Unum Group 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unum Group is an insurance holding company providing disability, life, accident, critical illness, dental and vision, and related workplace benefits in the United States, United Kingdom, and Poland. Principal segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods of 2019.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $2,996.3 million | $2,960.0 million | $8,888.6 million | $8,964.3 million |
| Premium income | $2,318.1 million | $2,331.2 million | $7,058.2 million | $7,013.0 million |
| Net investment income | $613.2 million | $599.4 million | $1,767.2 million | $1,819.0 million |
| Income before tax | $299.6 million | $299.4 million | $839.3 million | $1,004.7 million |
| Net income | $231.1 million | $242.0 million | $657.6 million | $804.1 million |
| Diluted EPS | $1.13 | $1.16 | $3.23 | $3.81 |
| After-tax adjusted operating income | $245.9 million | $282.7 million | $770.1 million | $849.9 million |
Q3 net income declined 4.5% year over year, while nine-month net income declined 18.2%. Approximate net margins were 7.7% for Q3 and 7.4% for the nine-month period; the filing does not present these margins as a primary GAAP metric. Adjusted operating income declined 13.0% in Q3 and 9.4% for the first nine months.
Net realized investment gains were $4.4 million in Q3 versus a $26.2 million loss in the prior-year quarter, but the nine-month realized investment loss widened to $105.8 million from $32.4 million. The nine-month loss included $59.3 million of credit losses on fixed maturity securities.
Operating cash flow was $1,278.8 million for the first nine months, compared with $1,256.8 million in 2019. Investing activities used $1,090.1 million, and financing activities used $169.0 million. Cash and bank deposits increased to $103.8 million from $84.1 million at year-end 2019.
At September 30, total assets were $69.6 billion, stockholders’ equity was $10.9 billion, and total liabilities were $58.7 billion. Fixed maturity securities totaled $49.3 billion at fair value, including $8.0 billion of net unrealized gains. The earned book yield on the investment portfolio was 4.73% for the first nine months, down from 5.00% for full-year 2019.
Long-term debt was $3.38 billion, with no short-term debt outstanding. Unum Group and intermediate holding companies held $1.178 billion of cash, short-term investments, and short-dated fixed maturity securities. The company had $30.2 million of FHLB advances and access to $600 million of unsecured revolving credit facilities, with no outstanding borrowings under those facilities.
Material Changes Versus the Prior Comparable Period
- Unum US adjusted operating income declined 28.0% in Q3 and 11.2% for the nine months, primarily due to unfavorable benefits experience, particularly in group life, higher expenses, lower sales, and lower persistency. Its benefit ratio increased to 70.9% from 67.2% in Q3.
- Unum International adjusted operating income declined 11.6% in Q3 and 33.5% for the nine months, driven primarily by unfavorable benefits experience in the U.K. and lower investment income. The U.K. benefit ratio rose to 77.1% from 73.4% in Q3.
- Colonial Life adjusted operating income increased 5.7% in Q3 and 2.9% for the nine months, supported by higher investment income and lower operating expenses, partly offset by less favorable benefits experience.
- Closed Block adjusted operating income increased 163.2% in Q3 and 49.8% for the nine months, primarily due to favorable long-term care benefits experience, including higher claimant mortality, partly offset by unfavorable individual disability experience.
- Sales declined across the principal operating segments: Unum US sales decreased 18.5% in Q3 and 11.9% for the nine months; Unum International decreased 9.7% and 0.3%; and Colonial Life decreased 27.6% and 27.3%, respectively.
- The company incurred $23.3 million of pretax costs for an organizational design update in Q3 and recognized a $12.7 million pretax right-of-use asset impairment in Q2. No material additional organizational-design costs are expected.
- The company issued $500 million of 4.500% senior notes due 2025 in May 2020 and repaid $400 million of 5.625% senior notes at maturity in September 2020. No significant debt maturities are expected until 2024.
- No common shares were repurchased during the first nine months of 2020, compared with $297.2 million of repurchases in the prior-year period. The remaining authorization was $516.2 million at September 30, 2020, but management did not expect to resume repurchases through the remainder of the program.
Guidance, Outlook, Risks, and Unusual Items
Management expects near-term top-line growth to remain challenging and claims volatility to continue because of COVID-19. Low interest rates are expected to pressure investment yields and profit margins and may affect insurance liability discount rates. Management also expects continued volatility in partnership investment income and possible investment credit migration.
COVID-19 affected claims incidence, claim resolutions, sales activity, persistency, premium collectability, and operating processes. The company reported higher life claims incidence, delayed U.K. disability claim resolutions, lower early-year dental and vision utilization, higher third-quarter utilization, and higher long-term care mortality with lower submitted incidence. The ultimate duration and financial impact of the pandemic could not be determined.
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 from 2020 through 2026, with an estimated 2020 phase-in of $200 million to $250 million. Management stated that the examination conclusion does not affect GAAP long-term care reserves or financial results and expects to fund the statutory strengthening through cash flows.
The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 380%. Fitch and Moody’s downgraded relevant ratings in 2020, and AM Best changed its outlook to negative; S&P affirmed its ratings and outlook. Further downgrades could affect distribution, sales, capital costs, liquidity, and the company’s ability to raise capital.
Other risks include sustained low interest rates, additional investment credit losses or defaults, commercial real estate weakness, premium collection problems, higher claims, reserve inadequacy, regulatory changes, litigation, reinsurance counterparty risk, cybersecurity threats, foreign exchange volatility, and impairment of goodwill, deferred acquisition costs, or deferred tax assets. The securities class-action litigation was dismissed with prejudice, but plaintiffs appealed in June 2020; the outcome remains uncertain and no reserve was established.
Important Facts for Investors to Verify
- Verify the progression of long-term care statutory reserve contributions, the permitted phase-in schedule, and the impact on subsidiary capital and dividend capacity.
- Monitor COVID-19-related claims incidence, claim resolution rates, persistency, premium collections, sales, and any further allowance increases.
- Assess the sustainability of investment income under prolonged low interest rates and the effect of credit downgrades, defaults, energy exposure, and commercial real estate conditions.
- Reconcile GAAP net income with after-tax adjusted operating income, including realized investment losses and the organizational design and lease impairment charges.
- Review debt maturities, refinancing requirements, credit facility covenants, FHLB advances, and available holding-company liquidity.
- Track ratings actions, regulatory developments, litigation appeals, and any changes in reserve adequacy or risk-based capital ratios.