Unum Group 2010 First-Quarter 10-Q Summary
Business Context and Reporting Period
Unum Group is a disability and employee-benefits insurer operating primarily in the United States and United Kingdom, with additional life, long-term care, voluntary benefits, and related products. The filing covers the unaudited three months ended March 31, 2010, compared with the three months ended March 31, 2009. Principal segments are Unum US, Unum UK, Colonial Life, Individual Disability—Closed Block, and Corporate and Other.
Financial Performance and Position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $2,561.6 million | $2,448.9 million | 4.6% |
| Premium income | $1,863.2 million | $1,872.8 million | (0.5%) |
| Net investment income | $613.0 million | $573.7 million | 6.9% |
| Net realized investment gain (loss) | $25.6 million | $(64.6) million | Improved by $90.2 million |
| Income before income tax | $361.2 million | $250.6 million | 44.1% |
| Net income | $229.8 million | $164.9 million | 39.4% |
| Diluted earnings per share | $0.69 | $0.50 | Up $0.19 |
| Operating income before tax and realized gains or losses | $335.6 million | $315.2 million | 6.5% |
| Net cash from operating activities | $281.6 million | $290.9 million | Down $9.3 million |
Approximate net margin improved to 9.0% from 6.7%; segment operating income as a percentage of operating revenue was approximately 13.2% versus 12.5%. Benefits and expenses were broadly stable at $2,200.4 million versus $2,198.3 million, while income tax expense increased to $131.4 million from $85.7 million.
- Total assets were $54.997 billion at March 31, 2010, compared with $54.477 billion at December 31, 2009.
- Stockholders’ equity increased to $8.780 billion from $8.500 billion at year-end 2009.
- Investments totaled $43.908 billion, including $38.719 billion of fixed maturity securities at fair value.
- Cash and bank deposits were $51.7 million, compared with $71.6 million at December 31, 2009.
- Long-term debt was $2.291 billion and short-term debt was $225.1 million at March 31, 2010. The short-term debt consisted of 7.625% senior notes due March 2011.
- Leverage was 20.0% excluding specified non-recourse debt and 24.1% using consolidated debt to total consolidated capital, versus 20.5% and 24.8%, respectively, at year-end.
- Holding-company cash and marketable securities were approximately $775 million, down from approximately $915 million at year-end 2009.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 397%, compared with 382% at December 31, 2009.
- Cash used in investing activities was $249.9 million and cash used in financing activities was $51.6 million, resulting in a $19.9 million decrease in cash and bank deposits.
Material Changes Versus the Prior Comparable Period
- Net income benefited substantially from the change from a $64.6 million realized investment loss in Q1 2009 to a $25.6 million realized investment gain in Q1 2010. Fixed-maturity other-than-temporary impairment losses declined to $0.2 million from $73.6 million.
- Premium income was essentially flat overall. Unum US premium income declined 0.8%, while Unum UK increased 1.7% in reported dollars and Colonial Life increased 4.6%. Individual Disability—Closed Block premium income declined 6.8% as the block ran off.
- Unum US operating income increased 8.5% to $199.2 million, and its benefit ratio improved to 78.3% from 79.3%. Group disability benefit results improved, although premium growth and sales remained pressured.
- Unum UK operating income declined 2.7% in reported dollars and 10.4% in local currency. Its benefit ratio deteriorated to 63.1% from 53.3%, driven by unfavorable claim experience and lower premium income in group long-term disability.
- Colonial Life operating income increased 3.0% to $73.0 million, while its benefit ratio increased modestly to 47.1% from 46.3%.
- Consolidated sales declined 2.5% to $262.0 million. Unum US sales declined 9.2%, Unum UK sales increased 23.5% in dollars, and Colonial Life sales increased 8.4%.
- Other comprehensive income was $61.9 million versus a $121.8 million loss in Q1 2009, primarily reflecting improved unrealized securities gains, partly offset by reserve adjustments and foreign currency translation losses.
Guidance, Outlook, Risks, and Unusual Items
- Management’s 2010 priorities were disciplined top-line growth, capital management, business investment, and maintaining financial flexibility.
- Management expected Unum US premium income to increase slightly in 2010, with group disability margins leveling and potential future improvement at a slower pace than in 2009. Employment, wage growth, competitive pricing, and persistency remained key constraints.
- Unum UK had a cautious near-term premium outlook because of economic conditions and competitive pricing, but management expected improved premium growth later in 2010 and margins near 2009 levels.
- Colonial Life expected modest near-term premium growth but continued strong margins, with growth dependent on employment, employee buying patterns, and new account activity.
- The Individual Disability—Closed Block was expected to continue declining as policies matured and the block ran off. Its interest-adjusted loss ratio may remain volatile.
- Management stated that cash resources were sufficient for the next 12 months and that the company remained in compliance with debt covenants. Insurance-subsidiary dividends remain subject to regulatory restrictions and subsidiary capital needs.
- The investment portfolio had $2.5 billion of net unrealized gains at quarter-end. Gross unrealized losses on fixed maturity securities were $415.9 million, including $344.3 million on securities held in a loss position for at least 12 months. Management reported no subprime mortgage, Alt-A, or collateralized debt obligation exposure in its asset-backed or mortgage-backed portfolios, although it held $17.0 million of collateralized debt obligations in its public bond portfolio.
- A $10.2 million non-cash tax charge resulted from 2010 healthcare legislation affecting the tax treatment of postretirement prescription-drug subsidies.
- Management disclosed litigation, regulatory investigations, and contingent matters. A Merrick litigation matter was settled on April 29, 2010; other matters included Florida regulatory discussions, broker-related litigation, a False Claims Act appeal, and a Colorado insurance dispute scheduled for trial in August 2010.
- Key risks include unemployment-driven claim incidence, claim recovery rates, reserve adequacy, low interest rates, credit spreads, investment impairments, liquidity of fixed maturity securities, ratings actions, regulatory restrictions on subsidiary dividends, reinsurer performance, litigation, and foreign exchange movements.
Most Important Facts for Investors to Verify
- Whether the sharp year-over-year earnings improvement is sustainable without the favorable comparison in realized investment gains and impairment losses.
- Trends in Unum US sales, premium growth, employment levels, disability claim incidence, and claim recovery rates.
- Whether Unum UK’s higher benefit ratio and local-currency operating-income decline persist.
- The adequacy of reserves for disability, long-term care, and the Individual Disability—Closed Block businesses.
- Potential changes in the fair value and impairment status of the investment portfolio, including long-duration unrealized losses and below-investment-grade securities.
- Liquidity at the holding company, subsidiary dividend capacity, the $225.1 million of short-term debt due in March 2011, and compliance with debt and insurance-capital requirements.
- Developments in disclosed litigation, regulatory investigations, tax matters, and ratings, including the stated ratings of Unum Group and its operating subsidiaries.
- The filing text states that interim results are not necessarily indicative of full-year performance and that the financial statements were reviewed, not audited.