Unum Group 2015 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unum Group provides disability, life, accident, sickness, voluntary, dental, and related employee-benefit products primarily in the United States and United Kingdom. Its principal operating segments are Unum US, Unum UK, and Colonial Life; Closed Block and Corporate are additional reporting segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2015, with comparisons to September 30, 2014 and December 31, 2014.
Key Financial Metrics
| Metric | Three Months 2015 | Three Months 2014 | Nine Months 2015 | Nine Months 2014 |
|---|---|---|---|---|
| Total revenue | $2,657.8 million | $2,614.3 million | $8,008.9 million | $7,885.5 million |
| Premium income | $2,020.8 million | $1,947.2 million | $6,044.6 million | $5,829.3 million |
| Net investment income | $612.1 million | $611.3 million | $1,844.8 million | $1,859.5 million |
| Income before tax | $298.9 million | $317.0 million | $921.7 million | $996.6 million |
| Net income | $203.8 million | $219.1 million | $641.0 million | $684.3 million |
| Diluted EPS | $0.83 | $0.86 | $2.57 | $2.66 |
| After-tax operating income | $223.0 million | $219.1 million | $670.4 million | $673.4 million |
| After-tax operating EPS | $0.91 | $0.86 | $2.69 | $2.61 |
Third-quarter revenue increased 1.7 percent and nine-month revenue increased 1.6 percent. Premium income increased 3.8 percent and 3.7 percent, respectively, while net investment income was essentially flat in the quarter and declined 0.8 percent year to date. Net income declined 7.0 percent in the quarter and 6.3 percent year to date. The filing does not present a single consolidated net profit margin; based on reported figures, net income represented approximately 7.7 percent of third-quarter revenue and 8.0 percent of nine-month revenue.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating cash flow was $999.4 million for the first nine months of 2015, compared with $944.0 million in 2014.
- Investing activities used $454.8 million, including $3.27 billion of fixed-maturity security purchases and the $54.3 million acquisition of National Dental.
- Financing activities used $537.8 million, including $326.2 million of share repurchases and $129.2 million of dividends.
- Cash and bank deposits increased to $109.3 million at September 30, 2015, from $102.5 million at December 31, 2014. Cash equivalents and marketable securities at Unum Group and intermediate holding companies totaled approximately $484 million, including approximately $162 million held in the United Kingdom.
- Total assets were $61.50 billion, compared with $62.45 billion at year-end 2014. Stockholders’ equity was $8.58 billion, compared with $8.52 billion.
- Short-term debt increased to $506.1 million from $151.9 million, while long-term debt declined to $2.217 billion from $2.629 billion. Total reported debt was approximately $2.723 billion at September 30, 2015.
- The company had no outstanding borrowings under its revolving credit facility and reported no significant financial covenant concerns.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400 percent. Management stated that capital and financial positions were strong and that domestic resources were sufficient for the next 12 months.
Material Changes Versus the Prior Comparable Period
- Underlying operating performance improved in the third quarter: before-tax operating income increased 3.6 percent, and after-tax operating income increased from $219.1 million to $223.0 million.
- Year-to-date after-tax operating income declined slightly, from $673.4 million to $670.4 million, despite higher premium income, primarily because of lower investment income and operating pressures.
- Unum US premium income increased 6.8 percent in both the quarter and nine-month period. Segment operating income increased 3.1 percent in the quarter but was essentially flat year to date.
- Unum UK operating income increased 5.0 percent in local currency in the quarter and 2.9 percent year to date, although reported dollar results were reduced by the weaker British pound and lower investment income.
- Colonial Life operating income increased 7.5 percent in the quarter and 2.9 percent year to date, supported by premium growth and favorable risk results.
- Closed Block operating income increased 7.8 percent in the quarter and 0.4 percent year to date. Long-term-care risk results were unfavorable, while individual-disability risk results were favorable.
- Net realized investment loss was $26.6 million in the quarter and $41.1 million year to date, compared with a $1.2 million gain and a $33.4 million gain in the corresponding 2014 periods. The change primarily reflected losses on an embedded derivative in a modified coinsurance arrangement and other-than-temporary impairment losses on fixed-maturity securities.
