Unum Group (UNM) reported second-quarter operating income of 75 cents per share, higher than the Zacks Consensus Estimate of 72 cents. Results compare favorably with 69 cents earned in the prior-year period. Operating income was $232 million in the quarter, up 1.5% from $228.6 million in second-quarter 2010.
Strong results at Unum US, Unum UK and Colonial Life contributed to the better than expected results. Better operating and investment results coupled with share buyback also aided the bottom line.
Including realized after-tax investment gains of $2.2 million, the company reported net income of $229.8 million or 75 cents per share, compared with $209.7 million or 63 cents per share in the second quarter of 2010. The prior-year quarter’s registered net realized after-tax gains were $18.9 million.
Total revenue in the quarter under review was $2.56 billion, up 2% year over year.
Segment Update
Unum US Segment: Segment premium in the quarter was $1.22 billion, up 0.3% year over year.
Operating income increased 1% year over year to $218.1 million in the second quarter of 2011.
Unum UK Segment: Premium increased 15% year over year to $175.8 million in the second quarter of 2011. In local currency, premium increased 5.2% year over year to £107.8 million.
Segment operating income was $54.7 million in the second quarter of 2011, up 3.4% year over year.
The benefit ratio was 69.8% in second-quarter 2011, up from 66% in the prior-year quarter. The higher benefit ratio resulted from higher inflation on claim reserves associated with inflation index-linked group policies and a lower level of claim resolutions in group long-term disability, partially offset by favorable group long-term disability claims incidence.
Colonial Life Segment: Premium in the quarter increased 5.3% year over year to $282.0 million.
Operating income increased 1.8% year over year to $75.2 million in the reported quarter.
The benefit ratio was 51.2% compared with 48.3% in the year-ago period. The increase was a result of less favorable risk results in the accident, sickness, and disability product line and in the life product line, partially offset by favorable risk results in the cancer and critical illness product line.
Individual Disability – Closed Block Segment: Premium decreased 7.6% year over year to $196.3 million in second-quarter 2011.
Segment operating income reported a decrease of 16% to $10.4 million largely driven by lower premium income and net investment income.
Corporate and Other Segment: Operating loss of $16.8 million in the reported quarter was narrower than the loss of $17.6 million a year ago.
Financial Update
Unum Group ended the quarter with a debt of $2.73 billion, up from $2.61 billion as of March 31, 2011.
The debt-to-capital ratio was 20.8%, down 10 basis points from 20.9% at March 31, 2011.
Book value as of June 30, 2011, was $29.94 per share, up 2.9% from $29.08 as of March 31, 2011.
Share Repurchase
Unum Group spent $146.1 million to buy back 5.7 million shares during the second quarter 2011. As of June 30, 2011 the company had approximately $774.8 million remaining under its $1.0 billion share repurchase authorization.
Full-Year 2011 Guidance
Unum Group expects operating income per share to grow in the range of 6% to 12%.
Peer Comparison
AFLAC Inc. (AFL), which competes with Unum Group, reported operating earnings per share of $1.56, which were higher than the Zacks Consensus Estimate of $1.54 but modestly exceeded $1.35 reported in the year-ago quarter.
Earnings for the reported quarter benefited from top-line growth and a stronger yen/dollar exchange rate that helped increase operating earnings per share by 11 cents.
Lincoln National Corp. (LNC), another competitor of Unum reported second quarter operating earnings per share of $1.09, substantially ahead of the Zacks Consensus Estimate of 94 cents and 86 cents recorded in the prior-year quarter.
Our Take
We expect solid performance across all segments, strong capital position, aggressive share repurchases and continuous dividend payments to position the company for strong results going forward.
However, low interest rates are expected to impact investment income and reserving practices.
We maintain our long-term “Neutral” recommendation on Unum Group. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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