Unum Group Form 10-Q Summary
Business Context and Reporting Period
Unum Group is a U.S. and U.K. provider of disability, life, long-term care, accident, sickness, and voluntary employee-benefit insurance. The filing covers the quarter and six months ended June 30, 2009; financial statements are unaudited and prepared under U.S. GAAP. The principal reporting segments are Unum US, Unum UK, Colonial Life, Individual Disability–Closed Block, and Corporate and Other.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Total revenue | $2,628.0 million | $2,675.3 million | $5,076.9 million | $5,215.9 million |
| Premium income | $1,875.9 million | $1,968.6 million | $3,748.7 million | $3,919.1 million |
| Net investment income | $597.6 million | $613.1 million | $1,171.3 million | $1,204.5 million |
| Net realized investment gain | $87.3 million | $26.1 million | $22.7 million | $(42.4) million |
| Income before tax | $411.2 million | $367.0 million | $661.8 million | $611.7 million |
| Net income | $267.2 million | $240.3 million | $432.1 million | $403.4 million |
| Diluted EPS | $0.80 | $0.69 | $1.30 | $1.16 |
| Operating cash flow | Not separately provided | Not separately provided | $608.1 million | $701.3 million |
Reported net income increased 11.2% in the second quarter and 7.1% year to date. Revenue declined 1.8% and 2.7%, respectively, while income before tax increased 12.0% and 8.2%. The reported net income margin was approximately 10.2% for the quarter and 8.5% year to date, compared with approximately 9.0% and 7.7% in the respective prior-year periods.
- The consolidated benefit ratio improved to 84.5% in the quarter and 84.3% year to date, compared with 85.1% and 85.0% in 2008.
- Unum US operating income increased 11.5% in the quarter and 13.6% year to date; its before-tax operating income ratio improved to 15.6% and 15.3% from 13.8% and 13.3%.
- Unum UK operating income declined 6.6% in local currency in the quarter and 2.7% year to date, although its benefit ratio improved to 54.4% and 53.8% from 58.3% and 57.8%.
- Colonial Life operating income increased 4.5% in the quarter and 4.9% year to date, with a benefit ratio of 46.4% in both periods.
Financial Position, Debt, and Liquidity
| Balance Sheet Metric | June 30, 2009 | December 31, 2008 |
|---|---|---|
| Total assets | $51,339.8 million | $49,417.4 million |
| Total investments | $40,077.4 million | $37,865.9 million |
| Fixed maturity securities, fair value | $34,902.8 million | $32,134.1 million |
| Total stockholders’ equity | $7,478.4 million | $6,397.9 million |
| Short-term debt | $45.0 million | $190.5 million |
| Long-term debt | $2,250.6 million | $2,259.4 million |
| Cash and bank deposits | $48.7 million | $49.9 million |
- Net cash used in investing activities was $406.6 million, and net cash used in financing activities was $203.0 million, producing a $1.2 million decrease in cash during the first six months.
- Unum repaid $145.5 million of short-term debt, made $8.8 million of long-term debt repayments, and retired the remaining $132.2 million of 5.859% senior notes due May 2009.
- Leverage was 18.5% excluding non-recourse debt and 23.9% on a consolidated debt-to-capital basis, compared with 21.5% and 26.6% at year-end 2008.
- Management reported $250.0 million of unsecured revolving credit capacity and stated that available cash resources were sufficient for the next 12 months. Ordinary dividends available from traditional U.S. insurance subsidiaries were estimated at $653.3 million for 2009, subject to regulatory and subsidiary-board approvals.
Material Changes Versus the Prior Comparable Period
- Premium income declined 4.7% in the quarter and 4.3% year to date, primarily because of lower Unum UK premiums, expected declines in group business from pricing and risk-selection actions, weaker salary and employment growth, and the run-off of the Individual Disability closed block.
- Net investment income declined 2.5% in the quarter and 2.8% year to date because of currency translation, lower interest rates on floating-rate assets, fewer bond call premiums, and lower U.K. inflation-linked investment income.
- Net realized investment results improved substantially, but included significant volatility. The embedded derivative in a modified coinsurance arrangement generated gains of $140.1 million in the quarter and $163.7 million year to date, compared with $25.0 million and a $39.1 million loss in the prior-year periods.
- Other-than-temporary impairment losses on fixed maturity securities totaled $55.0 million in the quarter and $128.6 million year to date; $48.1 million and $121.7 million were recognized in earnings.
- Operating cash flow decreased to $608.1 million from $701.3 million, while total stockholders’ equity increased largely because of improved accumulated other comprehensive income and retained earnings.
- Unum US sales increased 10.8% in the quarter and 6.9% year to date, led by core-market and group-product growth; supplemental and voluntary sales declined 14.4% and 2.4%.
Guidance, Outlook, Risks, and Unusual Items
Management’s 2009 priorities were disciplined profitable growth, maintaining a strong investment portfolio, building capital, and retaining financial flexibility. Management expected continued growth in group disability and voluntary and supplemental products, while group life and AD&D operating results were expected to be flat to declining versus 2008.
- Management expected the Unum US group disability benefit ratio to remain favorable relative to 2008, but noted that unemployment, consumer confidence, claim incidence, recovery rates, and persistency could adversely affect results.
- Unum UK faced cautious premium-growth prospects and unfavorable dollar translation from the weaker British pound. Management expected strong local-currency profitability despite lower investment income from inflation-linked bonds.
- Management expected Corporate and Other pension costs to be approximately $42.0 million higher in 2009 than in 2008.
- The investment portfolio had a weighted average credit rating of A3, a duration-weighted book yield of 6.74%, and $2.092 billion of gross unrealized losses on fixed maturity securities at June 30, 2009. Below-investment-grade securities had amortized cost of $2.679 billion and fair value of $2.174 billion.
- The company reported no exposure to subprime mortgages or Alt-A loans in its mortgage- and asset-backed portfolios and only $16.8 million of fair value exposure to collateralized debt obligations in its public bond portfolio.
- Litigation and regulatory matters included disability-claims litigation, class-action matters, broker-related litigation, a False Claims Act action, and other proceedings. Management stated that ultimate outcomes cannot be predicted for all matters, although reserves and indemnification were expected to prevent a material adverse effect on financial position.
- Derivative counterparties had rating-related termination provisions. Current derivative credit exposure was $15.1 million, and $89.6 million of derivative liabilities had credit-risk-related contingent features.
- The company adopted new fair-value and other-than-temporary-impairment guidance in 2009. Adoption of the impairment guidance increased opening retained earnings by $14.3 million, net of tax, and shifted related amounts within accumulated other comprehensive income.
Facts Investors Should Verify
- Whether investment impairments, credit losses, and unrealized losses increased after June 30, 2009.
- Whether group disability claim incidence and recovery rates remained consistent with management’s expectations during the economic downturn.
- Whether Unum UK premium trends, persistency, and currency translation continued to pressure consolidated revenue.
- Whether subsidiary dividend capacity, risk-based capital ratios, and holding-company liquidity remained above management targets.
- Whether litigation, regulatory inquiries, tax matters, or rating-agency actions produced material changes after the filing date.
- How much reported earnings depended on the volatile $140.1 million quarterly and $163.7 million year-to-date gain from the modified coinsurance embedded derivative.