Unum Group 2018 Q1 SEC Filing Summary
Business context and reporting period
Unum Group is a provider of workplace financial protection benefits in the United States and United Kingdom, including disability, life, accident, critical illness, dental and vision products. Principal operating segments are Unum US, Unum UK and Colonial Life; Closed Block and Corporate are additional segments. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparison to the three months ended March 31, 2017.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2,899.6 million | $2,806.5 million | 3.3% increase |
| Premium income | $2,250.0 million | $2,142.9 million | 5.0% increase |
| Net investment income | $602.3 million | $602.4 million | Essentially unchanged |
| Income before income tax | $341.1 million | $330.3 million | 3.3% increase |
| Net income | $273.5 million | $229.9 million | 19.0% increase |
| Diluted EPS | $1.23 | $1.00 | 23.0% increase |
| After-tax adjusted operating income | $275.1 million | $236.1 million | 16.5% increase |
| After-tax adjusted operating EPS | $1.24 | $1.02 | Increase |
| Operating cash flow | $299.9 million | $310.2 million | Decrease |
The effective income tax rate declined to 19.9% from 30.4%, primarily because of the Tax Cuts and Jobs Act, which reduced the U.S. federal corporate tax rate to 21%. Benefits and expenses increased 3.3% to $2,558.5 million. The filing does not present a consolidated operating margin as a primary GAAP metric; income before tax was approximately 11.8% of total revenue in Q1 2018 based on reported figures.
Segment adjusted operating income was $243.9 million for Unum US, $29.8 million for Unum UK, $81.0 million for Colonial Life, $28.9 million for Closed Block, and a $40.3 million loss for Corporate. Unum US benefit ratio improved to 66.8% from 67.9%; Unum UK increased to 71.9% from 71.4%; Colonial Life increased to 51.6% from 50.8%.
Balance sheet, debt and liquidity
- Total assets were $63.0 billion at March 31, 2018, versus $64.0 billion at December 31, 2017.
- Total investments were $51.7 billion, including $44.5 billion of fixed maturity securities and $2.2 billion of commercial mortgage loans.
- Stockholders’ equity was $9.5 billion, compared with $9.6 billion at year-end 2017.
- Short-term debt was $200.0 million and long-term debt was $2.72 billion. The short-term debt consisted of senior unsecured notes due July 2018.
- Cash and bank deposits were $308.9 million, compared with $77.4 million at December 31, 2017. Unum Group and intermediate holding companies held $887 million of cash, short-term investments and fixed maturity securities.
- Operating cash flow was $299.9 million. Investing activities provided $119.3 million, while financing activities used $187.7 million, including $105.7 million for share repurchases and $52.4 million for dividends.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 380%. The company stated that insurance subsidiary capital adequacy ratios exceeded levels requiring regulatory action.
- The company had $350.0 million of Federal Home Loan Bank advances, $2.1 million of letters of credit and no borrowed amounts outstanding under its credit facility.
Material changes versus the prior comparable period
- Net income benefited from higher premium income, favorable overall benefits experience and a substantially lower effective tax rate.
- Q1 2017 included a $20.6 million pretax, $13.4 million after-tax guaranty fund assessment related to an insolvent unaffiliated insurer; no comparable charge was recorded in Q1 2018.
- Net realized investment results shifted from a $11.0 million gain to a $2.2 million loss. Q1 2018 included a $1.0 million other-than-temporary impairment loss and a $1.7 million loss on an embedded derivative, compared with an $8.6 million gain on that derivative in Q1 2017.
- Other comprehensive income declined to a $192.4 million loss from income of $51.4 million, primarily reflecting lower unrealized gains on securities as interest rates and credit spreads increased. The net unrealized gain on fixed maturity securities declined to $4.3 billion from $5.7 billion at year-end 2017.
- Unum US adjusted operating income increased 2.0%, Colonial Life declined 1.7%, and Closed Block declined 8.5%. Unum UK operating income was essentially unchanged in local currency.
- Sales increased 4.2% at Unum US and 7.6% at Colonial Life, but declined 22.6% in local currency at Unum UK.
- The company repurchased 1.9 million shares for approximately $100 million. Approximately $412.8 million remained under the authorized repurchase program at March 31, 2018.
- The company adopted several accounting updates, including ASC 230, ASC 606, ASC 715, ASC 740, ASC 815 and ASC 825. The filing states that these changes generally had no effect on results of operations, although ASC 825 produced beginning-of-year equity and investment reclassifications.
Guidance, outlook, risks and unusual items
- Management expects continued premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline and improving operational efficiency during 2018.
- Management expects a 2018 effective tax rate of approximately 19% to 20%.
- Low interest rates continue to pressure investment yields, profit margins and reserve adequacy. The company plans to gradually increase alternative-asset allocations, particularly in long-term care, which may increase investment-income volatility.
- Closed Block long-term care remains a significant watch area. Higher claims incidence, persistency, mortality, morbidity, interest rates, rate increases and claim-resolution experience could affect reserve adequacy and future earnings.
- Unum UK faces economic and claims uncertainty related to the United Kingdom’s planned withdrawal from the European Union, including possible pressure from lower growth, wage inflation, interest rates and currency movements.
- In January 2018, the company agreed to acquire Pramerica Zycie TUiR SA, a Polish financial protection provider. Closing was expected by year-end 2018, subject to customary approvals and conditions; management did not expect a material 2018 impact or a change to its share repurchase and dividend strategy.
- Litigation, regulatory inquiries and unclaimed-property matters remain contingencies. The company believes current reserves and indemnification should prevent a material adverse effect on financial position, but acknowledges that unfavorable outcomes could materially affect results or cash flows in a particular period.
- Other key risks include investment credit losses, prolonged low rates, insurance reserve volatility, reinsurance counterparty performance, financial-strength ratings, cybersecurity, regulatory or tax changes, derivatives counterparty risk and limited liquidity in certain investments.
Most important facts for investors to verify
- Whether premium growth and segment operating income remain consistent with management’s 2018 outlook, particularly at Unum US and Colonial Life.
- Whether long-term care claims experience, rate increases and reserve assumptions support the adequacy of Closed Block reserves.
- The effect of interest rates and credit spreads on investment income, unrealized gains, statutory capital and RBC ratios.
- The July 2018 maturity and refinancing or repayment of the $200.0 million short-term debt balance.
- Progress and final terms of the Pramerica acquisition, including regulatory approval and closing.
- Whether the 19% to 20% effective tax-rate outlook is achieved and how future NAIC RBC changes affect excess capital.
- Developments in litigation, unclaimed-property investigations, guaranty-fund obligations and other regulatory contingencies.
- The sustainability of share repurchases and dividends relative to holding-company liquidity and insurance-subsidiary dividend capacity.