Unum Group quarterly report, Q2 FY2018

Business Context and Reporting Period

Unum Group is a provider of workplace financial protection benefits, including disability, life, accident, critical illness, dental, vision, and related services. Its principal segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared primarily with the same 2017 periods.

Key Financial Metrics

Metric	Q2 2018	Q2 2017	Six Months 2018	Six Months 2017
Total revenue	$2,890.3 million	$2,822.0 million	$5,789.9 million	$5,628.5 million
Net income	$285.5 million	$245.1 million	$559.0 million	$475.0 million
Diluted EPS	$1.29	$1.07	$2.52	$2.07
After-tax adjusted operating income	$287.6 million	$240.4 million	$562.7 million	$476.5 million
Net cash from operating activities	Not separately provided	Not separately provided	$696.2 million	$649.3 million

Premium income increased 3.7% in the quarter and 4.3% year to date. Net investment income increased only 0.5% and 0.2%, respectively, as asset growth was largely offset by lower yields.
Net income margins were approximately 9.9% in the quarter and 9.7% year to date, based on reported revenue. Adjusted operating income was $357.4 million in the quarter and $700.7 million year to date before tax.
The effective tax rate declined to 19.5% in the quarter and 19.7% year to date, compared with 32.2% and 31.3% in the prior-year periods, primarily due to the Tax Cuts and Jobs Act.
Total assets were $62.4 billion at June 30, 2018, compared with $64.0 billion at December 31, 2017. Stockholders’ equity was $9.4 billion, including accumulated other comprehensive loss of $276.2 million.
Investments totaled $51.2 billion, including $43.4 billion of fixed maturity securities. Net unrealized gains on fixed maturity securities declined to $3.5 billion from $5.7 billion at year-end 2017, primarily due to higher Treasury rates and credit spreads.
Debt consisted of $200.0 million of short-term debt and $3.0 billion of long-term debt at June 30. The short-term notes matured in July 2018. In May, the company issued $300.0 million of 6.25% junior subordinated notes due 2058.
Cash and bank deposits were $99.5 million at quarter-end. Unum Group and intermediate holding companies held $1.16 billion of fixed maturity securities, short-term investments, and cash. The traditional U.S. insurance subsidiaries’ weighted-average RBC ratio was approximately 385%.
Operating cash flow was $696.2 million, investing cash flow was negative $601.6 million, and financing cash flow was negative $72.5 million for the first six months. Cash increased $22.1 million.

Material Changes Versus the Prior Comparable Period

Second-quarter net income rose 16.5%, while diluted EPS increased from $1.07 to $1.29. Six-month net income rose 17.7%, and diluted EPS increased from $2.07 to $2.52.
After-tax adjusted operating income increased 19.6% in the quarter and 18.1% year to date. The 2017 year-to-date comparison included a $13.4 million after-tax guaranty fund assessment that did not recur.
Unum US adjusted operating income increased 1.3% in the quarter and 1.7% year to date. Its benefit ratio improved to 67.0% and 66.9%, respectively, from 67.4% and 67.7%.
Unum UK adjusted operating income declined 9.7% in local currency in the quarter and 5.0% year to date. Its benefit ratio increased to 76.7% and 74.3%, respectively.
Colonial Life adjusted operating income increased 3.4% in the quarter and 0.9% year to date, supported by premium and investment income growth.
Closed Block adjusted operating income declined 9.2% in the quarter and 8.9% year to date. Long-term care benefit experience was unfavorable, with interest-adjusted loss ratios of 96.9% and 96.7%, compared with 89.4% and 89.0%.
The company repurchased 4.4 million shares for approximately $200 million during the first six months and paid $103.3 million of dividends. The new repurchase authorization had approximately $650 million remaining at June 30.

Guidance, Outlook, Risks, and Unusual Items

Management expected continued premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline, and ongoing investment in infrastructure and technology.
The annual long-term care reserve review was accelerated and was expected to be completed in the third quarter of 2018. Management stated that an increase in long-term care reserves might be required and estimated that any increase would likely be predominantly a GAAP event and would not exceed $750 million after tax.
Management planned to suspend share repurchases until the reserve review was announced, with intended repurchases of approximately $100 million per quarter beginning in the fourth quarter of 2018 and continuing into 2019.
The company expected a 2018 effective tax rate of approximately 19% to 20%. It also expected year-end RBC ratios to decline primarily because of higher NAIC RBC factors adopted in response to the lower statutory tax rate.
Low interest rates continue to pressure investment yields, profit margins, and reserve adequacy. The company expected to increase its allocation to alternative assets, which could increase investment-income volatility.
The U.K. withdrawal from the European Union could affect economic growth, wage inflation, claims volatility, investment values, and solvency ratios. Foreign exchange movements also affect reported results.
Unum agreed to acquire Pramerica Zycie TUiR SA in Poland, subject to customary approvals and closing conditions, with closing expected by the end of 2018. Management did not expect a material 2018 financial impact.
The company disclosed three alleged securities class actions filed in 2018 relating principally to long-term care terminations, claim incidence, reserves, and capital management disclosures. The matters were at a preliminary stage, no losses were estimated, and no reserves were established.
Investment risks include higher interest rates, credit-spread widening, defaults, impairments, illiquidity, and valuation uncertainty. The company reported $455.1 million of gross unrealized losses on fixed maturity securities at June 30 and recognized $1.0 million of other-than-temporary impairment losses during the first six months.

Important Facts for Investors to Verify

Completion and conclusions of the third-quarter long-term care reserve review, including the actual after-tax reserve impact.
Long-term care claims incidence, persistency, premium-rate increases, claim resolution rates, and interest-adjusted loss ratios.
Whether the company resumes the planned quarterly share repurchases and maintains its dividend strategy after the reserve review.
Repayment or refinancing of the $200.0 million short-term notes that matured in July 2018 and the effect of the new subordinated debt on interest expense and leverage.
Trends in investment yields, unrealized losses, credit impairments, alternative-asset exposure, and statutory capital ratios.
Developments in the disclosed securities litigation and any related regulatory or unclaimed-property matters.
Closing of the Pramerica acquisition and its effect on capital, liquidity, and European operations.