Newswires
UNUM GROUP – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Unum Group , aDelaware general business corporation, and its insurance and non-insurance subsidiaries, which collectively withUnum Group we refer to as the Company, operate inthe United States , theUnited Kingdom , Poland, and, to a limited extent, in certain other countries. The principal operating subsidiaries inthe United States areUnum Life Insurance Company of America (Unum America ),Provident Life and Accident Insurance Company (Provident),The Paul Revere Life Insurance Company (Paul Revere),Colonial Life & Accident Insurance Company (Colonial Life),Starmount Life Insurance Company , in theUnited Kingdom ,Unum Limited , and inPoland ,Unum Zycie TUiR S.A. (Unum Poland ). We are a leading provider of financial protection benefits inthe United States and theUnited Kingdom . Our products include disability, life, accident, critical illness, dental and vision, and other related services. We market our products primarily through the workplace.
We have three principal operating business segments: Unum US,
International
Corporate segments. These segments are discussed more fully under "Segment
Results" included herein in this Item 2.
The benefits we provide help the working world thrive throughout life's moments.
As a leading provider of employee benefits, we offer a broad portfolio of
products and services through the workplace.
Specifically, we offer group, individual, voluntary, and dental and vision products as well as provide certain fee-based services. These products and services, which can be sold stand-alone or combined with other coverages, help employers of all sizes attract and retain a stronger workforce while protecting the incomes and livelihood of their employees. We believe employer-sponsored benefits are the most effective way to provide workers with access to information and options to protect their financial stability. Working people and their families, particularly those at lower and middle incomes, are perhaps the most vulnerable in today's economy yet are often overlooked by many providers of financial services and products. For many of these people, employer-sponsored benefits are the primary defense against the potentially catastrophic fallout of death, illness, or injury. We have established a corporate culture consistent with the social values our products provide. Because we see important links between the obligations we have to all of our stakeholders, we place a strong emphasis on operating with integrity and contributing to positive change in our communities. Accordingly, we are committed not only to meeting the needs of our customers who depend on us, but also to being accountable for our actions through sound and consistent business practices, a strong internal compliance program, a comprehensive risk management strategy, and an engaged employee workforce. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1 contained in this Form 10-Q and with the "Cautionary Statement Regarding Forward-Looking Statements" included below the Table of Contents, as well as the discussion, analysis, and consolidated financial statements and notes thereto in Part I, Items 1 and 1A, and Part II, Items 7, 7A, and 8 of our annual report on Form 10-K for the year endedDecember 31, 2021 .
Operating Performance and Capital Management
For the third quarter of 2022, we reported net income of$410.7 million , or$2.04 per diluted common share, compared to net income of$328.6 million , or$1.60 per diluted common share, in the third quarter of 2021. For the first nine months of 2022, we reported net income of$1,034.6 million , or$5.11 per diluted common share, compared to net income of$664.5 million , or$3.24 per diluted common share in the same period of 2021.
Included in our results for the third quarter of 2022 are:
•A net investment loss on the Company's investment portfolio of$4.4 million before tax and$3.4 million after tax, or$0.02 per diluted common share; •Amortization of the cost of reinsurance of$15.2 million before tax and$12.1 million after tax, or$0.06 per diluted common share; and, •A reserve decrease related to assumption updates of$155.0 million before tax and$122.5 million after tax, or$0.61 per diluted common share. 68 --------------------------------------------------------------------------------
Included in our results for the first nine months of 2022 are:
•A net investment loss of$22.3 million before tax and$17.1 million after tax, or$0.09 per diluted common share; •Amortization of the cost of reinsurance of$48.5 million before tax and$38.4 million after tax, or$0.19 per diluted common share; and, •A reserve decrease related to assumption updates of$155.0 million before tax and$122.5 million after tax, or$0.61 per diluted common share.
