Unum Group 10-Q Summary
Business Context and Reporting Period
Unum Group provides workplace financial protection products, including disability, life, accident, critical illness, dental and vision insurance, primarily in the United States, United Kingdom and Poland. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Principal operating segments are Unum US, Unum International and Colonial Life; Closed Block and Corporate are additional reporting segments.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Total revenue | $2,993.0 million | $3,021.2 million | $6,065.0 million | $5,892.3 million |
| Premium income | $2,374.4 million | $2,368.7 million | $4,752.7 million | $4,740.1 million |
| Net investment income | $563.5 million | $569.0 million | $1,112.2 million | $1,154.0 million |
| Income before tax | $262.6 million | $337.6 million | $461.4 million | $539.7 million |
| Net income | $182.9 million | $265.5 million | $335.9 million | $426.5 million |
| Diluted EPS | $0.89 | $1.30 | $1.64 | $2.10 |
| Net margin | Approximately 6.1% | Approximately 8.8% | Approximately 5.5% | Approximately 7.2% |
| Adjusted operating income | $362.6 million | $316.5 million | $636.1 million | $662.6 million |
Adjusted operating income excludes realized investment gains and losses and selected unusual items. After-tax adjusted operating income was $286.2 million, or $1.39 per diluted share, in the second quarter and $498.2 million, or $2.43 per diluted share, for the first six months.
- Operating cash flow was $544.2 million for the first six months, down from $852.4 million in 2020, including $456.8 million of cash paid to the reinsurer in connection with the Closed Block individual disability transaction.
- Investing activities used $506.7 million, compared with $1,090.7 million used in the prior-year period.
- Financing activities used $111.4 million, compared with $319.8 million provided in 2020. The company paid $116.7 million of common dividends.
- Cash and bank deposits declined to $123.1 million at June 30, 2021, from $197.0 million at December 31, 2020.
- Total assets were $70.8 billion and stockholders’ equity was $10.9 billion at June 30, 2021.
- Long-term debt was $3.44 billion. The company issued $600.0 million of 4.125% senior notes due 2051 and retired $500.0 million of 4.500% senior notes due 2025.
- Holding-company liquidity was $1.717 billion. The company also reported $286.6 million of FHLB borrowings, approximately $906 million of additional FHLB borrowing capacity and no borrowings outstanding under its $500 million revolving credit facility at June 30.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 375%.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income fell 31.1%, while first-half net income fell 21.2%. The principal drivers were the $67.3 million pretax early debt-retirement charge, $19.7 million of reinsurance-cost amortization, the $13.9 million right-of-use asset impairment and a $24.2 million deferred tax expense from the U.K. tax-rate increase.
- Six-month adjusted operating income declined 4.0% to $636.1 million, despite second-quarter adjusted operating income increasing 14.6% to $362.6 million.
- Net investment income declined 1.0% in the quarter and 3.6% year to date, reflecting lower investment yields and reduced assets supporting the ceded Closed Block individual disability business. Private equity partnership income partially offset the pressure.
- Unum US adjusted operating income declined 22.7% in the quarter and 40.2% year to date. Its benefit ratio increased to 71.7% from 68.1% in the quarter and to 73.0% from 66.3% year to date.
- Unum International adjusted operating income increased 64.2% in the quarter and 48.4% year to date, supported by higher investment income, lower expenses and favorable benefits experience.
- Colonial Life adjusted operating income increased 5.4% in the quarter but declined 1.7% year to date. Sales increased 53.7% in the quarter and 17.3% year to date.
- Closed Block adjusted operating income increased to $111.2 million in the quarter and $208.2 million year to date, compared with $36.7 million and $66.4 million, respectively. The results include the effects of the individual disability reinsurance transaction and related amortization.
- The net unrealized gain on fixed maturity securities declined to $6.6 billion from $7.6 billion at December 31, 2020, primarily because of higher U.S. Treasury rates.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year premium income to grow slightly from 2020, but below historical rates, and expects continued claims volatility because of COVID-19 and economic uncertainty.
- Low interest rates are expected to continue pressuring investment yields, profit margins and potentially insurance liability discount rates. Miscellaneous investment income, particularly private-equity partnership valuations, may remain volatile.
- The company completed the second phase of its Closed Block individual disability reinsurance transaction in March 2021. It ceded a substantial portion of the remaining business, transferred $767.0 million of assets, released approximately $200 million of capital and expects approximately $80 million of reinsurance-cost amortization in 2021.
- Closed Block long-term-care results remain sensitive to mortality, morbidity, claim resolutions, persistency, interest rates and approved premium-rate increases. Management expects long-term-care premium income and adjusted operating revenue to decline over time as the block runs off.
- Unum America’s statutory long-term-care reserves were found by the Maine Bureau of Insurance to be deficient by $2.1 billion as of December 31, 2018. The company was permitted to phase in additional statutory reserves over seven years; the 2021 phase-in amount is expected to be calculated and recorded in the fourth quarter. The company states that this does not affect GAAP long-term-care reserves or results.
- COVID-19 remains a risk to sales, persistency, mortality, disability claim incidence, premium collections, investment performance and liquidity. Other disclosed risks include prolonged low rates, credit losses, regulatory changes, litigation, cyberattacks, reinsurance counterparty performance, ratings downgrades and foreign-exchange movements.
- In July 2021, after the reporting date, the company terminated a $100 million unsecured revolving facility and entered into a new five-year £75 million standby letter-of-credit facility. No amounts had been drawn under the new facility at the filing date.
- The company reported no material changes to its previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective as of June 30, 2021.
Investor Verification Checklist
- Verify the sustainability of Unum US benefits experience and the effect of COVID-19-related claims volatility on benefit ratios.
- Assess long-term-care reserve adequacy, the 2021 statutory reserve phase-in and the effect of future premium-rate approvals and claim-resolution experience.
- Reconcile GAAP net income to adjusted operating income, particularly the reinsurance transaction, debt-retirement charge, U.K. tax-rate adjustment and asset impairment.
- Monitor investment yields, private-equity partnership valuations, unrealized investment gains, below-investment-grade exposure and future credit losses.
- Review liquidity after the reinsurance cash payment, debt refinancing, FHLB borrowings and post-quarter credit-facility changes.
- Evaluate reinsurance counterparty collateral and performance, including the long-term obligations under the Commonwealth arrangements.
- Confirm future statutory capital requirements, insurance-subsidiary dividend capacity and the potential effect of ratings or regulatory changes.