Unum Group 10-Q Summary — Quarter Ended June 30, 2013
Business Context and Reporting Period
Unum Group is a U.S. and U.K. provider of disability, life, accidental death and dismemberment, voluntary, supplemental, and long-term-care insurance products, primarily distributed through the workplace. The filing covers the three and six months ended June 30, 2013. The interim financial statements are unaudited and were reviewed by Ernst & Young LLP.
Reporting segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Total revenue | $2,601.9 million | $2,617.9 million | $5,226.7 million | $5,229.2 million |
| Premium income | $1,905.8 million | $1,927.6 million | $3,836.7 million | $3,849.5 million |
| Net investment income | $626.1 million | $633.5 million | $1,247.2 million | $1,253.0 million |
| Income before tax | $311.5 million | $296.4 million | $615.3 million | $606.4 million |
| Net income | $218.6 million | $216.4 million | $431.2 million | $430.3 million |
| Diluted EPS | $0.82 | $0.76 | $1.61 | $1.50 |
| After-tax operating income | $218.5 million | $225.3 million | $434.1 million | $438.5 million |
| Operating income by segment | $311.1 million | $310.1 million | $619.5 million | $619.3 million |
Reported net margin was approximately 8.4% in the second quarter and 8.2% for the first six months, based on GAAP net income and total revenue. The consolidated benefit ratio was 87.2% in the quarter and 86.3% year to date, compared with 87.3% and 86.9%, respectively, in the prior-year periods.
- Unum US operating income increased 0.6% in the quarter and 0.8% year to date. Premium income increased 1.5% and 2.0%, respectively.
- Unum UK operating income increased 14.1% in the quarter but declined 4.1% year to date in pound sterling. Premium income fell primarily because of reinsurance agreements ceding additional group life business.
- Colonial Life operating income increased 5.2% in the quarter and 6.7% year to date, while premium income increased 3.7% in both periods.
- Closed Block operating income increased 15.2% in the quarter and 38.4% year to date, although the segment is expected to decline as its business runs off.
Cash Flow, Capital, Debt, and Liquidity
| Metric | Six Months 2013 | Six Months 2012 |
|---|---|---|
| Cash provided by operating activities | $448.3 million | $679.1 million |
| Cash provided by investing activities | $174.8 million | $(520.9) million |
| Cash used by financing activities | $(652.6) million | $(236.8) million |
| Ending cash and bank deposits | $47.8 million | $38.0 million |
- Cash flows declined year over year primarily because of changes in taxes, receivables, and other operating items, including pension contributions of $54.2 million.
- Consolidated investments totaled $48.9 billion at June 30, 2013, down from $51.9 billion at December 31, 2012. Fixed maturity securities totaled $42.6 billion at fair value.
- Holding-company cash and marketable securities were approximately $597 million, down from $805 million at year-end 2012. Management stated that domestic resources were sufficient for the next 12 months.
- Short-term debt was $153.6 million, consisting entirely of securities-lending transactions. Long-term debt was $2.644 billion, compared with $2.755 billion at December 31, 2012.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 398%, within the company’s 375%–400% target range.
- The company repurchased 7.3 million shares for $193.5 million during the first six months and paid $70.4 million of common-stock dividends. Approximately $356.6 million remained under the repurchase authorization at June 30, 2013.
Material Changes Versus Prior Comparable Period
- GAAP net income increased 1.0% in the second quarter and 0.2% year to date, while diluted EPS increased because of the lower share count resulting from repurchases.
- After-tax operating income decreased 3.0% in the quarter and 1.0% year to date, despite slightly higher operating income by segment.
- Sales declined at Unum US by 18.7% in the quarter and 7.7% year to date; Unum UK sales declined 7.2% and 29.2% in pound sterling; Colonial Life sales declined 2.0% and 3.3%.
- Net realized investment gains improved to $13.3 million in the quarter and $23.6 million year to date, compared with a $2.1 million loss and a $10.3 million gain in the respective prior-year periods. The 2013 results included an $18.8 million year-to-date gain from the embedded derivative in a modified coinsurance arrangement.
