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UNM > SEC Filings for UNM > Form 10-Q on 31-Jul-2014All Recent SEC Filings

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Form 10-Q for UNUM GROUP


31-Jul-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

Unum Group, a Delaware general business corporation, and its insurance and non-insurance subsidiaries, which collectively with Unum Group we refer to as the Company, operate in the United States, the United Kingdom, and, to a limited extent, in certain other countries. The principal operating subsidiaries in the United States are Unum Life Insurance Company of America, Provident Life and Accident Insurance Company, The Paul Revere Life Insurance Company, and Colonial Life & Accident Insurance Company, and in the United Kingdom, Unum Limited. We are the largest provider of disability insurance products in the United States and the United Kingdom. We also provide a complementary portfolio of other insurance products, including employer- and employee-paid group benefits, life insurance, and other related services.

We have three principal operating business segments: Unum US, Unum UK, and Colonial Life. Our remaining segments are the Closed Block and Corporate segments. These segments are discussed more fully under "Segment Results" included herein in this Item 2.

The benefits we provide help protect people from the financial hardship of illness, injury, or loss of life by providing support when it is needed most. As one of the leading providers of employee benefits in the U.S. and the U.K., we offer a broad portfolio of products and services through the workplace.

Specifically, we offer group, individual, and voluntary benefits, either as stand-alone products or combined with other coverages, that help employers of all sizes attract and retain a stronger workforce while protecting the incomes and livelihood of their employees. We believe employer-sponsored benefits represent the single most effective way to provide workers with access to the information and options they need to protect their financial stability. Working people and their families, particularly those at lower and middle incomes, are perhaps the most vulnerable in today's economy yet are often overlooked by many providers of financial services and products. For many of these people, employer-sponsored benefits are the primary defense against the potentially catastrophic fallout of death, illness, or injury.

We have established a corporate culture consistent with the social values our products provide. We are committed not only to meeting the needs of our customers who depend on us, but also to operating with integrity and being accountable for our actions. Our sound and consistent business practices, strong internal compliance program, and comprehensive risk management strategy enable us to operate efficiently as well as to identify and address potential areas of risk in our business. We have also applied these same values to our social responsibility efforts. Because we see important links between the obligations we have to all of our stakeholders, we place a strong emphasis on contributing to positive change in our communities.

This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1 contained in this Form 10-Q and with the "Cautionary Statement Regarding Forward-Looking Statements" included below the Table of Contents, as well as the discussion, analysis, and consolidated financial statements and notes thereto in Part I, Items 1 and 1A, and Part II, Items 6, 7, 7A, and 8 of our annual report on Form 10-K for the year ended December 31, 2013.

Operating Performance and Capital Management

For the second quarter of 2014, we reported net income of $242.5 million, or $0.94 per diluted common share, compared to net income of $218.6 million, or $0.82 per diluted common share, in the same period of 2013. For the first six months of 2014, net income was $471.4 million, or $1.82 per diluted common share, compared to net income of $431.2 million, or $1.61 per diluted common share, in the same period of 2013. Included in these results are costs related to the early retirement of debt during the second quarter of 2014, net realized investment gains and losses, including a hedge gain associated with the retirement of the debt, and non-operating retirement-related gains or losses. Adjusting for these items, after-tax operating income was $234.8 million, or $0.91 per diluted common share, in the second quarter of 2014, compared to $218.5 million, or $0.82 per diluted common share, in the same period of 2013. After-tax operating income was $460.5 million, or $1.78 per diluted common share, in the first six months of 2014, compared to $434.1 million, or $1.62 per diluted common share, in the same period of 2013. For the second quarter of 2014, after-tax operating income per diluted common share grew 11.0 percent, with 7.5 percent driven by growth in income and 3.5 percent driven by our capital management strategy of returning capital to shareholders through repurchases of our common stock.


Operating revenue, which excludes net realized investment gains and losses, was slightly higher in the second quarter and first six months of 2014 relative to the same periods of 2013, driven by growth in premium income. Net investment income, also a significant source of revenue for us, was relatively consistent with the second quarter and first six months of 2013. Before-tax operating income increased by 7.7 percent and 6.0 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, with favorable earnings in all of our segments.

