Unum Group quarterly report, Q1 FY2021

Business Context and Reporting Period

Unum Group is an insurance provider operating primarily in the United States, United Kingdom, and Poland. Its principal products include disability, life, accident, critical illness, dental, vision, and related workplace benefits. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020, and the balance sheet is compared with December 31, 2020.

Key Financial Metrics

Metric	Q1 2021	Q1 2020	Change
Total revenue	$3,072.0 million	$2,871.1 million	7.0% increase
Premium income	$2,378.3 million	$2,371.4 million	0.3% increase
Net investment income	$548.7 million	$585.0 million	6.2% decrease
Net realized investment gain (loss)	$84.6 million	$(144.0) million	Improved by $228.6 million
Income before tax	$198.8 million	$202.1 million	1.6% decrease
Net income	$153.0 million	$161.0 million	5.0% decrease
Diluted EPS	$0.75	$0.79	Decrease
Adjusted operating income	$273.5 million	$346.1 million	21.0% decrease
After-tax adjusted operating income	$212.0 million	$274.1 million	22.6% decrease

Calculated net income margin was approximately 5.0% of revenue, compared with approximately 5.6% in the prior-year quarter. Calculated adjusted operating income margin was approximately 9.2% of adjusted operating revenue, compared with approximately 11.5% in Q1 2020.

Total assets were $69.3 billion at March 31, 2021, down from $70.6 billion at year-end 2020.
Stockholders’ equity was $10.6 billion, compared with $10.9 billion at December 31, 2020. Accumulated other comprehensive income declined from $374.2 million to a $24.9 million accumulated loss, primarily because of lower unrealized gains on fixed maturity securities.
Fixed maturity securities were $42.1 billion at fair value, with $5.5 billion of net unrealized gains. The portfolio was 84.4% investment grade and 15.6% below investment grade based on fair value.
Long-term debt was $3.35 billion. The filing states that there are no significant debt maturities until 2024.
Operating cash flow was $(162.0) million, compared with $219.9 million provided in Q1 2020. The 2021 outflow included $456.8 million paid to the reinsurer in connection with the Closed Block transaction.
Investing activities provided $588.6 million, financing activities used $61.8 million, and cash and bank deposits increased by $364.8 million to $561.8 million.
Holding company liquidity was $1.664 billion. The company had $302.2 million of FHLB borrowings, approximately $939 million of additional FHLB borrowing capacity, and $600 million of unsecured revolving credit capacity with no borrowings outstanding.
The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 370%.
The common dividend was $0.285 per share, and $58.4 million was paid in dividends during the quarter. No share repurchases occurred.

Material Changes Versus the Prior Comparable Period

Reported revenue benefited from the change from a $144.0 million realized investment loss in Q1 2020 to an $84.6 million realized investment gain in Q1 2021. The 2021 gain included $67.6 million from investment transfers associated with the Closed Block individual disability reinsurance transaction.
Underlying profitability weakened. After-tax adjusted operating income fell to $212.0 million from $274.1 million, primarily because of unfavorable benefits experience, particularly in U.S. life products, and lower net investment income.
Unum US adjusted operating income fell 55.8% to $115.7 million. Its benefit ratio increased to 74.3% from 64.4%, and sales declined 10.3%.
Unum International adjusted operating income increased 36.1% to $26.4 million, primarily because of favorable benefits experience and lower operating expenses.
Colonial Life adjusted operating income declined 9.6% to $73.3 million, with its benefit ratio increasing to 55.4% from 52.4%.
Closed Block adjusted operating income increased to $97.0 million from $29.7 million, but reported results included significant reinsurance-related charges and amortization.
Net investment income declined 6.2%, reflecting lower yields, although private equity partnership income increased and helped offset some pressure.
Gross unrealized gains on fixed maturity securities declined from $7.6 billion at year-end 2020 to $5.5 billion at March 31, 2021, primarily due to higher U.S. Treasury rates.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Closed Block Individual Disability Reinsurance

On March 31, 2021, Unum completed the second phase of its reinsurance transaction with Commonwealth Annuity and Life Insurance Company. The ceding companies transferred $767.0 million of assets and released approximately $200 million of capital during Q1 2021, in addition to $400 million released in December 2020. The transaction produced a $71.7 million pretax net loss, or $56.7 million after tax, excluding the separately reported realized investment gain.

Realized investment gain related to the transaction: $67.6 million pretax.
Reserve and transaction-cost impact: $139.3 million pretax reduction to adjusted operating income.
Cost of reinsurance amortization: $20.0 million pretax in Q1 2021.
Management expects 2021 cost-of-reinsurance amortization of approximately $75 million to $85 million, declining over an estimated 25-year runoff period.
Reinsurance recoverable recognized for policies already on claim: $990.0 million.

Operating Outlook

Management expects top-line growth to remain challenging, particularly in the first half of 2021, because of COVID-19-related sales disruption, unemployment, and customer uncertainty. Claims volatility may remain elevated, particularly in short-term disability and group and voluntary life products. The low-interest-rate environment is expected to continue pressuring investment yields and profit margins. No specific consolidated earnings guidance was provided.

For Closed Block long-term care, management expects continued premium-rate increases but declining overall premium income as the block runs off. The long-term care interest-adjusted loss ratio is expected to be approximately 85% to 90% over the long term, subject to quarterly volatility. Reserve adequacy remains sensitive to mortality, morbidity, claim resolutions, interest rates, rate increases, benefit elections, and persistency.

Principal Risks and Contingencies

COVID-19 may affect mortality, morbidity, claim incidence, sales, persistency, premium collections, operations, and liquidity.
Sustained low interest rates may reduce investment income and affect insurance liability discount rates.
Investment portfolio volatility, credit downgrades, defaults, impairments, and below-investment-grade exposure may reduce earnings and statutory capital.
Long-term care reserves remain subject to significant assumption risk. The Maine Bureau of Insurance concluded that Unum America’s statutory long-term care reserves were deficient by $2.1 billion as of December 31, 2018; the company received permission to phase in additional statutory reserves over seven years through 2026. The 2020 phase-in was $229 million, and the 2021 amount will be recorded in Q4 2021.
Unum is involved in ordinary-course claim litigation and regulatory matters. A securities class-action appeal remained pending before the Sixth Circuit; no reserve was established because the company could not estimate a reasonably possible loss range.
The company has $641.0 million of unfunded private equity partnership commitments, $106.5 million of private-placement investment commitments, and $18.0 million of commercial mortgage loan commitments.
Fitch revised its outlook to stable from negative during the quarter. AM Best and Moody’s outlooks remained negative, while S&P’s outlook remained stable.

Most Important Facts for Investors to Verify

Whether COVID-19-related mortality and disability claims remain elevated in subsequent quarters, especially in U.S. life and disability products.
The pace and amount of Closed Block reinsurance cost amortization, capital releases, and any further effects on reported earnings and cash flow.
The adequacy of long-term care statutory and GAAP reserves, including the 2021 statutory reserve phase-in.
Trends in net investment income, interest rates, unrealized investment gains, credit losses, and private equity partnership valuations.
Sales, persistency, premium income, and benefit ratios across Unum US and Colonial Life, where Q1 operating performance deteriorated.
Liquidity availability, FHLB borrowing capacity, credit facility covenants, debt maturities, and the ability of insurance subsidiaries to upstream dividends.
The status and potential exposure from pending litigation, regulatory investigations, and the securities class-action appeal.
The impact of adopting the long-duration insurance accounting standard, scheduled for January 1, 2023, which management expects may materially affect financial position, results of operations, and disclosures.