Unum Group 2020 Form 10-K Summary
Business context and reporting period
Unum Group provides workplace financial protection benefits, including disability, life, accident, critical illness, dental and vision insurance, and related services in the United States, United Kingdom, and Poland. Principal operating segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. The filing covers the fiscal year ended December 31, 2020, with particular material activity in the fourth quarter.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Premium income | $9,378.1 million | $9,365.6 million | 0.1% |
| Total revenue | $13,162.1 million | $11,998.9 million | 9.7% |
| Net investment income | $2,360.7 million | $2,435.3 million | (3.1%) |
| Net realized investment gain | $1,199.1 million | $(23.2) million | Primarily reinsurance-related |
| Income before tax | $964.0 million | $1,382.1 million | (30.3%) |
| Net income | $793.0 million | $1,100.3 million | (27.9%) |
| Diluted EPS | $3.89 | $5.24 | (25.8%) |
| Adjusted operating income | $1,278.0 million | $1,432.6 million | (10.8%) |
| After-tax adjusted operating income | $1,005.4 million | $1,140.6 million | (11.8%) |
| Operating cash flow | $597.5 million | $1,741.6 million | Down materially |
| Total assets | $70,625.8 million | $67,013.4 million | 5.4% |
| Long-term debt | $3,345.7 million | $2,926.9 million | 14.3% |
| Stockholders’ equity | $10,871.0 million | $9,965.0 million | 9.1% |
The consolidated benefit ratio increased to 95.7% from 80.0%; excluding the Closed Block reinsurance impacts and the 2020 long-term-care and group-pension reserve increases, the ratio was 80.2%. The earned book yield declined to 4.75% from 5.00%. The risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 365% on a weighted-average basis.
Segment performance and changes versus 2019
- Unum US: Adjusted operating income declined 19.9% to $825.4 million. Premium income was essentially flat at $6,018.9 million, while the benefit ratio worsened to 68.8% from 66.9%. Sales fell 10.0%, and lower persistency and COVID-19-related group-life claims weighed on results.
- Unum International: Adjusted operating income declined 29.0% to $76.6 million. Premium income increased 3.5% to $652.8 million, but the Unum UK benefit ratio increased to 78.9% from 76.7% due partly to lower claim resolutions and higher group-life claims.
- Colonial Life: Adjusted operating income declined 2.6% to $335.4 million. Premium income increased 1.6% to $1,712.0 million, but the benefit ratio increased to 52.9% from 51.3%. Sales declined 27.0% amid pandemic-related disruption.
- Closed Block: Reported a pretax operating loss of $1,235.7 million, primarily reflecting the individual-disability reinsurance transaction and reserve increases. Excluding those items, adjusted operating income increased to $241.4 million from $137.7 million.
- Corporate: Adjusted operating loss increased to $200.8 million from $188.6 million, reflecting lower investment income and higher expenses.
Material fourth-quarter and unusual items
- Unum ceded approximately 75% of its Closed Block individual-disability business to Commonwealth Annuity and Life Insurance Company, effective July 1, 2020. The first phase involved $6.1 billion of reinsurance recoverables, $6.7 billion of transferred assets, and an approximately $438 million ceding commission.
- The transaction generated a $1,302.3 million pretax realized investment gain, substantially offset by a $1,284.5 million pretax increase in benefits and reserves from recognizing previously unrealized investment gains and losses. The net after-tax benefit attributed to the transaction was $32.0 million, or $0.16 per diluted share.
- Unum recorded a $151.5 million pretax long-term-care reserve increase and a $17.5 million pretax group-pension reserve increase in the fourth quarter.
- Other 2020 items included $23.3 million of organizational-design costs and a $12.7 million impairment of a right-of-use asset.
- The company expects the second phase of the individual-disability reinsurance transaction to close in the first quarter of 2021, subject to consents and regulatory approvals. Management expected approximately $250 million of additional capital release if completed.
Liquidity, debt, capital, and cash flow
- Holding-company liquidity was approximately $1.512 billion at December 31, 2020.
- FHLB advances totaled $312.2 million, with approximately $1.093 billion of additional capacity. Two unsecured revolving credit facilities provided aggregate capacity of $600 million, with no borrowings outstanding at year-end.
- Unum issued $500 million of 4.50% senior notes due 2025. Its $400 million of 5.625% senior notes matured in September 2020. Management stated that no significant debt maturities were expected until 2024.
- Cash dividends paid to common shareholders totaled $231.9 million, or $1.14 per share. No common shares were repurchased in 2020, and the prior repurchase authorization expired without replacement.
- Approximately $974 million was available during 2021 for dividends from traditional U.S. insurance subsidiaries without prior regulatory approval; approximately £170 million was considered distributable from Unum Limited, subject to local requirements.
Guidance, outlook, and principal risks
Management expected 2021 top-line growth to remain challenging, particularly early in the year, with continued claims volatility, lower sales activity, pressure on investment yields, and possible volatility in partnership investment income. The company planned continued investment in digital capabilities, enrollment, underwriting, claims processing, leave management, and adjacent workplace-benefit markets.
The most significant risks include COVID-19 effects on mortality, morbidity, claims processing, sales, persistency, premium collection, liquidity, and investments; sustained low interest rates; long-term-care reserve adequacy; unfavorable disability and life claims experience; investment credit losses and downgrades; reinsurance counterparty performance; regulatory capital requirements; rating downgrades; cybersecurity and operational resilience; litigation; and restrictions on subsidiary dividends.
The Maine Bureau of Insurance concluded that Unum America’s long-term-care statutory reserves were deficient by $2.1 billion as of December 31, 2018. The regulator permitted the additional statutory reserves to be phased in over seven years; the 2020 phase-in was approximately $229 million. This conclusion did not affect GAAP long-term-care reserves or GAAP earnings, but it is relevant to statutory capital and future liquidity.
Important facts for investors to verify
- Whether the second phase of the Closed Block individual-disability reinsurance transaction closed and whether the expected additional capital release was realized.
- Actual 2021 long-term-care claims, mortality, premium-rate approvals, and reserve adequacy compared with management’s assumptions and sensitivities.
- COVID-19 effects on group-life, disability, sales, persistency, claims resolution, and premium receivable collectability.
- Changes in statutory capital, RBC ratios, rating-agency outlooks, and dividend capacity at insurance subsidiaries.
- Development of investment credit losses, below-investment-grade exposure, commercial real-estate risk, and private-equity partnership valuations.
- Debt refinancing needs beginning in 2024, covenant compliance, and the availability of holding-company liquidity.
- Pending securities-litigation appeal and other regulatory or litigation contingencies; the filing does not provide a clear estimate of reasonably possible losses for these matters.