Unum Group 2012 Form 10-K Summary
Business context and reporting period
Unum Group filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed February 22, 2013. The company provides disability, life, accident, sickness, cancer, critical illness, long-term care, and voluntary employee-benefit products, primarily through workplace distribution in the United States and United Kingdom.
Major operating segments were Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. Unum Group had approximately 9,100 full-time employees at year-end. The filing includes unaudited fourth-quarter 2012 results, but the principal reporting period is the full year.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Premium income | $7,716.1 million | $7,514.2 million | 2.7% increase |
| Total revenue | $10,515.4 million | $10,278.0 million | 2.3% increase |
| Net investment income | $2,515.2 million | $2,519.6 million | 0.2% decrease |
| Net realized investment gain | $56.2 million | $(4.9) million | Improved |
| Income before income tax | $1,249.5 million | $333.3 million | 274.9% increase |
| Net income | $894.4 million | $284.2 million | 214.7% increase |
| Diluted earnings per share | $3.17 | $0.94 | Increased |
| Net cash from operating activities | $1,379.6 million | $1,193.7 million | 15.6% increase |
| Total assets | $62,236.1 million | $59,555.2 million | 4.5% increase |
| Long-term debt | $2,755.4 million | $2,570.2 million | Increase |
| Total stockholders' equity | $8,612.6 million | $8,169.7 million | 5.4% increase |
The consolidated benefit ratio was 87.1% in 2012 versus 95.9% in 2011, although the 2011 ratio included substantial Closed Block reserve charges. Excluding those charges, the 2011 benefit ratio was 85.9%. The 2012 net margin was approximately 8.5% of total revenue, compared with approximately 2.8% in 2011.
- Unum US: Premium income was $4,456.5 million, up 3.7%; operating income was $847.1 million, up 3.7%; benefit ratio was 72.7%.
- Unum UK: Premium income was $694.6 million, up 1.0% in dollars and 2.2% in pounds; operating income was $131.3 million, down 31.1% in dollars and 30.3% in local currency; benefit ratio was 77.9%.
- Colonial Life: Premium income was $1,194.5 million, up 5.2%; operating income was $274.3 million, up 1.6%; benefit ratio was 52.5%.
- Closed Block: Premium income was $1,370.5 million, down 1.8%; operating income was $95.5 million versus a loss of $829.2 million in 2011, which included major reserve and DAC charges.
At December 31, 2012, total policy and contract benefit liabilities were $46.2 billion, including $39.9 billion of policy and claim reserves before the unrealized investment adjustment. The fixed-maturity portfolio had a fair value of $45.0 billion and net unrealized gains of approximately $7.2 billion.
Material changes versus the prior comparable period
- Net income benefited from the absence of the $573.6 million long-term care reserve charge, $183.5 million individual disability reserve charge, and $196.0 million long-term care DAC impairment recognized in 2011.
- After-tax operating income declined to $887.5 million, or $3.15 diluted operating EPS, from $905.4 million, or $2.98, in 2011. Reported EPS increased primarily because of substantial share repurchases.
- Unum US operating income increased as premium growth and expense management offset generally stable risk results.
- Unum UK operating income declined materially because of adverse group-life risk results, lower investment yields, premium-rate increases, and reduced persistency.
- Colonial Life operating income increased modestly, but its benefit ratio deteriorated slightly because of less favorable life and cancer and critical illness experience.
- Closed Block results improved sharply because 2011 charges did not recur; underlying 2012 long-term care risk experience remained unfavorable compared with 2011 excluding the prior-year charge.
- The company adopted new deferred acquisition cost accounting guidance retrospectively. The cumulative effect at January 1, 2010 was a $455.1 million reduction to stockholders' equity, and prior periods were adjusted.
- Unum issued $250.0 million of 5.75% senior notes due 2042. Consolidated debt increased, and the leverage ratio rose to 30.4% from 28.7%; leverage excluding non-recourse debt and securities-lending debt was 25.3% versus 23.5%.
- The company repurchased 23.6 million shares for $500.6 million during 2012 and paid $133.8 million of common dividends. The remaining authorization under the July 2012 repurchase program was approximately $550.0 million at year-end.
