Unum Group 10-Q Summary
Business context and reporting period
Unum Group provides workplace financial protection products, including disability, life, accident, critical illness, dental and vision insurance, primarily in the United States, United Kingdom and Poland. The filing covers the quarter and six months ended June 30, 2020, with comparisons to the same periods of 2019. The results reflect substantial uncertainty from the COVID-19 pandemic and related economic disruption.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Premium income | $2,368.7 million, up 1.1% | $4,740.1 million, up 1.2% |
| Total revenue | $3,021.2 million, up 0.1% | $5,892.3 million, down 1.9% |
| Net investment income | $569.0 million, down 8.9% | $1,154.0 million, down 5.4% |
| Income before income tax | $337.6 million, down 4.1% | $539.7 million, down 23.5% |
| Net income | $265.5 million, down 5.6% | $426.5 million, down 24.1% |
| Diluted earnings per share | $1.30 versus $1.33 | $2.10 versus $2.64 |
| After-tax adjusted operating income | $250.1 million, or $1.23 per diluted share | $524.2 million, or $2.58 per diluted share |
| Net cash provided by operating activities | Not separately reported | $852.4 million versus $942.7 million |
Net income margin was approximately 8.8% for the second quarter and 7.2% for the first six months, based on reported total revenue. Adjusted operating income was $316.5 million before tax in the second quarter and $662.6 million for the first six months, excluding realized investment gains or losses and the lease impairment.
- Total assets were $69.3 billion at June 30, 2020, versus $67.0 billion at December 31, 2019.
- Stockholders’ equity increased to $10.6 billion from $10.0 billion, primarily reflecting higher accumulated other comprehensive income from unrealized investment gains.
- Fixed maturity securities totaled $48.2 billion at fair value, including $7.4 billion of net unrealized gains. Below-investment-grade securities represented 8.5% of the portfolio on an amortized-cost basis, net of allowances.
- Short-term debt was $399.9 million and long-term debt was $3.4 billion at June 30, 2020.
- Cash and bank deposits increased to $165.6 million from $84.1 million at year-end 2019.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 370%.
Material changes versus the prior comparable period
- Premium income grew modestly, but lower investment yields, COVID-19-related partnership losses and higher expenses reduced profitability.
- Adjusted operating income declined 12.8% in the second quarter and 6.7% for the first six months, based on the reported comparative amounts.
- Net investment income declined primarily because private equity partnership valuations, recorded with a one-quarter lag, reflected the market deterioration during the first quarter of 2020.
- Net realized investment loss for the first six months was $110.2 million versus a $6.2 million loss in 2019. The 2020 amount included $59.3 million of credit losses on fixed maturity securities and a $45.0 million loss from an embedded derivative in a modified coinsurance arrangement.
- Unum US adjusted operating income declined 8.8% in the quarter and 2.5% year to date. Group life results were pressured by higher claims incidence, while supplemental and voluntary products benefited from lower dental and vision utilization.
- Unum International adjusted operating income declined 50.8% in the quarter and 42.3% year to date, primarily due to lower investment income and currency translation effects.
- Colonial Life adjusted operating income increased 7.7% in the quarter and 1.4% year to date, despite significant declines in new sales.
- Corporate adjusted operating loss increased to $58.1 million in the quarter and $104.0 million year to date, partly due to higher interest expense and a lease impairment.
- Sales declined 2.9% for Unum US and 43.0% for Colonial Life in the second quarter. The company stated that COVID-19 disrupted in-person sales, increased unemployment and caused customers to defer purchasing decisions.
- The company did not repurchase common stock during the first six months of 2020, compared with $200.2 million of repurchases in the first six months of 2019.
Liquidity, debt and capital actions
- Operating cash flow was $852.4 million for the first six months, while investing activities used $1.1 billion and financing activities provided $319.8 million.
- Unum issued $500.0 million of 4.500% senior notes due 2025 in May 2020 and received $494.1 million of proceeds.
- The company had $162.1 million of advances from regional Federal Home Loan Banks and no borrowings outstanding under its $600 million of unsecured revolving credit facilities, although $0.6 million of letters of credit had been issued.
- The $399.9 million of short-term debt consisted primarily of 5.625% senior unsecured notes due in the third quarter of 2020. Management stated that this maturity had been funded through prior debt issuance and that no significant additional maturities were expected until 2024.
- Management stated that liquidity remained adequate and that it could sell liquid investments or draw on credit facilities if needed.
Guidance, outlook, risks and unusual items
- Management did not provide quantified earnings guidance. It expects near-term top-line growth to be challenging, with continued claims volatility, sales disruption, lower persistency and pressure on investment yields.
- Management expects partnership investment gains in the third quarter to partially offset losses recorded in the second quarter, because the partnerships report on a one-quarter lag.
- COVID-19 may increase group life and disability claims, disrupt claims processing, reduce premium collectability and persistency, and increase credit losses and reserve pressure. The company stated that the ultimate impact cannot yet be estimated.
- Premium receivable credit-loss allowances increased to $47.5 million at June 30, 2020 from $23.8 million at January 1, primarily because of unemployment, billing accommodations and customer financial uncertainty.
- The company recognized a $12.7 million pretax, $10.0 million after-tax impairment on an unused office lease right-of-use asset, reducing second-quarter and year-to-date diluted earnings per share by approximately $0.05.
- The Maine Bureau of Insurance concluded that statutory long-term-care reserves at Unum America were deficient by $2.1 billion as of December 31, 2018. The regulator permitted a seven-year phase-in beginning in 2020, with an estimated 2020 strengthening of $200 million to $250 million. Management stated that GAAP reserves and results were not affected and that expected cash flows would fund the statutory strengthening.
- Fitch and Moody’s downgraded ratings in April and May 2020, respectively, citing long-term-care reserve and capital-flexibility concerns. AM Best revised its outlook to negative; S&P affirmed its ratings and outlook.
- The company faces ordinary-course litigation and regulatory matters. A consolidated securities class action was dismissed with prejudice in June 2020, but plaintiffs filed an appeal; no reserve was established because a loss range could not be estimated.
- On July 22, 2020, a U.K. tax-rate increase was enacted and is expected to produce approximately $9 million of additional tax expense in the third quarter of 2020.
- The company adopted the current expected credit loss standard in 2020, reducing opening retained earnings by $18.9 million. It expects the future long-duration insurance contract accounting standard to have a material impact, but the filing does not provide a quantified estimate.
Important facts for investors to verify
- Progression of COVID-19 claims incidence, claims resolution rates, premium collectability and persistency.
- Statutory long-term-care reserve strengthening, the effect on subsidiary capital and the ability to fund the $200 million to $250 million estimated 2020 phase-in.
- Future rating-agency actions and their effect on capital access, distribution relationships and borrowing costs.
- Changes in investment portfolio credit quality, including downgrades, defaults, energy-sector exposure and additional credit-loss allowances.
- Whether expected third-quarter partnership investment gains materialize and offset second-quarter valuation losses.
- Ability to refinance or repay the $400 million of notes due in the third quarter of 2020 while maintaining liquidity and regulatory capital.
- Impact of sustained low interest rates on investment income, reserve discount rates, margins and long-term-care reserve adequacy.