Unum Group 2020 First-Quarter 10-Q Summary
Business context and reporting period
Unum Group provides disability, life, accident, critical illness, dental, vision, and related workplace benefits in the United States, United Kingdom, and Poland. Its principal segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. The filing covers the unaudited three months ended March 31, 2020, with comparison to March 31, 2019. Results were reported during the initial COVID-19 pandemic and include management estimates regarding its potential effects.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $2,871.1 million | $2,987.6 million | (3.9%) |
| Premium income | $2,371.4 million | $2,338.7 million | 1.4% |
| Net investment income | $585.0 million | $594.7 million | (1.6%) |
| Net realized investment gain (loss) | $(144.0) million | $1.1 million | Unfavorable change |
| Income before income tax | $202.1 million | $353.3 million | (42.8%) |
| Net income | $161.0 million | $280.9 million | (42.7%) |
| Diluted earnings per share | $0.79 | $1.31 | (39.7%) |
| After-tax adjusted operating income | $274.1 million | $280.3 million | (2.2%) |
| After-tax adjusted operating income per diluted share | $1.35 | $1.31 | 3.1% |
| Net cash provided by operating activities | $219.9 million | $516.8 million | (57.4%) |
Premium growth was driven by the in-force block and prior-period sales, while investment income declined because of lower yields. The reported net loss from investments included $53.9 million of fixed-maturity credit losses, primarily related to energy-sector securities, and an $86.9 million loss on an embedded derivative in a modified coinsurance arrangement.
At March 31, 2020, total assets were $65.3 billion, stockholders’ equity was $9.8 billion, and cash and bank deposits were $337.2 million. Total investments were $53.8 billion, including $45.3 billion of fixed-maturity securities. The fixed-maturity portfolio had $5.3 billion of gross unrealized gains and $1.1 billion of gross unrealized losses, compared with $6.5 billion and $91.2 million, respectively, at December 31, 2019.
Short-term debt was $399.8 million and long-term debt was $2.9 billion. The short-term debt consisted of 5.625% senior unsecured notes due in the third quarter of 2020. Certain insurance subsidiaries had $451.7 million of Federal Home Loan Bank advances. Unum Group had access to $600 million of unsecured revolving credit facilities, with no borrowings outstanding and $0.6 million of letters of credit issued.
The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 365%. Holding company and intermediate holding company liquidity included $1.025 billion of cash, short-term investments, and fixed-maturity securities. The company paid $57.8 million of common dividends and made no share repurchases during the quarter.
Material changes versus the prior comparable period
- Net income decreased 42.7%, primarily because Q1 2020 included substantial realized investment losses versus a small realized gain in Q1 2019.
- Adjusted operating income declined modestly to $346.1 million before tax from $352.2 million, while after-tax adjusted operating income per share increased because diluted shares declined to 203.4 million from 214.4 million.
- Unum US adjusted operating income increased 3.8% to $261.8 million, supported by premium growth and favorable benefits experience. Its benefit ratio improved to 64.4% from 65.3%.
- Unum International adjusted operating income decreased 33.3% to $19.4 million, primarily because of unfavorable benefits experience in the United Kingdom. The U.K. benefit ratio increased to 80.5% from 70.2%.
- Colonial Life adjusted operating income decreased 4.8% to $81.1 million, with its benefit ratio increasing to 52.4% from 51.1%.
- Closed Block adjusted operating income decreased 4.2% to $29.7 million. Long-term-care experience improved, while individual-disability results were less favorable.
- Sales declined 15.3% at Unum US and 8.7% at Colonial Life, while Unum International sales increased 5.8% in U.S. dollars.
- Operating cash flow fell from $516.8 million to $219.9 million. Investing activities provided $122.6 million in Q1 2020 versus using $365.2 million in Q1 2019, partly because of higher collateral-related funding. The company did not repurchase stock, compared with $100 million of repurchases in Q1 2019.
- Adoption of the current expected credit loss standard reduced beginning retained earnings by $18.9 million and increased reported allowances for receivables, mortgage loans, and investments.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide quantitative full-year earnings guidance. It expects COVID-19 to create near-term challenges for sales, persistency, premium collection, claims incidence, investment valuations, and capital.
- Management estimated that private-equity partnership investments could produce second-quarter 2020 losses of approximately $30 million to $50 million, or 5% to 8% of the portfolio, as delayed first-quarter partnership results are recorded.
- Unum expects continued pressure on margins from low interest rates, including lower investment yields and potentially lower discount rates applied to insurance liabilities.
- COVID-19 had not significantly affected Q1 reported operations, but premium-receivable credit-loss allowances increased to $32.6 million at March 31, 2020, primarily because of unemployment and customer-collectability concerns. The company also increased its commercial mortgage-loan allowance to $11.1 million.
- The company expects sales disruption, lower persistency, and potentially lower premium income if economic conditions persist. It may experience higher claims, especially in short-term disability, leave-management, and group-life products.
- The Maine Bureau of Insurance concluded that Unum America’s long-term-care statutory reserves were deficient by $2.1 billion as of December 31, 2018. The regulator permitted the additional statutory reserves to be phased in over seven years beginning in 2020; the estimated 2020 phase-in is $200 million to $250 million. The company stated that this conclusion does not affect GAAP long-term-care reserves or results.
- Fitch downgraded the company and rated domestic insurance subsidiaries on April 16, 2020, and Moody’s downgraded them on May 4, 2020; both cited long-term-care exposure, capital flexibility, and COVID-19 risks. Moody’s and Fitch assigned negative outlooks. S&P affirmed its ratings and outlook.
- Unum continues to face securities class-action litigation concerning prior disclosures about long-term-care policy terminations, claims incidence, reserves, and capital management. The company has not established reserves and cannot estimate reasonably possible losses.
- Other significant risks include credit deterioration and defaults in the investment portfolio, commercial real-estate vacancies, sustained low interest rates, reinsurance counterparty risk, regulatory changes, litigation, cyber risk, ratings downgrades, and potential impairment of goodwill, deferred acquisition costs, or deferred tax assets.
Important facts investors should verify
- Whether COVID-19 causes materially higher claims, premium lapses, collection losses, or sales declines after March 31, 2020.
- The magnitude and timing of the expected $30 million to $50 million partnership-investment losses.
- Energy-sector credit performance, additional investment impairments, ratings migrations, and effects on statutory capital.
- Progress and funding requirements for the $200 million to $250 million annual statutory long-term-care reserve phase-in and the ultimate resolution of the $2.1 billion deficiency conclusion.
- Liquidity available to refinance or repay the $400 million of notes due in the third quarter of 2020 and compliance with credit-facility covenants.
- Changes in insurer financial-strength ratings, RBC ratios, U.K. solvency ratios, and the company’s ability to receive dividends from insurance subsidiaries.
- Emerging claims and reserve trends in long-term care, disability, group life, and other long-duration products.