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Unum Group (UNM) reported first-quarter operating income of 73 cents per share, missing the Zacks Consensus Estimate by 3 cents. Results compare favorably with 70 cents earned in the prior-year period. Operating income was $213.2 million in the quarter, down 2.7% from $219.1 million in first-quarter 2011.

The company experienced soft results at Unum UK and the Closed Block. However, solid performances at Unum US and Colonial Life compensated for the weak performances and led to the year-over-year improvement. Share repurchases also aided the bottom line.

The quarter had net realized investment gain of $8.3 million, offset by non-operating retirement-related loss of $7.6 million, thereby having no material impact on the bottom line.

Total revenue in the quarter was $2.61 billion, up 1.9% year over year. The top line surpassed the Zacks Consensus Estimate of $2.59 billion.

Segment Update

Unum US Segment: Segment premium in the quarter was $1.112 billion, up 4% year over year.

Operating income increased 5.8% year over year to $205.9 million in the quarter.

Unum UK Segment: Premium increased 2.2% year over year to $170.7 million in the fourth quarter of 2011. In local currency, premium increased 4.2% year over year to £108.6 million.

Segment operating income was $38.8 million in the quarter, down 20.7% year over year.

The benefit ratio was 72.4% in first-quarter 2012, up from 69.3% in the prior-year quarter. The higher benefit ratio resulted from unfavorable risk experience in the group life line of business.

Colonial Life Segment: Premium in the quarter increased 5.7% year over year to $296.3 million.

Operating income increased 4% year over year to $69.7 million in the reported quarter.

The benefit ratio was 52.1% compared with 51.4% in the year-ago period. The increase was a result of higher risk experience in the accident, sickness and disability line.

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 decreased 7.5% year over year while premium income for the long-term care line of business increased 3.1% year over year.

The segment reported an operating income of $15.4 million, down 51.7% year over year. The decline was attributable to lower income from the long-term care line of business, partially offset by higher income from the individual disability – closed block line of business.

Corporate and Other Segment: Operating loss of $20.6 million in the reported quarter was narrower than the loss of $21.8 million incurred a year ago.

Financial Update

Unum Group ended the quarter with a debt of $1.94 billion, flat with the end level of 2011.

The debt-to-capital ratio was 23.4%, up 100 basis points from 22.4% as of December 31, 2011.

Book value as of December 31, 2011, was $28.62 per share, up 3.8% from $27.58 as of December 31, 2010.

Dividends

The Board of Directors approved a 23.8% hike in the quarterly dividend. The increased dividend of 13 cents will be paid in the third quarter of 2012.

Share Repurchase

Unum Group spent $175.2 million to buy back 7.5 million shares in the quarter. As of March 31, 2012, the company is left with $349.7 million remaining under its $1.0 billion share repurchase authorization.

Business Restructuring

Following the strategic review of the long-term care business, Unum Group discontinued new sales of group long-term care contracts during the first quarter of 2012 and reclassified the long-term care line of business to the Closed Block segment from the Unum US unit.

Looking at 2012

Unum Group expects operating income per share to grow in the lower range of 6% to 12%.

Peer Comparison

AFLAC Inc's (AFL), which competes with Unum, reported first-quarter 2012 operating earnings per share of $1.74 outpacing both the Zacks Consensus Estimate of $1.65 and the year-ago quarter’s earnings of $1.62.

A stronger yen/dollar exchange rate and higher investment income related to portfolio de-risking boosted the operating earnings per share by 4 cents and 5 cents, respectively.

Total revenue for the reported quarter spiked up 21.9% year over year to $6.24 billion, slivering past the Zacks Consensus Estimate of $6.2 billion. Despite the ongoing derisking activities, total revenue benefited from the strengthening of yen against the dollar along with consistent improvement in the U.S. and better-than-expected performance in Japan.

Lincoln National Corp. (LNC), competing with Unum, is scheduled to release its first quarter results today after the bell while yet another peer Cigna Corp. (CI) is scheduled to release its first quarter results on May 3 before the bell.

Zacks Rank

We maintain our long-term Neutral recommendation on Unum Group. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates slight downward pressure on the shares over the near term.

 
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