Unum Group 2022 Q2 Form 10-Q Summary
Business Context and Reporting Period
Unum Group provides workplace financial protection products, including disability, life, accident, critical illness, dental and vision coverage, primarily in the United States, United Kingdom and Poland. The filing reports unaudited results for the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Operating segments are Unum US, Unum International, Colonial Life, Closed Block and Corporate.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Total revenue | $3,040.9 million | $2,993.0 million | $6,023.4 million | $6,065.0 million |
| Premium income | $2,417.3 million | $2,374.4 million | $4,820.6 million | $4,752.7 million |
| Net investment income | $559.0 million | $563.5 million | $1,086.2 million | $1,112.2 million |
| Income before tax | $443.1 million | $262.6 million | $755.2 million | $461.4 million |
| Net income | $370.4 million | $182.9 million | $623.9 million | $335.9 million |
| Diluted EPS | $1.83 | $0.89 | $3.07 | $1.64 |
| Adjusted operating income | $463.8 million | $362.6 million | $806.4 million | $636.1 million |
| After-tax adjusted operating income | $386.6 million | $286.2 million | $663.9 million | $498.2 million |
- Q2 net income increased 102.5%; six-month net income increased 85.7%.
- Q2 total revenue increased 1.6%, while six-month revenue decreased 0.7%, primarily reflecting lower investment gains and investment income.
- Q2 income before tax margin was approximately 14.6%; net income margin was approximately 12.2%.
- Six-month operating cash flow was $784.6 million, compared with $482.2 million in 2021. Investing activities used $514.3 million and financing activities used $193.9 million.
- Cash and bank deposits were $151.4 million at June 30, 2022, compared with $75.0 million at December 31, 2021.
- Long-term debt was $3,442.8 million at June 30, 2022, substantially unchanged from $3,442.2 million at year-end 2021. No amounts were drawn on the $500 million revolving credit facility; $0.4 million of letters of credit were outstanding.
- Holding company liquidity was approximately $1.177 billion, and the weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 415%.
- Total assets were $63.1 billion and stockholders’ equity was $9.7 billion at June 30, 2022, compared with $70.1 billion and $11.4 billion, respectively, at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Adjusted operating income increased 28.0% in the second quarter and 26.8% for the first six months. Unum US benefited from favorable disability and life claims experience, higher premiums and lower benefit ratios. Colonial Life also reported improved benefit experience.
- Unum US adjusted operating income increased 64.8% in Q2 and 58.3% year to date. Its benefit ratio improved to 62.6% from 71.7% in Q2 and to 66.7% from 73.0% for the six months.
- Colonial Life adjusted operating income increased 5.5% in Q2 and 13.1% year to date; its benefit ratio improved to 47.6% from 51.7% in Q2.
- Unum International operating income was generally stable in U.S. dollars. Unum UK benefited from higher investment income but experienced higher benefit ratios, partly due to inflation-linked benefits and unfavorable claims experience.
- Closed Block adjusted operating income declined 28.7% in Q2 and 16.7% year to date. Long-term care and retained individual disability loss ratios were less favorable, and premium income continued to decline as the closed blocks run off.
- Net investment income decreased 0.8% in Q2 and 2.3% year to date. Net investment loss was $4.1 million in Q2 and $17.9 million year to date, compared with a $0.9 million gain and an $85.5 million gain, respectively, in 2021.
- The 2021 comparison included unusual costs: $67.3 million for early retirement of debt, a $13.9 million right-of-use asset impairment, a $24.2 million U.K. tax-rate-related charge and reinsurance transaction impacts. These items did not recur in 2022.
- The company repurchased 3.1 million shares for approximately $94.9 million during the first six months and paid $122.3 million of common-stock dividends. Approximately $105.1 million remained available under the repurchase authorization at June 30.
Guidance, Outlook, Risks and Unusual Items
- Management expects positive 2022 operating trends, solid premium growth and improved claim experience as COVID-19 impacts lessen. No specific consolidated earnings-per-share guidance was provided.
- Rising interest rates may improve yields on new investments but may produce additional unrealized losses on existing fixed-maturity securities. Net investment income may remain volatile because of private-equity partnership valuations, bond call activity and other miscellaneous investment income.
- At June 30, 2022, fixed-maturity securities had a net unrealized loss of approximately $1.1 billion, compared with a $5.9 billion net unrealized gain at December 31, 2021. Management stated it did not intend, and did not expect to be required, to sell securities before recovery.
- Unum America is phasing in approximately $2.2 billion of additional statutory long-term-care reserves identified by the Maine Bureau of Insurance. A total of $100 million was phased in during the first half of 2022, leaving approximately $2.210 billion to be phased in at June 30. Unum Group made $350 million of capital contributions to affiliated captive reinsurer Fairwind during the first half of 2022.
- Unum expects approximately $67 million of 2022 amortization related to the cost of the Closed Block individual disability reinsurance transaction.
- Unum will adopt long-duration insurance accounting standard ASU 2018-12 on January 1, 2023 using the modified retrospective method. Management estimated a transition-date reduction in accumulated other comprehensive income and stockholders’ equity of approximately $6.5 billion to $7.0 billion based on then-current assumptions; using June 30, 2022 interest rates, the estimated reduction would have been approximately $2.0 billion to $2.5 billion. The filing states that the change will not affect cash flows or statutory results.
- In August 2022, after the reporting date, Unum entered into a $350 million senior unsecured delayed-draw term loan facility maturing in 2027 and announced the planned September 2022 redemption of $350 million of 4.000% senior notes due 2024.
- Key risks include COVID-19 and claims volatility, long-term-care reserve adequacy, interest rates and credit spreads, investment losses, reinsurance counterparty performance, regulatory and legal matters, rating changes, foreign exchange movements, cybersecurity and technology execution.
- The company is involved in ordinary-course litigation and regulatory inquiries. It stated that general claim litigation is not expected to be material to consolidated financial condition after existing reserves, although adverse outcomes could materially affect results in a particular period.
Important Facts for Investors to Verify
- Reconcile GAAP net income with after-tax adjusted operating income and assess whether favorable claims experience is sustainable.
- Monitor the magnitude and duration of unrealized investment losses, credit losses and private-equity partnership valuation changes.
- Evaluate the effect of ASU 2018-12 adoption on equity, OCI, reserves, earnings patterns and comparability of future results.
- Track the statutory long-term-care reserve phase-in, capital contributions to Fairwind and the availability of dividends from regulated insurance subsidiaries.
- Verify the execution and funding of the post-quarter-end term loan and senior-note redemption.
- Assess Closed Block long-term-care loss ratios, rate-increase approvals, claim termination rates and the continuing amortization of reinsurance costs.
- Review insurance subsidiary capital ratios, holding company liquidity, debt covenants, rating agency actions and remaining share-repurchase capacity.