Unum Group 2012 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unum Group is a provider of disability, life, accident, sickness, long-term care, and related employee-benefit products in the United States and United Kingdom. Its principal reporting segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. This unaudited Form 10-Q covers the three months ended March 31, 2012, with comparisons to the three months ended March 31, 2011.
Financial Performance and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $2,611.3 million | $2,563.1 million | 1.9% increase |
| Premium income | $1,921.9 million | $1,869.5 million | 2.8% increase |
| Net investment income | $619.5 million | $618.7 million | 0.1% increase |
| Net realized investment gain | $12.4 million | $15.2 million | 18.4% decrease |
| Income before income tax | $310.0 million | $327.4 million | 5.3% decrease |
| Net income | $213.9 million | $223.6 million | 4.3% decrease |
| Diluted earnings per share | $0.73 | $0.71 | Increase, aided by repurchases |
| After-tax operating income | $213.2 million | $219.1 million | 2.7% decrease |
| Benefit ratio | 86.5% | 85.2% | 130 basis-point increase |
| Operating cash flow | $329.3 million | $301.0 million | 9.4% increase |
Benefits and change in reserves increased 4.4% to $1,662.9 million, while total benefits and expenses increased 2.9% to $2,301.3 million. The lower effective tax expense of $96.1 million, compared with $103.8 million in the prior-year quarter, partially offset lower pre-tax income.
At March 31, 2012, total assets were $59.6 billion and stockholders’ equity was $8.2 billion. Fixed maturity securities were $42.4 billion at fair value, including $5.5 billion of net unrealized gains. Gross unrealized losses on fixed maturity securities totaled $157.4 million.
Total debt was $2.9 billion, consisting of $372.2 million of short-term debt related to securities lending and $2,552.8 million of long-term debt. The consolidated debt-to-capital leverage ratio was 28.9%, compared with 28.7% at December 31, 2011; excluding non-recourse debt and securities-lending debt, the ratio was 23.4%, compared with 23.5%.
Cash and bank deposits were $102.5 million at quarter-end. Cash and marketable securities held at the parent and intermediate holding companies were approximately $575 million, compared with $756 million at year-end, primarily reflecting share repurchases. Management stated that domestic resources were sufficient for expected liquidity requirements over the next 12 months.
Segment Results
- Unum US: Operating income increased 5.8% to $205.9 million. Premium income increased 4.0% to $1,112.0 million, sales increased 12.1%, and the benefit ratio increased modestly to 72.5% from 72.1%.
- Unum UK: Operating income declined 20.7% to $38.8 million, or 18.8% in local currency. Premium income increased 2.2% in dollars and 4.2% in pounds, but the benefit ratio deteriorated to 72.4% from 69.3%. Results were also affected by a weaker pound and lower investment income.
- Colonial Life: Operating income increased 4.8% to $69.7 million. Premium income increased 5.7% to $296.3 million, while the benefit ratio increased to 52.1% from 51.4%.
- Closed Block: Operating income decreased 51.7% to $15.4 million. Individual disability premium income declined as the block ran off, while long-term care risk results were adversely affected by higher claim incidence.
- Corporate: Operating loss improved to $20.6 million from $21.8 million, primarily because of lower interest and debt expense.
Material Changes Versus the Prior Comparable Period
- Revenue and premium income grew, but higher benefits and unfavorable risk results reduced pre-tax income and net income.
- Operating cash flow improved, while investing activities used $181.8 million, compared with $188.0 million of investing cash inflow in Q1 2011.
- Financing cash usage decreased to $161.6 million from $486.0 million, principally because the prior-year period included repayment of $225.1 million of maturing senior notes.
- Unum Group repurchased 7.5 million shares for $175.2 million during the quarter. Approximately $349.7 million remained under the $1.0 billion authorization, which expired in August 2012.
- The company adopted ASU 2010-26 on deferred acquisition costs retrospectively. The adoption reduced stockholders’ equity by $459.5 million as of January 1, 2011 and materially reduced reported deferred acquisition costs; it did not represent a cash impact.
- Other comprehensive income was a loss of $6.4 million, compared with income of $54.9 million in Q1 2011, primarily reflecting changes in unrealized securities gains and policy-reserve adjustments.
Guidance, Outlook, Risks, and Unusual Items
Management expects disciplined top-line growth, continued expense management, and capital generation during 2012. It expects premium growth to remain constrained by unemployment, wage trends, and competitive pricing, with improvement dependent on economic and employment recovery.
- Unum US initiated price increases for group disability products in response to higher claim incidence and the low-interest-rate environment. Management expected full-year group disability benefit ratios to be generally consistent with 2011.
- Unum UK expected near-term pressure from competitive pricing and the economic environment, but anticipated full-year benefit ratios and profit margins to stabilize generally near 2011 levels. Management did not expect Q1 group-life sales, which benefited from several large cases, to continue at the same elevated rate.
- Colonial Life expected modest premium growth and generally consistent benefit ratios, with continued volatility in investment income.
- Group long-term care sales were discontinued in February 2012, although a limited amount of previously quoted or underwritten business was expected to be issued during Q2. Rate-increase filings for certain individual long-term care policies were expected to begin contributing to premium income later in 2012.
- The company recognized a $12.3 million realized investment gain from the change in fair value of an embedded derivative in a modified coinsurance arrangement. Management characterized this item as primarily a GAAP reporting effect that is not expected to cause a permanent change in assets or equity.
- The investment portfolio had no exposure to subprime mortgages, Alt-A loans, collateralized debt obligations, or direct sovereign debt of Greece, Ireland, Italy, Portugal, and Spain. Corporate holdings domiciled in those countries totaled $572.8 million of fair value and remained subject to credit, liquidity, and redenomination risks.
- Principal risks include claim incidence and recovery volatility, mortality and morbidity assumptions, reserve adequacy, sustained low interest rates, investment losses and impairments, credit spreads, foreign exchange movements, regulatory restrictions on subsidiary dividends, reinsurer performance, rating downgrades, litigation, and regulatory investigations.
- Unum was involved in various litigation and regulatory matters, including a putative class action involving retained asset accounts and unclaimed-property examinations. Management believed the ultimate outcome of pending matters, after reserves and indemnification, should not materially affect financial position, but acknowledged that an adverse result could materially affect a particular period’s earnings or cash flow.
Important Facts for Investors to Verify
- Whether higher claim incidence and benefit ratios persist, particularly in Unum US group disability, Unum UK, and long-term care.
- The sustainability of premium and sales growth given unemployment, wage growth, competitive pricing, and persistency trends.
- Reserve adequacy and assumptions for long-term disability and long-term care, including the effect of rate increases and claim-resolution experience.
- Investment portfolio credit performance, unrealized losses, low interest rates, bond calls, and the potential for impairments or reduced investment income.
- Liquidity at holding companies after share repurchases and the ability of regulated subsidiaries to pay dividends.
- Progress and remaining capacity under the share repurchase program, together with the effect of repurchases on per-share earnings and capital.
- Potential effects of litigation, unclaimed-property examinations, tax matters, regulatory actions, and rating-agency decisions.
- The financial impact and comparability implications of the retrospective deferred-acquisition-cost accounting change.