Unum Group 2019 Second-Quarter Form 10-Q Summary
Business context and reporting period
Unum Group is an insurance and employee-benefits provider operating primarily in the United States, the United Kingdom, and Poland. Its principal products include disability, life, accident, critical illness, dental, and vision benefits, marketed largely through the workplace. The filing covers the unaudited three and six months ended June 30, 2019, compared with the same periods of 2018.
Principal operating segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. The company reported 208.6 million common shares outstanding as of July 29, 2019.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $3,016.7 million | $2,890.3 million | $6,004.3 million | $5,789.9 million |
| Premium income | $2,343.1 million | $2,221.0 million | $4,681.8 million | $4,471.0 million |
| Net investment income | $624.9 million | $623.6 million | $1,219.6 million | $1,225.9 million |
| Income before tax | $352.0 million | $354.8 million | $705.3 million | $695.9 million |
| Net income | $281.2 million | $285.5 million | $562.1 million | $559.0 million |
| Diluted EPS | $1.33 | $1.29 | $2.64 | $2.52 |
| After-tax adjusted operating income | $286.9 million | $287.6 million | $567.2 million | $562.7 million |
| After-tax adjusted operating EPS | $1.36 | $1.30 | $2.67 | $2.54 |
GAAP net income margin was approximately 9.3% for the quarter and 9.4% for the six-month period. Adjusted operating income margin, based on adjusted operating revenue, was approximately 9.5% for both periods.
- Second-quarter premium income increased 5.5%; six-month premium income increased 4.7%.
- Second-quarter total revenue increased 4.4%; six-month total revenue increased 3.7%.
- Second-quarter net income declined 1.5%, while six-month net income increased 0.6%.
- Net realized investment losses were $7.3 million in the quarter and $6.2 million year to date, compared with losses of $2.6 million and $4.8 million in the respective 2018 periods.
- No other-than-temporary impairment losses on fixed maturity securities were recorded in 2019; $1.0 million was recorded in the first six months of 2018.
Cash flow, balance sheet, debt, and liquidity
| Balance-sheet item | June 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $65,843.7 million | $61,875.6 million |
| Total investments | $54,394.4 million | $50,707.6 million |
| Cash and bank deposits | $60.8 million | $94.0 million |
| Total liabilities | $56,390.6 million | $53,253.8 million |
| Long-term debt | $3,341.2 million | $2,971.3 million |
| Stockholders’ equity | $9,453.1 million | $8,621.8 million |
- Six-month operating cash flow was $942.7 million, up from $696.2 million in 2018.
- Investing activities used $1,007.2 million, primarily reflecting purchases of fixed maturity and short-term investments.
- Financing activities provided $31.3 million, compared with $72.5 million used in 2018.
- Cash and bank deposits decreased $33.2 million during the first six months, ending at $60.8 million.
- In June 2019, the company issued $400.0 million of 4.00% senior notes due 2029 and received $395.9 million of proceeds.
- The existing unsecured revolving credit facility was increased from $400 million to $500 million and extended through April 2024. A separate $100 million facility was also established through April 2022. No borrowings were outstanding under either facility at June 30, 2019; $2.0 million of letters of credit had been issued under the larger facility.
- Unum Group and intermediate holding companies held $977 million of fixed maturity securities, short-term investments, and cash at quarter-end.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 365%.
- The board authorized a new $750 million share-repurchase program through November 2020. The company repurchased 5.6 million shares for approximately $200 million during the first six months, leaving approximately $716.2 million authorized at June 30.
Material changes versus the prior comparable period
- Unum US adjusted operating income increased 1.3% in the quarter and 2.3% year to date. Premium growth was partly offset by lower investment income; the six-month benefit ratio improved to 66.5% from 66.9%.
- Unum International adjusted operating income increased 11.2% in the quarter and 4.2% year to date in U.S. dollars. The U.K. benefit ratio deteriorated to 85.6% in the quarter and 78.1% year to date, versus 76.7% and 74.3%, respectively.
