Unum Group quarterly report, Q3 FY2013

Unum Group 10-Q Summary

Business context and reporting period

Unum Group provides disability, life, accident, sickness, voluntary and related insurance products primarily in the United States and United Kingdom. Reported segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods. The interim financial statements were reviewed, not audited.

Key financial metrics

Metric	Q3 2013	Q3 2012	Nine months 2013	Nine months 2012
Total revenue	$2,540.9 million	$2,628.0 million	$7,767.6 million	$7,857.2 million
Premium income	$1,897.3 million	$1,929.4 million	$5,734.0 million	$5,778.9 million
Net investment income	$615.5 million	$619.2 million	$1,862.7 million	$1,872.2 million
Income before tax	$284.1 million	$320.4 million	$899.4 million	$926.8 million
Net income	$205.7 million	$230.2 million	$636.9 million	$660.5 million
Diluted EPS	$0.78	$0.83	$2.38	$2.32
After-tax operating income	$224.6 million	$224.0 million	$658.7 million	$662.5 million
Operating diluted EPS	$0.85	$0.80	$2.47	$2.33

Reported net margin was approximately 8.1% in the third quarter and 8.2% for the first nine months. Consolidated benefit ratios improved to 86.5% and 86.4%, respectively, from 87.4% and 87.1% in the comparable 2012 periods.

At September 30, 2013, total assets were $59.6 billion, total liabilities were $50.9 billion and stockholders’ equity was $8.7 billion.
Total investments were $49.1 billion, including $42.6 billion of fixed maturity securities at fair value. The fixed-income portfolio had a duration-weighted book yield of 6.32%, down from 6.47% at December 31, 2012.
Cash and bank deposits were $63.0 million. Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $678 million, compared with $805 million at year-end 2012.
Operating cash flow was $709.5 million for the first nine months, down from $953.8 million in 2012. Investing activities provided $70.8 million, while financing activities used $794.6 million.
Short-term debt was $140.5 million, consisting entirely of securities lending agreements. Long-term debt was $2.63 billion. A new five-year, $400 million unsecured revolving credit facility was undrawn at September 30, 2013.
The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 397%, compared with slightly less at December 31, 2012.

Material changes versus the prior comparable period

Third-quarter revenue declined 3.3% and nine-month revenue declined 1.1%, primarily reflecting lower premium income, lower net investment income and unfavorable realized investment results.
Third-quarter net income declined 10.6% and nine-month net income declined 3.6%. Operating income was comparatively stable: after-tax operating income increased slightly in the quarter and declined modestly year to date.
The company recorded a $26.1 million realized investment loss in the quarter versus a $21.3 million gain in Q3 2012. The loss included approximately $30 million from selling lower-yielding fixed maturity securities for reinvestment at higher yields and improved credit quality.
Unum US operating income increased 1.6% in the quarter and 1.1% year to date, supported by premium growth and favorable risk results. Unum US sales declined 0.8% in the quarter and 6.0% year to date.
Unum UK operating income rose 16.2% in local currency in the quarter but declined 0.2% in U.S. dollars year to date. Premium income fell substantially because of group-life reinsurance transactions and the weaker pound. The company reported improved benefit ratios.
Colonial Life operating income increased 0.4% in the quarter and 4.6% year to date, while premium income increased 3.2% and 3.5%, respectively. Sales declined 2.9% and 3.2%.
Closed Block operating income increased 23.8% year to date, although the block’s revenue is expected to decline over time as policies run off.
Unrealized gains on fixed maturity securities declined to approximately $4.4 billion from $7.2 billion at year-end 2012, primarily because of higher U.S. Treasury rates. Accumulated other comprehensive income declined to $409.6 million from $628.0 million.
The company repurchased 9.8 million shares for $268.5 million during the first nine months, compared with 18.6 million shares for $400.5 million in 2012, and paid $108.8 million in dividends.

Guidance, outlook, commentary and unusual items

Management remained cautious about low interest rates, weak economic growth, employment and wage trends, political uncertainty, healthcare reform and competitive conditions. These factors were expected to pressure sales, premium growth and investment yields.
Management expected marginal year-over-year premium growth, with stronger growth opportunities dependent on improving employment trends. It expected continued pressure on net investment income and profit margins from the low-rate environment.
Unum US expected its 2013 group-disability benefit ratio to be slightly below 2012 levels and identified expense efficiencies, claims management and product mix as potential margin drivers.
Unum UK was pursuing rate increases and pricing discipline to improve profitability, while accepting near-term pressure on sales, persistency and premium income. Group-life reinsurance was expected to reduce both premium and benefit volatility.
Colonial Life expected continued premium growth and generally stable benefit ratios, although sales remained exposed to economic conditions and competition in voluntary benefits.
U.S. and U.K. defined-benefit pension plans were amended to freeze future participation or accruals. The changes reduced the net pension liability by approximately $330 million and increased other comprehensive income by approximately $115 million after tax. A $3.7 million third-quarter curtailment gain was recognized.
Management stated that no additional U.S. pension contribution was expected in 2013, while an additional U.K. contribution of approximately £0.8 million was expected in the fourth quarter.
The company was evaluating redomestication of a Bermuda insurance subsidiary. If completed in the fourth quarter, management estimated no material 2013 net-income impact and expected to maintain its risk-based-capital and holding-company-liquidity targets.
Unum disclosed a $12.1 million class-action damages award plus $1.3 million of prejudgment interest relating to retained asset accounts. The company appealed and did not accrue the judgment because management determined a loss was not probable.
Other litigation, unclaimed-property inquiries, regulatory investigations and a long-term-care inflation-protection lawsuit remain possible sources of adverse cash-flow or earnings impacts. Management stated that the ultimate outcome of pending matters could not generally be estimated.

Important facts for investors to verify

Whether premium and sales growth recover as employment, wages and economic conditions improve, particularly in Unum US and Colonial Life.
The sustainability of favorable disability and life risk results, including claim incidence, recovery rates, mortality and persistency.
The effect of prolonged low interest rates on investment yields, reserve discount rates, pricing and margins.
Whether the reduction in unrealized investment gains leads to additional realized losses or impairments if rates, credit spreads or liquidity conditions worsen.
Progress and financial effects of Unum UK’s reinsurance, pricing and business-mix actions.
The outcome and potential cash impact of the retained-asset-account appeal, unclaimed-property matters, regulatory inquiries and other litigation.
Use of the remaining $281.6 million under the share-repurchase authorization, debt covenant compliance and availability of the $400 million revolving facility.
Execution and regulatory consequences of any redomestication of the Bermuda insurance subsidiary.