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Unum Group (UNM) reported first-quarter operating income of 69 cents per share, a penny lower than the Zacks Consensus Estimate of 70 cents. Results compare favorably with 67 cents earned in the prior-year period. Operating income was $215.7 million in the quarter, down 3.5% from $223.5 million in first-quarter 2010.

Soft performance at Unum UK and Individual Disability – Closed Block contributed to the lower-than-expected results.

Including realized after-tax investment gains of $9.7 million or 3 cents per share, the company reported net income of $225.4 million or 72 cents per share, compared with $229.8 million or 69 cents per share in the first quarter of 2010. The prior-year quarter’s registered net realized after-tax gains were $16.5 million or 5 cents per share and tax charge was $10.2 million or 3 cents per share.

Total revenue in the quarter under review was $2.56 billion, inching up 0.06% year over year. Results exceeded the Zacks Consensus estimate of $2.55 billion.

Segment Update

Unum US Segment: Segment premium in the quarter was $1.22 billion, up 0.3% year over year.

Operating income increased 5% year over year to $209.1 million in the first quarter of 2011.

Unum UK Segment: Premium increased 0.8% year over year to $167.1 million in the first quarter of 2011. In local currency, premium decreased 1.8% year over year to £104.2 million.

Segment operating income was $48.7 million in the first quarter of 2011, down 19.6% year over year.

The benefit ratio was 69.3% in first-quarter 2011, up from 63.1% in the prior-year quarter. The higher benefit ratio resulted from lower premium income and a lower level of claim resolutions in group long-term disability, partially offset by favorable group long-term disability claim incidence.

Colonial Life Segment: Premium in the quarter increased 5.8% year over year to $280.4 million.

Operating income declined 5.5% year over year to $69 million in the reported quarter.

The benefit ratio was 51.4% compared with 47.1% in the year-ago period. The increase was a result of less favorable risk results in the accident, sickness, and disability product line and life product line.

Individual Disability – Closed Block Segment: Premium decreased 5.5% year over year to $202.3 million in first-quarter 2011.

Segment operating income reported a decrease of 15% to $9.9 million largely driven by lower premium income and net investment income.

Corporate and Other Segment: Operating loss of $21.7 million in the reported quarter widened from a loss of $8.9 million a year ago.

Financial Update

Unum Group ended the quarter with a debt of $2.61 billion, up from $2.14 billion from 2010 end.

The debt-to-capital ratio was 20.9%, down 190 basis points from 22.8% at 2010 end.

Book value as of March 31, 2011, was $29.08 per share, up 10.2% from $26.38 as of December 31, 2010.

Share Repurchase

Unum Group spent $223.6 million to buy back 8.6 million shares during the first quarter 2011. As of March 31, 2011, the company had approximately $920.7 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 first quarter operating earnings of $1.63 per share, which came in modestly higher than the Zacks Consensus Estimate of $1.52 and $1.41 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 10 cents.

Lincoln National Corp. (LNC), another competitor of Unum, reported first quarter operating earnings per share of $1.08, substantially ahead of the Zacks Consensus Estimate of 92 cents and 83 cents recorded in the prior-year quarter.

Our Take

We expect solid performance across segments, strong capital position, aggressive share repurchases and continuous dividend payments to position the company for strong results going forward.

However, unemployment and sluggish economic recovery will delay new business, exerting pressure on premium growth. Also, low interest rates are expected to exert downward pressure on investment income.

We maintain our long-term “Neutral” recommendation on Unum Group. The quantitative Zacks #3 Rank (short-term Neutral rating) for the company indicates no clear directional pressure on the shares over the near term.

 
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