Unum Group — Q1 2022 Form 10-Q Summary
Business context and reporting period
Unum Group provides disability, life, accident, critical illness, dental, vision, and related financial protection products, primarily through workplace channels in the United States, United Kingdom, and Poland. The filing covers the three months ended March 31, 2022, compared with the same period of 2021. Principal operating segments are Unum US, Unum International, and Colonial Life, with Closed Block and Corporate segments.
Financial performance and key metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Premium income | $2,403.3 million | $2,378.3 million | +1.1% |
| Total revenue | $2,982.5 million | $3,072.0 million | -2.9% |
| Net investment income | $527.2 million | $548.7 million | -3.9% |
| Net investment gain (loss) | $(13.8) million | $84.6 million | Unfavorable comparison |
| Income before income tax | $312.1 million | $198.8 million | +57.0% |
| Net income | $253.5 million | $153.0 million | +65.7% |
| Diluted EPS | $1.25 | $0.75 | +66.7% |
| After-tax adjusted operating income | $277.3 million | $212.0 million | +30.8% |
| Adjusted operating income | $342.6 million | $273.5 million | +25.3% |
| Operating cash flow | $325.8 million | $(193.8) million | Improved |
Total benefits and expenses declined 7.1% to $2,670.4 million. The effective tax rate was 18.8%, compared with 23.0% in Q1 2021. The filing does not provide a consolidated GAAP operating margin; adjusted operating income as a percentage of adjusted operating revenue was approximately 11.4% in Q1 2022, compared with approximately 9.2% in Q1 2021.
Segment adjusted operating income was $171.6 million for Unum US, $27.2 million for Unum International, $90.1 million for Colonial Life, $94.1 million for Closed Block, and $(40.4) million for Corporate. Reported benefit ratios were 70.9% for Unum US, 80.7% for Unum UK, and 49.3% for Colonial Life.
Balance sheet, capital, liquidity, and debt
- Total assets were $66.5 billion at March 31, 2022, down from $70.1 billion at December 31, 2021, primarily reflecting lower fair values of fixed maturity securities.
- Total stockholders’ equity was $10.6 billion, compared with $11.4 billion at year-end 2021. Accumulated other comprehensive income declined from $354.1 million to $(580.1) million, primarily due to market-related unrealized investment losses.
- Fixed maturity securities were $39.9 billion at fair value, with $2.3 billion of net unrealized gains. Gross unrealized losses increased substantially as U.S. Treasury rates and credit spreads rose.
- Long-term debt was $3.4 billion. No amounts were borrowed under the $500 million revolving credit facility at March 31, 2022; $0.4 million of letters of credit were outstanding.
- Available holding-company liquidity was $1.269 billion. The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 400%.
- Cash and bank deposits were $106.6 million at quarter-end. Financing cash outflows included $50.0 million for share repurchases and $62.0 million for dividends.
- FHLB advances were $178.2 million, with approximately $834.1 million of additional borrowing capacity.
Material changes versus the prior comparable period
- Net income increased primarily because Q1 2021 included significant costs associated with the second phase of the Closed Block individual disability reinsurance transaction, including a $133.1 million reserve impact and $6.2 million of transaction costs. Q1 2021 also included a $67.6 million realized investment gain related to the transaction.
- Adjusted operating income improved across Unum US and Colonial Life, while Unum International increased modestly. Favorable mortality and claims experience, particularly as COVID-19 impacts lessened, supported results.
- Premium income increased modestly, and sales increased 6.8% at Unum US, 47.4% at Unum International, and 15.3% at Colonial Life.
- Net investment income decreased due to lower yields and less favorable miscellaneous investment income.
- Operating cash flow improved from an outflow of $193.8 million to an inflow of $325.8 million. Q1 2021 cash flow included a $456.8 million payment related to the reinsurance transaction.
- The company repurchased $50.0 million of common stock under an accelerated share repurchase agreement. Including the April 2022 final settlement, total shares repurchased under the agreement were 1.7 million, leaving $150.0 million under the existing authorization.
- The company made a $215.0 million capital contribution to Fairwind Insurance Company and recorded a $50 million first-quarter phase-in amount related to the Unum America long-term-care statutory reserve deficiency.
Guidance, outlook, risks, contingencies, and unusual items
Management expects positive operating trends in 2022, including solid premium growth and improving claims experience as COVID-19 effects lessen. Unum US expects full-year premium income to grow slightly faster than in 2021; Colonial Life expects growth below pre-pandemic levels. Management continues to invest in digital capabilities, technology, customer experience, and adjacent markets.
Key risks include COVID-19-related mortality, morbidity and claims volatility; inflation and higher interest rates; lower investment yields and further unrealized losses; credit losses or defaults in the investment portfolio; long-term-care reserve adequacy; regulatory capital requirements; litigation and regulatory investigations; reinsurance counterparty performance; cybersecurity; foreign exchange movements; and the ability to maintain financial-strength ratings and liquidity.
The company expects to adopt the long-duration insurance accounting standard, ASU 2018-12, on January 1, 2023 using the modified retrospective method. Management estimates the transition could reduce accumulated other comprehensive income and total stockholders’ equity by approximately $6.5 billion to $7.0 billion, although it would not affect cash flows or statutory financial results. The filing states that the adoption is expected to materially affect GAAP results and disclosures.
Unum America’s long-term-care statutory reserve deficiency was approximately $2.26 billion remaining to be phased in at March 31, 2022. The company plans to fund the deficiency through operating cash flows and capital contributions. The filing states that general claim litigation is not expected to materially affect consolidated financial condition, but adverse outcomes could materially affect results in a particular period.
In April 2022, after quarter-end, the company extended its $500 million senior unsecured revolving credit facility through April 2027 and may request up to $200 million of additional commitments.
Investor verification checklist
- Verify the effect of rising interest rates, credit spreads, and unrealized investment losses on statutory capital, GAAP equity, and future investment income.
- Monitor the remaining long-term-care statutory reserve phase-in, capital contributions to Fairwind, and the adequacy of long-term-care reserves under changing mortality, morbidity, interest-rate, and rate-increase assumptions.
- Assess the implementation of ASU 2018-12, including the estimated $6.5 billion to $7.0 billion AOCI and equity reduction and subsequent OCI volatility.
- Reconcile GAAP net income with after-tax adjusted operating income and identify recurring versus excluded investment, reinsurance, and reserve items.
- Track COVID-19, inflation, claims resolution rates, mortality, and disability experience across the core and Closed Block businesses.
- Review liquidity, FHLB borrowing capacity, credit-facility covenants, debt maturities, rating-agency actions, and the pace of share repurchases and dividends.