Unum Group 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
Unum Group provides workplace financial protection products, including disability, life, accident, critical illness, dental, and vision insurance, primarily in the United States and United Kingdom. Its principal operating segments are Unum US, Unum UK, and Colonial Life; Closed Block and Corporate are additional segments. The filing covers the unaudited three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $2,927.8 million | $2,819.1 million | $8,717.7 million | $8,447.6 million |
| Premium income | $2,251.8 million | $2,153.6 million | $6,722.8 million | $6,438.7 million |
| Net investment income | $619.2 million | $609.0 million | $1,845.1 million | $1,831.9 million |
| Income before tax | $(377.8) million | $366.8 million | $318.1 million | $1,058.7 million |
| Net income | $(284.7) million | $252.3 million | $274.3 million | $727.3 million |
| Diluted EPS | $(1.30) | $1.12 | $1.24 | $3.19 |
| After-tax adjusted operating income | $300.6 million | $246.1 million | $863.3 million | $722.6 million |
- Reported Q3 net loss primarily reflected a $750.8 million pretax, or $593.1 million after-tax, long-term care reserve increase. Excluding this charge and realized investment gains, adjusted operating income increased 22.1% in the quarter and 19.5% for the first nine months.
- Premium income increased 4.6% in Q3 and 4.4% for the first nine months. Net investment income increased modestly, while the earned investment yield declined to 5.17% for the first nine months from 5.23% for full-year 2017.
- Q3 benefits and change in reserves increased 46.1%, and total benefits and expenses increased 34.8%, largely because of the long-term care reserve strengthening.
- Segment adjusted operating income was $270.9 million for Unum US, $26.1 million for Unum UK, $84.2 million for Colonial Life, $32.2 million for Closed Block, and $(47.1) million for Corporate.
- Q3 benefit ratios were 67.5% for Unum US, 74.2% for Unum UK, and 51.5% for Colonial Life. Excluding the reserve increase, Closed Block long-term care experience was described as consistent with expectations.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow for the first nine months was $1,083.5 million, compared with $876.6 million in 2017. Investing activities used $587.4 million and financing activities used $359.3 million, producing a $136.8 million increase in cash and bank deposits to $214.2 million.
- Total assets were $62.25 billion at September 30, 2018, down from $64.01 billion at December 31, 2017. Total stockholders’ equity declined to $8.52 billion from $9.57 billion, primarily reflecting a $978.5 million year-to-date other comprehensive loss.
- Fixed maturity securities totaled $43.07 billion at fair value. Net unrealized gains declined to $3.2 billion from $5.7 billion at year-end 2017 as Treasury rates and credit spreads increased.
- Long-term debt was $2.98 billion, compared with $2.74 billion at year-end 2017. The company issued $300.0 million of 6.25% junior subordinated notes due 2058 and repaid $200.0 million of maturing senior unsecured notes and $45.0 million of other principal during the period.
- Unum Group and its intermediate holding companies held $973 million of fixed maturity securities, short-term investments, and cash. The credit facility had $2.1 million of letters of credit outstanding and no borrowings.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 385%. Management stated that all U.S. insurance subsidiaries remained above levels requiring regulatory action.
- The company repurchased 4.4 million shares for approximately $200 million during the first nine months and paid $160.2 million of common stock dividends. No shares were repurchased in Q3; approximately $650 million remained under the authorization.
Material changes versus the prior comparable period
- The principal change was the long-term care reserve strengthening following an assumption review. Updated claims incidence, claim termination, mortality, lapse, morbidity, premium-rate-increase, and discount-rate assumptions increased reserves by $750.8 million pretax.
- The reserve increase was driven by approximately $2.2 billion of unfavorable liability and interest-rate assumption changes, partially offset by approximately $1.4 billion of favorable premium-rate-increase assumptions.
- Long-term care assumptions include a 5.5% new-money yield through 2021, increasing gradually to 6.25% by 2025. Management estimated that unfavorable changes in key assumptions could reduce reserve margin by approximately $250 million to $1.0 billion depending on the assumption.
- Accumulated other comprehensive loss shifted to $(868.5) million from income of $127.5 million at year-end 2017, primarily because of lower unrealized fixed-income gains and related reserve adjustments.
- Fitch affirmed the company’s BBB issuer rating and A ratings for domestic insurance subsidiaries but changed its outlook to negative, citing adverse long-term care reserve development.
Guidance, outlook, risks, and unusual items
- Management expects continued premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline, and improved operating efficiency for the remainder of 2018.
- Management intended to resume share repurchases in Q4 2018 and stated that the long-term care reserve increase was not expected to impair capital deployment plans.
- Management expects future quarterly effective tax rates generally in the 19% to 20% range. The company was still finalizing the Tax Cuts and Jobs Act accounting and increased its provisional repatriation-tax estimate to $77.9 million.
- A $266.5 million gross unrecognized tax benefit liability was recorded in Q3 related to a 2017 tax-return position; the company stated that the item could reasonably reverse within 12 months.
- Low interest rates continue to pressure investment yields and insurance liability discount rates. The company plans to gradually increase alternative-asset allocations, which may increase net investment income volatility.
- U.K. economic uncertainty related to Brexit may affect growth, claims, investment values, foreign exchange, and solvency ratios.
- The company faces securities class actions and shareholder derivative actions related primarily to disclosures concerning long-term care reserves and policy experience. The matters were described as preliminary, no loss range could be estimated, and no reserves were established.
- Other risks include morbidity and mortality deviations, claim duration and recovery rates, premium-rate approvals, investment defaults and impairments, credit-rating changes, regulatory developments, litigation, cyber risk, reinsurance counterparty risk, and liquidity constraints.
- On October 1, 2018, after the reporting period, the company completed its purchase of Pramerica Zycie TUiR SA in Poland. Management did not expect a material 2018 impact.
Important facts for investors to verify
- Whether long-term care claim incidence, claim termination, morbidity, mortality, lapse, premium-rate approvals, and investment-yield experience are developing consistently with the revised reserve assumptions.
- The sensitivity of reserve margins and statutory capital to adverse long-term care assumption changes and the effect on future RBC ratios.
- The sustainability of adjusted operating income after excluding the long-term care reserve charge and other non-GAAP items.
- The impact of rising interest rates and wider credit spreads on unrealized investment gains, stockholders’ equity, investment income, and reserve economics.
- The pace of share repurchases, dividends, debt service, and cash transfers from regulated insurance subsidiaries.
- The status and potential exposure from the securities class actions, derivative suits, tax-position liability, unclaimed-property matters, and other regulatory contingencies.
- Whether the negative Fitch outlook or future rating actions affect financing costs, derivative collateral requirements, capital flexibility, or new business.