Unum Group 2013 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Unum Group is a U.S.- and U.K.-based insurer focused primarily on disability insurance, group life, accidental death and dismemberment, voluntary benefits, long-term care, and related workplace products. The filing covers the unaudited three months ended March 31, 2013, compared with the same period in 2012. Principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $2,624.8 million | $2,611.3 million | 0.5% increase |
| Premium income | $1,930.9 million | $1,921.9 million | 0.5% increase |
| Net investment income | $621.1 million | $619.5 million | 0.3% increase |
| Income before tax | $303.8 million | $310.0 million | 2.0% decrease |
| Net income | $212.6 million | $213.9 million | 0.6% decrease |
| Diluted EPS | $0.79 | $0.73 | Increase |
| After-tax operating income | $215.6 million | $213.2 million | 1.1% increase |
| Diluted operating EPS | $0.80 | $0.73 | Increase |
| Operating cash flow | $265.1 million | $329.3 million | 19.5% decrease |
Net income margin was approximately 8.1% of revenue, compared with approximately 8.2% in the prior-year quarter. The consolidated benefit ratio improved to 85.4% from 86.5%.
- Unum US operating income increased 1.1% to $208.1 million; premium income increased 2.5% and the benefit ratio improved to 70.9% from 72.5%.
- Unum UK operating income declined 19.3% to $31.3 million, primarily reflecting group-life reinsurance, lower sales, weaker persistency, lower investment income, and pound-to-dollar translation.
- Colonial Life operating income increased 8.2% to $75.4 million, supported by 3.6% premium growth and higher investment income.
- Closed Block operating income increased 77.3% to $27.3 million due to favorable risk results and higher investment income.
- Corporate reported an operating loss of $33.7 million versus a $20.6 million loss, primarily due to higher debt expense and less favorable expense accruals.
At March 31, 2013, total assets were $61.6 billion, stockholders' equity was $8.6 billion, and total investments were $51.1 billion. Fixed maturity securities totaled $44.4 billion at fair value and carried $6.8 billion of net unrealized gains. The portfolio included $3.1 billion of below-investment-grade fixed maturity securities at fair value.
Total debt was approximately $2.9 billion, consisting of $236.3 million of short-term debt and $2,673.9 million of long-term debt. Short-term debt consisted entirely of securities lending transactions. The company remained in compliance with debt covenants and reported no significant financial covenants.
Cash and bank deposits were $102.0 million at quarter-end. Cash equivalents and marketable securities at Unum Group and intermediate holding companies were approximately $652 million, down from $805 million at December 31, 2012. Management stated that domestic resources were sufficient for liquidity needs over the next 12 months. The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 396%, within the 375% to 400% target range.
Material Changes Versus the Prior Comparable Period
- Operating earnings were broadly stable, while diluted EPS rose because the company reduced its share count through repurchases.
- Operating cash flow declined by $64.2 million, while investing cash flow shifted from a $181.8 million use to a $184.1 million source, principally because of lower investment purchases and higher net sales of short-term investments.
- Financing cash use increased to $424.5 million from $161.6 million, reflecting a $219.5 million reduction in securities lending debt, $71.2 million of long-term debt repayments, $99.0 million of common-stock repurchases, and $35.7 million of dividends.
- The company repurchased approximately 3.7 million shares for $95.1 million during the quarter. Approximately $454.9 million remained under the July 2012 repurchase authorization.
- Unum UK entered into reinsurance agreements effective January 1, 2013 that ceded a portion of group life business. The agreements reduced group-life premium and benefit levels but are intended to reduce volatility.
- In January 2013, the company retired $62.5 million of Tailwind Holdings senior secured notes for $56.2 million, producing a $4.0 million pretax gain.
- Accumulated other comprehensive income declined to $485.7 million from $628.0 million, primarily due to a $142.3 million after-tax comprehensive loss driven by lower unrealized securities gains and foreign-currency translation losses.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management maintained a cautious outlook for 2013 because of low interest rates, unfavorable economic conditions, high unemployment, limited employment and wage growth, and competitive pricing. The company expects marginal year-over-year premium growth, with stronger growth dependent on improving employment conditions. Low interest rates are expected to pressure investment income, claim reserve discount rates, and near-term profit margins.
- Unum US expects continued pressure on sales and persistency but believes margin improvement can come from product mix, pricing actions, claims performance, and expense efficiencies.
- Unum UK expects near-term premium and sales pressure while repricing and business-mix changes are intended to improve profitability and stability.
- Colonial Life expects premium growth and strong margins, although sales and investment income may remain volatile.
- Closed Block revenue and income are expected to decline over time as the business runs off, with potential volatility from long-term-care claims, interest rates, mortality, morbidity, persistency, and reserve assumptions.
- Investment risks include sustained low rates, credit deterioration, defaults, impairments, spread changes, illiquidity, foreign-exchange movements, and valuation uncertainty. The company recorded a $0.8 million other-than-temporary impairment on fixed maturity securities and reported a $1.0 million impairment loss on mortgage loans and other invested assets.
- Derivative counterparty exposure was $8.5 million. Certain derivative agreements contain ratings-related termination provisions; a ratings downgrade could require immediate settlement.
- Legally binding unfunded commitments included $75.7 million for tax-credit partnerships and $3.7 million for transferable state tax credits. Non-binding commitments included $153.0 million for private-placement securities, $107.8 million for private-equity partnerships, and $48.2 million for commercial mortgage loans.
- The company faces litigation and regulatory matters, including a retained-asset-account class action, unclaimed-property investigations, and West Virginia unclaimed-property complaints. Management believes the ultimate effect should not materially affect financial position, but acknowledges that an adverse outcome could materially affect results or cash flow in a particular period.
- The filing identifies sustained low interest rates, claim incidence and recovery experience, unemployment, regulation, healthcare reform, litigation, reinsurance collectibility, ratings, investment performance, liquidity, cyber and catastrophe events, and accounting changes as material risks.
Most Important Facts for Investors to Verify
- Whether premium growth and sales improve as employment conditions stabilize, particularly in Unum US and Colonial Life.
- Whether Unum UK's reinsurance and repricing actions improve margins without causing excessive persistency and sales deterioration.
- Trend in operating cash flow and holding-company liquidity after debt repayments, dividends, and share repurchases.
- Risk-based capital levels, insurance-subsidiary dividend capacity, and the effect of future regulatory capital requirements.
- Investment portfolio credit quality, unrealized gains, below-investment-grade exposure, impairments, and sensitivity to interest-rate changes.
- Long-term-care and disability claim experience, reserve adequacy, and the potential for adverse morbidity, mortality, incidence, recovery, or persistency assumptions.
- Developments in pending litigation, unclaimed-property inquiries, and retained-asset-account proceedings.
- Whether share repurchases are sustainable without weakening liquidity, capital flexibility, or insurance-subsidiary financial strength.