Unum Group 2015 Q1 SEC Filing Summary
Business context and reporting period
Unum Group is a provider of disability, life, accident, sickness, supplemental, voluntary, cancer, and critical illness insurance, primarily distributed through workplace channels in the United States and United Kingdom. The filing covers the unaudited three months ended March 31, 2015, compared with the same period of 2014. Principal operating segments were Unum US, Unum UK, and Colonial Life; Closed Block and Corporate were also reported.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $2,647.4 million | $2,614.4 million | 1.3% increase |
| Premium income | $2,006.3 million | $1,938.5 million | 3.5% increase |
| Net investment income | $602.0 million | $615.8 million | 2.2% decrease |
| Income before tax | $303.0 million | $329.8 million | 8.1% decrease |
| Net income | $212.9 million | $225.8 million | 5.7% decrease |
| Diluted EPS | $0.84 | $0.86 | Decrease |
| After-tax operating income | $224.8 million | $222.6 million | 1.0% increase |
| After-tax operating EPS | $0.89 | $0.85 | Increase |
| Operating cash flow | $400.1 million | $346.7 million | 15.4% increase |
Reported net margin was approximately 8.0% of total revenue. Before-tax operating income was $321.3 million, compared with $324.9 million in the prior-year quarter; the corresponding operating income margin was approximately 12.1% of operating revenue.
- Benefits and change in reserves increased 1.4% to $1,653.9 million, while total benefits and expenses increased 2.6% to $2,344.4 million.
- Net realized investment loss was $15.3 million versus a $6.3 million gain in Q1 2014. The 2015 loss included a $4.5 million other-than-temporary impairment on fixed maturity securities and a $3.9 million loss on an embedded derivative.
- Cash flow from investing activities used $233.6 million, primarily reflecting purchases of fixed maturity securities. Financing activities used $184.9 million, including $108.1 million of share repurchases, $42.3 million of dividends, and $29.1 million of debt repayments.
- Cash and bank deposits were $84.1 million at March 31, 2015, down from $102.5 million at year-end 2014. Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $426 million.
- Fixed maturity securities were $45.9 billion at fair value, with $6.8 billion of net unrealized gains. The earned book yield on the investment portfolio was 5.29%, compared with 5.52% for full-year 2014.
- Total assets were $63.0 billion and stockholders’ equity was $8.7 billion at March 31, 2015.
- Short-term debt was $151.9 million and long-term debt was $2.6 billion. The short-term debt consisted of 6.85% notes due in the fourth quarter of 2015. No amounts were outstanding under the revolving credit facility.
Material changes versus the prior comparable period
- Premium growth in the principal operating segments was 5.0%, supported by sales growth, rate increases, and generally favorable persistency.
- Unum US operating income increased 3.3% to $214.3 million; premium income increased 6.7%, sales increased 17.3%, and the benefit ratio improved to 68.3% from 70.2%.
- Unum UK operating income declined 2.3% in local currency. Premium income increased 0.1% in pounds, but lower investment income reduced reported results; the benefit ratio improved to 65.3% from 70.2%.
- Colonial Life operating income declined 1.9% to $77.6 million despite 5.0% premium growth. Its benefit ratio increased to 51.3% from 50.5%.
- Closed Block operating income declined 5.7% to $26.7 million. Long-term care risk results were less favorable than in the unusually strong prior-year quarter.
- Lower interest rates and tighter credit spreads reduced investment yields and pressured margins. Net investment income fell despite higher invested assets.
- The company repurchased 3.2 million shares for approximately $108 million. Approximately $321.5 million remained under the $750 million authorization, which expired June 12, 2015.
- The company retrospectively adopted proportional amortization accounting for qualified affordable housing investments. The adoption reduced January 1, 2014 stockholders’ equity by $19.2 million and adjusted prior-period results, including reducing Q1 2014 net income by $3.1 million.
- The company reached agreement with the IRS on specified tax matters, reducing reserves for uncertain tax positions by $19.3 million and reducing federal income tax expense by $5.8 million.
Guidance, outlook, risks, contingencies, and unusual items
Management provided qualitative rather than quantified earnings guidance. For 2015, it expects continued premium and sales growth, stable or generally consistent benefit ratios in major operating lines, disciplined pricing and underwriting, expense management, and continued capital returns. Management also expects low interest rates to continue pressuring investment income, profit margins, and reserve discount rates.
- Key operating risks include changes in claim incidence, recovery rates, mortality, morbidity, persistency, unemployment, consumer confidence, medical treatments, and government programs.
- Investment risks include interest-rate changes, credit spreads, defaults, impairments, liquidity constraints, and exposure to energy-sector issuers affected by lower oil and gas prices.
- Long-term care and other closed-block results remain sensitive to morbidity, longevity, persistency, premium rate increases, interest rates, and reserve assumptions.
- Unum UK faced foreign-exchange translation pressure from a weaker pound and was preparing for Solvency II, effective January 1, 2016, which could increase regulatory, disclosure, and capital requirements.
- The company reported an approximately 400% weighted-average NAIC Company Action Level risk-based capital ratio for traditional U.S. insurance subsidiaries, generally consistent with year-end 2014.
- Pending litigation and regulatory matters include claims-handling disputes, unclaimed death-benefit and unclaimed-property investigations, and a putative nationwide class action concerning long-term-care inflation protection. Management stated that the ultimate outcomes cannot be predicted, although it does not expect the aggregate effect to be material to financial position after reserves and indemnification.
- An inadvertent failure to register certain shares issued through the 401(k) plan could create rescission rights. Approximately 722,421 unregistered shares were estimated for the preceding twelve months, and the company expected to make a voluntary rescission offer; management did not expect a material financial impact.
- Legally binding unfunded commitments included $8.8 million for tax credit partnerships and $24.1 million for transferable state tax credits. Non-binding commitments included $59.0 million for private-placement securities, $159.0 million for private-equity partnerships, and $55.8 million for commercial mortgage loans.
Important facts for investors to verify
- Whether premium growth and favorable risk results persist while low investment yields continue to pressure earnings.
- The effect of interest rates, credit spreads, energy-sector stress, and future investment impairments on net investment income, accumulated other comprehensive income, and capital.
- Future reserve development, particularly in long-term care, disability, and other long-tailed products.
- The maturity or refinancing of the $151.9 million of short-term notes due in the fourth quarter of 2015 and the company’s ongoing debt-repayment capacity.
- The pace and continuation of share repurchases, dividends, and capital transfers from regulated insurance subsidiaries.
- Developments in Solvency II implementation, U.K. capital requirements, litigation, unclaimed-property investigations, and the 401(k) share-rescission process.
- The company’s use of non-GAAP operating income and operating EPS, including the reconciliation to GAAP net income and the recurrence of excluded investment and retirement-related items.