Unum Group 2014 Form 10-K Summary
Business context and reporting period
Unum Group is a leading provider of disability insurance in the United States and United Kingdom, with complementary group life, voluntary, accident, sickness, cancer, critical illness, and related workplace benefits. Its principal operating segments are Unum US, Unum UK, and Colonial Life; Closed Block contains discontinued or no-longer actively marketed individual disability and long-term care businesses; Corporate includes holding-company activities. The filing covers the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012. The audited financial statements received an unqualified opinion from Ernst & Young LLP, and management reported effective internal control over financial reporting.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $10,509.7 million | $10,353.8 million | +1.5% |
| Premium income | $7,797.2 million | $7,624.7 million | +2.3% |
| Net investment income | $2,477.4 million | $2,492.1 million | -0.6% |
| Income before tax | $527.2 million | $1,205.2 million | -56.3% |
| Net income | $413.4 million | $858.1 million | -51.8% |
| Diluted EPS | $1.61 | $3.23 | -50.2% |
| Operating income, before tax | $1,292.5 million | $1,241.8 million | +4.1% |
| After-tax operating income | $910.4 million | $882.5 million | +3.2% |
| Operating cash flow | $1,223.6 million | $1,031.5 million | +18.6% |
Reported GAAP earnings were materially reduced by a $698.2 million pretax, $453.8 million after-tax increase in long-term care reserves and a $64.4 million pretax pension settlement loss. Excluding specified unusual items, diluted after-tax operating income increased to $3.55 from $3.32.
- Consolidated benefit ratio was 93.8%, compared with 86.5% in 2013. Excluding the long-term care and prior-year reserve adjustments, the 2014 ratio was 84.8%, compared with 86.4%.
- Earned book yield declined to 5.48% from 5.57%, reflecting the low-interest-rate and tighter-credit-spread environment.
- Net unrealized gains on fixed maturity securities increased to $6.3 billion from $4.1 billion, primarily because U.S. Treasury rates declined.
- Total assets increased to $62.5 billion from $59.4 billion. Stockholders’ equity was $8.6 billion, compared with $8.7 billion.
- Policy and contract benefit reserves were $45.9 billion, compared with $43.1 billion; the broader reserve measure including policy and contract benefits was $47.5 billion.
Segment performance and material changes
| Segment | 2014 premium income | 2014 operating income | Key change versus 2013 |
|---|---|---|---|
| Unum US | $4,659.7 million | $856.3 million | Premiums +3.2%; operating income -0.3% excluding the effect of 2013 reserve adjustments; benefit ratio 70.6%. |
| Unum UK | $607.2 million | $147.8 million | Premiums +9.1% in reported dollars and +3.6% in local currency; operating income +12.0% in reported dollars and +6.5% in local currency; benefit ratio improved to 71.0%. |
| Colonial Life | $1,273.7 million | $300.2 million | Premiums +3.4%; operating income +5.4% excluding the 2013 unclaimed-death-benefits reserve increase; benefit ratio improved to 51.9%. |
| Closed Block | $1,256.6 million | $122.6 million | Premiums -4.7% as blocks ran off; reported results included the $698.2 million long-term care reserve increase. |
- Sales improved significantly: Unum US sales increased 21.0%, Unum UK sales increased 12.3% in dollars and 7.2% in pounds, and Colonial Life sales increased 11.6%.
- The long-term care reserve increase followed updated assumptions for discount rates, mortality, morbidity, persistency, and future premium-rate increases. Management expects the charge to have no material effect on future subsidiary cash flows or capital-management plans, but reserves remain highly sensitive to assumptions; a 25-basis-point change in the long-term care discount rate was estimated to affect reserves by approximately $475 million.
- The 2014 pension plan amendment generated a $64.4 million pretax settlement loss and included $214.5 million of lump-sum benefit payments from plan assets. The U.S. pension plan was underfunded by $245.1 million at year-end.
- Unum repurchased 8.7 million shares for approximately $301 million during 2014 and paid $159.4 million of common-stock dividends. The remaining authorization under the repurchase program was approximately $429.5 million at year-end.
