Unum Group 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
Unum Group provides disability, life, accident, critical illness, dental, vision, and related financial protection products, primarily through workplace channels in the United States and United Kingdom. The filing covers the unaudited three months ended March 31, 2017, with comparison to the same period of 2016. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $2,806.5 million | $2,725.4 million | 3.0% |
| Premium income | $2,142.9 million | $2,087.5 million | 2.7% |
| Net investment income | $602.4 million | $606.4 million | (0.7%) |
| Income before income tax | $330.3 million | $304.2 million | 8.6% |
| Net income | $229.9 million | $210.6 million | 9.2% |
| Diluted earnings per share | $1.00 | $0.88 | 13.6% |
| After-tax operating income | $236.1 million | $224.2 million | 5.3% |
| After-tax operating income per diluted share | $1.02 | $0.94 | 8.5% |
| Net cash from operating activities | $308.0 million | $293.3 million | 5.0% |
The effective income tax rate was 30.4%, compared with 30.8% in the prior-year quarter. Adoption of the stock-compensation accounting update reduced the first-quarter 2017 effective tax rate by approximately one percentage point.
At March 31, 2017, total assets were $62.5 billion, stockholders’ equity was $9.1 billion, and long-term debt was $3.0 billion. Cash and bank deposits were $107.0 million. The company reported a weighted-average risk-based capital ratio for its traditional U.S. insurance subsidiaries above 390%.
Cash flow, liquidity, investments, and capital management
- Investing activities used $124.4 million, primarily reflecting net purchases of investments and property and equipment.
- Financing activities used $177.0 million, including $106.9 million for share repurchases, $46.5 million for dividends, and $15.2 million for debt repayments.
- Cash and bank deposits increased $6.6 million during the quarter to $107.0 million.
- Unum Group and intermediate holding companies held $648 million of fixed maturity securities, short-term investments, and cash, excluding amounts committed for subsidiary contributions; approximately $148 million was held in U.K. subsidiaries.
- The company repurchased 2.1 million shares for approximately $100 million. Approximately $395.7 million remained available under the $750 million repurchase authorization.
- Fixed maturity securities totaled $44.6 billion at fair value, with a net unrealized gain of approximately $4.9 billion. The earned book yield was 5.18%, compared with 5.30% for full-year 2016.
- No other-than-temporary impairment losses on fixed maturity securities were recorded in Q1 2017, compared with $21.1 million in Q1 2016.
- Long-term debt was $2,984.6 million, net of deferred issuance costs. The company had $2.1 million of letters of credit outstanding and no borrowings under its credit facility.
Material changes versus the prior comparable period
- Net income increased $19.3 million, while diluted EPS increased from $0.88 to $1.00, aided by earnings growth and lower weighted-average shares outstanding following repurchases.
- Operating income increased to $339.9 million from $324.7 million. After-tax operating income increased to $236.1 million from $224.2 million.
- Unum US operating income increased 10.7% to $239.1 million. Its benefit ratio improved to 67.9% from 69.3%, and sales increased 11.1%, aided by the dental and vision offering added in 2016.
- Unum UK operating income declined 8.9% in local currency. Its benefit ratio worsened to 71.4% from 67.9%, although local-currency sales increased 24.2%. Reported dollar results were adversely affected by the weaker British pound.
- Colonial Life operating income increased 6.5% to $82.4 million, with premium income up 6.6% and a benefit ratio broadly stable at 50.8%.
- Closed Block operating income declined 6.2% to $31.6 million as individual disability premium income declined and expenses increased relative to premium income.
- Net realized investment gains were $11.0 million versus a $20.5 million loss in Q1 2016, primarily because the prior-year period included impairment losses.
- Other expenses increased 12.3%, principally because of a $20.6 million pretax guaranty fund assessment related to the liquidation of an unaffiliated insurer.
Guidance, outlook, risks, and unusual items
Management expects continued premium growth in the core businesses, generally stable benefits experience, disciplined sales and pricing, expense control, and further operating-efficiency improvements during 2017. Management expects solid operating income growth, but did not provide a specific consolidated earnings or revenue target in the filing.
- Low interest rates continue to pressure investment yields, profit margins, and the adequacy of reserves for certain products. The company has substantial sensitivity to rising interest rates and improving employment, payroll, and wage growth.
- Management expects the group disability benefit ratio to improve for full-year 2017 compared with 2016, while Colonial Life’s annual benefit ratio is expected to remain generally consistent with 2016.
- U.K. economic uncertainty following the Brexit process may dampen growth, create investment valuation and solvency-ratio volatility, and reduce reported results through further weakening of sterling.
- Insurance reserves remain sensitive to claim incidence, mortality, morbidity, claim recovery and resolution rates, persistency, discount rates, and changes in medical, economic, and regulatory conditions.
- Investment risks include credit defaults, impairments, credit-spread changes, interest-rate movements, liquidity constraints, and valuation uncertainty for securities using unobservable inputs.
- Material contingencies include litigation, regulatory examinations, unclaimed-benefit and unclaimed-property matters, and possible additional guaranty fund assessments. Management believes pending matters should not materially affect financial position, but an adverse period-specific effect on earnings or cash flow remains possible.
- The company had commitments that may or may not be funded, including $38.0 million for private-placement securities, $252.0 million for private-equity partnerships, and $56.6 million for commercial mortgage loans.
- Forward-looking results are also subject to cyber risk, technology execution, competition, reinsurance counterparty risk, financial-strength ratings, tax and accounting changes, foreign exchange movements, and the ability to maintain liquidity and regulatory capital.
Important facts for investors to verify
- Reconcile GAAP net income of $229.9 million with after-tax operating income of $236.1 million, including the effects of the $20.6 million pretax guaranty fund assessment and $11.0 million realized investment gain.
- Monitor reserve adequacy and benefit ratios, particularly for group disability, long-term care, and other long-tailed products.
- Assess the effect of sustained low interest rates on investment income, discount rates, margins, and reserve requirements.
- Track Unum UK performance in local currency separately from reported dollar results, including Brexit-related economic and currency effects.
- Review the size, quality, liquidity, and unrealized gains and losses of the fixed maturity portfolio, including below-investment-grade and Level 3 investments.
- Evaluate capital flexibility after share repurchases, dividends, debt service, subsidiary capital requirements, and potential guaranty fund or litigation-related payments.
- Confirm the status and remaining capacity of the share repurchase program, debt maturities, credit ratings, and regulatory capital ratios.