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Unum Reports Mixed Disability Results

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Unum Group Corp. (NYSE:UNM) made a profit during the second quarter, but a smaller profit than it earned during the second quarter of 2011.

Other insurers in the U.S. disability insurance market have been reporting a wide range of results today and Wednesday.


Operating income at Unum’s U.S. group disability insurance business was down, but group disability premium revenue was up slightly.

Unum, Chattanooga, Tenn., is reporting $216 million in net income for all operations for the latest quarter on $2.6 billion in revenue, compared with $228 million in net income on $2.6 billion in revenue for the second quarter of 2011.

Unum US is reporting $213 million in operating income for the latest quarter on $1.1 billion in premium revenue, up from $206 million in operating income on $1.1 billion in premium revenue for the comparable quarter in 2011.

The group disability business is reporting $70 million in operating income on $516 million in premium revenue, compared with $79 million in operating income on $507 million in premium revenue for the comparable quarter in 2011.

Group long-term disability (LTD) sales fell 6%, to $36 million, but group short-term disability sales increased 33%, to $24 million, and persistency — the likelihood that LTD business on the books would stay on the books — increased to about 92%, from about 90%, Unum says.

The Rest of the Pack

Hartford Financial Group Inc., Hartford (NYSE:HIG), says sales of fully insured group disability plans fell 27%, for example, to $27 million. Group disability premium revenue fell 6%, to $423 million.

But group disability sales at Lincoln National Corp., Radnor, Pa. (NYSE:LNC), increased 23%, to $38 million.

Prudential Financial Inc., Newark, N.J. (NYSE:PRU) — a company that combines results for group long-term disability insurance with results for group long-term care insurance — group disability sales increased to $41 million, from $30 million, and group disability gross premiums, policy charges and fee income increased to $362 million, from $304 million.

The Rates

Analysts say low yields on bond holdings continue to hold down the insurers’ earnings on long-term disability business as well as on other products with results that depend partly on general account investment performance, such as long-term care insurance and kinds of annuities.

The Federal Reserve Board continues to do what it can to hold interest rates to unusually low levels in an effort to encourage home buyers, companies and others to borrow money and to help lower the costs of borrowers who have taken out variable-rate loans.

Insurers typically invest much more heavily in corporate notes and other fixed-income securities that pay higher rates than bills, notes and bonds issued by the U.S. government pay.

Hartford, for example, says in a financial supplement that it has invested about 50% of its fixed-maturity investments in corporate debt securities and only 6% in U.S. Treasuries. 

MetLife Inc., New York (NYSE:MET), says U.S. Treasury and agency securities made up 13% of its fixed-maturity securities investments available for sale during the second quarter. About 47% of the fixed-maturity securities available for sale were U.S. and foreign corporate securities.

But the low rates on government securities can influence other rates. Hartford says its companywide annualized investment yield fell to 4.4% before taxes during the second quarter, down 0.2 percentage points from the annualized yield for the second quarter of 2011.

At MetLife, the overall investment yield on non-medical health products, which could include products such as dental insurance as well as disability insurance, ended the quarter at 6.52%, down slightly from 6.53% a year earlier. The average yield on fixed-maturity securities fell to 4.76%, from 4.94%.

Prudential says the average yield on fixed-maturity securities at its financial services business outside Japan fell to 5.31%, from 5.38%. Yields on all financial services business investments outside Japan fell to 4.9%, from 5.05%.

John Nadel, a securities analyst in the New York office of Sterne Agee Group Inc., wrote in a comment sent before Lincoln’s second-quarter earnings call that the, “Focus for the Call Likely Remains on Low Rates, Like it or Not.”

“We expect investors will continue to focus on the potential pressure of a sustained low(er) long-term rate environment,” Nadel said in the comment.

Richard McKenney, the chief financial officer (CFO) at Unum, noted during the Unum call that his company adjusted for the effects of low rates by announcing a 0.25-percent-point cut in the discount rate it uses to price new LTD claims. A cut of that size can take a $3 million bite out of Unum’s quarterly earnings and a 2% increase in LTD prices, he said.

Because of the lingering low rates and a modest increase in claims incidence, Unum has been asking for LTD increases in the “mid single digits this year,” and it expects increases to be in the “mid to high single digits” in 2013, McKenney said.

“Putting money to work today is quite difficult, especially at the short end of the curve,” McKenney said.

McKenney said Unum has been trying to increase yields by making more use of commercial mortgages and private placements.

Randal Freitag, the CFO at Lincoln, gave similar numbers during his company’s call. He said a 0.25-percentage-point cut in the discount rate assumption would translate into a 2% to 3% increase in group insurance prices and a $2 million to $3 million change in overall company income.


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