Unum Group 2015 Form 10-K Summary
Business context and reporting period
Unum Group is a leading provider of disability insurance in the United States and United Kingdom, with complementary group life, voluntary, accident, sickness, cancer, critical illness, dental, and related products. Its principal operating segments are Unum US, Unum UK, and Colonial Life; Closed Block contains discontinued or no-longer actively marketed individual disability and long-term care products, while Corporate includes unallocated investment income and expenses.
The filing covers the fiscal year ended December 31, 2015. The fourth-quarter 2015 results were also reported, but this is an annual Form 10-K rather than a standalone quarterly filing.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Premium income | $8,082.4 million | $7,797.2 million | +3.7% |
| Total revenue | $10,731.3 million | $10,524.5 million | +2.0% |
| Operating revenue | $10,775.1 million | $10,508.4 million | +2.5% |
| Net investment income | $2,481.2 million | $2,492.2 million | -0.4% |
| Income before income tax | $1,238.3 million | $542.0 million | +128.5% |
| Net income | $867.1 million | $402.1 million | +115.6% |
| Diluted earnings per share | $3.50 | $1.57 | +123.0% |
| After-tax operating income | $901.0 million | $899.1 million | +0.2% |
| Diluted operating EPS | $3.64 | $3.51 | +3.7% |
| Net cash from operating activities | $1,292.1 million | $1,223.6 million | +5.6% |
| Total assets | $60,589.7 million | $62,450.2 million | -3.0% |
| Total debt | $2,827.5 million | $2,780.6 million | +1.7% |
| Stockholders’ equity | $8,663.9 million | $8,521.9 million | +1.7% |
The consolidated benefit ratio was 83.9% in 2015, compared with 93.8% in 2014. The 2014 ratio included a $698.2 million long-term care reserve increase; excluding that adjustment, the 2014 benefit ratio was 84.8%.
Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $475 million at year-end, down from approximately $575 million in 2014. The company reported a weighted-average RBC ratio of approximately 400% for its traditional U.S. insurance subsidiaries.
Segment performance and material changes
- Unum US: Premium income increased 6.4% to $4,960.0 million and operating income increased 0.6% to $850.0 million. The benefit ratio improved to 70.1% from 70.6%. Sales increased 4.2%. Favorable group disability claims experience was partly offset by lower investment income and weaker group life claims experience.
- Unum UK: Premium income declined 5.1% in reported dollars to $576.2 million, primarily reflecting pound depreciation. In local currency, premium income increased 2.3% and operating income increased 2.4% to £92.0 million. The benefit ratio improved to 68.5% from 70.9%. The company acquired National Dental Plan for £35.9 million, or $54.3 million; the acquisition was not material to 2015 results.
- Colonial Life: Premium income increased 5.1% to $1,338.6 million and operating income increased 3.4% to $309.1 million. The benefit ratio improved to 51.0% from 51.9%, while sales increased 6.9%.
- Closed Block: Premium income declined 3.9% to $1,207.6 million as individual disability policies continued to run off. Operating income was $119.1 million, compared with $120.0 million in 2014 excluding the prior-year long-term care reserve increase. Long-term care benefits experience was less favorable than in 2014, although it remained within management’s expected range.
- Corporate: The operating loss increased to $124.8 million from $104.4 million, primarily because of lower investment income and higher legal expenses. The company stated that the remaining U.K. debt balance matured in 2015.
Cash flow, capital, debt, and liquidity
- Operating cash flow was $1,292.1 million. Investing activities used $713.0 million, and financing activities used $568.7 million.
- The company issued $275.0 million of 3.875% senior notes due 2025 and repaid $151.9 million of 6.85% notes at maturity. Long-term debt was $2,475.1 million and short-term debt was $352.4 million at year-end.
- Unum maintained a $400 million unsecured revolving credit facility, expandable to $600 million. No borrowings were outstanding at year-end, although $2.1 million of letters of credit had been issued.
- Share repurchases totaled 12.3 million shares costing approximately $427 million. Approximately $502 million remained under the $750 million repurchase authorization at December 31, 2015. Common dividends paid were $174.2 million, or $0.70 per share.
- Insurance subsidiaries provided the principal source of liquidity. Approximately $605 million of ordinary dividends was available from traditional U.S. insurance subsidiaries in 2015, of which $594.6 million was paid. Approximately $664 million was available without prior regulatory approval during 2016, subject to applicable restrictions.
Outlook, management commentary, risks, and unusual items
Management expected 2016 premium growth in the principal operating segments, stable-to-improving benefit ratios, disciplined pricing and underwriting, continued expense management, and further capital returns. Management also stated that higher employment, payroll growth, wage inflation, and rising interest rates could support future growth and margins.
Low interest rates remained the principal recurring pressure. The 2015 earned book yield was 5.40%, down from 5.52% in 2014. Management estimated approximately $2.8 billion of investable cash flows in 2016 and projected modest declines in net investment income if interest rates and credit spreads remained at January 2016 levels.
- Reserve adequacy is highly sensitive to discount rates, morbidity, mortality, claim incidence, claim resolution, persistency, and long-term care premium rate increases. A 25-basis-point change in the long-term care discount rate was estimated to affect reserves by approximately $430 million.
- The Closed Block long-term care business remains a material exposure. Premium rate increases require regulatory approval and may be delayed, reduced, or denied.
- Investment risks include credit defaults, widening spreads, energy-sector stress, impairments, valuation uncertainty, and limited liquidity in certain private or below-investment-grade securities. The company recognized $32.4 million of other-than-temporary impairment losses in 2015, including a $10.3 million impairment on securities issued by a U.S. coal company.
- Net realized investment losses were $43.8 million, including a $37.7 million loss from an embedded derivative in a modified coinsurance arrangement.
- Reinsurance reduces exposure but creates counterparty risk. Reinsurance recoverables were substantial, and the company remains contingently liable to policyholders if reinsurers fail to perform.
- Regulatory, litigation, unclaimed-property, cybersecurity, technology, catastrophe, competition, foreign currency, ratings, and derivative-collateral risks could adversely affect earnings, capital, or liquidity.
- Pending litigation included claims-handling matters, unclaimed-property investigations, and a long-term care inflation-protection class action. The company stated that reserves for the disclosed long-term care settlement matter were immaterial, but adverse litigation or regulatory outcomes could still materially affect a particular period.
Reported 2015 net income benefited from the absence of the $698.2 million long-term care reserve increase and $64.4 million pension settlement loss recorded in 2014. Therefore, the increase in GAAP net income substantially overstated the improvement in underlying operating performance; after-tax operating income increased only slightly.
Most important facts for an investor to verify
- Whether long-term care claims, mortality, morbidity, persistency, and approved premium rate increases remain consistent with the assumptions established in the 2014 reserve review.
- The sensitivity of reserves and capital to sustained low interest rates, including the estimated $430 million impact of a 25-basis-point long-term care discount-rate change.
- Whether the approximately 400% U.S. RBC ratio and subsidiary dividend capacity remain stable after future regulatory, market, and reserve developments.
- The quality, concentration, and impairment exposure of the investment portfolio, particularly the $5.0 billion energy-sector fixed maturity exposure and below-investment-grade securities.
- The effect of pound-dollar translation on Unum UK results and the company’s ability to upstream dividends under Solvency II and other regulatory requirements.
- Future capital allocation among share repurchases, dividends, debt repayment, acquisitions, and support for insurance subsidiaries.
- The ultimate cost and resolution of pending litigation, unclaimed-property examinations, and regulatory investigations.