Unum Group 2018 Form 10-K 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 primarily in the United States, United Kingdom, and Poland. Its principal segments are Unum US, Unum International, Colonial Life, Closed Block, and Corporate. This annual report covers the fiscal year ended December 31, 2018, with comparisons to 2017 and 2016. The filing was dated February 19, 2019.
Premium income by segment in 2018 was approximately 63.8% Unum US, 6.3% Unum International, 17.9% Colonial Life, and 12.0% Closed Block. Unum acquired Unum Poland and Jaimini Health in 2018 and acquired Leavelogic earlier in the year.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $11.60 billion | $11.29 billion | 2.8% increase |
| Premium income | $8.99 billion | $8.60 billion | 4.5% increase |
| Net investment income | $2.45 billion | $2.45 billion | 0.1% increase |
| Net realized investment gain/(loss) | $(39.5) million | $40.3 million | Less favorable |
| Income before income tax | $627.8 million | $1.40 billion | 55.3% decrease |
| Net income | $523.4 million | $994.2 million | 47.4% decrease |
| Diluted earnings per share | $2.38 | $4.37 | Decrease |
| After-tax adjusted operating income | $1.15 billion | $976.2 million | 17.3% increase |
| Adjusted operating income per diluted share | $5.20 | $4.29 | Increase |
The 2018 consolidated benefit ratio was 89.3%, compared with 82.1% in 2017. Excluding the long-term care reserve increase in 2018 and the unclaimed death benefits reserve increase in 2017, benefit ratios were 80.9% and 81.6%, respectively. The 2018 earned book yield on investments was 5.15%, compared with 5.23% in 2017.
Operating cash flow was $1.54 billion, up from $1.16 billion in 2017. Investing activities used $930.1 million and financing activities used $589.8 million. Cash and bank deposits increased by $16.6 million to $94.0 million.
Total assets were $61.88 billion and total stockholders’ equity was $8.62 billion at December 31, 2018. Long-term debt was $2.97 billion, compared with $2.74 billion in 2017. The company held $602 million of fixed maturity securities, short-term investments, and cash at the parent and intermediate holding-company levels. Its $400 million revolving credit facility, expiring in March 2021, had no borrowings outstanding, although $2.1 million of letters of credit had been issued.
Material changes versus the prior comparable period
- Long-term care reserve increase: Unum increased policy and claim reserves by $750.8 million before tax, or $593.1 million after tax, following its 2018 review of long-term care assumptions. The charge reduced diluted earnings by approximately $2.70 per share and was the principal reason GAAP net income declined.
- Underlying operating performance: After-tax adjusted operating income increased to $1.15 billion from $976.2 million, excluding the long-term care reserve charge and other unusual items.
- Unum US: Adjusted operating income increased 0.5% to $1.01 billion. Premium income increased 5.4%, but sales declined 1.3% and net investment income declined 4.0%.
- Unum International: Adjusted operating income increased 2.0% in U.S. dollars to $113.9 million, including the newly acquired Poland business. Unum UK adjusted operating income decreased 3.0% in local currency, while UK sales decreased 6.4% in local currency.
- Colonial Life: Adjusted operating income increased 3.1% to $335.2 million, premium income increased 6.1%, and sales increased 8.0%.
- Closed Block: Adjusted operating income increased 1.3% to $125.5 million after excluding the long-term care reserve charge. Premium income declined 4.6% as the individual disability block continued to run off.
- Investments and equity: The net unrealized gain on fixed maturity securities declined to $2.7 billion from $5.7 billion, primarily because of higher Treasury rates and wider credit spreads. Accumulated other comprehensive income declined to a loss of $814.2 million from income of $127.5 million.
- Capital deployment: Unum repurchased 8.7 million shares for approximately $350.7 million and paid $215.6 million in common dividends. The May 2018 repurchase authorization had approximately $500 million remaining at year-end.
- Debt: The company repaid $200 million of senior notes at maturity and issued $300 million of 6.25% junior subordinated notes due 2058.
Guidance, outlook, risks, contingencies, and unusual items
For 2019, management expected continued solid premium growth in core businesses, stable persistency, generally stable benefits experience, expense discipline, and an effective tax rate of approximately 20%. Management also expected stable adjusted operating income growth in Unum US, favorable sales and earnings growth at Colonial Life, and continued premium-rate actions and integration efforts in Unum International.
Management identified sustained low interest rates as a continuing pressure on investment yields, reserve discount rates, and profit margins. The company estimated approximately $2.9 billion of investable cash flows in 2019 and indicated that reinvestment at then-current market levels could reduce net investment income by approximately $0.1 million in 2019 and $1.2 million in 2020 under the stated scenario.
Long-term care remains the principal financial sensitivity. Reserve adequacy depends on claim incidence, claim termination and recovery rates, mortality, morbidity, persistency, premium-rate increases, and investment yields. The filing indicates that reasonably possible adverse changes in these assumptions could reduce long-term care reserve margin by hundreds of millions of dollars, and that the absence of assumed morbidity and mortality improvement could reduce reserve margin by approximately $1 billion.
Other significant risks include low interest rates, unfavorable disability and long-term care claims experience, investment defaults and credit-spread widening, liquidity and asset-liability mismatches, regulatory and statutory-capital changes, reinsurance collectibility, cybersecurity and technology execution, competition, foreign exchange movements, litigation, and changes in tax or accounting standards.
Three securities class actions and three shareholder derivative actions related primarily to disclosures concerning the long-term care business were consolidated during 2018. The cases were described as being in a preliminary stage; no reserves were established and the company could not estimate reasonably possible losses. The company also noted potential additional liabilities associated with unclaimed death benefits and evolving state investigations.
Traditional U.S. insurance subsidiaries had an approximately 370% weighted-average RBC ratio at year-end, significantly above the level requiring regulatory action, although lower than the prior year because of NAIC formula changes. Fitch revised its outlook on Unum Group to negative, citing adverse long-term care reserve development; other disclosed agency ratings were generally affirmed.
Most important facts for an investor to verify
- Whether long-term care claims incidence, claim termination rates, morbidity improvement, mortality, and approved premium-rate increases are tracking the assumptions adopted in 2018.
- Whether additional long-term care reserve charges, capital contributions, or rating downgrades could result from future assumption reviews.
- The sustainability of adjusted operating income after excluding the 2018 long-term care reserve increase and other non-GAAP adjustments.
- Current RBC ratios, statutory capital, subsidiary dividend capacity, and the effect of regulatory or rating-agency requirements on capital returns.
- Investment portfolio credit quality, unrealized losses, below-investment-grade exposure, mortgage-loan performance, and the effect of interest-rate changes on income and liquidity.
- The status and potential exposure of the consolidated securities class actions, derivative actions, unclaimed-property matters, and other regulatory proceedings.
- Progress on Unum Poland, Jaimini Health, Leavelogic, dental and vision expansion, digital investments, and the planned 2019 operating initiatives.