Unum Reports Third Quarter Earnings Beat Expectations

  • Wednesday, October 26, 2016

Unum Group on Wednesday reported net income of $236.0 million ($1.01 per diluted common share) for the third quarter of 2016, compared to net income of $203.8 million ($0.83 per diluted common share) for the third quarter of 2015. 

After-tax operating income, which excludes after-tax realized investment gains and losses on the company’s investment portfolio and the amortization of prior period actuarial losses on the company’s pension plans, was $231.3 million ($0.99 per diluted common share) in the third quarter of 2016, compared to $223.0 million ($0.91 per diluted common share) in the third quarter of 2015. The combined impact of the amounts excluded for the third quarters of 2016 and 2015 equaled net after-tax income of $4.7 million ($0.02 per diluted common share) and net after-tax losses of $19.2 million ($0.08 per diluted common share), respectively.

“Our third quarter results were very strong, driven in large part by solid premium growth in our core business operations,” said Richard P. McKenney, president and chief executive officer. “We continued to grow the top line and deliver value to our customers, as evidenced by our steady customer retention trends, while further cementing our position as a leader in the employee benefits marketplace. We also continued to generate excess capital, allowing us to invest in our business, such as our acquisition in the dental and vision market, while also directly returning value to shareholders.” 

Results by segment:

The company measures and analyzes its segment performance on the basis of "operating income" or "operating loss", which differ from income before income tax as presented in the consolidated statements of income due to the exclusion of net realized investment gains and losses and nonoperating retirement-related gains or losses. These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for income before income tax or net income. 

Unum US Segment
Unum US reported operating income of $231.0 million in the third quarter of 2016, an increase of 5.6 percent from $218.7 million in the third quarter of 2015. Premium income for the segment increased 5.9 percent to $1,315.0 million in the third quarter of 2016, compared to premium income of $1,241.8 million in the third quarter of 2015. Net investment income for the segment was $207.3 million in the third quarter of 2016, compared to $214.3 million in the third quarter of 2015. Within the Unum US operating segment, the group disability line of business reported a 20.6 percent increase in operating income to $85.4 million in the third quarter of 2016, compared to $70.8 million in the third quarter of 2015. Premium income in group disability increased 2.8 percent to $583.6 million in the third quarter of 2016, compared to $567.5 million in the third quarter of 2015, primarily due to an increase in the in-force block due to prior period sales, partially offset by lower persistency. Net investment income declined by 1.3 percent to $120.1 million in the third quarter of 2016, compared to $121.7 million in the third quarter of 2015, primarily due to a decline in yields. The benefit ratio for the third quarter of 2016 was 78.6 percent, compared to 80.5 percent in the third quarter of 2015, due primarily to lower claim incidence rates and favorable claim recovery experience in the group long-term disability product line and shorter claim duration periods and
lower prevalence rates in group short-term disability product line. Group long-term disability sales declined to $24.3 million in the third quarter of 2016, compared to $34.3 million in the third quarter of 2015. Group short-term disability sales declined to $11.7 million in the third quarter of 2016, compared to $15.2 million in the third quarter of 2015. Persistency in the group long-term disability
line of business was 90.5 percent for the first nine months of 2016, compared to 92.1 percent for the first nine months of 2015. Persistency in the group short-term disability line of business was 87.4 percent for the first nine months of 2016, compared to 87.9 percent for the first nine months of 2015. 

The group life and accidental death and dismemberment line of business reported operating income of $53.4 million in the third quarter of 2016, a decline of 11.3 percent from $60.2 million in the third quarter of 2015. Premium income for this line of business increased 5.5 percent to $388.7 million in the third quarter of 2016, compared to $368.6 million in the third quarter of 2015, primarily due to
growth in the in-force block resulting from prior period sales and improved persistency. Net investment income declined 19.0 percent to $28.1 million in the third quarter of 2016, compared to $34.7 million in the third quarter of 2015, primarily due to a decline in the level of invested assets supporting this line of business. The benefit ratio in the third quarter of 2016 was 72.6 percent, compared to 71.0 percent in the third quarter of 2015, reflecting a higher average claim size in the group life line, partially offset by favorable experience under group life waiver of premium benefits. Sales of group life and accidental death and dismemberment products declined 8.8 percent in the third quarter of 2016 to $31.1 million, compared to $34.1 million in the third quarter of 2015. Persistency in the group life line of business was 90.3 percent for the first nine months of 2016, compared to 88.5 percent for the first nine months of 2015. 

