Unum Net Income Drops From Previous 4th Quarter

Tuesday, February 04, 2014

Unum Group (NYSE: UNM) on Tuesday reported net income of $221.2 million ($0.84 per diluted common share) for the fourth quarter of 2013, compared to net income of $233.9 million ($0.85 per diluted common share) for the fourth quarter of 2012.

Included in these results are net realized investment gains and losses and non-operating retirement-related gains or losses, the combined impact of which resulted in a net after-tax gain of $4.3 million ($0.02 per diluted common share) for the fourth quarter of 2013, compared to a net after-tax gain of $8.9 million ($0.03 per diluted common share) in the fourth quarter of 2012. Also included are fourth quarter 2013 reserve adjustments for a reserve increase related to unclaimed death benefits ($95.5 million before tax and $62.1 million after tax, or $0.24 per diluted common share) and a reserve reduction related to group life waiver of premium benefits ($85.0 million before tax and $55.2 million after tax, or $0.21 per diluted common share).

Adjusting for these items, after-tax operating income was $223.8 million ($0.85 per diluted common share), in the fourth quarter of 2013, compared to $225 million ($0.82 per diluted common share), in the fourth quarter of 2012.

Thomas R. Watjen, president and chief executive officer, said, “We had a strong close to the year, with fourth quarter and full year earnings growth consistent with both our own expectations and the outlook we had provided at the start of the year. Through our disciplined underwriting and pricing we have maintained strong risk results across all of our business lines, which have helped us continue to generate strong margins and returns. I am also very encouraged by the sales momentum in our U.S. operations that began to emerge in the third quarter and gained further traction in the fourth quarter.

“We enter 2014 with strong positions in our markets, a solid financial base which gives us tremendous financial flexibility to support our businesses while also returning capital to our shareholders, and a commitment to maintaining the discipline which has been at the heart of our past success.”

Unum US Segment

Unum US reported operating income, including the adjustments related to the unclaimed death benefits reserve and the group life waiver reserve, of $226.7 million in the fourth quarter of 2013, compared to $212.2 million in the fourth quarter of 2012. Operating income excluding these adjustments was $217.1 million in the fourth quarter of 2013. Premium income for the segment increased slightly to $1,121.3 million in the fourth quarter of 2013, compared to premium income of $1,117.6 million in the fourth quarter of 2012.

Within the Unum US operating segment, the group disability line of business reported a 6.3 percent decline in operating income, with $68.9 million in the fourth quarter of 2013 compared to $73.5 million in the fourth quarter of 2012, as lower net investment income in the current quarter more than offset favorable risk experience in this line of business. Premium income in group disability declined 0.5 percent to $511.4 million in the fourth quarter of 2013, compared to $513.8 million in the fourth quarter of 2012, driven primarily by a decline in persistency in the group long-term disability product line. Net investment income declined 7.4 percent to $133.9 million in the fourth quarter of 2013, compared to $144.6 million in the fourth quarter of 2012, primarily due to lower levels of miscellaneous investment income. The benefit ratio for the fourth quarter of 2013 was 83.2 percent, compared to 84.5 percent in the fourth quarter of 2012. Underlying these results are favorable incidence rates and continued strong claim recovery experience. Group long-term disability sales declined 3.6 percent to $83.7 million in the fourth quarter of 2013, compared to $86.8 million in the fourth quarter of 2012. Group short-term disability sales increased 17.9 percent to $54.6 million in the fourth quarter of 2013, compared to $46.3 million in the fourth quarter of 2012. Persistency in the group long-term disability line of business was 87.2 percent for full year 2013, compared to 90.7 percent for full year 2012. Persistency in the group short-term disability line of business was 88.0 percent for both full year 2013 and 2012.

The group life and accidental death and dismemberment line of business reported operating income, including the adjustments related to the unclaimed death benefits reserve and the group life waiver reserve, of $98.3 million in the fourth quarter of 2013, compared to $55.1 million in the fourth quarter of 2012. Operating income excluding these adjustments was $62.4 million in the fourth quarter of 2013, with the increase over the prior year driven by growth in premium income and favorable risk experience. Premium income for this line of business increased 2.1 percent to $332.9 million in the fourth quarter of 2013, compared to $326.1 million in the fourth quarter of 2012, reflecting growth from sales, partially offset by lower persistency. The benefit ratio in the fourth quarter of 2013 was 59.2 percent and excluding the reserve adjustments previously noted was 70.0 percent, compared to 72.5 percent in the fourth quarter of 2012, reflecting more favorable mortality experience. Sales of group life and accidental death and dismemberment products increased 6.1 percent in the fourth quarter of 2013 to $100.6 million, compared to $94.8 million in the fourth quarter of 2012. Persistency in the group life line of business was 88.1 percent for full year 2013, compared to 90.6 percent for 2012.