- The company repurchased 9.4 million shares for $326.2 million during the first nine months. Approximately $602.7 million remained under the $750 million authorization at September 30, 2015.
- Unum acquired National Dental Plan Limited and related companies for $54.3 million. Management did not expect a material 2015 revenue or earnings impact.
Margins, Investment Portfolio, and Unusual Items
- Unum US benefit ratios were 69.8 percent for the quarter and 69.7 percent year to date, compared with 70.4 percent and 70.3 percent in 2014.
- Unum UK benefit ratios improved to 67.8 percent and 68.0 percent from 70.7 percent and 71.6 percent, respectively, in local-currency comparisons.
- Colonial Life benefit ratios improved to 51.2 percent and 51.0 percent from 52.7 percent and 51.7 percent.
- The fixed-maturity portfolio had a fair value of $44.4 billion and a net unrealized gain of $4.7 billion at September 30, 2015, down from $6.3 billion at year-end 2014, mainly because of wider credit spreads.
- The earned book yield was 5.36 percent for the first nine months of 2015, compared with 5.52 percent for full-year 2014.
- Other-than-temporary impairment losses on fixed-maturity securities were $9.4 million in the quarter and $22.0 million year to date.
- The company adopted proportional amortization accounting for qualified affordable-housing investments retrospectively. The adoption reduced stockholders’ equity by $19.2 million at January 1, 2014 and adjusted prior-period results.
Guidance, Outlook, Risks, and Contingencies
Management expected favorable full-year 2015 premium and sales growth, generally stable annual benefit ratios, and continued operating-margin support from pricing discipline, underwriting, expense management, product mix, and efficiency initiatives. No specific consolidated earnings-per-share guidance was provided.
- Low interest rates were expected to continue pressuring investment yields, profit margins, and reserve discount rates. Management also noted potential reserve effects from changes in interest rates.
- Claims experience may vary with incidence, recovery rates, mortality, morbidity, unemployment, consumer confidence, medical developments, and policy persistency.
- Long-term-care results remain sensitive to claim incidence, recovery rates, mortality, longevity, persistency, rate increases, and reserve assumptions. The company continues to seek premium-rate increases on certain long-term-care policies.
- Energy-sector investments face potential credit pressure from depressed oil and gas prices. Management expected no material losses currently but acknowledged that prolonged low prices could increase losses.
- Unum UK faced foreign-exchange effects and the pending January 1, 2016 implementation of Solvency II, which could increase supervisory, disclosure, and capital requirements and potentially affect dividends from U.K. subsidiaries.
- Derivative contracts with rating-related triggers had $56.5 million of liability fair value at September 30, 2015; a ratings downgrade could permit counterparties to terminate contracts and seek immediate payment.
- Litigation and regulatory matters include claims-handling disputes, unclaimed-death-benefit examinations, and a putative nationwide long-term-care class action concerning inflation protection. The company recorded an immaterial loss contingency for the class action and stated that ultimate outcomes cannot be predicted.
- Unfunded or potentially fundable commitments included $7.2 million for tax-credit partnerships, $23.6 million for transferable state tax credits, $47.0 million for private-placement securities, $182.7 million for private-equity partnerships, and $42.4 million for commercial mortgage loans.
- Management reported effective disclosure controls as of September 30, 2015 and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether premium growth and favorable risk results persist while low interest rates continue to pressure investment income and reserve discount rates.
- The future performance and credit quality of the $44.4 billion fixed-maturity portfolio, including unrealized losses and energy-sector exposure.
- Progress on long-term-care premium-rate increases and the sensitivity of reserves to claims, recovery, mortality, persistency, and interest-rate assumptions.
- The impact of Solvency II on Unum UK capital requirements, regulatory compliance, and dividend capacity.
- Debt maturities, refinancing needs, rating-related derivative triggers, and the effect of continued share repurchases on holding-company liquidity.
- Potential outcomes and additional costs from litigation, unclaimed-property investigations, regulatory matters, and the long-term-care class action.