Unum Group 2011 Q1 SEC Filing Summary
Business context and reporting period
Unum Group filed an unaudited Form 10-Q for the three months ended March 31, 2011. The company provides disability, life, long-term care, voluntary and related insurance products in the United States and United Kingdom. Reportable segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $2,563.1 million | $2,561.6 million | 0.1% |
| Premium income | $1,869.5 million | $1,863.2 million | 0.3% |
| Net investment income | $618.7 million | $613.0 million | 0.9% |
| Net realized investment gain | $15.2 million | $25.6 million | Down 40.6% |
| Income before tax | $330.2 million | $361.2 million | Down 8.6% |
| Net income | $225.4 million | $229.8 million | Down 1.9% |
| Diluted earnings per share | $0.72 | $0.69 | Up $0.03 |
| Operating income by segment | $315.0 million | $335.6 million | Down 6.1% |
| After-tax operating income | $215.7 million, or $0.69 per diluted share | $223.5 million, or $0.67 | Down 3.5% overall |
| Net cash from operating activities | $301.0 million | $281.6 million | Up $19.4 million |
Calculated margins were approximately 12.9% for income before tax and 8.8% for GAAP net income, based on total revenue. The consolidated benefit ratio increased to 85.2% from 84.2%.
- Total assets were $57.1 billion at March 31, 2011, compared with $57.3 billion at December 31, 2010.
- Stockholders’ equity was $9.0 billion, compared with $8.9 billion at year-end 2010.
- Fixed maturity securities were $40.3 billion at fair value, with a net unrealized gain of approximately $3.3 billion.
- Long-term debt was $2.605 billion; short-term debt was zero at quarter-end.
- The consolidated leverage ratio was 24.1%, compared with 25.9% at December 31, 2010. Excluding non-recourse debt and related capital, leverage was 20.9%, compared with 22.8%.
- Holding-company cash and marketable securities were approximately $816 million, down from approximately $1.2 billion at year-end.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 395%, compared with 398% at year-end.
Material changes versus the prior comparable period
- Revenue was essentially flat, while benefits and expenses increased 1.5% to $2.233 billion. This reduced pretax income despite modest growth in premium and investment income.
- Net income declined modestly, but diluted EPS increased because share repurchases reduced weighted-average diluted shares to 314.3 million from 333.5 million.
- Unum US operating income increased 5.0% to $209.1 million. Sales increased 10.4%, led by large-case, individual disability, long-term care and voluntary benefits sales, although group core-market sales declined 1.3%.
- Unum UK operating income declined 19.6% in dollars and 21.9% in local currency. The benefit ratio increased to 69.3% from 63.1%, and sales declined 27.3% in dollars and 28.6% in pounds.
- Colonial Life operating income declined 5.5% to $69.0 million. Premium income increased 5.8%, but the benefit ratio rose to 51.4% from 47.1%.
- Individual Disability–Closed Block operating income declined 15.4% to $9.9 million as the closed block continued to run off.
- Operating loss in Corporate and Other increased to $21.7 million from $8.9 million, primarily due to lower investment income and higher debt expense.
- The remaining $225.1 million of 7.625% senior notes matured in March 2011. The company also made $24.2 million of long-term debt principal payments.
- Unum repurchased 8.6 million shares for $223.6 million, including an accelerated repurchase of 7.7 million shares. Approximately $920.7 million remained under the new $1.0 billion authorization at March 31, 2011.
Guidance, outlook, commentary and risks
- Management’s 2011 priorities were disciplined profitable growth, financial flexibility, capital management, continued investment in the businesses and selective deployment of excess capital.
- Management expected marginal year-over-year premium growth for Unum US, with group disability benefit ratios generally consistent with 2010 and potential margin improvement from product mix and expense efficiencies.
- Unum UK was expected to experience cautious premium growth and continued negative earnings growth relative to 2010. The company expected the 2011 benefit ratio to be generally consistent with 2010 and profit margins to remain favorable but slightly lower.
- Colonial Life was expected to deliver modest premium growth and strong margins, although its overall benefit ratio was expected to be somewhat higher than in 2010.
- Management expected interest and debt expense for 2011 to be generally consistent with 2010, supported by the March debt maturity and no expected new debt issuance.
- Management anticipated no additional U.S. qualified pension contribution during 2011 because a $100 million contribution was made in the fourth quarter of 2010. U.K. pension contributions were expected to total approximately £3.2 million for 2011.
- Long-term care rate increases were being pursued in various states; 21 states had accepted requests through the first quarter. Related premium increases were expected to begin emerging in 2012.
- Key risks include unemployment and wage trends, claim incidence and recovery rates, reserve adequacy, low interest rates, credit spreads, investment impairments, liquidity and asset-liability matching, regulatory and tax changes, litigation, reinsurance recoverability, rating downgrades, foreign exchange movements and restrictions on subsidiary dividends.
- The filing reported $2.3 million of other-than-temporary impairment losses on fixed maturity securities in Q1 2011. It also reported a $14.1 million gain from an embedded derivative in a modified coinsurance arrangement, which management described as primarily a GAAP reporting item.
- Unrecognized tax benefits totaled $137.1 million; management stated that the liability could decrease by $0 to $40 million within 12 months as certain tax matters are resolved.
- Management stated that pending litigation and regulatory matters were not expected to have a material adverse effect on financial position, but acknowledged that unfavorable outcomes could materially affect a particular period’s results or cash flows.
Important facts for investors to verify
- Whether premium growth and sales momentum improve as employment and wage conditions recover, particularly in Unum US and Unum UK.
- Whether Unum UK and Colonial Life benefit ratios normalize after the Q1 deterioration.
- The sustainability of capital deployment, including the remaining $920.7 million share-repurchase authorization, relative to holding-company liquidity of approximately $816 million.
- Trends in investment impairments, unrealized gains, below-investment-grade securities and the company’s ability to maintain investment income in a low-interest-rate environment.
- Reserve adequacy for disability, long-term care and closed-block individual disability business.
- Developments in litigation, regulatory investigations, tax matters and potential limitations on dividends from insurance subsidiaries.
- Future effects of the deferred acquisition cost accounting update expected to apply after December 15, 2011; the filing states that the eventual impact had not been finalized.