- Colonial Life adjusted operating income declined 0.2% in the quarter but increased 2.4% year to date. Sales declined 4.2% in the quarter and were approximately flat year to date.
- Closed Block adjusted operating income increased 13.9% in the quarter and 10.6% year to date, despite declining premium income as the block winds down.
- The fixed maturity portfolio’s net unrealized gain increased to approximately $5.6 billion at June 30, 2019, from $2.7 billion at December 31, 2018, primarily due to lower Treasury rates and narrower credit spreads.
- The earned book yield declined to 5.04% for the first six months of 2019 from 5.15% for full-year 2018, reflecting continued pressure from the low-interest-rate environment.
- Long-term debt increased by approximately $369.9 million, primarily due to the 2029 senior-note issuance, partly offset by scheduled repayments.
- Share-count reduction from repurchases contributed to diluted EPS growth despite relatively flat net income.
Guidance, outlook, risks, contingencies, 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 customer experience. Management expects a 2019 effective tax rate of approximately 20% and anticipates continued adjusted operating income growth, although no specific consolidated earnings-per-share guidance was provided.
- Low interest rates are expected to continue pressuring investment yields, profit margins, and insurance-liability discount rates. Management believes the company has significant leverage to rising interest rates and improving payroll and wage growth.
- The U.K. operating environment remains exposed to Brexit-related economic uncertainty, lower growth, wage inflation, interest rates, claims volatility, currency movements, and potential solvency-ratio volatility.
- Closed Block long-term-care results remain sensitive to mortality, morbidity, claim resolution rates, persistency, investment returns, premium-rate increases, and reserve assumptions. Management expects the long-term-care interest-adjusted loss ratio to remain in an 85% to 90% range over the long term, with quarterly volatility.
- The company completed a $750.8 million pre-tax long-term-care reserve increase in the third quarter of 2018; 2019 comparisons for long-term-care benefits experience are therefore not fully comparable.
- At June 30, 2019, the company held $3.2 billion of below-investment-grade fixed maturity securities, with $89.9 million of gross unrealized losses. It also recorded a $15.6 million realized loss on the sale of securities issued by a U.S. oil and natural gas producer.
- Investment and insurance risks include credit losses, interest-rate changes, claim incidence and recovery experience, mortality and morbidity, reinsurance-counterparty performance, foreign exchange, derivatives, and asset-liability mismatches.
- The company is defending three consolidated securities class-action lawsuits concerning disclosures about long-term-care policy terminations, claim incidence, reserves, and capital management. The cases are preliminary, no loss range can be estimated, and no reserves have been established.
- Unfunded or potentially fundable commitments included $369.2 million for private-equity partnerships, $103.5 million for private-placement securities, and $87.1 million for commercial mortgage loans.
- ASC 326, the current expected credit loss standard, was scheduled for adoption January 1, 2020; management expected it to apply primarily to mortgage loans and reinsurance recoverables and continued evaluating the impact. The long-duration insurance-contract standard was expected to have a potentially material effect, with the effective date subject to a proposed FASB deferral.
Important facts for investors to verify
- Whether premium growth and adjusted operating income continue while investment yields remain under pressure.
- Development of U.K. benefits experience, Brexit-related economic effects, currency translation, and solvency ratios.
- Long-term-care reserve adequacy, approved premium-rate increases, claim-resolution trends, and the 85% to 90% long-term loss-ratio outlook.
- Credit quality, unrealized losses, realized investment losses, and liquidity of the fixed maturity portfolio.
- Progress and ultimate exposure from the consolidated securities litigation and other regulatory or unclaimed-property matters.
- Impact of long-duration insurance-contract and expected-credit-loss accounting changes on equity, earnings, reserves, and disclosures.
- Execution of the debt-refinancing plan, compliance with credit-facility covenants, capital strength, and the pace of share repurchases.