- The weighted-average RBC ratio for traditional U.S. insurance subsidiaries declined to approximately 396% from 405%, remaining within management's stated 375% to 400% target range.
Liquidity, capital, debt, and cash flow
- Cash and marketable securities at Unum Group and intermediate holding companies totaled approximately $805 million at year-end, including $193 million held in U.K. subsidiaries.
- Management stated that domestic resources were sufficient for expected liquidity needs over the following 12 months.
- Operating cash flow was $1,379.6 million; investing activities used $1,113.4 million and financing activities used $305.5 million.
- Short-term debt was $455.8 million, consisting entirely of securities-lending agreements. Total long-term debt was $2,755.4 million.
- Insurance subsidiaries paid $600.0 million of ordinary dividends to Unum Group during 2012. Amount available for ordinary dividends from traditional U.S. insurance subsidiaries in 2013 was $623.7 million, subject to applicable restrictions; approximately £144.7 million was available from Unum Limited, subject to regulatory approval.
- The company had $50.4 billion of contractual obligations, including projected policyholder liabilities of $42.0 billion and long-term debt payments of $4.7 billion. Reinsurance recoverable receipts were projected at $7.5 billion, although actual timing and amounts may vary.
Guidance, outlook, risks, contingencies, and unusual items
Management expected 2013 to remain characterized by below-average economic growth and low interest rates. Operating growth was expected to remain below long-term targets, while diluted after-tax operating EPS growth was expected to be neutral to positive relative to 2012. Management planned to emphasize disciplined growth, expense effectiveness, capital generation, and capital deployment.
- Low interest rates were expected to pressure investment income, reserve discount rates, pension obligations, and margins. Pricing and risk-management actions were not expected to provide favorable financial impact until 2014 and beyond.
- Unemployment and weak wage growth could limit premium growth, increase disability claim incidence, extend claim duration, and reduce persistency.
- Long-term care remains a significant reserve risk. The company continued seeking regulatory approval for rate increases and disclosed a potential adverse long-term care policy-reserve impact of approximately $400 million under modeled downside scenarios.
- Modeled reserve sensitivity was approximately plus or minus $230 million for both Unum US group disability and Closed Block individual disability claim reserves under reasonably possible aggregate assumption changes.
- Unum UK discontinued certain group-life product offerings, implemented rate increases, and entered into reinsurance effective January 1, 2013. The reinsurance was expected to reduce 2013 premium income and benefit payments and reduce group-life volatility.
- Tailwind Holdings retired its remaining $62.5 million of notes in January 2013, generating an immaterial gain expected in first-quarter 2013 results.
- Potential risks include adverse claims experience, investment defaults and impairments, credit-spread and valuation volatility, reinsurance counterparty failure, regulatory and tax changes, litigation, cyber and disaster risks, foreign currency movements, and credit-rating downgrades.
- The company was involved in claim litigation, retained-asset-account litigation, unclaimed-property examinations, and other regulatory matters. Management believed ultimate losses, after reserves and indemnification, should not materially affect financial position, but noted that unfavorable outcomes could materially affect a particular period.
- Solvency II, U.S. insurance solvency reforms, Bermuda regulatory changes, and Dodd-Frank implementation could increase capital, collateral, governance, supervisory, or disclosure requirements.
Most important facts for an investor to verify
- Whether Closed Block long-term care and individual disability reserves remain adequate as claims, mortality, morbidity, persistency, and interest-rate experience develops.
- Whether sustained low interest rates reduce investment income or require additional reserve strengthening or capital contributions.
- Whether Unum UK's pricing actions and new reinsurance arrangements improve risk results without causing excessive persistency or sales deterioration.
- Whether the 396% RBC ratio and holding-company liquidity remain within management's targets after dividends, buybacks, debt service, and adverse scenarios.
- Whether operating EPS growth is supported by underlying segment profitability rather than primarily by share repurchases and non-operating investment gains.
- The status and potential financial exposure of retained-asset-account litigation, unclaimed-property investigations, regulatory matters, and other contingencies.
- The effect of the retrospective DAC accounting adoption when comparing reported historical results.
- The collectibility and concentration of the $7.5 billion projected reinsurance recoverable and the financial strength of key reinsurers.