The supplemental and voluntary line of business reported an increase of 5.1 percent in operating income to $92.2 million in the third quarter of 2016, compared to $87.7 million in the third quarter of 2015. Premium income for supplemental and voluntary increased 12.1 percent to $342.7 million in the third quarter of 2016, compared to $305.7 million in the third quarter of 2015, driven by the addition of a U.S. dental and vision product offering resulting from an acquisition in August 2016 (see “Acquisition of Business” as follows), as well as growth in the in-force block of individual disability and voluntary benefits products due to prior period sales and favorable persistency. Net investment income increased to $59.1 million in the third quarter of 2016, compared to $57.9 million in the third quarter of 2015, due to an increase in the level of invested assets, partially offset by a decline in yields. The benefit ratio for the individual disability product line was 52.6 percent for the
third quarter of 2016, compared to 52.3 percent for the third quarter of 2015. The benefit ratio for voluntary benefits was 46.5 percent in the third quarter of 2016, compared to 45.8 percent in the third quarter of 2015, primarily driven by less favorable experience in the life product line. The benefit ratio for dental and vision was 68.0 percent. Relative to the third quarter of 2015, sales in the individual disability product line declined 22.6 percent in the third quarter of 2016 to $16.4 million. Sales in the voluntary benefits line of business declined 1.3 percent in the third quarter of 2016 to $45.6 million. Sales in the dental and vision product line totaled $4.5 million. Persistency in the individual disability product line was 91.2 percent for the first nine months of 2016, compared to 90.2 percent for the first nine months of 2015. Persistency in the voluntary benefits product line was 76.8 percent for the first nine months of 2016, compared to 75.3 percent for the first nine months of 2015. 

Unum UK Segment
Unum UK reported operating income of $28.2 million in the third quarter of 2016, a decline of 13.8 percent from $32.7 million in the third quarter of 2015. In local currency, operating income increased by 1.9 percent to £21.5 million in the third quarter of 2016, compared to £21.1 million in the third quarter of 2015. 

Premium income declined by 12.0 percent to $127.3 million in the third quarter of 2016, compared to $144.6 million in the third quarter of 2015. In local currency, premium income was £96.9 million in the third quarter of 2016, an increase of 3.9 percent from £93.3 million in the third quarter of 2015, primarily resulting from the addition of the U.K. dental product line in September 2015. Net investment income increased 1.8 percent to $28.5 million in the third quarter of 2016, compared to $28.0 million in the third quarter of 2015. In local currency, net investment income increased 19.9 percent to £21.7 million in the third quarter of 2016, compared to £18.1 million in the third quarter of 2015, primarily due to an increase in investment income from inflation index-linked bonds which support the claim reserves associated with certain group policies that provide for inflation-linked increases in benefits. The benefit ratio in the third quarter of 2016 was 71.8 percent, compared to 67.8 percent in the third quarter of 2015, due primarily to a higher average claim size and an increase in the claim incidence rate in group life, and a higher average claim size in group long-term disability. The addition of the dental product offering also contributed to the increase in the benefit ratio as this product line typically has a higher benefit ratio than other product lines reported in the supplemental product line. 

Sales declined by 1.5 percent to $19.4 million in the third quarter of 2016, compared to $19.7 million in the third quarter of 2015. In local currency, sales for the third quarter of 2016 increased by 15.6 percent to £14.8 million. Persistency in the group long-term disability line of business was 88.7 percent for the first nine months of 2016 compared to 88.5 percent for the first nine months of 2015.
Persistency in the group life line of business was 80.1 percent for the first nine months of 2016, compared to 80.6 percent for the first nine months of 2015. 

Colonial Life Segment
Colonial Life reported a 3.5 percent increase in operating income to $79.0 million in the third quarter of 2016, compared to $76.3 million in the third quarter of 2015. 

