Unum Group 10-Q Summary
Business context and reporting period
Unum Group is a leading provider of disability insurance in the United States and United Kingdom, with complementary life, long-term care, employee-paid and voluntary benefits businesses. Reported segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other. This unaudited Form 10-Q covers the three and nine months ended September 30, 2009, compared with the corresponding 2008 periods.
Financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Total revenue | $2,517.5 million | $2,442.7 million | $7,594.4 million | $7,658.6 million |
| Premium income | $1,861.1 million | $1,946.5 million | $5,609.8 million | $5,865.6 million |
| Net investment income | $579.6 million | $594.7 million | $1,750.9 million | $1,799.2 million |
| Net realized investment gain (loss) | $14.9 million | $(165.8) million | $37.6 million | $(208.2) million |
| Income before tax | $334.6 million | $159.8 million | $996.4 million | $771.5 million |
| Net income | $221.1 million | $108.0 million | $653.2 million | $511.4 million |
| Diluted EPS | $0.66 | $0.32 | $1.97 | $1.48 |
| Net income margin | 8.8% | 4.4% | 8.6% | 6.7% |
Benefits and expenses were $2,182.9 million in the third quarter and $6,598.0 million for the first nine months. The consolidated benefit ratio improved to 84.1% in the third quarter and 84.2% year to date, from 84.6% and 84.9%, respectively. Unum US operating income increased 14.9% in the quarter and 14.1% year to date; its benefit ratio improved to 79.3% and 79.4% from 80.8% and 80.7%.
Net cash provided by operating activities was $853.6 million for the first nine months, compared with $1,021.6 million in 2008. Investing activities used $738.9 million, compared with $200.8 million used in 2008. Financing activities provided $55.8 million, compared with $914.4 million used in 2008. Cash and bank deposits increased to $220.6 million from $49.9 million at December 31, 2008.
At September 30, 2009, total assets were $54.5 billion, stockholders’ equity was $8.2 billion, and total liabilities were $46.2 billion. Fixed maturity securities were $37.6 billion at fair value. The portfolio’s duration-weighted book yield was 6.77%, weighted average credit rating was A3, and policyholder liability and supporting investment portfolio durations were approximately 8.27 years and 7.01 years, respectively.
Long-term debt was $2.58 billion, compared with $2.26 billion at year-end 2008; short-term debt was zero. The company issued $350.0 million of seven-year, 7.125% senior notes due in 2016. The leverage ratio excluding non-recourse debt declined to 21.1% from 21.5%, while consolidated debt to total consolidated capital declined to 25.6% from 26.6%. Holding company cash and liquidity were approximately $864 million, compared with $526 million at year-end 2008. The traditional U.S. insurance subsidiaries’ weighted-average risk-based capital ratio was approximately 340%, compared with 332% at year-end 2008.
Material changes versus the prior comparable period
- Quarterly net income increased 104.7% and nine-month net income increased 27.7%, primarily reflecting the swing from realized investment losses in 2008 to a realized investment gain in 2009.
- Premium income declined 4.4% in both the quarter and first nine months, reflecting pricing discipline, lower salary and employment growth, weaker persistency, the run-off of the closed block, and foreign-exchange effects.
- Net investment income declined 2.5% in the quarter and 2.7% year to date, driven by the weaker British pound, lower inflation-linked income in the United Kingdom, lower floating-rate yields, and fewer bond call premiums and consent fees.
- Other-than-temporary impairment losses on fixed maturity securities recognized in earnings were $33.6 million in the quarter and $155.3 million year to date, compared with $68.0 million and $74.9 million in the 2008 periods.
- Other comprehensive income improved substantially, producing comprehensive income of $777.9 million in the quarter and $1,890.6 million year to date, compared with comprehensive losses of $560.6 million and $547.7 million.
- Unum UK operating income declined 26.9% in the quarter and 11.3% year to date in local currency, although its benefit ratio improved. Reported results were also reduced by pound depreciation.
- Colonial Life operating income increased 6.3% in the quarter and 5.4% year to date. Its benefit ratio was 48.2% in the quarter and 47.0% year to date.
- The Individual Disability–Closed Block segment’s operating income increased to $7.2 million in the quarter and $28.5 million year to date, but revenue is expected to decline as the block runs off.
Guidance, outlook, commentary, risks and unusual items
Management expects continued growth in group disability and voluntary and supplemental products, with group life and AD&D operating results flat to declining relative to 2008. Unum US expects a favorable full-year group disability benefit ratio compared with 2008, but anticipates continued pressure on premium growth, sales and persistency if economic conditions remain weak. Unum UK expects strong margins but modest margin deterioration and unfavorable dollar-translated full-year results because of the weaker pound. Colonial Life expects continued high profitability, with modest margin pressure and slightly lower premium growth.
- Management identified unemployment, consumer confidence, claim incidence and recovery rates, interest rates, credit spreads, investment impairments, foreign exchange, ratings actions, regulatory changes, litigation, persistency, pricing, reserving assumptions, reinsurer performance and changes in accounting standards as significant risks.
- The investment portfolio had $785.5 million of gross unrealized losses, including $311.3 million on below-investment-grade securities. Management stated that it expected to recover amortized cost on securities not impaired and did not intend, or expect to be required, to sell them before recovery.
- The company reported no exposure to subprime mortgages or Alt-A loans in its asset-backed or mortgage-backed portfolios and only $17.1 million of collateralized debt obligation exposure within its public bond portfolio.
- The company stated that defaults could reduce realized investment income and statutory capital and could eventually require external financing. It also noted that insurer dividend payments are subject to regulatory restrictions.
- A $250 million unsecured revolving credit facility was scheduled to expire on December 8, 2009. Management believed existing cash resources were sufficient for the next 12 months.
- Significant litigation and regulatory matters remained pending. The company had accrued for the Merrick matter, involving an amended $26.4 million judgment against Unum Group, but stated that the ultimate outcome of other matters could materially affect results or cash flows in a particular period.
- Unrecognized tax benefits totaled $148.3 million, including $133.1 million associated with deferred tax assets. The company stated that the amount could change significantly within 12 months, although it believed sufficient provision had been made.
- The company adopted revised debt-security impairment guidance effective April 1, 2009, increasing opening retained earnings by $14.3 million net of tax. Other 2009 accounting adoptions had no material effect on results.
- Derivative credit exposure was $18.8 million, while $139.9 million of derivative liabilities had credit-rating-related contingent features that could require termination and immediate payment if specified ratings thresholds were breached.
Most important facts for investors to verify
- Whether premium growth, sales and persistency recover as employment and salary conditions improve, particularly in Unum US supplemental and voluntary products and Unum UK.
- Whether disability claim incidence and recovery rates remain favorable and whether long-term-care loss ratios and reserves require adverse adjustments.
- Future impairment losses, defaults, unrealized losses and valuation changes in the fixed maturity portfolio, especially below-investment-grade and financial-institution holdings.
- Liquidity after the December 2009 revolving-credit-facility maturity, future debt service, insurer dividend capacity and any need for external financing.
- Changes in Unum Group and subsidiary credit and financial-strength ratings, including possible effects on derivative collateral or termination requirements.
- Developments in litigation, regulatory investigations, the Merrick appeal, the False Claims Act appeal, other class-action matters and the IRS tax examinations.
- The sustainability of reported earnings given the material contribution from realized investment gains and the $208.1 million year-to-date gain on the modified coinsurance embedded derivative.