Unum Group 10-Q Summary
Business Context and Reporting Period
Unum Group provides workplace financial protection products, including disability, life, accident, critical illness, dental and vision insurance. Its principal segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the same periods of 2016.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Total revenue | $2,822.0 million | $2,761.3 million | $5,628.5 million | $5,486.7 million |
| Premium income | $2,142.2 million | $2,081.6 million | $4,285.1 million | $4,169.1 million |
| Net investment income | $620.5 million | $623.3 million | $1,222.9 million | $1,229.7 million |
| Income before tax | $361.6 million | $340.2 million | $691.9 million | $644.4 million |
| Net income | $245.1 million | $236.8 million | $475.0 million | $447.4 million |
| Diluted EPS | $1.07 | $1.00 | $2.07 | $1.87 |
| After-tax operating income | $240.4 million | $233.0 million | $476.5 million | $457.2 million |
| Operating income | $353.5 million | $334.9 million | $693.4 million | $659.6 million |
- Net income increased 3.5% in the quarter and 6.2% for the first six months. After-tax operating income increased 3.2% and 4.2%, respectively.
- Approximate GAAP net margin was 8.7% in both Q2 2017 and Q2 2016. The effective tax rate was 32.2% in Q2 and 31.3% for the six-month period.
- Operating cash flow was $642.0 million for the first six months, compared with $561.4 million in 2016. Investing activities used $276.4 million and financing activities used $349.0 million.
- Cash and bank deposits were $117.0 million at June 30, 2017, compared with $100.4 million at December 31, 2016. Unum Group and intermediate holding companies held $757 million of cash, short-term investments and fixed maturity securities, excluding amounts committed for subsidiary contributions.
- Total assets were $63.4 billion and stockholders’ equity was $9.3 billion at June 30, 2017. Long-term debt was $3.0 billion, compared with $3.0 billion at year-end 2016.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries exceeded 395%. The filing states that debt covenants were satisfied and no credit facility borrowings were outstanding, although $2.1 million of letters of credit had been issued.
Material Changes Versus the Prior Comparable Period
- Premium income grew 2.9% in Q2 and 2.8% for the first six months, while net investment income declined 0.4% and 0.6%, respectively, because of lower yields and foreign-exchange effects.
- Unum US operating income increased 9.1% in Q2 and 9.9% year to date. Its benefit ratio improved to 67.4% from 69.1% in Q2 and to 67.7% from 69.2% for the first six months.
- Unum UK operating income declined 21.7% in reported dollars in Q2 and 21.3% year to date. In local currency, the declines were 12.1% and 10.6%, respectively, reflecting less favorable benefits experience and a weaker pound. Its benefit ratio increased to 75.6% from 70.1% in Q2.
- Colonial Life operating income increased 5.0% in Q2 and 5.7% year to date, supported primarily by premium growth.
- Closed Block operating income was unchanged in Q2 and decreased 3.2% year to date as individual disability premiums declined and the block continued to run off.
- Sales increased 10.7% for Unum US, 23.8% for Unum UK in local currency, and 7.5% for Colonial Life during Q2. Unum US growth benefited from dental and vision products added following the 2016 Starmount acquisition.
- There were no other-than-temporary impairment losses on fixed maturity securities in 2017, compared with $9.4 million in Q2 2016 and $30.5 million in the first six months of 2016.
- The company repurchased 4.3 million shares for approximately $200 million in the first six months and paid $92.3 million in dividends. A new $750 million repurchase authorization extends through November 2018; approximately $712.9 million remained available at June 30.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline and continued operating income growth during the remainder of 2017.
- Low interest rates continue to pressure investment yields, profit margins and reserve adequacy. The six-month earned book yield was 5.24%, compared with 5.30% for full-year 2016.
- Management expects continued improvement in the full-year Unum US group disability benefit ratio, while Colonial Life’s full-year benefit ratio is expected to remain generally consistent with 2016.
- Brexit-related economic uncertainty may dampen Unum UK growth, increase investment and solvency-ratio volatility, and weaken reported results through pound depreciation.
- The company recorded a $20.6 million pretax, $13.4 million after-tax guaranty fund assessment related to an unaffiliated insurer’s insolvency. This reduced six-month operating results by approximately $0.06 per diluted share.
- Unum faces ordinary-course claim litigation, regulatory inquiries and an ongoing West Virginia unclaimed-property case. Management believes ultimate pending litigation and regulatory matters should not materially affect financial position, but acknowledges that adverse outcomes could materially affect a particular period’s results or cash flows.
- Other significant risks include claims incidence and recovery rates, mortality and morbidity, investment losses and credit deterioration, reinsurance counterparty performance, interest-rate and foreign-exchange movements, cyber risk, competition, regulatory or tax changes, rating downgrades and reserve-assumption changes.
- Fixed maturity securities totaled $45.1 billion at fair value, including $5.5 billion of net unrealized gains. Below-investment-grade securities had $3.4 billion of fair value and $68.5 million of gross unrealized losses.
Important Facts for Investors to Verify
- Whether low interest rates continue to reduce investment income and require changes to reserve discount rates.
- Unum UK benefit ratios, local-currency profitability, sales trends and the effect of further pound weakness or Brexit-related disruption.
- The sustainability of favorable Unum US claims experience and management’s expected full-year benefit-ratio improvement.
- Long-term care and closed-block reserve adequacy, including the success and regulatory approval of requested premium-rate increases.
- Progress and remaining capacity under the $750 million share-repurchase program, alongside statutory capital needs and dividend capacity.
- Credit quality, unrealized losses and impairment exposure in the investment portfolio, particularly below-investment-grade securities and long-duration assets.
- Developments in litigation, unclaimed-property examinations, the West Virginia matter and future guaranty-fund assessments.
- The effect of the 2016 individual disability reinsurance agreement and the Starmount acquisition on premium growth, benefit ratios and earnings comparability.