Unum Group 2021 Form 10-K Summary
Business context and reporting period
Unum Group is an insurance holding company providing disability, life, accident, critical illness, dental, vision, long-term care, and related workplace benefits in the United States, United Kingdom, and Poland. Its 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, 2021, with comparisons primarily to 2020 and 2019.
Premium income mix in 2021 was approximately 64.1% Unum US, 7.6% Unum International, 17.8% Colonial Life, and 10.5% Closed Block. The company employed approximately 10,300 people at year-end.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $12,013.8 million | $13,162.1 million | Down 8.7% |
| Premium income | $9,481.0 million | $9,378.1 million | Up 1.1% |
| Net investment income | $2,213.2 million | $2,360.7 million | Down 6.2% |
| Net investment gain | $76.7 million | $1,199.1 million | Lower due to prior-year reinsurance transaction gain |
| Income before tax | $1,063.0 million | $964.0 million | Up 10.3% |
| Net income | $824.2 million | $793.0 million | Up 3.9% |
| Diluted EPS | $4.02 | $3.89 | Up 3.3% |
| After-tax adjusted operating income | $890.7 million | $1,005.4 million | Down 11.4% |
| Net cash from operating activities | $1,387.5 million | $469.3 million | Up substantially |
| Stockholders’ equity | $11,416.4 million | $10,871.0 million | Up 5.0% |
The consolidated benefit ratio was 80.1% in 2021 versus 95.7% in 2020. Excluding reserve assumption updates and the Closed Block individual disability reinsurance transaction, benefit ratios were 80.7% and 80.2%, respectively. The earned book yield on investments increased to 4.85% from 4.75%, but net investment income declined because of lower yields and reduced assets supporting reinsured Closed Block business.
Total assets were $70.1 billion and total liabilities were $58.7 billion at December 31, 2021. Reserves for future policy and contract benefits were $48.0 billion, including $13.4 billion of long-term care reserves. Long-term debt was $3.44 billion, compared with $3.35 billion at year-end 2020.
Segment performance and material changes
- Unum US: Adjusted operating income was $464.9 million, down 43.7% after reflecting a $215.0 million reserve decrease in 2021. Excluding that reserve item, income declined 17.6%, primarily because of unfavorable disability and life claims experience. The benefit ratio increased to 74.9% from 68.8%, and sales fell 5.8% to $941.7 million.
- Unum International: Adjusted operating income increased 38.0% to $105.7 million. Premium income rose 9.8% to $717.0 million, and sales increased 16.9% to $105.8 million. Results benefited from higher investment income and lower operating expenses, partly offset by unfavorable benefits experience.
- Colonial Life: Adjusted operating income declined 1.8% to $329.2 million. Premium income decreased 1.3% to $1,690.2 million, while sales increased 16.1% to $479.8 million. Higher investment income and lower expenses largely offset unfavorable life claims experience.
- Closed Block: Adjusted operating income increased 63.5% to $394.7 million. The segment benefited from the absence of the large 2020 reinsurance-related impacts, although long-term care benefits experience was less favorable than in 2020. Long-term care premium income increased 5.6%, while individual disability premium income declined 11.1%.
- Corporate: Adjusted operating loss improved to $177.9 million from $200.8 million, primarily due to higher investment income. Corporate results included a $12.1 million software impairment, a $67.3 million early debt-retirement cost, and a $13.9 million lease right-of-use asset impairment.
Capital, liquidity, debt, and cash flow
- Weighted-average RBC ratio for traditional U.S. insurance subsidiaries was approximately 395% at year-end, described by management as in line with expectations and well above regulatory action levels.
- Holding company liquidity was $1.515 billion at December 31, 2021.
- The company had $160.9 million of FHLB advances and approximately $992 million of additional FHLB borrowing capacity. It also had a $500 million unsecured revolving credit facility with no borrowings outstanding and $0.4 million of letters of credit issued.
- The company issued $600 million of 4.125% senior notes due 2051 and retired $500 million of 4.500% senior notes due 2025, incurring $67.3 million of early-retirement costs. There were no significant debt principal maturities in 2022; $350 million is due in 2024 and $275 million in 2025.
