Unum Group 2019 Form 10-K Summary
Business context and reporting period
Unum Group provides workplace-focused financial protection products in the United States, United Kingdom, and Poland, including disability, life, accident, critical illness, dental, vision, and related administrative services. Principal operating segments are Unum US, Unum International, and Colonial Life; Closed Block and Corporate are additional reporting segments. The filing covers the fiscal year ended December 31, 2019, with fourth-quarter results presented as unaudited supplemental information.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Premium income | $9,365.6 million | $8,986.1 million | +4.2% |
| Total revenue | $11,998.9 million | $11,598.5 million | +3.5% |
| Net investment income | $2,435.3 million | $2,453.7 million | -0.7% |
| Income before tax | $1,382.1 million | $627.8 million | +120.1% |
| Net income | $1,100.3 million | $523.4 million | +110.2% |
| Diluted earnings per share | $5.24 | $2.38 | +120.2% |
| After-tax adjusted operating income | $1,140.6 million | $1,145.0 million | -0.4% |
| Operating cash flow | $1,741.6 million | $1,536.5 million | +13.3% |
Reported 2019 net income benefited from the absence of the $750.8 million pretax long-term-care reserve increase recorded in 2018. Excluding unusual items and realized investment gains or losses, adjusted operating income was broadly stable year over year. The 2019 effective tax rate was 20.4%, compared with 16.6% in 2018.
For the fourth quarter of 2019, premium income was $2,352.6 million, total revenue was $3,034.6 million, pretax income was $377.4 million, and net income was $296.2 million, or $1.44 diluted earnings per share. Fourth-quarter 2018 net income was $249.1 million, or $1.15 per diluted share. Fourth-quarter 2019 included $2.1 million of pretax debt-retirement costs.
Margins, segment performance, and material changes
- Consolidated benefit ratio improved to 80.0% from 89.3%, primarily because 2018 included the long-term-care reserve increase. Excluding that item, the 2018 benefit ratio was 80.9%.
- Unum US adjusted operating income increased 1.6% to $1,031.1 million; premium income rose 4.9% and the benefit ratio improved to 66.9% from 67.2%. Sales declined 0.4%, and supplemental and voluntary persistency was less favorable.
- Unum International adjusted operating income declined 5.3% to $107.9 million in reported dollars. Premium income increased 10.8%, helped by the 2018 acquisition of Unum Poland, while Unum UK benefits experience deteriorated and its benefit ratio increased to 76.7% from 74.4%.
- Colonial Life adjusted operating income increased 2.8% to $344.5 million. Premium income rose 5.1%, while its benefit ratio was broadly stable at 51.3% versus 51.4%.
- Closed Block adjusted operating income was $137.7 million versus $125.5 million excluding the 2018 reserve charge. Premium income declined 4.0% as the legacy block continues to run off; long-term-care premium rate increases partly offset policy terminations.
- Net investment income declined modestly as the earned book yield fell to 5.00% from 5.15%, reflecting the low-interest-rate environment. The net unrealized gain on fixed maturity securities increased to $6.4 billion from $2.7 billion.
Cash flow, capital, debt, and liquidity
- Net cash used in investing activities was $1,393.5 million, primarily reflecting purchases of investments. Net cash used in financing activities was $358.0 million.
- At year-end, total assets were $67.0 billion and stockholders’ equity was $10.0 billion, compared with $61.9 billion and $8.6 billion, respectively, in 2018.
- Total debt was $3.33 billion, including $399.7 million classified as short-term debt and $2.93 billion of long-term debt. Contractual principal maturities include $400 million in 2020 and $350 million in 2024.
- During 2019, Unum issued $400 million of 4.00% senior notes due 2029 and $450 million of 4.50% senior notes due 2049. It retired $433.1 million of debt and incurred $27.3 million of related pretax costs.
- Unum amended its revolving credit facility to $500 million through April 2024 and added a separate $100 million facility through April 2022. No borrowings were outstanding at year-end; $0.6 million of letters of credit had been issued under the primary facility.
- Traditional U.S. insurance subsidiaries had a weighted-average NAIC Company Action Level RBC ratio of approximately 365%. Approximately $1.035 billion of ordinary dividends was available from traditional U.S. subsidiaries in 2020 without prior regulatory approval, subject to applicable restrictions.
- Unum Group and intermediate holding companies held $863 million of fixed maturity securities, short-term investments, and cash. The company repurchased 12.3 million shares for approximately $400 million and paid $229.2 million in common-stock dividends during 2019.
Outlook, risks, contingencies, and unusual items
Management expects positive operating trends in core businesses during 2020, including solid premium growth, stable underwriting results, operating efficiencies, and continued capital returns. Management also expects stable adjusted operating income growth in Unum US and Colonial Life. The company intends to continue investing in digital capabilities, leave-management services, distribution, and technology, while evaluating acquisition opportunities.
Key pressures include sustained low interest rates, lower reinvestment yields, reserve sensitivity to discount rates, morbidity and mortality trends, claim incidence and resolution rates, long-term-care premium-rate approvals, economic conditions, competition, foreign-exchange movements, reinsurance collectibility, regulatory capital requirements, cybersecurity, technology execution, and litigation.
- Long-term-care reserves were $12.1 billion and are highly sensitive to morbidity, mortality, claim incidence, claim termination, persistency, interest rates, and future premium-rate increases. Reasonably possible variations in assumptions could materially affect reserve margins.
- The Closed Block long-term-care business is in loss recognition; management expects a long-term interest-adjusted loss ratio of approximately 85% to 90%, with quarterly volatility.
- The filing identifies consolidated securities litigation related to disclosures concerning long-term-care policy terminations and claim incidence. The matters were in a preliminary stage, no reserves had been established, and the company could not estimate reasonably possible losses.
- Unclaimed-death-benefit investigations and settlement-related obligations could result in payments or penalties exceeding established reserves.
- The company recorded $25.3 million of other-than-temporary impairment losses on fixed maturity securities in 2019 and reported a $23.2 million net realized investment loss.
- The filing states that the U.K.'s withdrawal from the European Union was not expected to materially affect underlying U.K. operations, but economic growth, claims, investment values, solvency ratios, taxes, and reported results could remain volatile.
Most important facts for investors to verify
- Reconcile reported net income with adjusted operating income, particularly the effects of the 2018 long-term-care reserve charge and 2019 debt-retirement costs.
- Review the adequacy and sensitivity of the $12.1 billion long-term-care reserve, including the success of premium-rate increase filings and actual claim resolution experience.
- Monitor investment yields, credit impairments, unrealized gains, below-investment-grade exposure, and the impact of interest-rate changes on reserves and capital.
- Track RBC ratios, subsidiary dividend capacity, holding-company liquidity, debt maturities, and compliance with revolving-credit covenants.
- Assess persistency and sales trends, especially in Unum US voluntary benefits, Colonial Life, and Unum UK.
- Review developments in securities litigation, unclaimed-death-benefit matters, regulatory examinations, reinsurance recoverability, and cybersecurity risks.
- Consider the planned adoption of long-duration insurance accounting changes in 2022, which management expects may materially affect financial position, results, and disclosures.