Unum Group 2023 Q3 Form 10-Q Summary
Business context and reporting period
Unum Group is an insurance provider operating primarily in the United States, United Kingdom, and Poland. Its principal products include disability, life, accident, critical illness, dental, vision, and related workplace benefit services. The principal operating segments are Unum US, Unum International, and Colonial Life; Closed Block and Corporate are additional reporting segments.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2023. Prior-period amounts were adjusted for the January 1, 2023 adoption of ASU 2018-12, which significantly changed accounting for long-duration insurance contracts.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $3,092.5 million | $2,959.1 million | $9,240.8 million | $8,979.3 million |
| Premium income | $2,525.9 million | $2,388.9 million | $7,494.3 million | $7,206.3 million |
| Net investment income | $526.0 million | $511.6 million | $1,565.9 million | $1,597.8 million |
| Income before tax | $261.7 million | $641.6 million | $1,211.4 million | $1,376.5 million |
| Net income | $202.0 million | $510.3 million | $953.2 million | $1,118.0 million |
| Diluted EPS | $1.02 | $2.53 | $4.81 | $5.52 |
| Adjusted operating income | $490.2 million | $416.2 million | $1,478.1 million | $1,218.1 million |
| After-tax adjusted operating income | $381.7 million | $332.3 million | $1,163.1 million | $992.5 million |
GAAP net income margin was approximately 6.5% in the third quarter and 10.3% for the first nine months, compared with approximately 17.2% and 12.5%, respectively, in the comparable periods. After-tax adjusted operating income increased 14.9% in the quarter and 17.2% year to date, reflecting improved underlying operating performance despite unfavorable reserve assumption updates.
- Premium income increased 5.7% in the quarter and 4.0% year to date, supported by in-force growth and higher sales.
- Operating cash flow was $859.3 million for the first nine months, down from $1,061.8 million in 2022. Investing activities used $498.6 million and financing activities used $314.0 million.
- Cash and bank deposits were $165.9 million at September 30, 2023, compared with $119.2 million at December 31, 2022.
- Total assets were $60.0 billion and stockholders’ equity was $9.6 billion at September 30, 2023. Long-term debt was $3.43 billion and short-term debt was $2.0 million.
- Holding company liquidity was $1.182 billion. The $500 million revolving credit facility had no borrowings outstanding, and letters of credit totaled $0.4 million.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 470%.
- Fixed maturity securities had a fair value of $34.1 billion and gross unrealized losses of $4.6 billion, primarily attributable to higher interest rates. Management stated it had no intent or requirement to sell securities before recovery.
Material changes versus the prior comparable period
- GAAP earnings declined sharply because Q3 2023 included a $177.2 million pretax unfavorable reserve assumption update, compared with a $243.3 million favorable update in Q3 2022. The 2023 update was driven primarily by Closed Block long-term care assumptions, partly offset by favorable Unum US group disability and Colonial Life updates.
- The Closed Block long-term care update increased future policy benefit liabilities by $368.1 million and reflected lower expected active-policy lapses and mortality, partly offset by higher expected future premium rate increases.
- Unum US adjusted operating income rose to $357.8 million in Q3 and $1.013 billion year to date, supported by favorable group disability experience and premium growth. Its benefit ratio improved to 59.1% in Q3 from 63.8%.
- Unum International adjusted operating income increased to $36.8 million in Q3 and $118.7 million year to date, primarily from favorable U.K. group disability experience and higher premium income. Reported Q3 sales declined 24.7%, although nine-month sales increased 24.1%.
- Colonial Life adjusted operating income declined to $102.9 million in Q3 and $312.3 million year to date, mainly because of higher deferred acquisition cost amortization and operating expenses.
- Closed Block adjusted operating income declined to $34.2 million in Q3 and $143.6 million year to date. The long-term care interest-adjusted loss ratio rose to 105.3% in Q3 and 94.7% year to date, excluding reserve assumption updates.
- During Q3, Unum sold more than $700 million of shorter-duration long-term care bonds and reinvested the proceeds in higher-quality, higher-yielding, longer-duration bonds. The transactions generated approximately $35 million of realized investment losses but are expected to improve future investment income and asset-liability matching.
- The company repurchased 3.9 million shares for $175.4 million during the first nine months and paid $205.7 million of common stock dividends. The remaining authorization under the 2023 program was $75.9 million at September 30. In October 2023, the board authorized a new $500 million repurchase program beginning January 1, 2024.
Guidance, outlook, risks, contingencies, and unusual items
Management expects positive operating trends in core businesses, including premium growth and improved claim experience, and anticipated increased adjusted operating income growth for 2023. Management also expects continued investment in digital capabilities, technology, customer experience, and workplace distribution.
- Higher interest rates may increase yields on new investments and reduce insurance reserves through higher discount rates, but may also create additional unrealized investment losses.
- Long-term care remains the principal reserve and earnings uncertainty. Claim incidence, claim resolution, morbidity, mortality, lapses, premium rate increases, and investment returns may materially affect future results. The filing identifies potential sensitivity in present-value long-term care cash flows ranging from approximately $150 million to $1.08 billion under specified assumption scenarios.
- The company continues to seek state approval for long-term care premium rate increases. A Maine regulatory examination previously identified a statutory long-term care premium deficiency reserve requirement for Unum America. The remaining amount to be recognized was $1.3015 billion at September 30, 2023, with no additional funding expected to be required by year-end under the stated phase-in plan.
- Unum Group contributed $600 million to affiliated captive reinsurer Fairwind during the first nine months; Fairwind paid no dividends in 2022 and was not expected to pay dividends in 2023.
- Investment risks include credit losses, commercial real estate exposure, private-market valuation and liquidity, interest-rate volatility, and approximately $836.9 million of unfunded private equity partnership commitments.
- Other risks include adverse claims experience, reinsurance counterparty performance, regulatory changes, litigation, cybersecurity, technology execution, rating downgrades, foreign currency movements, and limitations on dividends from insurance subsidiaries.
- The filing states that no material changes occurred in previously disclosed risk factors. General claim litigation is reserved based on experience, but adverse outcomes, including punitive damages, could materially affect results in a particular period. The ultimate outcome of certain legal and regulatory matters cannot be estimated clearly.
Important facts for investors to verify
- Reconcile GAAP net income and adjusted operating income, particularly the $177.2 million pretax reserve assumption charge and the treatment of investment losses, reinsurance amortization, and non-contemporaneous reinsurance.
- Review the sustainability of Unum US claims improvement and premium growth, including whether favorable group disability experience normalizes.
- Assess the adequacy and sensitivity of Closed Block long-term care reserves, approved and pending premium rate increases, and statutory reserve funding requirements.
- Monitor the $4.6 billion gross unrealized loss in fixed maturity securities, portfolio credit quality, interest rates, and the company’s ability to hold securities to recovery.
- Evaluate liquidity after dividends, share repurchases, the $600 million Fairwind contribution, debt service, and approximately $900 million of disclosed investment commitments.
- Confirm statutory capital ratios, rating agency outlooks, regulatory dividend capacity, and the impact of any future rating or solvency changes.
- Consider the comparability of 2022 results because all prior periods were recast for ASU 2018-12 and may not be comparable with historically reported filings.