Unum Group 2014 Q1 SEC Filing Summary
Business Context and Reporting Period
Unum Group is a provider of disability, life, accident, sickness, voluntary, and related insurance products, primarily distributed through employers in the United States and United Kingdom. The filing covers the unaudited three months ended March 31, 2014, compared with the three months ended March 31, 2013.
The principal operating segments were Unum US, Unum UK, and Colonial Life. Closed Block and Corporate were reported separately. Management stated that disclosure controls were effective as of March 31, 2014, and that there were no material changes to previously disclosed risk factors.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $2,611.1 million | $2,624.8 million | (0.5%) |
| Premium income | $1,938.5 million | $1,930.9 million | 0.4% |
| Net investment income | $612.5 million | $621.1 million | (1.4%) |
| Income before income tax | $326.5 million | $303.8 million | 7.5% |
| Net income | $228.9 million | $212.6 million | 7.7% |
| Diluted EPS | $0.88 | $0.79 | 11.4% |
| After-tax operating income | $225.7 million | $215.6 million | 4.7% |
| After-tax operating EPS | $0.87 | $0.80 | 8.8% |
| Net cash from operating activities | $346.7 million | $265.1 million | 30.8% |
Net income margin was approximately 8.8% in Q1 2014 versus 8.1% in Q1 2013. The consolidated benefit ratio improved to 84.2% from 85.4%. Before-tax operating income increased 4.3% to $321.6 million, with favorable earnings in all segments except Corporate.
- Unum US operating income increased 1.3% to $210.8 million; premium income rose 1.1%, sales increased 7.2%, and the benefit ratio improved to 70.2% from 70.9%.
- Unum UK operating income increased 16.6% in reported dollars to $36.5 million and 8.9% in local currency. Local-currency premium income declined 1.3%, while the benefit ratio increased to 70.1% from 69.5%.
- Colonial Life operating income increased 5.3% to $79.4 million; premium income rose 3.0% and the benefit ratio improved to 50.5% from 52.5%.
- Closed Block operating income increased 6.6% to $29.1 million despite a 6.6% decline in premium income as the business continued to run off.
Balance Sheet, Debt, Liquidity, and Capital
| Metric | March 31, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $61,078.6 million | $59,403.6 million |
| Total investments | $50,532.9 million | $48,914.9 million |
| Total liabilities | $52,122.9 million | $50,744.5 million |
| Stockholders’ equity | $8,955.7 million | $8,659.1 million |
| Short-term debt | $61.6 million | $76.5 million |
| Long-term debt | $2,948.2 million | $2,612.0 million |
| Cash and bank deposits | $76.2 million | $94.1 million |
- Unum issued $350.0 million of unsecured 4.00% senior notes due 2024, receiving $347.2 million of proceeds net of issuance costs and discounts.
- Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $822 million, compared with $514 million at year-end 2013. Management stated that domestic resources were sufficient for the next 12 months.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400%, compared with 405% at December 31, 2013.
- The company repurchased 2.9 million shares for approximately $100 million and paid $38.3 million in dividends. Approximately $629.9 million remained under the $750 million repurchase authorization.
- Net cash used in investing activities was $540.6 million, principally reflecting purchases of fixed maturity securities and short-term investments. Net cash provided by financing activities was $176.0 million.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite slightly lower revenue, primarily because benefits and expenses declined 1.6%, risk results were generally favorable, and retirement-related expense declined.
- Net investment income fell 1.4% because of lower invested-asset yields, lower bond call premiums, and lower private-equity income, partly offset by higher invested assets and U.K. inflation-linked bond income.
- Other-than-temporary impairment losses on fixed maturity securities declined to zero from $0.8 million. Net realized investment gains declined to $6.3 million from $10.3 million.
- Other comprehensive income was $199.4 million versus a loss of $142.3 million, driven mainly by higher unrealized gains on securities. Accumulated other comprehensive income increased to $454.4 million from $255.0 million.
- Operating cash flow increased by $81.6 million, while investing cash flow shifted from a $184.1 million source to a $540.6 million use, reflecting substantially higher investment purchases and short-term investment activity.
- Fixed maturity securities increased to $43.7 billion from $42.3 billion, and the net unrealized gain on those securities increased to approximately $5.2 billion from $4.1 billion.
- A commercial mortgage loan was modified in a troubled debt restructuring, resulting in a $3.0 million impairment provision. The mortgage loan allowance increased to $4.5 million.
Guidance, Outlook, Risks, and Unusual Items
Management expected 2014 conditions to be similar to, or modestly better than, 2013, but continued to cite low interest rates and below-average economic growth. The company planned to protect margins through pricing and risk actions, invest in infrastructure and employees, simplify processes and products, and deploy excess capital while maintaining strong capitalization.
- Low interest rates and tightening credit spreads were expected to pressure investment yields, reserve discount rates, and near-term margins.
- Management expected year-over-year premium growth during the remainder of 2014, although economic weakness and competition could continue to constrain growth, particularly in existing customer accounts.
- Unum US expected its full-year 2014 group disability benefit ratio to be slightly below 2013 levels, while warning that higher-than-expected policy terminations could adversely affect deferred acquisition cost amortization.
- Unum UK continued to face challenging economic and competitive conditions. Rate increases were expected to support profitability but could pressure premium growth, sales, and persistency.
- Closed Block revenue was expected to decline as the business ran off. Long-term-care results remained sensitive to morbidity, mortality, persistency, interest rates, claim resolution rates, and reserve assumptions.
- Investment risks included interest-rate movements, credit spreads, defaults, impairments, liquidity, valuation uncertainty, and reinvestment risk. Approximately 89% of fixed maturity securities were valued using Level 2 or Level 3 inputs rather than active-market Level 1 prices.
- Derivative contracts had $117.7 million of liability fair value subject to credit-rating-related termination provisions. Current net derivative credit exposure after collateral was $0.2 million.
- Unum disclosed a $12.1 million damages award and $1.3 million of prejudgment interest in the Merrimon retained-asset-account litigation. The company had not accrued the judgment because it determined a loss was not probable and was appealing.
- Unclaimed death-benefit examinations and regulatory inquiries could result in additional beneficiary payments, escheatment, or penalties exceeding established reserves.
- After quarter-end, the company elected to redeem $145.0 million of 6.85% U.K. debt on May 15, 2014. The expected impact on second-quarter net income was immaterial.
Important Facts for Investors to Verify
- Whether premium growth and sales momentum continued while low interest rates pressured investment income and margins.
- Subsequent trends in disability and long-term-care claim incidence, recoveries, mortality, persistency, and reserve adequacy.
- The sustainability and capital impact of share repurchases, dividends, debt issuance, and the remaining $629.9 million repurchase authorization.
- Changes in the company’s risk-based capital ratio, statutory capital, liquidity, debt levels, and financial-strength ratings.
- Developments in the Merrimon appeal, unclaimed-property investigations, the Don long-term-care class action, and other litigation or regulatory matters.
- Realized investment losses, other-than-temporary impairments, credit deterioration, and valuation changes within the fixed maturity portfolio.
- The filing cautions that interim results are not necessarily indicative of full-year performance and that actual results may differ materially from forward-looking statements.