Unum Group 2021 Q3 SEC Filing Summary
Business context and reporting period
Unum Group is an insurance holding company providing disability, life, accident, critical illness, dental, vision, and related workplace benefits in the United States, United Kingdom, and Poland. Principal segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared primarily with the corresponding 2020 periods.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $2,969.7 million | $2,996.3 million | $9,034.7 million | $8,888.6 million |
| Premium income | $2,353.7 million | $2,318.1 million | $7,106.4 million | $7,058.2 million |
| Net investment income | $550.2 million | $613.2 million | $1,662.4 million | $1,767.2 million |
| Income before tax | $409.9 million | $299.6 million | $871.3 million | $839.3 million |
| Net income | $328.6 million | $231.1 million | $664.5 million | $657.6 million |
| Diluted EPS | $1.60 | $1.13 | $3.24 | $3.23 |
| After-tax adjusted operating income | $210.5 million | $245.9 million | $708.7 million | $770.1 million |
| Adjusted operating EPS | $1.03 | $1.21 | $3.46 | $3.78 |
Reported net margin was approximately 11.1% in the third quarter and 7.4% for the first nine months. Adjusted operating income was approximately 8.8% of adjusted operating revenue in the third quarter and 10.0% for the first nine months.
- Operating cash flow was $999.3 million for the first nine months, down from $1,278.8 million in 2020. Investing cash use was $905.8 million and financing cash use was $168.8 million, producing a $75.3 million decrease in cash and bank deposits to $121.7 million.
- Total assets were $70.6 billion at September 30, 2021, broadly unchanged from December 31, 2020. Stockholders’ equity was $11.1 billion, up from $10.9 billion.
- Total investments were $52.4 billion, including $43.6 billion of fixed maturity securities. Net unrealized gains on fixed maturity securities were approximately $6.3 billion.
- Long-term debt was $3.44 billion, compared with $3.35 billion at year-end 2020. The estimated fair value of long-term debt was $3.91 billion.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 380%, described by management as in line with expectations.
- Holding company liquidity was $1.638 billion. Regional Federal Home Loan Bank advances were $261.0 million, with approximately $927 million of additional borrowing capacity. The company also reported access to a $500 million unsecured revolving credit facility with no borrowings outstanding.
Material changes versus the prior comparable period
- Third-quarter net income increased 42.2%, principally due to the $181.4 million pretax reserve decrease from assumption updates, primarily reflecting improved claim recovery trends in Unum US group long-term disability.
- First-nine-month net income increased only 1.0%, while after-tax adjusted operating income declined 8.0%. The adjusted comparison excludes or reflects significant unusual items in both periods.
- Net investment income declined 10.3% in the third quarter and 5.9% year to date, reflecting lower yields and reduced invested assets supporting the ceded Closed Block individual disability business, partially offset by stronger private equity partnership results.
- Premium income increased 1.5% in the third quarter and 0.7% year to date. Unum International performed strongly, while Colonial Life premium income declined 2.0% year to date and Unum US was broadly stable.
- Unum US adjusted operating income declined 53.0% in the third quarter excluding the reserve update and 43.8% year to date, driven primarily by unfavorable disability and life benefits experience. The Unum US benefit ratio, excluding the reserve update, rose to 77.6% in the third quarter and 74.5% year to date from 70.9% and 67.8%, respectively.
- Unum International adjusted operating income increased 28.0% in the third quarter and 40.6% year to date. Colonial Life adjusted operating income declined 13.1% and 5.7%, respectively, due mainly to less favorable benefits experience and higher operating expenses.
- The company issued $600.0 million of 4.125% senior notes due 2051 and retired $500.0 million of 4.500% senior notes due 2025, incurring a $67.3 million pretax early-retirement charge.
- The company completed the second phase of its Closed Block individual disability reinsurance transaction in March 2021. Year-to-date effects included a $67.6 million realized investment gain, $133.1 million of reserve-related expense from OCI realization, $6.2 million of transaction costs, $990.0 million of reinsurance recoverable, and $59.4 million of amortization of reinsurance cost.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects full-year premium income to grow slightly from 2020, but below historical rates, with continued claims volatility related to COVID-19.
- Low interest rates are expected to continue pressuring investment yields and profit margins. Miscellaneous investment income, including private equity partnership valuations and bond call activity, may remain volatile.
- Management expects approximately $80 million of 2021 amortization of the Closed Block individual disability reinsurance cost, with declining amortization over an estimated 25-year runoff period.
- During the third quarter, Unum recognized a $12.1 million pretax impairment of discontinued internal-use software. The company also recorded a $13.9 million pretax right-of-use asset impairment in the second quarter.
- The company expects to adopt the long-duration insurance contract accounting standard on January 1, 2023 using the modified retrospective method. Management expects a material decrease in accumulated other comprehensive income at transition, potentially material future OCI volatility, significant effects on GAAP results, and expanded disclosures; cash flows and statutory results are not expected to be affected.
- Unum America’s long-term care statutory reserves were determined by the Maine Bureau of Insurance to be deficient by $2.1 billion as of December 31, 2018. The deficiency is being phased in through 2026; the 2021 phase-in amount will be recorded in the fourth quarter. Management also expects to accelerate recognition of an additional $250 million of premium deficiency reserves by December 31, 2022. The filing states that this examination conclusion does not affect GAAP long-term care reserves or results.
- On October 25, 2021, the board authorized up to $250 million of share repurchases through December 31, 2022. Management intended to execute a $50 million accelerated share repurchase in the fourth quarter; no shares had been repurchased during the first nine months.
- Key risks include COVID-19 claims and sales effects, mortality and disability incidence, long-term care reserve adequacy, sustained low rates, investment credit losses and defaults, reinsurance counterparty performance, rating downgrades, regulatory changes, litigation, cyber risk, foreign exchange movements, and liquidity or capital constraints.
Most important facts for an investor to verify
- Reconcile reported net income with adjusted operating income and identify the effect of the $181.4 million reserve release, reinsurance amortization, debt retirement cost, software impairment, and other excluded items.
- Monitor Unum US disability and group life benefit ratios, including whether COVID-19-related claims experience improves or deteriorates.
- Assess long-term care reserve adequacy, the 2021 statutory reserve phase-in, and the planned additional $250 million premium deficiency recognition.
- Review the economic and capital effects of the Closed Block individual disability reinsurance transaction, including reinsurance recoverables, collateral, counterparty exposure, and future amortization.
- Track net investment income yields, unrealized investment gains, below-investment-grade exposure, private equity valuations, and potential credit losses.
- Evaluate liquidity after the decline in operating cash flow, debt refinancing and retirement activity, FHLB advances, credit facility availability, planned share repurchases, and ongoing capital requirements.
- Model the expected impact of the 2023 long-duration insurance accounting adoption on equity, OCI, earnings, and reported reserve balances.
- Confirm the status and potential exposure of pending litigation, regulatory inquiries, and the company’s financial strength and issuer credit ratings.