Unum Group 2010 Q2 Form 10-Q Summary
Business context and reporting period
Unum Group is a U.S. and U.K. provider of disability insurance and related employee benefits, including group and individual disability, life, accidental death and dismemberment, long-term care, voluntary benefits, and workplace products. The filing covers the quarter and six months ended June 30, 2010; financial statements are unaudited and prepared under U.S. GAAP.
Primary reporting segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Financial results and key metrics
| Metric | Three months ended June 30, 2010 | Six months ended June 30, 2010 |
|---|---|---|
| Total revenue | $2,510.6 million | $5,072.2 million |
| Premium income | $1,849.8 million | $3,713.0 million |
| Net investment income | $629.8 million | $1,242.8 million |
| Net realized investment gain (loss) | $(29.5) million | $(3.9) million |
| Income before tax | $308.1 million | $669.3 million |
| Net income | $209.7 million | $439.5 million |
| Diluted earnings per share | $0.63 | $1.32 |
| Net cash from operating activities | Not separately provided for the quarter | $668.4 million |
- Net profit margin was approximately 8.4% for the quarter and 8.7% for the six-month period.
- Benefits and change in reserves were $1,579.6 million in the quarter and $3,148.5 million for six months. The consolidated benefit ratio was 85.4% and 84.8%, respectively.
- Total assets were $56.8 billion at June 30, 2010, including $45.4 billion of investments and $39.8 billion of fixed maturity securities at fair value.
- Stockholders’ equity was $8.9 billion, compared with $8.5 billion at December 31, 2009.
- Debt consisted of $225.1 million of short-term debt and $2.27 billion of long-term debt. Consolidated debt-to-total-capital leverage was 23.8%, compared with 24.8% at year-end 2009.
- Cash and marketable securities at holding companies were approximately $773 million at quarter-end, compared with $915 million at year-end 2009.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400%, compared with 382% at year-end 2009.
Material changes versus the prior comparable period
- Second-quarter revenue declined 4.5% and six-month revenue was essentially flat, down 0.1%, primarily because lower premium income and realized investment results offset higher net investment income.
- Second-quarter net income fell 21.5% to $209.7 million, while six-month net income increased 1.7% to $439.5 million.
- Net realized investment results changed from gains of $87.3 million in the second quarter and $22.7 million for six months in 2009 to losses of $29.5 million and $3.9 million, respectively, in 2010.
- Net investment income increased 5.4% in the quarter and 6.1% for six months, driven primarily by growth in invested assets and higher bond call premiums.
- Operating income excluding realized investment gains and losses increased 4.2% in the quarter and 5.3% for six months, to $337.6 million and $673.2 million, respectively.
- Unum US operating income increased 12.9% in the quarter and 10.7% for six months, despite modest premium declines. Its benefit ratio improved to 79.5% for the quarter and 78.9% for six months.
- Unum UK operating income declined 21.4% in the quarter and 12.4% for six months in U.S. dollars, reflecting lower premium income and materially higher benefit ratios.
- Colonial Life operating income increased 3.6% in the quarter and 3.3% for six months. Premium income increased 6.7% and 5.7%, respectively, although benefit ratios were higher than in 2009.
- Operating cash flow increased to $668.4 million from $608.1 million. Investing cash use increased to $429.1 million from $406.6 million, and financing cash use increased to $229.5 million from $203.0 million.
- The company repurchased approximately 5.7 million shares for $129.8 million during the quarter and first six months under a newly authorized $500 million program. The quarterly dividend was increased from $0.0825 to $0.0925 per share, effective with the expected third-quarter 2010 payment.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected a slight increase in Unum US premium income for 2010, continued benefit-ratio stabilization in group disability, and slower margin improvement than in 2009.
- Management expected Unum UK margins to remain favorable but below 2009 levels, with cautious premium-growth expectations because of economic conditions and competitive pricing.
- Colonial Life was expected to maintain strong profit margins, although its 2010 benefit ratio was expected to be slightly elevated relative to favorable 2009 and 2008 experience.
- The Individual Disability–Closed Block segment is expected to decline over time as the block runs off, with possible volatility in investment income, claims resolution, and reserve assumptions.
- Unemployment, wage growth, consumer confidence, claim incidence and recovery rates, interest rates, credit spreads, investment impairments, foreign exchange, competition, regulatory changes, ratings, reinsurance recoverability, litigation, and reserve assumptions remain key risks.
- Fixed maturity securities had a $3.7 billion net unrealized gain at June 30, 2010, compared with a $2.0 billion gain at year-end 2009 and a $0.5 billion loss at June 30, 2009. Gross unrealized losses were $277.9 million.
- The company recorded $10.4 million of other-than-temporary impairment losses during the first six months, compared with $121.7 million in the prior-year period.
- A $15.0 million pretax settlement related to litigation concerning corporate-owned life insurance policies was recorded in second-quarter operating results.
- A $10.2 million non-cash tax charge was recorded in the first quarter because of 2010 health-care legislation affecting the tax treatment of postretirement prescription drug subsidies.
- The company entered into a 17-year noncancelable office lease with aggregate minimum payments of $98.7 million and committed $14.1 million for leasehold improvements.
- Unfunded partnership commitments included $57.5 million that was legally binding, approximately $91.5 million to private equity partnerships that was not legally binding, and approximately $1.8 million for underlying partnerships.
- Management stated that cash resources were sufficient for the next 12 months and that the company remained in compliance with debt covenants. The filing states that ultimate litigation and regulatory outcomes cannot be predicted, although management did not expect them to materially affect financial position after reserves and indemnification.
- Disclosure controls and procedures were assessed as effective as of June 30, 2010. The independent auditor performed a review, not an audit, of the interim financial statements.
Important facts for investors to verify
- Whether premium growth and sales recover as employment and wage trends improve, particularly in Unum US group disability and Unum UK.
- Whether Unum UK and Colonial Life benefit ratios normalize or remain elevated.
- The sustainability of higher investment income, bond call premiums, and the substantial unrealized investment gains.
- Potential impairment, credit-spread, interest-rate, duration-mismatch, and below-investment-grade investment risks.
- Holding-company liquidity after share repurchases, dividends, debt maturities, pension contributions, and partnership commitments.
- Potential effects of litigation, regulatory investigations, the New York Attorney General subpoena, and the pending tax matters.
- Changes in insurer statutory capital, dividend capacity, debt ratings, and financial-strength ratings.
- Future reserve adequacy, particularly for long-term care, disability, the closed block, and products affected by claim incidence or recovery trends.