Unum Group 10-Q Summary — First Quarter 2019
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. The filing covers the three months ended March 31, 2019, with comparison to the three months ended March 31, 2018. Results are unaudited and interim results are not necessarily indicative of full-year performance.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Premium income | $2,338.7 million | $2,250.0 million | 3.9% increase |
| Total revenue | $2,987.6 million | $2,899.6 million | 3.0% increase |
| Income before tax | $353.3 million | $341.1 million | 3.6% increase |
| Net income | $280.9 million | $273.5 million | 2.7% increase |
| Diluted EPS | $1.31 | $1.23 | 6.5% increase |
| After-tax adjusted operating income | $280.3 million | $275.1 million | 1.9% increase |
| Net investment income | $594.7 million | $602.3 million | 1.3% decrease |
| Operating cash flow | $516.8 million | $299.9 million | Increase of $216.9 million |
Net margin was approximately 9.4% of revenue, compared with approximately 9.4% in the prior-year quarter. The effective income tax rate was 20.5%, compared with 19.9% in Q1 2018. The filing does not provide a consolidated GAAP operating margin, but adjusted operating income was $352.2 million before tax.
- Segment adjusted operating income: Unum US $252.3 million, up 3.4%; Unum International $29.1 million, down 2.3% in reported dollars; Colonial Life $85.2 million, up 5.2%; Closed Block $31.0 million, up 7.3%; Corporate reported a $(45.4) million loss.
- Benefit ratios: Unum US improved to 65.3% from 66.8%; Unum UK improved to 70.2% from 71.9%; Colonial Life improved modestly to 51.1% from 51.6%.
- Invested assets and equity: Total investments were $52.6 billion and total assets were $63.9 billion at March 31, 2019. Stockholders’ equity was $9.1 billion.
- Debt and liquidity: Long-term debt was $3.0 billion. Cash and bank deposits were $62.1 million at quarter-end, while Unum Group and intermediate holding companies held $594 million of fixed maturity securities, short-term investments, and cash.
- Capital: The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 360%, described by management as in line with expectations and significantly above regulatory-action levels.
Material Changes Versus the Prior Comparable Period
- Premium growth occurred across each principal operating segment, supported by sales growth, dental and vision expansion, the addition of Unum Poland, and generally stable persistency.
- Net investment income declined because of lower invested-asset yields and lower miscellaneous investment income, partly offset by higher invested-asset levels.
- Benefits experience was generally favorable, particularly in Unum US group disability, Unum UK, and Colonial Life.
- Amortization of deferred acquisition costs increased 12.6%, primarily because of growth in deferred acquisition assets and higher policy terminations in certain businesses.
- Other comprehensive income was $311.9 million, compared with a $192.4 million loss in Q1 2018, primarily reflecting higher unrealized gains on fixed maturity securities. The net unrealized gain on fixed maturity securities increased to $4.3 billion from $2.7 billion at December 31, 2018.
- Operating cash flow increased materially, while investing cash flow shifted to a $365.2 million use from a $119.3 million source in Q1 2018, primarily reflecting investment purchases and short-term investment activity.
- The company repurchased 2.7 million shares for approximately $100 million and paid $55.7 million of common stock dividends. Approximately $400 million remained under the $750 million repurchase authorization at March 31, 2019.
- Adoption of ASC 842 increased other assets by $117.7 million and other liabilities by $122.0 million at January 1, 2019, with a $3.4 million reduction to retained earnings. The adoption did not materially affect reported operating results.
Outlook, Commentary, Risks, and Unusual Items
Management expects continued premium growth in the core businesses, generally stable persistency and benefits experience, expense discipline, and continued investment in digital capabilities and operational efficiency. Management expects the 2019 effective tax rate to be approximately 20% and anticipates continued capital returns while maintaining strong capital levels.
- Low interest rates are expected to continue pressuring investment yields and profit margins. Management believes the company has significant leverage to rising interest rates and improving economic conditions.
- The Closed Block is expected to generate declining premium income over time as the business winds down. Long-term care results remain sensitive to mortality, morbidity, claim resolution, premium rate increases, persistency, and reserve assumptions.
- During Q3 2018, the company increased long-term care policy and claim reserves by $750.8 million, or $593.1 million after tax. Q1 2019 long-term care experience was described as consistent with expectations but was not comparable with Q1 2018 because of the assumption update.
- Brexit-related uncertainty may affect U.K. growth, claims, investment values, exchange rates, and solvency ratios. Management did not expect a material increase in impairments or defaults from Brexit at the filing date.
- Unum disclosed consolidated securities litigation concerning alleged disclosure failures related to long-term care. The company filed a motion to dismiss in March 2019, has not established reserves, and cannot estimate a reasonably possible loss range. Related shareholder derivative actions were voluntarily dismissed without prejudice in February 2019.
- Fixed maturity securities included $3.2 billion of below-investment-grade securities at fair value. Gross unrealized losses totaled $271.8 million, but the company recorded no other-than-temporary impairment losses in Q1 2019.
- On April 29, 2019, after quarter-end, the company increased its existing revolving credit facility from $400 million to $500 million, extended its maturity to April 2024, and entered into a separate $100 million revolving facility maturing in April 2022. No borrowings were outstanding under the existing facility at March 31, 2019.
Important Facts for Investors to Verify
- Whether premium growth and favorable benefit ratios persist as interest-rate pressure continues.
- Long-term care reserve adequacy, including the effects of claim incidence, termination rates, mortality, morbidity, premium rate increases, and claim resolutions.
- Investment portfolio credit quality, below-investment-grade exposure, unrealized losses, and sensitivity to interest rates and credit spreads.
- Regulatory capital, subsidiary dividend capacity, financial-strength ratings, and the effect of any ratings downgrade on liquidity or derivative obligations.
- Developments and potential exposure in the consolidated securities litigation and other regulatory or unclaimed-property matters.
- Execution of the company’s digital, technology, expense-efficiency, and workplace-product expansion initiatives.