Unum Group 2012 Q2 SEC Filing Summary
Business context and reporting period
Unum Group is a provider of disability, life, accident, sickness, voluntary and related employee-benefit products in the United States and United Kingdom. Its principal operating segments are Unum US, Unum UK, Colonial Life, Closed Block and Corporate. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012, with comparisons to the periods ended June 30, 2011.
The company adopted updated deferred acquisition cost accounting effective January 1, 2012, with retrospective application. The adoption reduced stockholders’ equity by $459.5 million as of January 1, 2011 and revised prior-period results; it did not materially change the underlying cash economics.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Year-over-year change | Six months ended June 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $2,617.9 million | 2.1% | $5,229.2 million | 2.0% |
| Premium income | $1,927.6 million | 2.8% | $3,849.5 million | 2.8% |
| Net investment income | $633.5 million | (0.6%) | $1,253.0 million | (0.2%) |
| Income before tax | $296.4 million | (11.4%) | $606.4 million | (8.4%) |
| Net income | $216.4 million | (4.9%) | $430.3 million | (4.6%) |
| Diluted EPS | $0.76 | Up from $0.74 | $1.50 | Up from $1.45 |
| After-tax operating income | $225.3 million | Down from $235.0 million | $438.5 million | Down from $454.1 million |
Net income margin was approximately 8.3% for the second quarter and 8.2% for the first six months. After-tax operating income margin was approximately 8.6% and 8.4%, respectively. EPS benefited from substantial share repurchases, with diluted weighted-average shares declining to 283.7 million in the quarter and 287.5 million for the first six months.
- Operating income by segment was $310.1 million in the second quarter and $619.3 million for the first six months, excluding realized investment gains or losses, non-operating retirement-related items and income taxes.
- Operating income increased at Unum US by 3.5% in the quarter and 4.6% year to date, but declined at Unum UK by 43.8% and 32.0%, Colonial Life by 6.0% and 0.8%, and Closed Block by 15.5% and 34.0%, respectively.
- Consolidated benefit ratios were 87.3% for the quarter and 86.9% year to date, compared with 85.3% in both comparable 2011 periods.
- Operating cash flow was $679.1 million for the first six months, compared with $615.7 million in 2011.
- Net cash used in investing activities was $520.9 million, while net cash used in financing activities was $236.8 million. Cash and bank deposits ended at $38.0 million, compared with $116.6 million at December 31, 2011.
Balance sheet, debt and liquidity
- Total assets were $60.7 billion at June 30, 2012, up from $59.6 billion at December 31, 2011. Stockholders’ equity was $8.4 billion, compared with $8.2 billion at year-end.
- Fixed maturity securities were $43.5 billion at fair value, including $6.4 billion of net unrealized gains. Approximately 93.8% were classified as Level 1 or Level 2 fair value measurements.
- Short-term debt was $467.1 million, consisting entirely of securities lending transactions. Long-term debt was $2.54 billion. Consolidated leverage was 29.3%, compared with 28.7% at year-end; excluding specified non-recourse and securities-lending debt, leverage was 23.3% versus 23.5%.
- Holding-company cash and marketable securities were approximately $564 million, down from $756 million at December 31, 2011, primarily reflecting $300.3 million of share repurchases.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 404%, compared with 405% at year-end. Management stated that capital and liquidity positions were strong and that domestic resources were sufficient for the next 12 months.
- During the second quarter, Unum made a voluntary $53.0 million contribution to its U.S. qualified pension plan. U.K. pension contributions were £2.1 million for the first six months.
Material changes versus the prior comparable period
- Revenue and premium income increased modestly, but benefits and expenses grew faster than revenue, causing pre-tax income and operating income to decline.
- Unum US showed improved operating performance and sales growth, while Unum UK was materially weakened by adverse claims experience, higher benefit ratios and foreign-exchange translation effects.
- Colonial Life premium income grew, but margins declined because of less favorable mortality and cancer and critical-illness claims experience.
- Closed Block premium income declined as individual disability business ran off. Long-term-care risk results deteriorated, although premium rate increases are expected to provide future support.
- Net investment income declined slightly because of lower bond call premiums and, in the U.K., lower asset yields. No other-than-temporary impairment loss on fixed maturity securities was recorded in 2012 through June 30, compared with $3.0 million in the first six months of 2011.
- Unum repurchased 13.5 million shares for $300.3 million during the first six months. In July 2012, the board authorized a new $750.0 million repurchase program through January 2014, replacing the prior $1.0 billion authorization.
- The company released a $61.1 million liability for unrecognized tax benefits in the second quarter, with a corresponding deferred tax asset release. Management also disclosed an $8 million to $10 million expected reduction in third-quarter tax expense from a U.K. tax-rate change enacted in July 2012.
Guidance, outlook, risks and unusual items
Management expects disciplined top-line growth, continued expense management and ongoing capital generation. Near-term premium and sales growth remain constrained by high unemployment, limited wage growth and competitive pricing. Unum US expects marginal year-over-year premium growth for the remainder of 2012 and generally stable group-disability benefit ratios. Unum UK expects second-half benefit ratios and profit margins to improve from first-half levels, although margins are expected to remain below the 2011 average. Colonial Life expects modest premium growth and benefit ratios generally consistent with first-half 2012 levels. Closed Block revenue and earnings are expected to decline over time as the business runs off.
- Principal operating risks include claim incidence, recovery rates, mortality, morbidity, reserve adequacy, persistency, unemployment, consumer confidence, low interest rates, credit spreads, investment impairments and limited availability of assets matching liability cash flows.
- Investment risks include $3.0 billion of below-investment-grade fixed maturity securities at fair value and $601.1 million of fixed maturity securities tied to issuers domiciled in Greece, Ireland, Italy, Portugal and Spain. The company reported no direct sovereign exposure to those countries and no related impairment losses at June 30, 2012.
- Derivative counterparties had $10.5 million of net current credit exposure. Certain derivative agreements contain rating-related termination provisions; liability-position derivatives with such features had aggregate fair value of $165.7 million.
- Pending litigation and regulatory matters include a certified retained-asset-account class action, unclaimed-property examinations and other insurance-related proceedings. Management believes ultimate losses should not materially affect financial position, but acknowledges that adverse outcomes could materially affect a particular period’s results or cash flows.
- The company had $122.0 million of legally binding unfunded tax-credit partnership commitments and $5.6 million of commitments for transferable state tax credits, plus non-binding commitments of $142.3 million for private-placement securities, $75.0 million for private-equity partnerships and $32.5 million for commercial mortgage loans.
- Management identified no material changes to previously disclosed risk factors. Disclosure controls and procedures were considered effective as of June 30, 2012.
Important facts for investors to verify
- Whether adverse Unum UK claims experience and elevated consolidated benefit ratios improve as projected in the second half of 2012.
- The sustainability of Unum US premium growth and whether unemployment and competitive pricing continue to constrain existing-account growth.
- Long-term-care reserve adequacy, claim resolution rates and the timing and effectiveness of approved premium-rate increases.
- The impact of persistently low interest rates, lower bond call income and declining fixed-income portfolio yields on investment income.
- The quality and liquidity of the fixed maturity portfolio, including below-investment-grade holdings and European corporate exposures.
- The effect of share repurchases on holding-company liquidity, leverage and future per-share results.
- The outcome and potential damages of the retained-asset-account litigation and ongoing unclaimed-property and regulatory examinations.
- The effects of the retrospective deferred acquisition cost accounting change when comparing 2012 results with earlier filings.