The supplemental and voluntary line of business reported operating income, including the adjustment to the unclaimed death benefits reserve, of $59.5 million in the fourth quarter of 2013, compared to $83.6 million in the fourth quarter of 2012. Operating income excluding the reserve adjustment was $85.8 million in the fourth quarter of 2013, with the growth over the prior year driven by higher operating income in both the individual disability – recently issued and voluntary benefits lines of business. Premium income for supplemental and voluntary declined slightly to $277.0 million in the fourth quarter of 2013, compared to $277.7 million in the fourth quarter of 2012. The decline resulted from lower premium income from the individual disability – recently issued product line due to a reinsurance agreement entered into during the second quarter of 2013 to cede a small block of individual disability – recently issued business. The interest adjusted loss ratio for the individual disability - recently issued product line in the fourth quarter of 2013 declined to 30.7 percent from 32.0 percent in the fourth quarter of 2012, reflecting favorable claim incidence. The benefit ratio for voluntary benefits was 66.1 percent in the fourth quarter of 2013 and excluding the reserve adjustment previously noted was 49.8 percent in the fourth quarter of 2013 compared to 52.0 percent in the fourth quarter of 2012, also reflecting favorable risk experience. Sales in the individual disability – recently issued line of business increased 27.9 percent in the fourth quarter of 2013 to $15.6 million from $12.2 million in the prior year fourth quarter. Relative to the fourth quarter of 2012, sales in the voluntary benefits line of business declined 1.7 percent in the fourth quarter of 2013 to $40.4 million, compared to $41.1 million in the year ago quarter. Persistency in the individual disability – recently issued product line was 90.5 percent for full year 2013, compared to 91.4 percent for full year 2012. Persistency in the voluntary benefits product line was 77.0 percent for full year 2013, compared to 78.9 percent for 2012.

Unum UK Segment

Unum UK reported operating income of $35.9 million in the fourth quarter of 2013, an increase of 2.6 percent from $35.0 million in the fourth quarter of 2012. In local currency, operating income for the fourth quarter of 2013 increased 1.8 percent, to £22.2 million from £21.8 million in the fourth quarter of 2012, primarily reflecting improved results in the group life line of business.

Premium income decreased 21.4 percent to $137.9 million in the fourth quarter of 2013, compared to $175.5 million in the fourth quarter of 2012, due primarily to group life reinsurance agreements entered into in the first quarter of 2013. In local currency, premium income decreased 22.1 percent to £85.1 million in the fourth quarter of 2013, compared to £109.3 million in the fourth quarter of 2012. The benefit ratio in the fourth quarter of 2013 was 73.0 percent, compared to 76.2 percent in the fourth quarter of 2012. The lower benefit ratio in the fourth quarter of 2013 reflects more favorable risk results in the group life line of business which offset slightly unfavorable risk experience from higher claim incidence levels in the group long-term disability line of business.
Sales declined by 8.5 percent to $20.4 million in the fourth quarter of 2013, compared to $22.3 million in the fourth quarter of 2012. In local currency, sales for the fourth quarter of 2013 declined 9.4 percent to £12.6 million, compared to £13.9 million in the fourth quarter of 2012, reflecting a decline in both group life and group long-term disability sales relative to the comparable period of 2012. Persistency in the group long-term disability line of business was 82.2 percent for full year 2013, compared to 84.0 percent for 2012. Persistency in the group life line of business was 66.7 percent for full year 2013, compared to 82.5 percent for 2012, reflecting the Company’s aggressive efforts to re-price this block of business.

Colonial Life Segment

Colonial Life reported operating income, including the adjustment to the unclaimed death benefits reserve, of $49.3 million in the fourth quarter of 2013, compared to $68.3 million in the fourth quarter of 2012. Operating income excluding the reserve adjustment was $69.4 million in the fourth quarter of 2013, reflecting an increase in premium income and stable risk experience.

