Business Context and Reporting Period
Unum Group filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company provides workplace financial protection products, including disability, life, accident, critical illness, dental, and vision coverage, primarily in the United States and United Kingdom. Principal operating segments are Unum US, Unum UK, and Colonial Life, with Closed Block and Corporate segments.
Financial Highlights
| Metric | Q3 2017 | Q3 2016 | Nine Months 2017 | Nine Months 2016 |
|---|---|---|---|---|
| Total revenue | $2,819.1 million | $2,763.3 million | $8,447.6 million | $8,250.0 million |
| Premium income | $2,153.6 million | $2,089.4 million | $6,438.7 million | $6,258.5 million |
| Income before tax | $366.8 million | $332.1 million | $1,058.7 million | $976.5 million |
| Net income | $252.3 million | $236.0 million | $727.3 million | $683.4 million |
| Diluted EPS | $1.12 | $1.01 | $3.19 | $2.88 |
| After-tax operating income | $246.1 million | $228.7 million | $722.6 million | $685.9 million |
- Total revenue increased 2.0% in the quarter and 2.4% year to date; premium income increased 3.1% and 2.9%, respectively.
- Net income increased 6.9% in the quarter and 6.4% year to date. Diluted EPS benefited from lower share count following repurchases.
- Operating income before tax was $357.0 million in the quarter and $1,050.4 million year to date. The year-to-date figure excludes a $20.6 million pretax guaranty fund assessment.
- Net investment income declined 0.4% in the quarter and 0.5% year to date, reflecting lower portfolio yields partly offset by higher invested assets and miscellaneous income.
- Operating cash flow was $866.0 million for the first nine months, compared with $754.9 million in the prior-year period.
- Net cash used in investing activities was $377.9 million, while net cash used in financing activities was $518.4 million. Cash and bank deposits ended at $70.1 million, down from $100.4 million at December 31, 2016.
- Total assets were $63.8 billion and stockholders’ equity was $9.4 billion at September 30, 2017.
- Debt included $199.9 million of short-term debt and $2.754 billion of long-term debt. No credit facility borrowings were outstanding; letters of credit totaled $2.1 million.
- Management reported an approximately 410% weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries, above its long-range target.
Material Changes Versus Prior Comparable Period
- Unum US operating income increased 11.9% in the quarter and 10.6% year to date, supported by premium growth and favorable benefits experience. Its benefit ratio improved to 67.7% from 69.4% in the quarter and 69.3% year to date.
- Unum UK operating income declined 6.0% in local currency in the quarter and 9.2% year to date, primarily due to less favorable benefits experience. Its benefit ratio increased to 74.9% from 71.8% in the quarter and to 74.0% from 70.0% year to date.
- Colonial Life operating income increased 3.4% in the quarter and 5.0% year to date, primarily from premium growth. Its benefit ratio was broadly stable.
- Closed Block operating income declined 7.0% in the quarter and 4.3% year to date as individual disability premium income and investment yields declined.
- The 2017 year-to-date comparison benefited from no other-than-temporary impairment losses on fixed maturity securities, versus $30.5 million in such losses in the 2016 period.
- The company repurchased 6.3 million shares for approximately $300 million during the first nine months and paid $144.1 million in dividends, compared with $136.2 million in the prior-year period.
- Accumulated other comprehensive income improved to $124.3 million from a $51.0 million loss at December 31, 2016, primarily due to higher unrealized gains on fixed maturity securities and foreign currency translation effects.
- Fixed maturity securities totaled $45.4 billion at fair value, including $5.6 billion of net unrealized gains. Gross unrealized losses totaled $110.6 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected continued premium growth in core businesses, generally stable persistency and benefits experience, expense discipline, and continued operating efficiency improvements for the remainder of 2017.
- Management expected Unum US operating income growth to remain strong and anticipated continued improvement in its group disability benefit ratio.
- Low interest rates were expected to continue pressuring investment yields, profit margins, and potentially reserve adequacy. Management noted significant potential benefit from rising interest rates and an improving economy.
- Unum UK remained exposed to economic uncertainty and potential growth dampening related to the United Kingdom’s withdrawal from the European Union, as well as foreign exchange and solvency-ratio volatility.
- Long-tail Closed Block products, particularly long-term care and individual disability, remain sensitive to mortality, morbidity, interest rates, premium rate increases, persistency, claim resolution rates, and reserve assumptions. The company continues to seek long-term-care rate increases from regulators.
- The company recorded a $20.6 million pretax, or $13.4 million after-tax, guaranty fund assessment related to an unaffiliated insurer declared insolvent.
- Pending litigation, unclaimed-property investigations, regulatory matters, and claims-handling disputes could adversely affect results or cash flows in a particular period. Management stated that the ultimate outcome of pending matters is not fully predictable but does not currently expect a material adverse effect on financial position.
- Other key risks include sustained low interest rates, adverse claims experience, investment losses or defaults, reinsurance counterparty risk, cyberattacks, regulatory or tax changes, rating downgrades, foreign currency movements, and insufficient liquidity.
- Accounting standards scheduled for adoption after the reporting date were generally expected to have no material effect, although the company had not determined the impact of leases, derivatives, callable debt premium amortization, or expected credit-loss requirements.
Important Facts for Investors to Verify
- Reconcile GAAP net income with after-tax operating income and assess the recurring nature of realized investment gains and the guaranty fund assessment.
- Monitor Unum UK claims experience, sales trends, currency exposure, and the financial effects of Brexit-related economic uncertainty.
- Evaluate reserve adequacy for long-term disability and long-term care products under changing interest-rate, mortality, morbidity, lapse, and claim-resolution assumptions.
- Review the sustainability of investment yields and the credit quality, unrealized losses, and liquidity of the $45.4 billion fixed maturity securities portfolio.
- Assess capital deployment against liquidity needs, including the remaining approximately $612.8 million share-repurchase authorization, dividends, debt maturities, and subsidiary capital requirements.
- Track pending litigation, unclaimed-property proceedings, guaranty-fund assessments, and other regulatory contingencies for changes in exposure or reserves.