Unum Group 2022 Q3 Form 10-Q Summary
Business context and reporting period
Unum Group is an insurance and employee-benefits provider operating primarily in the United States, United Kingdom, and Poland. Its products include disability, life, accident, critical illness, dental, vision, and related workplace services. The filing covers the quarter and nine months ended September 30, 2022, compared with the corresponding 2021 periods. Principal segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $2,961.9 million | $2,969.7 million | $8,985.3 million | $9,034.7 million |
| Premium income | $2,391.7 million | $2,353.7 million | $7,212.3 million | $7,106.4 million |
| Income before tax | $515.3 million | $409.9 million | $1,270.5 million | $871.3 million |
| Net income | $410.7 million | $328.6 million | $1,034.6 million | $664.5 million |
| Diluted EPS | $2.04 | $1.60 | $5.11 | $3.24 |
| Adjusted operating income | $379.9 million | $260.4 million | $1,186.3 million | $896.5 million |
| After-tax adjusted operating income | $303.7 million | $210.5 million | $967.6 million | $708.7 million |
Reported net income increased 25.0% in the third quarter and 55.7% for the first nine months. Calculated net margins were approximately 13.9% and 11.5%, respectively. Premium income increased 1.6% in the quarter and 1.5% year to date, while total revenue declined slightly because of lower net investment income and investment losses.
- Net investment income was $511.6 million in Q3 and $1,597.8 million for nine months, down 7.0% and 3.9%, respectively, primarily because of lower miscellaneous investment income and lower portfolio yields.
- Net investment losses were $4.4 million in Q3 and $22.3 million for nine months, compared with a $0.1 million loss and an $85.4 million gain in the prior-year periods.
- Operating cash flow was $1,061.8 million for nine months, up from $907.4 million. Investing activities used $691.2 million and financing activities used $302.3 million. Cash and bank deposits ended at $143.3 million.
- Total assets were $60.9 billion, down from $70.1 billion at December 31, 2021. Stockholders’ equity was $8.7 billion, down from $11.4 billion, primarily reflecting a $3.5 billion decline in accumulated other comprehensive income.
- Fixed maturity securities totaled $34.1 billion at fair value and had a $3.6 billion net unrealized loss, compared with a $5.9 billion net unrealized gain at year-end 2021.
- Long-term debt was $3.4 billion. Available holding-company liquidity was approximately $1.079 billion, and the $500 million revolving credit facility had no borrowings outstanding at September 30, 2022.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 415%.
Material changes versus the prior comparable periods
- Unum US adjusted operating income increased to $275.0 million in Q3 and $742.0 million for nine months, compared with $88.5 million and $383.5 million. The improvement reflected favorable disability and life benefits experience, premium growth, and reserve assumption updates.
- Colonial Life adjusted operating income increased 12.9% in Q3 and 13.0% for nine months, supported by favorable claims experience. Its benefit ratio improved to 46.8% from 55.9% in Q3 and to 47.9% from 54.3% for nine months.
- Unum International adjusted operating income increased to $29.9 million in Q3 and $82.0 million for nine months, aided by higher U.K. investment income and premium income, partly offset by currency translation.
- Closed Block adjusted operating income declined to $34.1 million in Q3 and $207.5 million for nine months, compared with $109.8 million and $318.0 million. Long-term-care and retained individual-disability loss ratios were less favorable, and the business continues to run off.
- Q3 2022 included a $155.0 million pretax reserve reduction from assumption updates, primarily reflecting improved disability claim recovery trends. The company also increased ceded Closed Block individual-disability reserves by $193.9 million, with no net income effect because the related amount was recoverable from the reinsurer.
- Share repurchases totaled $137.5 million for nine months, including 4.2 million shares. The remaining authorization at September 30 was approximately $62.5 million. Dividends paid were $188.4 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects positive 2022 operating trends, solid premium growth, and improved claim experience in the core businesses, while noting continuing claims volatility and uncertainty related to COVID-19.
- Higher interest rates may improve yields on new investments but may create additional unrealized losses on existing holdings. Management reported no intent or requirement to sell securities with unrealized losses before recovery.
- The company expects continued volatility in miscellaneous investment income, including private-partnership valuations and bond calls. Private equity partnership investments had a carrying value of $1.125 billion and $806.2 million of unfunded commitments.
- The company expects to adopt the long-duration targeted improvements accounting standard on January 1, 2023 using the modified retrospective method. Management estimates the transition could reduce AOCI and total equity by approximately $6.5 billion to $7.0 billion using transition-date assumptions; using September 30, 2022 rates, the estimated reduction would be approximately $0.5 billion to $1.0 billion. The change is not expected to affect cash flows or statutory results.
- Unum America’s long-term-care statutory reserve deficiency was approximately $2.16 billion remaining to be phased in as of September 30, 2022. The company recorded $150 million of phase-in amounts during the first nine months and expects to fund the remaining deficiency through operating cash flows and capital contributions.
- Unum Group contributed $465.0 million to affiliated captive reinsurer Fairwind during the first nine months of 2022. Fairwind was not expected to pay dividends during 2022.
- The company entered into a $350 million five-year term loan in August 2022 and used the proceeds to redeem $350 million of senior notes due 2024. It also retired $14 million of junior subordinated debt in September, incurring $4.2 million of total early-retirement costs during Q3.
- Potential risks include reserve inadequacy, long-term-care mortality and morbidity trends, interest-rate and credit-spread movements, investment losses, reinsurance counterparty performance, regulatory capital requirements, litigation, cyber events, foreign exchange, inflation, and changes in insurance or tax laws.
- The filing states that general claim litigation is reserved based on experience and is not expected to be material to consolidated financial condition, but adverse punitive-damages outcomes could materially affect results in a particular period. The ultimate outcomes of broader litigation and regulatory matters cannot be predicted.
Important facts for investors to verify
- Reconcile reported net income with after-tax adjusted operating income and isolate the $155.0 million reserve benefit, reinsurance amortization, and investment losses.
- Assess the effect of the January 1, 2023 long-duration-contract accounting transition on equity, AOCI, reserves, earnings patterns, and disclosures.
- Monitor the statutory long-term-care reserve phase-in, future capital contributions, Fairwind funding, and dividend capacity from insurance subsidiaries.
- Evaluate the sustainability of favorable disability and life claims experience after excluding reserve assumption updates and COVID-related effects.
- Review the $3.6 billion unrealized fixed-income loss, credit-loss allowances, investment-grade concentration, and liquidity under adverse interest-rate or credit conditions.
- Track debt maturities, variable-rate term-loan exposure, credit-facility covenants, ratings, and the company’s ability to fund dividends and repurchases.
- Review the $806.2 million of unfunded private-partnership commitments and the limited liquidity of many underlying investments.