Unum Group 2010 Form 10-K Summary
Business context and reporting period
Unum Group filed its Form 10-K for the fiscal year ended December 31, 2010. The company provides disability, life, long-term care, accident, sickness, critical illness, and other employee-benefit products in the United States and United Kingdom. Its principal segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Premium income was concentrated in Unum US, which represented approximately 65.3% of consolidated premium income, followed by Colonial Life at 14.5%, Unum UK at 8.8%, and the remaining segments at 11.4% combined.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $10,193.2 million | $10,091.0 million | 1.0% |
| Premium income | $7,431.4 million | $7,475.5 million | (0.6%) |
| Net investment income | $2,495.5 million | $2,346.6 million | 6.3% |
| Net realized investment gain | $24.7 million | $11.7 million | Higher gain |
| Income before tax | $1,331.3 million | $1,292.3 million | 3.0% |
| Net income | $886.1 million | $852.6 million | 3.9% |
| Diluted EPS | $2.71 | $2.57 | 5.4% |
| Operating income by segment | $1,306.6 million | $1,280.6 million | 2.0% |
| After-tax operating income | $880.6 million, or $2.69 per share | $852.4 million, or $2.57 per share | 3.3% per share |
| Operating cash flow | $1,196.8 million | $1,237.0 million | $(40.2) million |
| Total assets | $57,307.7 million | $54,477.0 million | 5.2% |
| Total stockholders’ equity | $8,944.4 million | $8,500.1 million | 5.2% |
| Total debt | $2,856.4 million | $2,549.6 million | Higher due to new issuance |
Net income represented approximately 8.7% of total revenue. The consolidated benefit ratio increased to 85.5% from 84.2% in 2009.
- Unum US operating income increased 6.6% to $826.0 million; its benefit ratio was 79.3% versus 79.1%.
- Unum UK operating income declined 16.3% in dollars and 15.8% in local currency to $208.8 million; its benefit ratio rose to 67.0% from 54.5%.
- Colonial Life operating income increased 0.5% to $282.2 million; premium income rose 6.0%, while the benefit ratio increased to 49.7% from 47.3%.
- Individual Disability–Closed Block operating income increased 28.9% to $44.2 million, although premium income declined 5.7% as the block continued to run off.
- Corporate and Other reported a $54.6 million operating loss, compared with a $59.2 million loss in 2009.
Material changes versus the prior comparable period
- Net income increased modestly despite a slight decline in premium income, supported by higher net investment income and lower other-than-temporary impairment losses.
- Net investment income increased by $148.9 million, primarily from growth in invested assets, higher bond call premiums, and higher income on U.K. inflation-linked bonds.
- Other-than-temporary impairment losses on fixed maturity securities fell to $15.9 million from $215.5 million in 2009.
- Unum US sales declined 5.7%, reflecting unemployment, lower salary growth, fewer covered employees, and competitive pressure. Voluntary-benefit sales nevertheless increased 15.6%.
- Unum UK premium income declined 5.2% in dollars, and local-currency operating income declined 15.8%, primarily because of lower premium growth, competitive pricing, inflation-linked benefit reserves, and unfavorable group-life claims experience.
- Colonial Life premium income increased 6.0%, but accident, sickness, and disability claims experience deteriorated.
- Policy and contract benefit reserves increased to $39,715.0 million from $37,740.8 million. Gross policy and claim reserves, excluding unrealized adjustments, were $38,171.7 million at year-end.
Debt, liquidity, capital, and unusual items
- Unum issued $400.0 million of 5.625% senior notes due 2020 and had $225.1 million of 7.625% notes due in March 2011 classified as short-term debt.
- Consolidated leverage was 25.9%, compared with 24.8% in 2009; leverage excluding non-recourse debt and associated capital was 22.8% versus 20.5%.
- Holding-company cash and marketable securities increased to approximately $1.2 billion from $915 million. Management stated that liquidity was sufficient for the following 12 months.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries increased to approximately 398% from 382%.
- Unum repurchased 16.4 million shares for approximately $356.0 million and paid $114.8 million of common dividends. The quarterly dividend increased to $0.0925 per share in the third quarter of 2010.
- Fixed maturity securities had a fair value of $40.0 billion and a net unrealized gain of approximately $3.5 billion. The portfolio’s weighted-average credit rating was A3.
- Reinsurance recoverable was $4.8 billion. Approximately 91% was attributable to 14 major reinsurers rated A or better by AM Best or supported by collateral.
- The filing reports a $10.2 million non-cash tax charge related to healthcare reform and a $2.7 million tax benefit from the U.K. tax-rate change.
Guidance, outlook, management commentary, and risks
Management’s 2011 priorities were disciplined profitable growth, capital management, financial flexibility, continued investment in the businesses, and selective deployment of excess capital.
- Unum US expected marginal year-over-year premium growth, a group-disability benefit ratio generally consistent with 2010, and potential margin improvement from product mix and expense efficiencies.
- Unum UK expected cautious premium growth and negative earnings growth relative to 2010, with an overall benefit ratio generally consistent with 2010 and margins slightly below 2010 levels.
- Colonial Life expected modest premium growth, strong margins, and a benefit ratio somewhat higher than the favorable 2009 and first-half 2010 experience.
- The Individual Disability–Closed Block segment was expected to continue declining as policies mature and terminate.
- Management began seeking rate increases on certain individual long-term-care policies; approved increases were expected to contribute higher premium income during 2011.
Principal risks include unemployment and weak wage growth, higher disability claim incidence or duration, reserve inadequacy, sustained low interest rates, investment impairments and credit losses, rating downgrades, regulatory and capital changes including Solvency II and Dodd-Frank, litigation and regulatory investigations, reinsurer insolvency, competition, foreign-exchange movements, operational failures, and restrictions on dividends from insurance subsidiaries. The filing states that the financial statements and internal controls received unqualified opinions from Ernst & Young LLP.
Most important facts for an investor to verify
- Whether disability and long-term-care claim incidence, claim resolution rates, and reserve adequacy remain consistent with management’s assumptions.
- The sustainability of premium growth once employment, wages, and employer benefit-plan demand recover.
- The effect of low interest rates on investment income, reserve discount rates, and long-duration products.
- The liquidity and refinancing plan for the $225.1 million of debt due in March 2011 and the broader debt maturity schedule.
- The collectibility and concentration of the $4.8 billion reinsurance recoverable.
- The impact of regulatory developments, rate-increase approvals, litigation, retained-asset-account claims, and tax audits.
- The effect of share repurchases and dividends on holding-company liquidity, statutory capital, ratings, and future capital deployment.