Unum Group (UNM) reported third-quarter operating income of 80 cents per share, beating the Zacks Consensus Estimate by 3 cents. Earnings improved almost 7% year over year. Operating income was $224 million in the quarter, inching up 0.4% from the prior-year quarter.
The company experienced soft results at Unum UK, Colonial Life Segment and the Closed Block that led to weaker numbers in the quarter However, solid performances at Unum US was a partial offset. Lower share count due to share repurchases buoyed the bottom line.
The quarter had net realized investment gain of $13.8 million or 6 cents per share and incurred non-operating Retirement-related loss of $7.6 million or 3 cents per share. Adjusting for these items, Unum reported net income of $230.2 million or 83 cents per share in the third quarter 2012, comparing favorably with $202 million or 68 cents per share in the prior-year quarter.
The year-ago quarter includes net realized investment loss of $15.9 million or 5 cents per share and incurred non-operating Retirement-related loss of $5.2 million or 2 cents per share.
Total revenue in the quarter was $2.63 billion, up 3.2% year over year. The top line beat the Zacks Consensus Estimate by 0.6%.
Segment Update
Unum US Segment: Segment premium in the quarter was $1.11 billion, up 3.5% year over year.
Operating income augmented 3.4% year over year to $216.3 million in the quarter.
Unum UK Segment: Premium decreased 0.2% year over year to $175.2 million in the quarter. In local currency, premium increased 1.6% year over year to £110.8 million.
Segment operating income was $27.5 million in the quarter, down 20.7% year over year.
The benefit ratio was 77.7% in third quarter 2012, down from 78.8% in the prior-year quarter. The decline in benefit ratio reflects favorable risk experience in the group disability line of business, partially offset by unfavorable group life risk experience.
Colonial Life Segment: Premium in the quarter increased 5.5% year over year to $299.4 million.
Operating income waned 3% year over year to $68.7 million in the reported quarter, attributable to rise in premium income, more than offsetting the impact of a slightly higher benefit ratio.
The benefit ratio increased 30 basis points to 52.9%. The escalation was due to unfavorable mortality experience in the life line of business, more than offsetting the favorable experience in the cancer and critical illness and accident, sickness, and disability lines of business.
Closed Block Segment: The segment now includes the results of the closed blocks of individual disability, long-term care and other closed blocks, previously reported in the Corporate and Other segment.
Premium income for the individual disability – closed block line of business skidded 6.8% year over year. Additionally, premium income for the long-term care line of business strengthened 4.8% year over year.
The segment reported an operating income of $25.6 million, down 16.9% year over year. The decline was attributable to lower income in the long-term care line of business, partially offset by higher income from the individual disability line of business.
Corporate and Other Segment: Operating loss of $27.4 million in the reported quarter was wider than the loss of $20.8 million incurred a year ago.
Financial Update
Unum Group ended the quarter with a debt of $2.19 billion, compared with $1.94 billion at the prior-quarter end.
The debt-to-capital ratio was 25.2%, up 200 basis points from 23.3% as of June 30, 2012.
Book value as of September 30, 2012, was $31.53 per share, up 2.5% from $30.77 as of September 30, 2011.
Share Repurchase
Unum Group spent $100.2 million to buy back 5.1 million shares in the quarter.
The Board approved a new share purchase program, whereby Unum is authorized to buyback $750 million worth shares through January 2014. This new authorization replaces the previous authorization of $1 billion scheduled to expire in August 2012.
2012 Guidance
Unum Group expects operating income per share to amplify in the range of 3% to 6%.
Peer Comparison
AFLAC Inc. (AFL), which competes with Unum, reported third-quarter 2012 operating earnings per share of $1.77, modestly exceeding the Zacks Consensus Estimate of $1.66 and the year-ago quarter’s earnings of $1.65. A slightly weak yen/dollar exchange rate had nil impact on the operating earnings.
Total revenue for the reported quarter augmented 14.4% year over year to $6.85 billion, also surpassing the Zacks Consensus Estimate of $6.43 billion. Despite the ongoing derisking activities, weak yen and the low-rate environment, total revenue benefited from consistent improvement in the U.S. and Japan.
Zacks Rank
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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