- Net unrealized gains on fixed maturity securities declined to approximately $4.7 billion from $7.2 billion at December 31, 2012, primarily due to higher U.S. Treasury rates. Accumulated other comprehensive income declined to $216.7 million from $628.0 million.
- In June 2013, Unum announced that its U.S. defined benefit pension plans would freeze participation and benefit accruals effective December 31, 2013. Remeasurement reduced the U.S. net pension liability by $327.4 million and increased other comprehensive income, net of applicable tax, by approximately $212.8 million. A $0.7 million curtailment loss was recognized in earnings.
- The company purchased and retired $62.5 million of Tailwind Holdings senior secured notes for $56.2 million, recognizing a $4.0 million pretax gain.
Guidance, Outlook, Risks, and Unusual Items
Management maintained a cautious near-term outlook because of low interest rates, unfavorable economic conditions, limited employment and wage growth, competitive pressure, and perceived marketplace distraction from healthcare reform implementation. Management expects marginal premium growth during 2013, with stronger growth dependent on improved economic and employment trends.
- Low interest rates are pressuring investment yields, claim reserve discount rates, and margins. The duration-weighted book yield on fixed-income securities was 6.35% at June 30, 2013, compared with 6.47% at year-end 2012.
- Unum US expects group disability benefit ratios in 2013 to be generally consistent with 2012, while continuing price increases and expense-management initiatives.
- Unum UK is prioritizing profitability and business-mix improvement through rate increases, pricing discipline, and reinsurance, but expects continued pressure on premium growth and persistency.
- Closed Block results may be volatile and are expected to decline over time. Long-term-care results remain sensitive to morbidity, mortality, persistency, interest rates, and reserve assumptions; the company continues to seek regulatory approval for premium-rate increases.
- Investment risks include interest-rate changes, credit spreads, defaults, impairments, liquidity, and exposure to below-investment-grade and European securities. Fixed maturity securities had $269.3 million of gross unrealized losses at June 30, 2013, but the company recorded only $0.8 million of other-than-temporary impairment losses year to date.
- Derivative counterparty exposure was limited to $0.3 million after collateral, but certain derivative agreements contain credit-rating triggers. Liability derivatives subject to rating-related provisions had a fair value of $137.6 million.
- The company faces ongoing litigation and regulatory matters, including retained-asset-account litigation, unclaimed-property investigations, West Virginia unclaimed-property complaints, and a California long-term-care class action. Management believes the ultimate outcome should not materially affect financial position, but acknowledges that unfavorable outcomes could materially affect a particular period’s results or cash flows.
- Legally binding unfunded commitments included $56.8 million for tax-credit partnerships and $3.7 million for transferable state tax credits. Additional non-binding commitments totaled $48.5 million for private-placement securities, $133.7 million for private-equity partnerships, and $119.8 million for commercial mortgage loans.
- A U.K. tax-rate reduction enacted in July 2013 is expected to reduce third-quarter income-tax expense by approximately $4 million to $7 million.
Most Important Facts for Investors to Verify
- Whether premium and new-sales growth improves as employment trends stabilize, particularly at Unum US and Colonial Life.
- The sustainability of operating margins amid low investment yields, reserve discount-rate pressure, and higher acquisition-cost amortization.
- Unum UK’s progress in improving group-life profitability while managing lower premiums, persistency, and reinsurance effects.
- The quality, duration, unrealized losses, and credit performance of the $42.6 billion fixed-maturity portfolio.
- Actual holding-company liquidity, insurance-subsidiary dividend capacity, RBC ratios, debt maturities, and rating-agency actions.
- Potential financial effects of long-term-care claims and rate approvals, pension-plan changes, pending litigation, unclaimed-property matters, and regulatory investigations.
- The effect of continued share repurchases on EPS, capital flexibility, and insurance-subsidiary capitalization.