Unum Group 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unum Group provides disability, life, accident, sickness, voluntary, dental, vision, cancer and critical illness insurance primarily through workplace channels in the United States and United Kingdom. Its principal 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 six months ended June 30, 2016, compared with the corresponding 2015 periods.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $2,761.3 million | $2,703.7 million | $5,486.7 million | $5,351.1 million |
| Premium income | $2,081.6 million | $2,017.5 million | $4,169.1 million | $4,023.8 million |
| Net investment income | $623.3 million | $630.7 million | $1,229.7 million | $1,232.7 million |
| Income before tax | $340.2 million | $319.8 million | $644.4 million | $622.8 million |
| Net income | $236.8 million | $224.3 million | $447.4 million | $437.2 million |
| Diluted EPS | $1.00 | $0.90 | $1.87 | $1.74 |
| After-tax operating income | $235.7 million | $222.6 million | $462.5 million | $447.4 million |
| Operating income per diluted share | $0.99 | $0.89 | $1.94 | $1.78 |
Q2 revenue increased 2.1% and net income increased 5.6% year over year. Six-month revenue increased 2.5% and net income increased 2.3%. The effective tax rates were 30.4% for the quarter and 30.6% year to date.
Operating cash flow was $561.4 million for the first six months, down from $726.4 million in 2015. Investing cash used was $852.5 million, primarily reflecting investment purchases, while financing cash provided was $272.0 million, principally from debt issuance. Cash and bank deposits declined $19.1 million to $93.8 million.
At June 30, 2016, total assets were $63.9 billion, stockholders’ equity was $9.2 billion, and total liabilities were $54.7 billion. Fixed maturity securities were $45.9 billion at fair value, including $6.3 billion of net unrealized gains. Short-term debt was $350.7 million and long-term debt was $3.04 billion. Management reported a weighted-average U.S. traditional insurance subsidiary RBC ratio of approximately 390%.
Material Changes Versus the Prior Comparable Period
- Premium income grew 3.2% in Q2 and 3.6% for the first six months, led by Unum US and Colonial Life; Closed Block premiums continued to decline.
- Net investment income decreased 1.2% in Q2 and was broadly stable year to date, reflecting lower investment yields and lower miscellaneous investment income in several businesses.
- Benefits experience was generally favorable in Unum US, while Colonial Life experienced less favorable mortality and Unum UK reported mixed claims experience. Closed Block results reflected unfavorable individual disability and long-term care experience.
- Unum US operating income increased 12.0% in Q2 and 6.2% year to date. Its Q2 benefit ratio improved to 69.1% from 71.2%.
- Unum UK operating income decreased 3.7% in reported dollars in Q2 and 0.6% year to date; in local currency, it increased 2.8% and 5.8%, respectively. The weaker British pound reduced reported results.
- Colonial Life operating income was essentially flat, increasing 0.4% in Q2 and 0.1% year to date, despite premium growth and lower investment income.
- Closed Block operating income declined 10.9% in Q2 but increased 4.7% year to date. Long-term care interest-adjusted loss ratios rose to 92.6% in Q2 and 90.7% year to date, versus 83.4% and 85.4% in the prior-year periods.
- The company repurchased 6.5 million shares for approximately $200 million during the first six months and authorized a new $750 million repurchase program through November 2017. Approximately $698.7 million remained available at June 30.
Debt, Liquidity and Capital Management
- In May 2016, Unum issued $600 million of senior notes: $350 million due 2021 at 3.00% and $250 million due 2042 at 5.75%. Net proceeds were $609.1 million and are expected to support general corporate purposes, including repayment of $350.7 million of notes due in September 2016.
- The company extended its $400 million revolving credit facility through March 2021. It had $2.1 million of letters of credit outstanding and no borrowings under the facility at June 30.
- Management stated that the holding company and intermediate holding companies had approximately $600 million of cash, short-term investments and fixed maturity securities available, excluding amounts committed for debt maturity, subsidiary contributions and the anticipated Starmount acquisition.
- The company believes domestic resources are sufficient to meet liquidity requirements for the next 12 months. Insurance subsidiary dividends remain subject to regulatory, capital adequacy and solvency restrictions.
- Shareholder distributions included $89.4 million of dividends during the first six months, compared with $83.5 million in 2015.
Guidance, Outlook and Unusual Items
- Management expects 2016 year-over-year premium growth supported by stable persistency, disciplined sales growth and pricing actions. Full-year group disability benefit ratios are expected to be generally consistent with 2015 levels.
- Low interest rates remain a significant pressure on investment yields, profit margins and reserve adequacy. Management believes rising interest rates and improving employment, payroll and wage trends would provide meaningful upside.
- Management expects continued quarterly volatility in Closed Block individual disability and long-term care results and is pursuing additional long-term care rate increases subject to regulatory approval.
- The June 2016 Brexit referendum may dampen near-term U.K. growth, weaken reported results through currency translation and create volatility in investment fair values and U.K. solvency ratios. Management does not currently expect a material increase in impairments or defaults.
- Other-than-temporary impairment losses on fixed maturity securities were $30.5 million year to date, compared with $12.6 million in 2015, driven primarily by energy-sector securities. Management expects additional downgrades or impairments could occur if oil prices remain depressed for several years.
- Unum entered into an agreement to acquire Starmount, a dental and vision insurer, for $127 million plus net assets. Closing was expected by the end of the third quarter of 2016, subject to approvals and customary conditions. Management did not expect a material 2016 financial impact.
- Pending litigation and regulatory matters include claims-handling disputes, unclaimed death benefits and long-term care policy litigation. A California class settlement was approved in July 2016 and had an immaterial effect on the company. Management believes pending matters should not materially affect financial position, although individual periods could be affected by unfavorable outcomes.
- Forward-looking results remain subject to interest-rate movements, claim incidence and severity, mortality and morbidity, persistency, economic conditions, regulation, litigation, investment performance, reinsurance counterparty risk, cyber events, ratings changes and liquidity constraints.
Most Important Facts for Investors to Verify
- Whether premium growth and favorable Unum US claims experience persist while investment yields remain under pressure.
- The timing and funding of the September 2016 debt maturity and the effect of the May debt issuance on leverage and interest expense.
- Development of long-term care and individual disability reserves, loss ratios and approved rate increases in the Closed Block.
- Energy-sector credit performance, other-than-temporary impairments and the $6.3 billion unrealized gain in the fixed maturity portfolio.
- The financial and regulatory effects of Brexit on Unum UK, including currency translation and solvency ratios.
- Completion and integration of the Starmount acquisition and whether it affects capital deployment or share repurchases.
- Regulatory and litigation developments involving unclaimed benefits, claims handling and long-term care policy administration.
- Cash generation, statutory capital, insurance subsidiary dividend capacity and the company’s ability to sustain dividends and repurchases.