Cash flow, debt, liquidity, and capital
- Operating activities provided $1,223.6 million; investing activities used $886.6 million; financing activities used $328.6 million. Cash and bank deposits increased by $8.4 million to $102.5 million.
- Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $575 million at year-end, including approximately $176 million held in U.K. subsidiaries. Management stated that domestic resources were sufficient for the next 12 months.
- Total debt was $2,780.6 million, including $2,628.7 million of long-term debt and $151.9 million of debt due in 2015. The company issued $350 million of 4.00% senior notes due 2024 and retired $145 million of 6.85% notes for a total cash cost of $158.2 million.
- The $400 million revolving credit facility had no borrowings outstanding, although $2.1 million of letters of credit had been issued. The company reported compliance with debt covenants.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries exceeded 400% and was generally consistent with 2013. Approximately $605 million of ordinary dividends was available from traditional U.S. subsidiaries during 2015 without prior regulatory approval, subject to applicable conditions; approximately £167 million was available from Unum Limited subject to regulatory approval.
- Ratings agencies maintained stable outlooks. Unum Group issuer ratings were BBB/Baa2/bbb, and primary domestic insurance subsidiaries generally carried A/A2 financial-strength ratings.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continued premium and sales growth in 2015, generally stable benefit ratios in Unum US and Colonial Life, ongoing improvement in Unum UK profitability, and continued operating revenue decline in the Closed Block as policies mature. Priorities included pricing discipline, expense efficiency, infrastructure investment, product simplification, stronger employer relationships, and disciplined capital deployment.
- Low interest rates and tighter credit spreads were expected to continue reducing investment yields, pressuring margins, and potentially increasing reserve requirements. Management estimated that constant January 2015 interest-rate and credit-spread conditions would reduce net investment income by approximately $1 million in 2015 and $7 million in 2016 relative to expectations.
- Insurance reserves depend on morbidity, mortality, claim incidence, claim resolution, persistency, discount rates, premium-rate increases, and government benefit offsets. Adverse experience could require additional reserve increases.
- Long-term care remains the most significant reserve sensitivity and is exposed to longevity, claim duration, premium-rate approval, and investment-yield risk.
- Investment risks include defaults, credit-spread changes, impairments, valuation uncertainty, energy-sector exposure, and illiquidity. The company recognized a $13.5 million other-than-temporary impairment on securities issued by a U.S. oil and natural-gas exploration and production company.
- Regulatory risks include potential changes to risk-based capital rules, captive-reinsurance regulation, Dodd-Frank derivatives requirements, and U.K. Solvency II, expected to take effect January 1, 2016.
- Unum remains exposed to litigation and regulatory investigations, including unclaimed-property and unclaimed-death-benefit matters and a purported long-term care inflation-protection class action. Management stated that ultimate outcomes could materially affect a particular period, although it did not expect pending matters, after reserves and indemnification, to materially affect consolidated financial position.
- The company depends on dividends from regulated subsidiaries to fund parent-level obligations, dividends, and repurchases. Restrictions or adverse subsidiary results could reduce holding-company liquidity.
- Foreign-currency translation affects reported results: a 10% decline in the pound would reduce reported stockholders’ equity by approximately $100 million and annual pretax operating income by approximately $15 million, based on the filing’s sensitivity estimates.
Important facts for investors to verify
- Whether long-term care claims, mortality, morbidity, persistency, premium-rate approvals, and investment yields are tracking the assumptions adopted at December 31, 2014.
- The development of the $45.9 billion reserve balance and the sensitivity of future earnings and capital to discount-rate and claim-resolution changes.
- Actual 2015 premium growth, sales conversion, persistency, benefit ratios, and investment yields by operating segment.
- Availability and timing of subsidiary dividends, including the effect of RBC requirements, captive-reinsurance regulation, and Solvency II.
- Refinancing or repayment of the $151.9 million of debt due in 2015 and continued access to the revolving credit facility.
- Further developments in unclaimed-property examinations, long-term care litigation, regulatory matters, and potential additional liabilities.
- The impact of the January 1, 2015 accounting change for tax-credit partnerships, which was expected to reduce opening stockholders’ equity by approximately $30 million and reduce 2014 reported net income by approximately $11.3 million on a retrospective basis.