Business Context and Reporting Period
Unum Group’s Form 10-K covers the fiscal year ended December 31, 2017, with fourth-quarter results separately disclosed. The company provides workplace-oriented disability, life, accident, critical illness, dental, vision, and related benefits in the United States and United Kingdom. Principal operating segments are Unum US, Unum UK, Colonial Life, Closed Block, and Corporate.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $11,286.8 million | $11,046.5 million | +2.2% |
| Premium income | $8,597.1 million | $8,357.7 million | +2.9% |
| Net investment income | $2,451.7 million | $2,459.0 million | -0.3% |
| Income before tax | $1,404.0 million | $1,347.7 million | +4.2% |
| Net income | $994.2 million | $931.4 million | +6.7% |
| Diluted EPS | $4.37 | $3.95 | +10.6% |
| Adjusted operating income | $1,423.3 million | $1,323.5 million | +7.5% |
| After-tax adjusted operating income | $976.2 million | $915.6 million | +6.6% |
| Operating cash flow | $1,149.4 million | $1,116.1 million | +3.0% |
| Total assets | $64,013.1 million | $61,941.5 million | +3.3% |
| Total stockholders’ equity | $9,574.9 million | $8,968.0 million | +6.8% |
The consolidated benefit ratio improved to 82.1% from 83.1% in 2016, or 81.6% excluding the unclaimed death benefits reserve increase. The earned book yield declined to 5.23% from 5.30%. The company reported $5.7 billion of net unrealized gains on fixed maturity securities at year-end, compared with $4.7 billion in 2016.
Segment Performance
- Unum US: Adjusted operating income increased 10.4% excluding the unclaimed death benefits reserve increase, supported by premium growth and favorable benefits experience. Sales increased 19.6%.
- Unum UK: Adjusted operating income declined 8.6% in local currency. Premium income increased 1.9% in local currency, while the benefit ratio rose to 74.4% from 69.4%.
- Colonial Life: Adjusted operating income increased 3.4% excluding the unclaimed death benefits reserve increase. Sales increased 7.5%.
- Closed Block: Adjusted operating income declined 4.3%, reflecting expected premium runoff and lower investment yields. Long-term care interest-adjusted loss ratio was 91.1%.
Debt, Liquidity, and Capital
- Total debt was $2,938.3 million at December 31, 2017, including $199.9 million of short-term debt and $2,738.4 million of long-term debt.
- The company had no borrowings outstanding under its $400 million revolving credit facility, which extends through March 2021; $2.1 million of letters of credit had been issued.
- Unum Group and intermediate holding companies held $864 million of fixed maturity securities, short-term investments, and cash.
- The weighted-average RBC ratio for traditional U.S. insurance subsidiaries was approximately 390%, lower than the prior year primarily because tax reform reduced admitted deferred tax assets.
- Approximately $797 million was available in 2018 for ordinary dividends from traditional U.S. insurance subsidiaries without prior regulatory approval; approximately £260 million was available from Unum Limited subject to regulatory approval.
- Shareholders received $196.0 million of dividends, and the company repurchased 8.2 million shares for approximately $400 million during 2017.
Material Changes Versus the Prior Comparable Period
- Net income increased $62.8 million, while after-tax adjusted operating income increased $60.6 million.
- Premium growth continued across the principal operating segments, led by Unum US and Colonial Life; Closed Block premium income declined as expected.
- Net investment income was broadly stable but remained under pressure from lower investment yields and the low interest-rate environment.
- Benefits experience improved overall, particularly in Unum US, while Unum UK experienced materially less favorable claims results.
- The 2016 Starmount acquisition continued to contribute to Unum US dental and vision premium income and sales.
- The company’s fixed maturity portfolio increased in fair value, while other-than-temporary impairment losses declined to $8.1 million from $30.5 million.
- Debt declined from 2016 levels, primarily due to scheduled repayments, although $200 million of notes was classified as short-term debt because of its 2018 maturity.
- Accumulated other comprehensive income improved to $127.5 million from a $51.0 million loss, primarily due to higher unrealized investment gains and foreign currency effects.
Guidance, Outlook, Risks, and Unusual Items
Management expects continued solid premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline, and further operational efficiency in 2018. Management expects the 2018 effective tax rate to be approximately 19% to 20% and anticipates stronger statutory earnings from insurance subsidiaries.
- The Tax Cuts and Jobs Act produced a $31.5 million net tax benefit in 2017, comprising a $97.9 million deferred-tax remeasurement benefit partially offset by a $66.4 million deemed-repatriation tax expense. These tax effects were described as provisional.
- The company recorded a $39.0 million pretax reserve increase for unclaimed death benefits and a $20.6 million pretax guaranty fund assessment related to an insolvent unaffiliated insurer.
- Management expects low interest rates to continue pressuring investment income, margins, and reserve adequacy. It plans to increase allocations to alternative assets, particularly for long-term care, which may increase investment-income volatility.
- Long-term care remains a material reserve risk. A 25-basis-point change in the assumed discount rate was estimated to affect long-term care reserves by approximately $450 million to $500 million.
- Other significant risks include adverse morbidity and mortality trends, claim duration and resolution assumptions, investment credit losses, reinsurance recoverability, regulatory and tax changes, litigation, cybersecurity, technology execution, rating downgrades, and restrictions on subsidiary dividends.
- The company finalized a Global Resolution Agreement concerning unclaimed property examinations in January 2018; future payments, penalties, or similar state investigations could exceed recorded reserves.
- In January 2018, Unum entered into an agreement to acquire Pramerica Zycie TUiR SA in Poland, subject to customary approvals and closing conditions. Management did not expect a material 2018 financial impact.
Important Facts for Investors to Verify
- Reconcile GAAP net income and EPS with adjusted operating income, including the effects of tax reform, unclaimed death benefits, guaranty fund assessments, and realized investment gains.
- Assess the sustainability of Unum US and Colonial Life claims performance and the deterioration in Unum UK’s benefit ratio.
- Review long-term care reserve adequacy, approved and pending premium rate increases, claim resolution trends, and sensitivity to interest rates and morbidity.
- Monitor RBC ratios after tax reform and any subsequent NAIC or rating-agency methodology changes.
- Confirm holding-company liquidity, debt maturities, subsidiary dividend capacity, and the availability and conditions of the revolving credit facility.
- Evaluate the credit quality, unrealized gains and losses, below-investment-grade exposure, and interest-rate sensitivity of the investment portfolio.
- Track the financial and regulatory consequences of unclaimed property examinations, litigation, reinsurance recoverables, and the proposed Pramerica acquisition.