Unum Group 2013 Form 10-K Summary
Business context and reporting period
Unum Group is a U.S.-based insurance holding company providing disability, life, accident, sickness, voluntary and related employee-benefit products primarily through the workplace in the United States and United Kingdom. Its principal segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This filing covers the fiscal year ended December 31, 2013; fourth-quarter results are included but the filing is an annual report.
Unum US represented approximately 59.2% of 2013 consolidated premium income, Colonial Life 16.2%, Unum UK 7.3% and Closed Block 17.3%. The Company had approximately 9,200 full-time employees at year-end.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Premium income | $7,624.7 million | $7,716.1 million | (1.2%) |
| Operating revenue | $10,347.0 million | $10,459.2 million | (1.1%) |
| Total revenue | $10,353.8 million | $10,515.4 million | (1.5%) |
| Net investment income | $2,492.1 million | $2,515.2 million | (0.9%) |
| Income before tax | $1,205.2 million | $1,249.5 million | (3.5%) |
| Net income | $858.1 million | $894.4 million | (4.1%) |
| Diluted earnings per share | $3.23 | $3.17 | +1.9% |
| Operating income | $1,241.8 million | $1,239.7 million | +0.2% |
| After-tax operating income | $882.5 million | $887.5 million | (0.6%) |
| Net cash from operating activities | $1,031.5 million | $1,379.6 million | (25.2%) |
Net income included a $62.1 million after-tax charge for unclaimed death benefits and a $55.2 million after-tax benefit from reducing group-life waiver-of-premium reserves. Excluding these items, management reported 2013 after-tax operating income of $882.5 million, or $3.32 per diluted share, compared with $887.5 million, or $3.15 per diluted share, in 2012.
The consolidated benefit ratio improved to 86.5% from 87.1%. Excluding the 2013 life-insurance reserve adjustments, the ratio was 86.4%. The operating income ratio was approximately 12.8% based on operating income and operating revenue.
Segment performance
- Unum US: Premium income increased 1.4% to $4,517.1 million. Operating income increased 1.4% to $859.0 million, including the reserve adjustments. The benefit ratio was 71.3%, compared with 72.7% in 2012. Sales declined 2.0%.
- Unum UK: Premium income declined 19.9% to $556.6 million, primarily because of new group-life reinsurance arrangements and foreign-exchange translation. Operating income increased slightly to $132.0 million, while the benefit ratio improved to 74.3% from 77.9%. Local-currency sales declined 18.7%.
- Colonial Life: Premium income increased 3.2% to $1,232.2 million. Operating income rose 3.9% to $284.9 million, including the unclaimed-death-benefit reserve increase. Excluding that charge, the benefit ratio was 52.5%, consistent with 2012. Sales increased 1.6%.
- Closed Block: Premium income declined 3.8% to $1,318.8 million as the legacy business ran off. Operating income increased 14.6% to $109.4 million, helped by favorable risk results and higher investment income. The segment remains exposed to long-term-care and individual-disability reserve volatility.
- Corporate: Operating loss widened to $143.5 million from $108.5 million, primarily because of lower investment income and higher interest and other expenses.
Balance sheet, capital, liquidity and debt
- Total assets were $59.4 billion, down from $62.2 billion. Stockholders’ equity was $8.66 billion, compared with $8.61 billion.
- Reserves for future policy and contract benefits were $43.1 billion. Gross policy and claim reserves, before the unrealized investment adjustment, were $40.5 billion; reinsurance ceded was $6.85 billion.
- Fixed-maturity securities were $42.3 billion at fair value. The net unrealized gain declined to approximately $4.1 billion from $7.2 billion because of higher U.S. Treasury rates.
- Long-term debt was $2.61 billion and short-term debt was $76.5 million. The Company remained in compliance with its debt covenants.
- Unum Group entered into a five-year, $400 million unsecured revolving credit facility in August 2013, with potential expansion to $600 million. No borrowings were outstanding at year-end.
- Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $514 million, down from $805 million, primarily because of share repurchases and an approximately $300 million capital contribution related to captive-reinsurance re-domestication.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 405%, up from 396%. Approximately $591 million was available for 2014 ordinary dividends from traditional U.S. insurance subsidiaries without prior regulatory approval, subject to applicable conditions.
