UNUM GROUP – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Introduction
We have three major business segments: Unum US, Unum
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
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 value 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.
We are an industry leader, and we believe we are well positioned in our sector with solid long-term growth prospects. Given the nature of our business, however, we are sensitive to economic and financial market movements, including interest rates, consumer confidence, and employment levels. Our business outlook, which recognizes both the challenges of the current economic environment as well as the mitigating impact of risk-reducing actions we have taken in recent years, is consistent with our risk appetite. Although the occurrence of one or more of the risk factors discussed in our 2012 annual report on Form 10-K may cause our results to differ materially from our outlook, our business plan has been tested against a variety of economic scenarios, and we believe we can continue to meet the challenges presented by the current economic environment. We remain cautious of the near-term outlook for employment levels and wages, both of which limit opportunities for premium growth, but we believe we are poised to profitably grow as employment trends improve.
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
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Executive Summary
Although we have confidence in our future, as we look to the remainder of 2013 we are maintaining a cautious view of the business environment given the continuing challenge of low interest rates and unfavorable economic conditions. We intend to remain focused on profitable top line growth in select markets, continue our disciplined investment strategy, drive effectiveness in our operating performance, and generate consistent, sustainable capital available for deployment. We continue to believe that our strategy of delivering a broad set of financial protection choices to employees while also enabling employers to define their financial contribution in support of those choices should enable us to continue as a market leader over the long term.
A discussion of our operating performance and capital management follows.
Operating Performance and Capital Management
For the first quarter of 2013, we reported net income of
Our Unum US segment reported an increase in segment operating income of slightly over one percent in the first quarter of 2013 compared to the same period of 2012, with growth in premium income, favorable risk results, and continued favorable expense management. Although Unum US premium income increased 2.5 percent in the first quarter of 2013 compared to the same period of 2012, the ongoing high levels of unemployment and the competitive environment continue to pressure our premium income growth, including the growth which normally occurs due to salary growth and growth in the number of employees covered under existing policies. The benefit ratio for our Unum US segment for the first quarter of 2013 was 70.9 percent compared to 72.5 percent in the same period of 2012, with overall favorable risk results in all of our major lines of business within the segment. Unum US experienced higher amortization of deferred acquisition costs for the supplemental and voluntary lines due to less favorable persistency in certain products and issue years. Unum US sales increased 1.3 percent in the first quarter of 2013 compared to the same period of 2012, with growth in the supplementary and voluntary line and the group large case market segment partially offset by lower sales in the group core market segment. Premium persistency overall declined relative to the first quarter of 2012.
Our Unum
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Our Colonial Life segment reported an increase in segment operating income of 8.2 percent in the first quarter of 2013 compared to the same period of 2012, with higher operating revenue partially offset by less favorable risk results. Premium income grew 3.6 percent in the first quarter of 2013 compared to the same period of 2012. Also contributing to higher operating revenue in the first quarter of 2013 were higher bond call premiums and private equity partnership investment income, which can exhibit quarterly volatility. The benefit ratio for Colonial Life was slightly higher at 52.5 percent in the first quarter of 2013 compared to 52.1 percent in the same period of 2012. Colonial Life sales decreased 4.9 percent in the first quarter of 2013 compared to the same period of 2012, with decreases in the public sector and core commercial market segment sales partially offset by growth in large case commercial market segment sales. Persistency continues to be strong and was favorable for all product lines in the first quarter of 2013 relative to the same period of 2012.
Our Closed Block segment reported an increase in segment operating income of 77.3 percent in the first quarter of 2013 relative to the same period of 2012, with an increase in net investment income as well as favorable risk results in both the individual disability and long-term care lines of business.
Our investment portfolio continues to perform well, with slight growth in net investment income in the first quarter of 2013 compared to the same period of 2012. Our asset quality remains strong, with minimal realized investment losses from either sales or impairments and a net unrealized gain on our fixed maturity securities of
We believe our capital and financial positions are strong. At
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.
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 three months of 2013.
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
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