Unum Group 2015 Q2 SEC Filing Summary
Business context and reporting period
Unum Group filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2015. The company provides disability, life, accident, sickness, voluntary and related insurance products primarily through workplace channels in the United States and United Kingdom. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $2,703.7 million | $2,656.8 million | $5,351.1 million | $5,271.2 million |
| Premium income | $2,017.5 million | $1,943.6 million | $4,023.8 million | $3,882.1 million |
| Net investment income | $630.7 million | $632.4 million | $1,232.7 million | $1,248.2 million |
| Income before tax | $319.8 million | $349.8 million | $622.8 million | $679.6 million |
| Net income | $224.3 million | $239.4 million | $437.2 million | $465.2 million |
| Diluted EPS | $0.90 | $0.93 | $1.74 | $1.79 |
| Operating income after tax | $222.6 million | $231.7 million | $447.4 million | $454.3 million |
| Operating diluted EPS | $0.89 | $0.90 | $1.78 | $1.75 |
Reported net income margins were approximately 8.3% in the quarter and 8.2% year to date, compared with approximately 9.0% and 8.8% in the comparable 2014 periods. Operating income before tax was $321.9 million in the quarter and $643.2 million year to date.
- Operating revenue increased 2.7% in the quarter and 2.4% year to date, while premium income increased 3.8% and 3.7%, respectively.
- Benefits and expenses increased 3.3% in the quarter and 3.0% year to date, outpacing reported revenue growth.
- Operating cash flow was $726.4 million for the first six months, essentially unchanged from $725.8 million in 2014.
- Investing activities used $352.7 million and financing activities used $353.6 million during the first six months. Cash and bank deposits ended at $122.6 million.
- Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $481 million at June 30, 2015.
- Total assets were $61.7 billion and stockholders’ equity was $8.5 billion at June 30, 2015.
- Short-term debt was $151.9 million and long-term debt was $2.58 billion. The company had no borrowings under its revolving credit facility and reported compliance with debt covenants.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400%.
Material changes versus the prior comparable period
- Net income declined 6.3% in the quarter and 6.0% year to date. Before-tax operating income declined 4.9% and 3.0%, respectively.
- Premium growth in the principal operating segments was approximately 5%, led by Unum US and Colonial Life. Unum UK growth was positive in local currency but reported dollar results were affected by pound depreciation.
- Unum US operating income declined 6.0% in the quarter and 1.5% year to date, primarily from less favorable group product risk results and lower investment income.
- Unum UK operating income increased 5.9% in local currency in the quarter and 2.0% year to date, supported by improved risk results, but reported dollar income declined because of currency translation.
- Colonial Life operating income increased 3.6% in the quarter and 0.8% year to date, helped by premium growth and favorable risk results.
- Net realized investment results deteriorated to a $0.8 million gain in the quarter and a $14.5 million loss year to date, compared with gains of $25.9 million and $32.2 million in 2014. The change reflected losses on an embedded derivative, other-than-temporary impairments and the absence of a 2014 debt-retirement hedge gain.
- Other-than-temporary impairment losses on fixed maturity securities were $8.1 million in the quarter and $12.6 million year to date; no comparable losses were recorded in 2014.
- Accumulated other comprehensive income declined to $3.4 million from $166.4 million at December 31, 2014, largely because of lower unrealized gains on fixed maturity securities.
- The company repurchased 6.2 million shares for $211.2 million in the first six months and authorized a new $750 million repurchase program through November 21, 2016. Approximately $717.7 million remained available at June 30.
Guidance, outlook, risks and unusual items
Management expects continued premium growth, stable persistency and disciplined pricing, underwriting and expense management during the remainder of 2015. Management expects the 2015 group disability benefit ratio to be generally consistent with 2014, with premium-rate increases offsetting the effect of a lower claim reserve discount rate. The filing does not provide specific consolidated earnings guidance.
- Low interest rates are pressuring investment yields, reserve discount rates and profit margins. The earned book yield was 5.38% for the first six months of 2015 versus 5.52% for full-year 2014.
- The net unrealized gain on fixed maturity securities decreased to approximately $4.9 billion from $6.3 billion at year-end 2014, primarily because of higher Treasury rates.
- Key insurance risks include claim incidence, recovery rates, mortality, morbidity, persistency, pricing adequacy, reserve assumptions and adverse economic conditions.
- Long-term care and other closed-block results remain sensitive to claim development, interest rates, premium-rate approvals, longevity and persistency. Additional rate increases were being sought from state regulators.
- Solvency II, effective for the U.K. business January 1, 2016, could increase supervisory, disclosure and capital requirements and may affect dividends from U.K. subsidiaries.
- Energy-sector investments faced potential ratings pressure from lower oil and gas prices, although management did not expect material losses.
- Pending litigation and regulatory matters include unclaimed death-benefit investigations and a long-term-care inflation-protection class action. An immaterial loss contingency was accrued for the latter. Management believes pending matters should not materially affect financial position, but adverse outcomes could affect results or cash flows in a particular period.
- The company identified 722,421 previously unregistered shares issued through its 401(k) plan and commenced a voluntary rescission offer. Management does not expect a material financial impact.
- Forward-looking results remain exposed to interest rates, investment defaults and credit spreads, reinsurance counterparty performance, ratings changes, regulation, litigation, cybersecurity, foreign exchange and liquidity conditions.
Important facts for investors to verify
- Whether premium growth and segment sales momentum continue while Unum US group disability risk results normalize.
- The trajectory of investment yields, unrealized gains, impairments and realized losses in the fixed-income portfolio.
- Long-term care claim experience, reserve adequacy and the success and persistency impact of requested rate increases.
- Capital effects and dividend capacity following implementation of Solvency II and any changes in U.S. insurance regulation.
- Debt maturity and refinancing requirements, including the $151.9 million of 6.85% notes due in the fourth quarter of 2015.
- Developments in litigation, unclaimed-property examinations, the long-term-care class action and the 401(k) rescission offer.
- Execution of the $750 million share-repurchase authorization relative to liquidity, capital needs and insurance-subsidiary requirements.