Unum Group 2011 Q3 SEC Filing Summary
Business context and reporting period
Unum Group is an insurance company providing disability, life, long-term care, accident, sickness, critical illness, and voluntary benefits in the United States and United Kingdom. The filing covers the unaudited quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Principal segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $2,545.6 million | $2,527.9 million | $7,673.2 million | $7,600.1 million |
| Premium income | $1,881.2 million | $1,850.2 million | $5,625.7 million | $5,563.2 million |
| Net investment income | $629.2 million | $618.4 million | $1,885.0 million | $1,861.2 million |
| Income before tax | $293.3 million | $326.5 million | $961.5 million | $995.8 million |
| Net income | $205.6 million | $220.8 million | $660.8 million | $660.3 million |
| Diluted EPS | $0.69 | $0.68 | $2.15 | $2.00 |
| After-tax operating income | $221.5 million | $219.9 million | $669.2 million | $672.0 million |
| Operating diluted EPS | $0.74 | $0.68 | $2.18 | $2.04 |
Revenue increased 0.7% in the quarter and 1.0% year to date, while net income decreased 6.9% in the quarter and was essentially flat year to date. Approximate net margins were 8.1% for Q3 and 8.6% for the first nine months. The consolidated benefit ratio was 86.9% in Q3 and 85.8% year to date, compared with 85.8% and 85.1%, respectively, in 2010.
- Unum US: Operating income increased 7.2% in Q3 and 4.3% year to date. Premium income rose 1.3% and 0.6%, respectively, while sales increased 10.2% and 9.7%.
- Unum UK: Operating income declined 28.6% in local currency in Q3 and 18.3% year to date. Premium income grew, but benefit ratios increased to 78.8% and 72.7% from 66.9% and 65.3%.
- Colonial Life: Operating income declined 5.6% in Q3 and 3.1% year to date despite premium growth of 5.3% and 5.5%; benefit ratios increased to 52.6% and 51.7%.
- Individual Disability–Closed Block: Premium income declined 5.8% in Q3 and 6.3% year to date as the block runs off, while operating income increased 42.9% in Q3 and 1.2% year to date.
Balance sheet, cash flow, debt, and liquidity
- Total assets were $60.0 billion at September 30, 2011, up from $57.3 billion at December 31, 2010. Stockholders’ equity was $9.5 billion, compared with $8.9 billion at year-end.
- Fixed maturity securities were $42.4 billion at fair value, including $5.7 billion of net unrealized gains. Total investments were $48.8 billion.
- Net cash provided by operating activities was $788.7 million for the first nine months, down from $913.8 million in 2010. Net cash used in investing was $141.0 million, compared with $842.9 million in 2010.
- Net cash used in financing was $649.0 million, primarily reflecting $619.9 million of common-stock repurchases, $90.3 million of dividends, debt repayments, and securities-lending borrowings.
- Short-term debt was $342.4 million, entirely related to securities-lending transactions. Long-term debt was $2.6 billion. Consolidated debt-to-capital leverage was 26.4%, compared with 25.9% at year-end; excluding non-recourse and securities-lending debt, leverage was 21.2%, compared with 22.8%.
- Holding-company cash and marketable securities were approximately $647 million, down from $1.2 billion at December 31, 2010. Management stated that domestic resources were sufficient for anticipated liquidity needs over the next 12 months.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 396%, compared with 398% at year-end.
Material changes versus the prior comparable period
- Net realized investment results deteriorated to a loss of $23.9 million in Q3 and $12.3 million year to date, versus a gain of $1.1 million and a loss of $2.8 million in the comparable 2010 periods.
- The embedded derivative in a modified coinsurance arrangement generated realized losses of $33.7 million in Q3 and $24.4 million year to date, compared with a Q3 2010 gain of $1.6 million and a year-to-date 2010 loss of $3.7 million.
- Benefits and changes in reserves increased faster than revenue, contributing to lower pretax income and a higher consolidated benefit ratio.
- Operating results benefited from share repurchases: 25.4 million shares were repurchased for $619.9 million during the first nine months, reducing weighted-average diluted shares and increasing diluted EPS despite flat net income.
- The remaining $225.1 million of 7.625% senior notes matured in March 2011. The company also made principal payments on Northwind Holdings and Tailwind Holdings debt.
- The company adopted expanded troubled-debt-restructuring disclosures with no earnings impact. It expected adoption of the revised insurance deferred-acquisition-cost standard to reduce opening retained earnings by approximately $400 million to $600 million when adopted.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected near-term premium and sales growth to remain constrained by high unemployment, low wage growth, competitive pricing, and weak employment trends, while anticipating improved growth as the economy recovers.
- Unum US expected marginal year-over-year premium growth for the remainder of 2011. Group disability benefit ratios could remain elevated, and the company was considering 2012 price increases because of higher claim incidence and lower discount rates.
- Unum UK expected 2011 benefit ratios to be unfavorable to 2010 and profit margins to remain favorable but below 2010 levels. It was also considering group disability price increases if unfavorable risk trends and low interest rates persisted.
- Colonial Life expected modest near-term premium growth and higher benefit ratios than in 2010, although management continued to view the segment as well positioned for longer-term growth.
- Rate increases for certain individual long-term-care policies had been accepted in 35 states; increased premium income was expected to emerge beginning in 2012.
- Principal risks include claim incidence and recovery trends, long-term-care morbidity and persistency, reserve adequacy, low interest rates, credit spreads, investment impairments, liquidity, ratings, regulatory restrictions on subsidiary dividends, reinsurance counterparty performance, litigation, and currency movements.
- At September 30, 2011, two mortgage loans were past due and on nonaccrual status, with carrying values of $10.1 million and $9.5 million. The mortgage-loan allowance was $1.5 million.
- Legally binding unfunded commitments included $158.6 million for tax-credit partnerships and $15.7 million for transferable state tax credits. Additional non-binding commitments included private placements, private equity partnerships, commercial mortgage loans, and other investments.
- Litigation and regulatory matters included investigations concerning broker compensation, unclaimed property, retained asset accounts, and other insurance practices. Management believed the ultimate outcome should not materially affect financial position, but acknowledged that adverse outcomes could materially affect results or cash flow in a particular period.
- Forward-looking statements were expressly subject to economic, regulatory, interest-rate, claims, investment, rating, litigation, operational, reinsurance, currency, and cybersecurity risks.
Most important facts an investor should verify
- Whether deterioration in Unum UK and Colonial Life claims experience persists and whether Unum US group disability benefit ratios remain elevated.
- The sensitivity of reserves, investment income, and realized gains or losses to sustained low interest rates, credit spreads, and market volatility.
- The effect of the expected $400 million to $600 million deferred-acquisition-cost accounting adjustment on retained earnings and future earnings presentation.
- Whether holding-company liquidity remains adequate after substantial share repurchases and reduced cash and marketable securities.
- Progress and approvals for long-term-care rate increases and any proposed 2012 disability pricing actions.
- Potential financial effects of pending litigation, regulatory examinations, unclaimed-property reviews, tax matters, and restrictions on subsidiary dividends.
- Changes in insurer financial-strength ratings, risk-based capital, leverage, and securities-lending activity.