Unum Group 2014 Q3 SEC Filing Summary
Business context and reporting period
Unum Group is a provider of disability, life, supplemental and voluntary workplace benefits in the United States and United Kingdom. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $2,609.4 million | $2,540.9 million | $7,874.0 million | $7,767.6 million |
| Premium income | $1,947.2 million | $1,897.3 million | $5,829.3 million | $5,734.0 million |
| Net investment income | $606.4 million | $615.5 million | $1,848.0 million | $1,862.7 million |
| Income before tax | $312.1 million | $284.1 million | $985.1 million | $899.4 million |
| Net income | $221.1 million | $205.7 million | $692.5 million | $636.9 million |
| Diluted EPS | $0.87 | $0.78 | $2.69 | $2.38 |
| Operating income, before tax | $312.3 million | $312.9 million | $969.1 million | $932.4 million |
| After-tax operating income | $221.1 million | $224.6 million | $681.6 million | $658.7 million |
Revenue increased 2.7% in the quarter and 1.4% year to date. Net income increased 7.5% and 8.7%, respectively. Approximate net margins were 8.5% in Q3 2014 versus 8.1% in Q3 2013, and 8.8% for the first nine months versus 8.2% in the prior-year period.
- Consolidated benefit ratios improved to 84.9% in Q3 and 84.7% year to date, compared with 86.5% and 86.4% in 2013.
- Operating cash flow was $944.0 million for the first nine months, up from $709.5 million.
- Cash and bank deposits were $60.6 million at September 30, 2014, compared with $94.1 million at December 31, 2013. Management separately reported approximately $720 million of cash equivalents and marketable securities at Unum Group and intermediate holding companies, versus $514 million at year-end.
- Total assets were $62.0 billion and stockholders’ equity was $9.2 billion at September 30, 2014, compared with $59.4 billion and $8.7 billion, respectively, at December 31, 2013.
- Short-term debt was $70.2 million and long-term debt was $2.8 billion. The company had no borrowings under its revolving credit facility.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400%, compared with 405% at December 31, 2013.
Material changes versus the prior comparable period
- Premium growth was broad-based: Q3 premium income increased 3.4% at Unum US, 11.1% at Unum UK and 3.3% at Colonial Life. Closed Block premium income declined 4.2% as policies terminated or matured.
- Unum US operating income declined 2.5% in Q3 but increased 0.3% year to date. Its benefit ratio improved to 70.4% for Q3 and 70.3% year to date, while lower investment income and higher expenses constrained earnings.
- Unum UK operating income increased 7.0% in Q3 and 14.0% year to date in reported dollars. Favorable exchange-rate translation contributed to reported growth; local-currency earnings were flat in Q3 and up 5.8% year to date.
- Colonial Life operating income increased 3.2% in Q3 and 4.8% year to date, supported by premium growth and favorable risk results.
- Closed Block operating income increased 1.9% in Q3 and 12.1% year to date, despite declining premium income, due partly to favorable long-term-care risk results and higher investment income.
- Net investment income decreased 1.5% in Q3 and 0.8% year to date because of lower yields and miscellaneous investment income, despite higher invested assets in some portfolios.
- The company issued $350.0 million of 4.00% unsecured senior notes due 2024 in March 2014 and retired $145.0 million principal amount of 6.85% notes in May 2014, paying a $13.2 million make-whole amount.
- Share repurchases totaled $300.6 million for the first nine months, covering 8.7 million shares. Approximately $429.5 million remained under the $750 million program authorized through June 2015.
Guidance, outlook, risks and unusual items
Management expects profitable returns and year-over-year premium growth during the remainder of 2014. It expects the full-year 2014 group-disability benefit ratio to be slightly below 2013 levels and Colonial Life’s benefit ratio to be generally consistent with 2013, excluding the prior-year fourth-quarter reserve increase for unclaimed death benefits. Management continues to pursue pricing actions, expense efficiencies, product-mix changes and capital deployment.
- Low interest rates and tightening credit spreads are pressuring investment yields, profit margins and reserve discount rates. The fixed-income portfolio’s duration-weighted book yield declined to 6.19% from 6.28% at December 31, 2013.
- Fixed maturity securities were $44.7 billion at fair value, with $5.8 billion of net unrealized gains. Gross unrealized losses were $84.6 million, and no other-than-temporary impairment loss was recorded in 2014 through September 30.
- Insurance results remain sensitive to claim incidence, recovery rates, mortality, morbidity, persistency, unemployment, consumer confidence and medical or regulatory developments. Long-term-care and other closed-block reserves are particularly sensitive to changes in assumptions.
- The company expects a pretax pension settlement loss of approximately $55 million to $85 million in the fourth quarter of 2014 from a limited-time lump-sum offer to certain former U.S. pension participants.
- Legal and regulatory matters include unclaimed-death-benefit investigations, a long-term-care inflation-protection class action and other claim litigation. Management believes pending matters should not materially affect financial position, but acknowledges that an unfavorable outcome could materially affect results or cash flows for a particular period.
- Adoption of the affordable-housing investment accounting update on January 1, 2015 is expected to reduce opening retained earnings by approximately $25 million to $35 million; the filing states that the ongoing effect on 2015 earnings should be immaterial.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes were reported to the risk factors in the 2013 Form 10-K.
Most important facts for investors to verify
- Whether premium growth and improved benefit ratios persist while investment yields remain under pressure.
- The ultimate fourth-quarter pension settlement loss and related cash distributions.
- Reserve adequacy for group disability, long-term care and other long-tailed products under changing interest-rate, mortality, morbidity and claim-recovery assumptions.
- Progress and financial exposure related to unclaimed-death-benefit investigations and the long-term-care inflation-protection litigation.
- Capital and liquidity after continued share repurchases, debt refinancing, subsidiary dividend flows and insurance-regulatory capital requirements.
- Credit quality, unrealized gains and losses, below-investment-grade exposure and valuation assumptions in the investment portfolio.
- The effect of foreign exchange movements on reported Unum UK results and consolidated earnings.