Unum Group 2016 Q1 Form 10-Q Summary
Business Context and Reporting Period
Unum Group is a provider of disability, life, accident, sickness, voluntary, dental, vision, cancer, and critical illness insurance, primarily distributed through employers in the United States and United Kingdom. The filing covers the unaudited three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Principal operating segments were Unum US, Unum UK, and Colonial Life. Closed Block contains discontinued or no-longer-actively-marketed products, including individual disability and long-term care.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Premium income | $2,087.5 million | $2,006.3 million | 4.0% increase |
| Net investment income | $606.4 million | $602.0 million | 0.7% increase |
| Total revenue | $2,725.4 million | $2,647.4 million | 2.9% increase |
| Income before income tax | $304.2 million | $303.0 million | 0.4% increase |
| Net income | $210.6 million | $212.9 million | 1.1% decrease |
| Diluted earnings per share | $0.88 | $0.84 | Increase |
| After-tax operating income | $226.8 million | $224.8 million | 0.9% increase |
| After-tax operating income per diluted share | $0.95 | $0.89 | Increase |
| Operating cash flow | $293.3 million | $400.1 million | 26.7% decrease |
Benefits and change in reserves increased 4.6% to $1,729.8 million, while total benefits and expenses increased 3.3% to $2,421.2 million. The effective income tax rate was 30.8%, compared with 29.7% in the prior-year quarter.
Operating income before tax was $328.8 million, compared with $321.3 million. Operating results exclude net realized investment losses and non-operating retirement-related losses.
Balance Sheet, Investments, Debt, and Liquidity
- Total assets were $61.97 billion at March 31, 2016, compared with $60.56 billion at December 31, 2015.
- Stockholders’ equity was $8.92 billion, compared with $8.66 billion at year-end 2015.
- Total investments were $51.24 billion, including $44.70 billion of fixed maturity securities.
- Fixed maturity securities had $5.32 billion of gross unrealized gains and $424.5 million of gross unrealized losses. The net unrealized gain increased to $4.9 billion from $3.7 billion at December 31, 2015, primarily because of lower U.S. Treasury rates.
- Short-term debt was $351.4 million and long-term debt was $2.44 billion. A $400 million credit facility was extended to March 2021; no borrowings were outstanding under the facility, although $2.1 million of letters of credit had been issued.
- Cash and bank deposits were $120.7 million at quarter-end. Cash equivalents and marketable securities held at Unum Group and intermediate holding companies were approximately $478 million, with management stating that domestic resources were sufficient for expected liquidity needs over the next 12 months.
- Operating cash flow was reduced by higher changes in receivables and lower income-tax-related cash inflows compared with the prior year. Investing activities used $110.5 million and financing activities used $175.0 million.
- The company repurchased 3.7 million shares for approximately $100 million and paid $45.2 million of common stock dividends. Approximately $402.3 million remained under the repurchase authorization at March 31, 2016.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 390%, lower than year-end 2015 primarily because of the timing of subsidiary dividend payments.
Material Changes Versus the Prior Comparable Period
- Premium growth in the principal operating segments was approximately 5%, led by Unum US and Colonial Life.
- Unum US operating income increased 0.7% to $215.9 million, while its benefit ratio worsened to 69.3% from 68.3%. Sales declined 4.5%.
- Unum UK operating income increased 9.3% in local currency to £23.5 million. Premium income increased 6.1% in local currency, but the benefit ratio increased to 67.9% from 65.3%.
- Colonial Life operating income declined 0.3% to $77.4 million despite 5.7% premium growth. Its benefit ratio improved to 50.9% from 51.3%, but investment income declined.
- Closed Block operating income increased 26.2% to $33.7 million, helped by higher investment income and lower expenses. The segment’s individual disability and long-term care loss ratios remained exposed to claims and reserve volatility.
- Net realized investment loss increased to $20.5 million from $15.3 million. Other-than-temporary impairment losses on fixed maturity securities rose to $21.1 million from $4.5 million, primarily because of energy-sector impairments.
- The company’s diluted weighted-average share count declined to 239.9 million from 252.2 million, reflecting share repurchases and contributing to higher diluted EPS despite slightly lower net income.
- Other comprehensive income increased to $184.6 million from $94.0 million, primarily reflecting higher unrealized gains on securities, partly offset by related reserve and tax adjustments.
Guidance, Outlook, Risks, and Unusual Items
Management expected 2016 premium growth from stable persistency and disciplined sales growth, with potential upside from stronger employment, payroll growth, and economic conditions. The company planned to focus on pricing, underwriting, expense management, infrastructure, customer service, and capital deployment.
Low interest rates were expected to continue pressuring investment yields, profit margins, and reserve adequacy for certain products. Management expected full-year 2016 group disability and Colonial Life benefit ratios to be generally consistent with 2015 levels, although quarterly results could remain volatile.
- Energy-sector exposure generated $21.1 million of other-than-temporary impairment losses in the quarter, including an $11.6 million impairment on securities issued by a large U.S.-based energy company.
- Energy-sector fixed maturity securities had fair value of $4.94 billion and gross unrealized losses of $297.4 million. Management stated that prolonged depressed oil prices could produce additional losses.
- The company agreed to acquire Starmount for $127 million plus net assets. Closing was expected by the end of the third quarter of 2016, subject to approvals and other conditions. Management did not expect a material 2016 financial impact or a change to its share repurchase and dividend strategy.
- Unum had litigation and regulatory matters involving claims handling, unclaimed death benefits, and long-term care policy inflation protection. Management believed the ultimate outcome, after reserves and indemnification, should not materially affect financial position, but acknowledged that adverse outcomes could materially affect results or cash flows in a particular period.
- Key risks included sustained low interest rates, adverse claims incidence or morbidity, reserve assumption changes, investment defaults and credit spreads, regulatory or tax changes, cyberattacks, competition, ratings downgrades, reinsurance counterparty risk, litigation, foreign exchange movements, and limited liquidity or external financing access.
- Disclosure controls and procedures were determined to be effective as of March 31, 2016, and no material changes to internal control over financial reporting were reported.
Most Important Facts for Investors to Verify
- Whether premium growth and sales trends remain sufficient to offset declining investment yields and higher benefit ratios in selected product lines.
- Additional impairment or downgrade risk in the energy-sector investment portfolio, particularly below-investment-grade holdings.
- Reserve adequacy for long-duration individual disability and long-term care obligations under sustained low interest rates and changing claims experience.
- The timing, funding, regulatory approvals, and final financial impact of the Starmount acquisition.
- Liquidity available at the holding-company level after debt maturities, dividends, share repurchases, acquisition funding, and potential capital needs at insurance subsidiaries.
- Changes in risk-based capital ratios, insurer financial-strength ratings, and the ability of subsidiaries to pay dividends to parent entities.
- Developments in unclaimed-property investigations, long-term care litigation, and other regulatory or class-action matters.