AFL AFLAC Inc

Unum Group (UNM) reported third-quarter operating income of 74 cents per share, lagging the Zacks Consensus Estimate by a penny. Results compare favorably with 68 cents earned in prior-year period. Operating income was $221.5 million in the quarter, up 0.7% from $219.9 million in third-quarter 2010.

Strong results at Unum US and Individual Disability – Closed Block attributed to the better-than-expected results. Share buyback also aided the bottom line.                                                                                         

Including an after-tax investment loss of $15.9 million or 5 cents, the company reported net income of $205.6 million or 69 cents per share, compared with $220.8 million or 68 cents in the third quarter of 2010. The prior-year quarter’s registered net realized after-tax gains were $0.9 million.

Total revenue in the quarter under review was $2.57 billion, up 1.7% year over year. Top line was in line with the Zacks Consensus Estimate.

Segment Update

Unum US Segment: Segment premium in the quarter was $1.23 billion, up 1.3% year over year.

Operating income increased 7.2% year over year to $219.5 million in the third quarter of 2011.

Unum UK Segment: Premium increased 8.7% year over year to $175.5 million in the third quarter of 2011. In local currency, premium increased 4.8% year over year to £109.1 million.

Segment operating income was $34.9 million in the third quarter of 2011, down 26.1% year over year.

The benefit ratio was 78.8% in third-quarter 2011, up from 66.9% in the prior-year quarter. The higher benefit ratio resulted from unfavorable risk experience in group long-term disability due primarily to an increase in the average size and severity of new claims.

Colonial Life Segment: Premium in the quarter increased 5.3% year over year to $283.7 million.

Operating income decreased 5.6% year over year to $70.3 million in the reported quarter.

The benefit ratio was 52.6% compared with 49.9% in the year-ago period. The increase was a result of less favorable risk results in the accident, sickness, and disability product line and in cancer and critical illness line, partially offset by favorable risk results in the life product line.

Individual Disability – Closed Block Segment: Premium decreased 5.8% year over year to $196.4 million in third-quarter 2011.

Segment operating income reported an increase of 43% to $14 million largely driven by lower operating expenses and a decline in the interest adjusted loss ratio.

Corporate and Other Segment:Operating loss of $21.5 million in the reported quarter was wider than the loss of $10.8 million a year ago.

Financial Update

Unum Group ended the quarter with a debt of $2.93 billion, up from $2.73 billion as of June 30, 2011.

The debt-to-capital ratio was 21.2%, up 40 basis points from 20.8% at June 30, 2011.

Book value as of September 30, 2011, was $32.36 per share, up 8.1% from $29.94 as of June 30, 2011.

Share Repurchase

Unum Group spent $250.2 million to buy back 11.1 million shares during the third quarter 2011. As of September 30, 2011 the company had approximately $254.7 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's (AFL) third quarter 2011 operating earnings per share of $1.66 came in comfortably higher than the Zacks Consensus Estimate of $1.60 and $1.45 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 9 cents.

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, low interest rates are expected to impact investment income and reserving practices coupled with soft employment growth keep us on the sideline.

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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