- The Company repurchased 11.2 million shares for $318.6 million during 2013 and paid $146.5 million of common-stock dividends. The December 2013 authorization permits up to $750 million of additional repurchases through June 12, 2015.
Material changes versus the prior comparable period
- Premium income and operating revenue declined modestly, while operating income was broadly stable and diluted EPS increased because of share repurchases.
- Unum UK’s results were materially affected by group-life reinsurance, which reduced both premiums and benefit volatility.
- The fourth quarter included a $95.5 million pretax increase in reserves for unclaimed death benefits and an $85.0 million pretax reduction in group-life waiver-of-premium reserves.
- Net operating cash flow fell by $348.1 million, primarily reflecting changes in receivables, taxes and insurance-related cash flows.
- Investing cash used declined sharply to $39.9 million from $1.11 billion, while financing cash used increased to $974.8 million, reflecting debt repayments, share repurchases and dividends.
- The Company froze participation and future accruals in its U.S. defined-benefit pension plans effective December 31, 2013; the U.K. plan freeze becomes effective June 30, 2014. These amendments reduced the net pension liability by approximately $330 million before tax through other comprehensive income.
- The Closed Block’s long-term-care and individual-disability reserve charges recorded in 2011 did not recur in 2013, but the related assumptions remain important to future earnings and capital.
Guidance, outlook, risks and unusual items
Management expected 2014 economic conditions to be modestly improved or similar to 2013, with below-average growth, low interest rates and political uncertainty. The Company planned to pursue disciplined pricing, risk actions, expense efficiency, infrastructure investment and growth in core group and voluntary markets.
- Unum US expected marginal premium growth, continued pressure from weak employment growth, healthcare-reform-related market disruption and competition, and a 2014 group-disability benefit ratio slightly below 2013.
- Unum UK expected continued pressure on sales and persistency from pricing actions, while using rate increases, reinsurance and business-mix changes to improve group-life margins and reduce volatility.
- Colonial Life expected improved sales momentum and a 2014 benefit ratio generally consistent with 2013 excluding the unclaimed-death-benefit charge.
- The Closed Block is expected to decline over time as policies mature, with potential volatility from long-term-care claims, persistency, interest rates and investment income.
- Key risks include low interest rates, investment defaults and impairments, reserve-estimate volatility, disability and long-term-care morbidity and mortality, regulatory changes, captive-reinsurance restrictions, reinsurance counterparty credit, litigation, cyber incidents, foreign-exchange movements, competition and the availability of holding-company liquidity.
- Unum was subject to examinations and investigations concerning unclaimed property and unclaimed death benefits. Management cautioned that additional beneficiary payments, escheatment obligations or penalties could exceed established reserves.
- A retained-asset-account class action judgment awarded $12.1 million of damages plus $1.3 million of prejudgment interest; Unum appealed and had not accrued the judgment because it concluded a loss was not probable.
Important facts for investors to verify
- Reconcile GAAP net income of $858.1 million with management’s non-GAAP operating income and assess the recurrence risk of the 2013 reserve adjustments.
- Review long-term-care and closed-block reserve sensitivity, including the filing’s estimate that a 25-basis-point change in the long-term-care discount rate could affect reserves by approximately $400 million.
- Monitor Unum US disability claim incidence, recovery rates, persistency and pricing adequacy.
- Evaluate Unum UK’s group-life reinsurance structure, retained risk and effect on future premium, earnings and volatility.
- Assess holding-company liquidity after share repurchases, captive-reinsurance capital contributions and upcoming debt maturities, including $296.9 million due in 2015 and $350.0 million due in 2016.
- Verify statutory capital, dividend capacity, captive-reinsurance treatment and potential effects of evolving NAIC and Solvency II requirements.
- Track unclaimed-death-benefit examinations, retained-asset-account litigation and other regulatory or class-action matters.
- Consider the effect of higher interest rates on unrealized investment gains, reserve adjustments, net investment income, derivative collateral and capital.