Premium income for the fourth quarter of 2013 increased 2.1 percent to $308.1 million, compared to $301.9 million in the fourth quarter of 2012, driven by continued growth in the in-force block of business. The benefit ratio in the fourth quarter of 2013 was 58.9 percent and excluding the reserve adjustment previously noted was 52.4 percent, compared to 52.5 percent in the fourth quarter of 2012, as improved claims experience in the life product line offset slightly unfavorable claim experience in the cancer and critical illness and accident, sickness, and disability product lines.
Sales increased 10.4 percent to $139.8 million in the fourth quarter of 2013 from $126.6 million in the fourth quarter of 2012, driven by a strong increase in commercial sector sales, as well as increased sales in the public sector. Persistency for full year 2013 was generally consistent with the level of 2012.

Closed Block Segment

The Closed Block segment reported operating income of $26.8 million in the fourth quarter of 2013, compared to $28.8 million in the fourth quarter of 2012.

Premium income for this segment declined 5.5 percent in the fourth quarter of 2013 compared to the fourth quarter of 2012, primarily due to the expected run-off of the individual disability block of business. The interest adjusted loss ratio for the individual disability line of business was 85.7 percent in the fourth quarter of 2013, compared to 83.7 percent in the fourth quarter of 2012, reflecting slightly worse claim experience and a slight reduction in the claim reserve discount rate. The interest adjusted loss ratio for the long-term care line of business declined to 89.3 percent in the fourth quarter of 2013 from 89.9 percent in the fourth quarter of 2012, primarily due to a lower level of claim incidence.

Corporate Segment

The Corporate segment reported an operating loss of $39.8 million in the fourth quarter of 2013, compared to a loss of $34.6 million in the fourth quarter of 2012. The higher operating loss in the fourth quarter of 2013 was driven primarily by higher operating expenses and lower net investment income.

Unclaimed Death Benefits Reserve Increase Beginning in 2011, a number of state regulators began requiring insurers to cross-check specified insurance policies with the Social Security Administration’s Death Master File to identify potential matches. If a potential match was identified, insurers were requested to determine if benefits were due, locate beneficiaries, and make payments where appropriate. The Company began implementing this process in all states on a forward-looking basis as it believes adopting this process, which reflects an evolving regulatory and industry practice, is in the best interests of its customers. Therefore, in addition to adopting this process on a forward-looking basis, the Company began an initiative to search for potential claims from previous years.

During the fourth quarter of 2013, the Company completed its assessment of benefits which it estimates will be paid under this initiative, and as such, established additional reserves of $95.5 million for the payment of these benefits. Claim reserves were increased $49.1 million for Unum US group life, $26.3 million for Unum US voluntary life, and $20.1 million for Colonial Life voluntary life.

Release of Group Life Waiver Reserve

Within its Unum US segment, the Company offers group life coverage which consists primarily of renewable term life insurance and includes a provision for waiver of premium, if disabled. During 2013, the Company updated its assumptions for the group life waiver reserve to consider its emerging experience as well as industry experience from the Society of Actuaries, both of which indicate an increase in life expectancies, which decreases the ultimate anticipated death benefits to be paid under the group life waiver benefit. Emerging experience also reflects an improvement in claim recovery rates, which also lessens the likelihood of payment of a death benefit while the insured is disabled.

Upon completion of its review in the fourth quarter of 2013, the Company modified its mortality and claim recovery assumptions for the Unum US group life waiver reserves and, as a result, reduced the applicable claim reserves by $85.0 million.

Shares Outstanding

The Company’s average number of shares outstanding, assuming dilution, was 262.6 million for the fourth quarter of 2013, compared to 273.6 million for the fourth quarter of 2012. The actual number of shares outstanding totaled 260.0 million at December 31, 2013. During the fourth quarter of 2013, the Company repurchased approximately 1.4 million shares at a cost of $50 million. For full year 2013, the Company repurchased approximately 11.2 million shares at a cost of $319 million.
Capital Management

During the fourth quarter 2013, the Company completed the re-domestication of its Bermuda-based insurance subsidiary, UnumProvident International Ltd., under a U.S.-based regulator. At December 31, 2013, the weighted average risk-based capital ratio for the Company’s traditional U.S. insurance companies was approximately 405 percent, and cash and marketable securities in the holding companies equaled $514 million.

Book Value

Book value per common share as of December 31, 2013 was $33.30, compared to $31.87 at December 31, 2012.

Outlook

The Company anticipates growth in after-tax operating earnings per share for full year 2014 to be in the range of five percent to 10 percent.
 



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