Premium income for the third quarter of 2016 increased 6.3 percent to $354.1 million, compared to $333.1 million in the third quarter of 2015, primarily due to sales growth and stable persistency. Net investment income increased by 0.6 percent to $36.1 million in the third quarter of 2016, compared to $35.9 million in the third quarter of 2015. The benefit ratio in the third quarter of 2016 was 51.6 percent, compared to 51.2 percent in the third quarter of 2015, primarily reflecting less favorable mortality experience in the life product line, which was partially offset by favorable claims experience in the accident, sickness, and disability product line and the cancer and critical illness product line.

Sales increased 9.3 percent to $104.2 million in the third quarter of 2016 from $95.3 million in the third quarter of 2015, with favorable sales trends in both the core commercial and public sector market segments. Persistency in Colonial Life was 79.0 percent for the first nine months of 2016 compared to 78.6 percent for the first nine months of 2015. 

Closed Block Segment
The Closed Block segment reported operating income of $28.6 million in the third quarter of 2016, compared to operating income of $27.7 million in the third quarter of 2015. 

Premium income for this segment declined 2.8 percent in the third quarter of 2016 compared to the third quarter of 2015, due to expected policy terminations and maturities in the individual disability line of business which was partially offset by an increase in premium income for the long-term care line of business resulting from premium rate increases on certain in-force policies less the impact of policy terminations. Net investment income increased 2.0 percent to $334.1 million in the third quarter of 2016, compared to $327.5 million in the third quarter of 2015, due to an increase in the level of invested assets and higher miscellaneous investment income. The interest adjusted loss ratio for the individual disability line of business increased to 81.5 percent in the third quarter of 2016, compared to 80.8 percent in the third quarter of 2015, due primarily to unfavorable mortality experience, lower claim recoveries, and a reduction in the claim reserve discount rate to recognize the impact on future portfolio yields from the higher than normal level of bond tenders and calls experienced during 2016. The interest adjusted loss ratio for the longterm care line of business was 93.8 percent in the third quarter of 2016 compared to 89.9 percent in the third quarter of 2015, due to a higher average size of new claims and less favorable mortality experience, as well as the unfavorable impact of a large group case moving to an individual policy ported status during 2016. 

Corporate Segment
The Corporate segment reported an operating loss of $41.6 million for the third quarter of 2016, compared to an operating loss of $26.9 million in the third quarter of 2015. The higher operating loss in the third quarter of 2016 was due primarily to lower net investment income, higher interest and debt expense, and higher expenses primarily related to the third quarter of 2016 business acquisition (see “Acquisition of Business” as follows). 

OTHER INFORMATION
Acquisition of Business
On Aug. 1, the company acquired H&J Capital, L.L.C., parent of Starmount Life Insurance Company and AlwaysCare Benefits, for an initial cash purchase price of $140.1 million plus contingent cash consideration of $10.0 million to be paid upon satisfaction of certain conditions. Starmount Life Insurance Company is an independent provider of dental and vision insurance in the U.S. workplace, and AlwaysCare Benefits is a nationally licensed, third-party administrator. This acquisition, the results of which are included in consolidated financial statements for the period subsequent to the date of acquisition, did not have a material impact on revenue or results of operations during the third quarter of 2016. The existing dental and vision products as well as new dental and vision products to be marketed by Unum US are reported in the Unum US segment within the supplemental and voluntary product lines. Colonial Life dental and vision products are expected to be introduced in 2018. 

Shares Outstanding
The company’s weighted average number of shares outstanding, assuming dilution was 234.2 million for the third quarter of 2016, compared to 246.3 million for the third quarter of 2015. Shares outstanding totaled 232.1 million at Sept. 30. During the third quarter of 2016, the company repurchased approximately 2.9 million shares at a cost of approximately $100 million. 

Capital Management
At Sept. 30, the weighted average risk-based capital ratio for the company’s traditional U.S. insurance companies was approximately 395 percent, and cash and marketable securities in the holding companies equaled approximately $598 million, excluding amounts committed for subsidiary contributions. 

Book Value
Book value per common share as of Sept. 30, was $40.33, compared to $35.25 at Sept. 30, 2015. 

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