Our Unum US segment reported an increase in operating income of 2.2 percent and 1.8 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, with growth in premium income and overall favorable risk results. Premium income increased 2.3 percent and 1.7 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. The benefit ratios for our Unum US segment for the second quarter and first six months of 2014 were 70.4 percent and 70.3 percent, respectively, compared to 72.0 percent and 71.4 percent in the same periods of 2013. Unum US sales increased 40.0 percent and 20.3 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. Persistency remains strong and is generally consistent with our expectations.

Our Unum UK segment reported an increase in operating income, as measured in Unum UK's local currency, of 8.3 percent and 8.6 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, with growth in premium income and favorable risk results. Premium income in local currency increased 2.1 percent and 0.4 percent in the second quarter and first six months of 2014 relative to the same periods of 2013. The benefit ratios for Unum UK were 74.0 percent and 72.1 percent in the second quarter and first six months of 2014, respectively, compared to 84.2 percent and 76.7 percent in the same periods of 2013. Unum UK sales in local currency decreased 11.3 percent and 6.9 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. Persistency is stable, but group life persistency continues to be lower than our long-term expectations as a result of pursuing rate increases on renewing business.

Our Colonial Life segment reported an increase in operating income of 5.9 percent and 5.6 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, with growth in premium income and stable risk results. Premium income grew 2.9 percent and 3.0 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. The benefit ratios for Colonial Life were 52.0 percent and 51.2 percent in the second quarter and first six months of 2014, respectively, compared to 52.1 percent and 52.3 percent in the same periods of 2013. Colonial Life sales increased 7.7 percent and 7.2 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013. Persistency is generally stable relative to the prior year and is consistent with our expectations.

Our Closed Block segment reported an increase in operating income of 26.0 percent and 16.7 percent in the second quarter and first six months of 2014, respectively, compared to the same periods of 2013, with an increase in net investment income and favorable risk results in our long-term care line of business offset partially by less favorable risk results in our individual disability line of business.

Although investment income continues to be pressured by the low interest rate environment, our invested asset quality remains strong. The net unrealized gain on our fixed maturity securities was $6.0 billion at June 30, 2014 compared to $4.1 billion at December 31, 2013, with the increase due primarily to a decline in U.S. Treasury rates during the first six months of 2014.

We believe our capital and financial positions are strong. At June 30, 2014, the risk-based capital (RBC) ratio for our traditional U.S. insurance subsidiaries, calculated on a weighted average basis using the NAIC Company Action Level formula, was approximately 401 percent, compared to 405 percent at December 31, 2013. During the first six months of 2014, we repurchased 5.8 million shares of Unum Group common stock at a cost of approximately $200 million under our share repurchase program. Cash equivalents and marketable securities held at Unum Group and our other intermediate holding companies are a significant source of liquidity for us and were approximately $616 million at June 30, 2014, relative to $514 million at December 31, 2013. The increase was driven primarily by dividends from subsidiaries and our debt issuance in March, less debt repayments and repurchases of our common stock.


Consolidated Company Outlook

We believe our disciplined approach to providing financial protection products at the workplace puts us in a position of strength as we seek to capitalize on the growing and largely unfilled need for our products and services. While we continue to experience low interest rates and below-average economic growth, we have strategies in place which we believe will help us navigate this environment. We believe the need for our products and services remains strong, and we intend to continue protecting our solid margins and returns through our pricing and risk actions. During the remainder of 2014, we will continue to invest in our infrastructure and our employees, with a focus on quality and simplification of processes and product offerings. Our strategy will be centered on maintaining a strong customer focus while providing an innovative product portfolio of financial protection choices to deepen employee coverages, broaden employer relationships, and open new markets. We believe that consistent operating results, combined with the implementation of strategic initiatives and the effective deployment of capital, should allow us to meet our long-term financial objectives.

Further discussion is included in "Consolidated Operating Results," "Reconciliation of Non-GAAP Financial Measures," "Segment Results," "Investments," and "Liquidity and Capital Resources" contained in this Item 2 and in the "Notes to Consolidated Financial Statements" contained herein in Item 1.

Critical Accounting Estimates

We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in our financial statements.

The accounting estimates deemed to be most critical to our financial position and results of operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension and postretirement benefit plans, income taxes, and contingent liabilities. There have been no significant changes in our critical accounting estimates during the first six months of 2014.

For additional information, refer to our significant accounting policies in Note 1 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 and "Critical Accounting Estimates" in Part II, Item 7 of our annual report on Form 10-K for the year ended December 31, 2013.

Accounting Developments

See Note 2 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for information on new accounting standards and the impact, if any, on our financial position or results of operations.


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