Unum Group 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unum Group is an insurance holding company providing disability, life, accident, critical illness, dental, 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 quarter and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Premium income | $2,331.2 million | $2,251.8 million | $7,013.0 million | $6,722.8 million |
| Total revenue | $2,960.0 million | $2,927.8 million | $8,964.3 million | $8,717.7 million |
| Net investment income | $599.4 million | $619.2 million | $1,819.0 million | $1,845.1 million |
| Income before tax | $299.4 million | $(377.8) million | $1,004.7 million | $318.1 million |
| Net income | $242.0 million | $(284.7) million | $804.1 million | $274.3 million |
| Diluted EPS | $1.16 | $(1.30) | $3.81 | $1.24 |
| After-tax adjusted operating income | $282.7 million | $300.6 million | $849.9 million | $863.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $1,256.8 million | $1,083.5 million |
Premium income increased 3.5% in the quarter and 4.3% for the first nine months. Net investment income declined 3.2% and 1.4%, respectively, reflecting lower yields and miscellaneous investment income, partly offset by higher invested assets. The reported Q3 2019 net margin was approximately 8.2% of revenue; the filing does not present a single consolidated operating margin.
Balance Sheet, Debt, and Liquidity
- Total assets were $66.96 billion at September 30, 2019, versus $61.88 billion at December 31, 2018.
- Total investments were $55.59 billion, including $47.44 billion of fixed maturity securities at fair value.
- Stockholders’ equity was $9.63 billion, compared with $8.62 billion at year-end 2018.
- Short-term debt was $399.7 million and long-term debt was $3.04 billion at September 30, 2019.
- Cash and bank deposits were $77.0 million at September 30, 2019, compared with $94.0 million at December 31, 2018.
- Unum Group and its intermediate holding companies held approximately $1.04 billion of cash, short-term investments, and fixed maturity securities.
- Operating cash flow of $1.26 billion exceeded financing cash uses of $67.9 million; investing activities used $1.21 billion, producing a $17.0 million decrease in cash.
- The weighted-average risk-based capital ratio for traditional U.S. insurance subsidiaries was approximately 368%, described by management as in line with expectations and significantly above regulatory-action levels.
- The amended revolving credit facility increased to $500 million and was extended through April 2024. A separate $100 million facility expires in April 2022. No borrowings were outstanding under either facility at September 30, 2019.
Material Changes Versus Prior Comparable Period
- Net income improved from a Q3 2018 loss of $284.7 million to Q3 2019 income of $242.0 million, primarily because Q3 2018 included a $750.8 million pretax long-term-care reserve increase.
- Underlying profitability declined modestly: after-tax adjusted operating income decreased to $282.7 million from $300.6 million in Q3 and to $849.9 million from $863.3 million for the nine-month period.
- Adjusted operating income in Q3 increased at Colonial Life by 3.6%, while it declined at Unum US by 3.5%, Unum International by 7.3%, and the Closed Block by 16.5%. Nine-month adjusted operating income was broadly stable overall.
- Unum US premium income rose 3.9% in Q3 and 4.8% year to date; Colonial Life rose 5.0% and 5.6%; Unum International rose 10.4% and 11.6%; Closed Block premium income declined 3.9% in both periods.
- The company repurchased 9.0 million shares for approximately $300 million during the first nine months and paid $170.3 million of common-stock dividends.
- Unrealized gains on fixed maturity securities increased substantially, with net unrealized gains of approximately $6.6 billion at September 30, 2019 versus $2.7 billion at December 31, 2018, mainly because of lower U.S. Treasury rates.
- The company issued $400 million of 4.0% senior notes due 2029 in June and $450 million of 4.5% senior notes due 2049 in September. It retired $336.5 million of debt and capital securities in September and incurred $25.2 million of pretax early-retirement costs.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued premium growth in core businesses, generally stable benefits experience, expense discipline, and an effective tax rate of approximately 20% for 2019.
- Management expects continued stable adjusted operating income growth in 2019 for Unum US and growth in sales, premium, and adjusted operating earnings at Colonial Life.
- Low interest rates continue to pressure investment yields, discount rates, and profit margins. Management believes the company has substantial leverage to rising interest rates, payroll growth, and wage inflation.
- The Closed Block is expected to decline over time as its legacy disability and long-term-care business winds down. Long-term-care results remain sensitive to mortality, morbidity, claim resolutions, interest rates, premium-rate increases, benefit elections, and persistency.
- The U.K.’s economic and political uncertainty related to Brexit may affect growth, investment valuations, claims experience, currency translation, and solvency ratios.
- Q3 2019 included a $20.8 million other-than-temporary impairment on fixed maturity securities, a $26.2 million net realized investment loss, and a $25.2 million pretax debt-retirement cost.
- Long-term-care benefits experience in Q3 2019 was unfavorable but within management’s stated expectations; the filing identifies an expected long-term interest-adjusted loss ratio range of 85% to 90% for the long-term-care block.
- Three consolidated securities class actions relating to disclosures about long-term-care experience and reserves remained at a preliminary stage. The company denied the allegations, had not established reserves, and could not estimate reasonably possible losses.
- Other key risks include sustained low interest rates, adverse claims and reserve development, investment defaults and impairments, regulatory and legal matters, reinsurance counterparty risk, cyber events, ratings downgrades, technology execution, and liquidity constraints.
Important Facts for Investors to Verify
- Whether the company’s long-term-care assumptions and approved premium-rate increases remain adequate as claims incidence, claim terminations, mortality, and interest rates develop.
- Whether lower investment yields continue to reduce adjusted operating income and segment margins.
- The sustainability of capital returns, including the remaining approximately $616 million share-repurchase authorization, relative to insurance subsidiary capital requirements.
- The effect of the 2019 debt issuance and retirement transactions on interest expense, leverage, refinancing needs, and credit ratings.
- The credit quality, unrealized gains, impairment exposure, and liquidity of the fixed maturity investment portfolio, particularly below-investment-grade holdings.
- Potential outcomes and financial exposure from the consolidated securities litigation and other regulatory or unclaimed-property matters.
- The impact of Brexit-related economic conditions, foreign-exchange movements, and U.K. solvency requirements on Unum International.
- The company’s planned adoption of the long-duration insurance accounting standard, which management expected could materially affect financial position, results of operations, and disclosures.