- Operating cash flow was $1.388 billion. Investing activities used $1.341 billion and financing activities used $168.9 million, resulting in a $122.0 million decrease in cash and bank deposits.
- In November 2021, the company repurchased approximately 1.9 million shares for $50 million under an accelerated share repurchase agreement. Approximately $200 million remained available under the $250 million repurchase authorization at year-end. Common dividends paid were $239.4 million.
Material transactions and unusual items
- Closed Block individual disability reinsurance: In March 2021, Unum completed the second phase of a transaction with Commonwealth covering a substantial portion of remaining Closed Block individual disability business. The second phase involved $767.0 million of transferred assets, a $18.2 million ceding commission paid by Commonwealth, a $67.6 million pretax investment gain, $133.1 million of reserve recognition, and $79.1 million of pretax cost-of-reinsurance amortization in 2021. Approximately $200 million of capital was released in the first quarter.
- Reserve assumption updates: The company reduced Unum US group disability claim reserves by $215.0 million pretax, while increasing Closed Block long-term care, individual disability, and group pension reserves by $2.1 million, $6.4 million, and $25.1 million, respectively.
- COVID-19 effects: Elevated mortality affected group life and voluntary life products, while disability claim incidence and leave-management activity remained affected by the pandemic. Management also determined that $15.1 million of Unum US group life acquisition costs were not recoverable and therefore were not deferred.
- Tax and accounting: A U.K. tax-rate increase produced $24.2 million of additional tax expense. The effective tax rate rose to 22.5% from 17.7%. The company plans to adopt long-duration insurance accounting guidance on January 1, 2023 and estimates a transition reduction to accumulated other comprehensive income and stockholders’ equity of approximately $6.5 billion to $7.0 billion based on January 1, 2021 rates, or approximately $5.8 billion to $6.3 billion using December 31, 2021 rates. Management states that the change will not affect cash flows or statutory results.
Guidance, outlook, and principal risks
Management expects 2022 premium growth and improving claims experience as COVID-19 effects lessen, but anticipates continuing claims volatility, low-interest-rate pressure on margins, and volatility in miscellaneous investment income. Unum US expects full-year premium income to grow slightly faster than in 2021; Colonial Life expects growth below pre-pandemic levels. Closed Block premium income is expected to decline over time as the business runs off, and management expects approximately $70 million of cost-of-reinsurance amortization in 2022.
Key risks include adverse COVID-19 developments, higher mortality or disability incidence, unfavorable long-term care morbidity and mortality, insufficient approved rate increases, reserve assumption deterioration, sustained low interest rates, investment credit losses and illiquidity, reinsurance counterparty failure, regulatory capital and reserve requirements, rating downgrades, cybersecurity incidents, technology execution, foreign exchange movements, competition, litigation, and limitations on dividends from insurance subsidiaries.
The Maine Bureau of Insurance concluded that Unum America’s long-term care statutory reserves were deficient by approximately $2.7 billion before the 2021 phase-in adjustment. Approximately $438 million was phased in during 2021, leaving approximately $2.3 billion to be phased in through 2026. The company expects to fund the remaining strengthening through operating cash flows and capital contributions. This statutory matter does not affect reported GAAP long-term care reserves or GAAP financial results.
Investor verification checklist
- Verify the sustainability of operating earnings excluding the $215 million reserve release and other unusual items.
- Monitor COVID-19-related mortality, disability incidence, claim recoveries, and claims-processing trends, particularly in Unum US life and disability businesses.
- Assess long-term care reserve adequacy, future premium-rate approvals, the remaining approximately $2.3 billion statutory reserve phase-in, and associated capital contributions.
- Review the terms, collateral, counterparty exposure, and amortization schedule of the Commonwealth reinsurance transaction.
- Evaluate the impact of the 2023 long-duration insurance accounting adoption on equity, OCI, earnings, reserve measurements, and reported volatility.
- Track investment yields, credit losses, unrealized gains, private-equity partnership valuations, and sensitivity to higher interest rates and credit spreads.
- Confirm holding-company liquidity, subsidiary dividend capacity, RBC ratios, debt maturities, credit-facility covenants, and the availability of share-repurchase authorization.
- Review the filing’s litigation, regulatory, cybersecurity, reinsurance recoverability, and financial-strength-rating disclosures for developments after December 31, 2021.