Income before tax | $1,292.3 million | $824.0 million | 56.8% |
| Net income | $852.6 million | $553.2 million | 54.1% |
| Diluted EPS | $2.57 | $1.62 | 58.6% |
| Operating cash flow | $1,237.0 million | $1,326.1 million | (6.7%) |
| Long-term debt | $2,549.6 million | $2,259.4 million | 12.8% |
| Stockholders’ equity | $8,500.1 million | $6,397.9 million | 32.9% |
Net margin was approximately 8.5% of revenue, compared with approximately 5.5% in 2008. Before-tax operating income excluding realized investment gains and losses was $1,280.6 million, versus $1,289.9 million in 2008; the corresponding operating margin was approximately 12.7% of operating revenue.
- Unum US operating income rose 13.3% to $775.0 million. Premium income declined 1.8%, while the benefit ratio improved to 79.1% from 80.6%.
- Unum UK operating income declined 23.0% in reported dollars to $249.6 million, primarily because of lower premium income and unfavorable currency translation. The benefit ratio improved to 54.5% from 57.5%.
- Colonial Life operating income increased 4.8% to $280.9 million, with premium income up 3.9% and a stable 47.3% benefit ratio.
- Individual Disability–Closed Block operating income increased to $34.3 million from $27.7 million, but the business continues to run off.
- Consolidated reserves for future policy and contract benefits were $37.7 billion at year-end, while gross policy and claim reserves including the unrealized adjustment totaled approximately $39.5 billion.
- Risk-based capital for traditional U.S. insurance subsidiaries was approximately 382%, versus 332% at year-end 2008. Holding-company cash and marketable securities increased to approximately $915 million from $526 million.
Fourth-quarter and period-over-period changes
For the fourth quarter of 2009, net income was $199.4 million, or $0.60 per diluted share, compared with $41.8 million, or $0.13 per diluted share, in the fourth quarter of 2008. Fourth-quarter revenue was $2,496.6 million versus $2,323.7 million.
The annual earnings improvement was driven primarily by the absence of 2008’s large realized investment loss, a $243.1 million gain from the embedded derivative in a modified coinsurance arrangement, lower benefits and reserves, lower interest expense, and improved claims experience. These benefits were partly offset by lower premium income, lower investment income, higher taxes, and increased pension costs.
Unrealized gains on fixed maturity securities improved substantially to $2.0 billion at year-end 2009 from a $2.3 billion unrealized loss at year-end 2008. However, 2009 included $215.5 million of other-than-temporary impairment losses on fixed maturity securities, including $211.8 million recognized in earnings.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2010 earnings growth to be below longer-term expectations because of recession-related pressure on sales and premium growth. It anticipated disciplined growth, conservative capital deployment, continued investment in products and employees, and maintenance of financial flexibility.
- Unum US expected a slight increase in premium income during 2010, with benefit-ratio improvement continuing at a slower pace. Unum UK expected cautious premium growth and stable favorable margins. Colonial Life expected modest near-term growth and continued strong margins.
- High unemployment, lower wage growth, lower employee counts, weaker persistency, higher disability incidence, and longer claim durations could reduce premiums and increase reserves.
- Low interest rates, credit spreads, investment defaults, valuation uncertainty, and additional impairments could reduce investment income, statutory capital, liquidity, and earnings.
- Reinsurance recoverable was $4,996.9 million at year-end 2009. Fourteen reinsurers represented approximately 92% of the balance; collection depends on reinsurer solvency and performance.
- Regulatory and legal matters included continuing investigations involving broker compensation and quoting practices, unresolved litigation, and an appealed punitive-damages judgment in the Merrick matter. The filing states that reserves were not established for certain litigation matters and that potential losses could materially affect a particular period.
- Unum issued $350.0 million of 7.125% senior notes due 2016 and had no short-term debt at year-end. Contractual principal maturities included $225.1 million in 2011 and $2,324.7 million in 2015 and thereafter.
- The company adopted revised debt-security impairment guidance effective April 1, 2009, increasing opening retained earnings by $14.3 million after tax.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether improved earnings are sustainable after excluding investment-market gains, the modified-coinsurance derivative gain, and other non-operating items.
- Current disability and long-term-care claim incidence, recovery rates, persistency, and reserve adequacy, including the disclosed sensitivity of approximately $200 million for Unum US group disability reserves and $260 million for the closed block.
- Investment portfolio credit quality, impairment trends, below-investment-grade exposure, unrealized losses, and the impact of prolonged low interest rates.
- Availability of dividends from regulated insurance subsidiaries, statutory capital and RBC ratios, and holding-company liquidity relative to debt service and shareholder dividends.
- Status and potential financial exposure of broker-compensation investigations, litigation, tax audits, reinsurance recoverables, and other contingent liabilities.
- Unum UK results on a constant-currency basis, given the substantial effect of pound-to-dollar translation on reported revenue and earnings.