AM Best has upgraded the Long-Term Issuer Credit Ratings (Long-Term ICRs) to “a+” (Excellent) from “a” (Excellent) and affirmed the Financial Strength Rating (FSR) of A (Excellent) of the members of Unum Insurance Group. The outlook of the Long-Term ICRs has been revised to stable from positive, while the outlook of the FSR is stable. These companies are the core U.S. life/health (L/H) insurance subsidiaries of Unum Group (Unum) (headquartered in Chattanooga, TN) [NYSE: UNM]. In addition, AM Best has upgraded the Long-Term ICR to “bbb+” (Good) from “bbb” (Good) and the Long-Term Issue Credit Ratings (Long-Term IRs) of Unum. The outlook of the Long-Term ICR has been revised to stable from positive. (See below for a complete listing of the L/H subsidiaries and the Long-Term IRs.)
The Credit Ratings (ratings) reflect Unum’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).
The rating upgrades reflect Unum’s improved risk-adjusted capitalization and financial flexibility observed over the 2020-2023 period, previously recognized in 2022 with the revision of the Long-Term ICR outlooks to positive from stable, in conjunction with stable asset quality, strong financial flexibility, and enhanced liquidity. Improved risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), was observed after Unum reinsured a large block of individual disability reserves with a subsidiary of Global Atlantic Financial Group. The transaction, which completed in 2021, reduced outstanding reserves at the statutory group and materially improved risk-adjusted capitalization at the statutory group. Financial flexibility was improved through the issuance of $400 million of unissued pre-capitalized securities in 2021 While dividends out of the statutory entities to fully fund a long-term care (LTC) premium deficiency reserve (PDR) are expected to moderate risk-adjusted capital slightly, which remains above the company’s stated long-term target levels. AM Best expects Unum to maintain risk-adjusted capital, as measured by BCAR, at the very strong level over the medium term. Liquidity and financial flexibility are expected to remain elevated over the near term as Unum maintains its balance of unissued pre-capitalized securities and ample cash at the holding company. It also is expected that Unum will maintain financial leverage below management communicated 30% maximum, and likely closer to the year-end 2022 figure of 27%.
AM Best notes that Unum continues to have exposure to below-investment-grade bonds and commercial mortgage loans, as well as a large portion of NAIC Class 2 bonds. Below-investment-grade fixed-income securities represent 57% of capital and surplus as of year-end 2022, and approximately one half of fixed-income securities are NAIC 2-rated. Additionally, Unum has a portfolio of commercial mortgage loans, totaling $2.4 billion, or 64% of capital and surplus. However, these assets performed well through the COVID-19 pandemic with very few credit losses in absolute terms and relative to industry benchmarks. These assets support a block of longer-duration liabilities as part of an asset/liability matching strategy.
Reserve adequacy for Unum’s closed block LTC business remains a concern due to the complexity of reserve assumptions. However, near-term operating results have been favorable, statutory reserves have been increased through the funding of the PDR, and GAAP reserves have remained stable. Unum has announced that it will fully fund its LTC PDR in 2023, faster than the 2026 deadline initially agreed to with the Maine regulator. After the PDR is fully funded, statutory reserves will be materially higher than the best estimate GAAP reserves, indicating statutory reserves should be less sensitive to changes in assumptions prospectively.
Unum’s operating performance remains strong as sales accelerate and profitability improves post-pandemic. Premium growth was nominal in 2021 but accelerated through 2022 and the first half of 2023 as the sales environment improved post-pandemic. Higher employment and wage inflation contributed to organic growth on in-force blocks of business. Operating profitability continued to improve in 2022 as lower mortality rates positively impacted the life business and a strong labor market combined with internal process improvements materially improved disability results. Investment income continued to contribute positively to both statutory and GAAP earnings in 2022. However, Interest rate driven valuation declines in the fixed income portfolio of $7.0 billion had a significant impact on GAAP equity through other comprehensive income. This impact was only offset partially by $4.1 billion in reserve and deferred acquisition cost adjustments. Unrealized losses on fixed income securities did not materially impact statutory earnings or capital. Results through the first half of 2023 are well ahead of 2022 for premium growth and operating income. AM Best expects strong premium growth through the balance of 2023 and for operating income to meet or exceed pre-pandemic levels over the near term.
Unum continues to maintain good market share in its core business lines. The company has a large nationwide distribution network to support new business sales. Revenue and earnings are well-diversified across its employee benefits, voluntary and supplemental product portfolios. Unum has a mature ERM program that is incorporated into capital management, business planning and operations.
The Long-Term ICRs have been upgraded to “a+” (Excellent) from “a” (Excellent) and the FSR of A (Excellent) has been affirmed. The outlook of the Long-Term ICRs has been revised to stable from positive, while the FSR is stable for the following U.S. L/H subsidiaries of Unum Group:
- Unum Life Insurance Company of America
- Unum Insurance Company
- Provident Life and Accident Insurance Company
- The Paul Revere Life Insurance Company
- Colonial Life & Accident Insurance Company
- First Unum Life Insurance Company
- Provident Life and Casualty Insurance Company
- Starmount Life Insurance Company
The following Long-Term IRs have been upgraded, with the outlooks revised to stable from positive.
Unum Group—
-- to “bbb+” (Good) from “bbb” (Good) on $350 million 4.00% senior unsecured notes, due 2024
-- to “bbb+” (Good) from “bbb” (Good) on $275 million 3.875% senior unsecured notes, due 2025
-- to “bbb+” (Good) from “bbb” (Good) on $500 million 4.50% senior unsecured notes, due 2025
-- to “bbb+” (Good) from “bbb” (Good) on $250 million 6.75% senior unsecured notes, due 2028
-- to “bbb+” (Good) from “bbb” (Good) on $200 million 7.25% senior unsecured notes, due 2028
-- to “bbb+” (Good) from “bbb” (Good) on $400 million 4.00% senior unsecured notes, due 2029
-- to “bbb+” (Good) from “bbb” (Good) on $250 million 7.375% senior unsecured notes, due 2032
-- to “bbb+” (Good) from “bbb” (Good) on $250 million 5.75% senior unsecured notes, due 2042
-- to “bbb+” (Good) from “bbb” (Good) on $250 million 5.75% senior unsecured notes, due 2042
-- to “bbb+” (Good) from “bbb” (Good) on $450 million 4.50% senior unsecured notes, due 2049
-- to “bbb+” (Good) from “bbb” (Good) on $600 million 4.125% senior unsecured bonds, due 2051
-- to “bbb-” (Good) from “bb+” (Fair) on $300 million 6.25% junior subordinated notes, due 2058
Provident Financing Trust I—
-- to “bbb-” (Good) from “bb+” (Fair) on $300 million 7.405% capital securities, due 2038
The following indicative Long-Term IRs under the shelf registration have been upgraded, with the outlooks revised to stable from positive.
Unum Group—
-- to “bbb+” (Good) from “bbb” (Good) on senior unsecured
-- to “bbb” (Good) from “bbb-” (Good) on subordinated
-- to “bbb-” (Good) from “bb+” (Fair) on preferred stock
Unum Group Financing Trust I and II—
-- to “bbb-” (Good) from “bb+” (Fair) on preferred securities
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
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