Included in our results for the third quarter of 2021 are:
•A net investment loss of$0.1 million before tax and$0.1 million after tax, or a de minimis impact on earnings per diluted common share; •Amortization of the cost of reinsurance of$19.7 million before tax and$15.5 million after tax or$0.08 per diluted common share; •A net reserve decrease related to assumption updates of$181.4 million before tax and$143.3 million after tax, or$0.70 per diluted common share; and, •An impairment loss on internal-use software of$12.1 million before tax and$9.6 million after tax, or$0.05 per diluted common share.
Included in our results for the first nine months of 2021 are:
•A net investment gain, excluding the net realized investment gain related to the Closed Block individual disability reinsurance transaction, of$17.8 million before tax and$14.0 million after tax, or$0.07 per diluted common share; •Amortization of the cost of reinsurance of$59.4 million before tax and$46.8 million after tax, or$0.24 per diluted common share; •A net reserve decrease related to assumption updates of$181.4 million before tax and$143.3 million after tax, or$0.70 per diluted common share; •An impairment loss on internal-use software of$12.1 million before tax and$9.6 million after tax, or$0.05 per diluted common share; •Cost related to the early retirement of debt of$67.3 million before tax and$53.2 million after tax, or$0.26 per diluted common share; •An impairment loss on the right-of-use (ROU) asset of$13.9 million before tax and$11.0 million after tax, or$0.05 per diluted common share; •Tax expense related to aU.K. tax rate increase of$24.2 million , or$0.12 per diluted common share; and, •The impact from the second phase of the Closed Block individual disability reinsurance transaction that closed in the first quarter of 2021, which resulted in a net loss of$71.7 million before tax and$56.7 million after tax, or$0.27 per diluted common share. Excluding these items, after-tax adjusted operating income for the third quarter of 2022 was$303.7 million , or$1.51 per diluted common share compared to$210.5 million , or$1.03 per diluted common share, for the same period of 2021. After-tax adjusted operating income was$967.6 million , or$4.78 per diluted common share, in the first nine months of 2022, compared to$708.7 million , or$3.46 per diluted common share, in the first nine months of 2021. See "Reconciliation of Non-GAAP and Other Financial Measures" contained herein in this Item 2 for a reconciliation of these items. Our Unum US segment reported income before income tax and net investment gains and losses of$430.0 million and$897.0 million in the third quarter and first nine months of 2022, respectively, compared to$303.5 million and$598.5 million in the third quarter and first nine months of 2021, respectively, which includes the reserve decreases related to the assumption updates during the third quarter of 2022 and 2021. Excluding these items, our Unum US segment reported adjusted operating income of$275.0 million and$742.0 million in the third quarter and first nine months of 2022, respectively, compared to$88.5 million and$383.5 million in the third quarter and first nine months of 2021, respectively. The increase in adjusted operating income in the third quarter and first nine months of 2022 compared to the same periods of 2021 is primarily due to favorable benefits experience in our group product lines, and an increase in premium income, partially offset by higher operating expenses and lower net investment income. The benefit ratio, excluding the reserve decreases in the third quarters of 2022 and 2021, for our Unum US segment was 63.4 percent and 65.6 percent in the third quarter and first nine months of 2022, respectively, compared to 77.6 percent and 74.5 percent in third quarter and first nine months of 2021, respectively. Unum US sales increased 11.0 percent and 14.9 percent in the third quarter and first nine months of 2022, respectively, compared to the same periods of 2021. See "2022 Reserve Assumption Updates" and "2021 Reserve Assumption Updates" contained herein for further discussion. 69 -------------------------------------------------------------------------------- OurUnum International segment reported adjusted operating income, as measured inU.S. dollars, of$29.9 million and$82.0 million and in the third quarter and first nine months of 2022, respectively, compared to$27.4 million and$78.6 million in the third quarter and first nine months of 2021, respectively. As measured in local currency, our UnumUK line of business reported adjusted operating income of £23.6 million and £62.1 million in the third quarter and first nine months of 2022, respectively, compared to £18.4 million and £53.8 million in the third quarter and first nine months of 2021, respectively. As measured in local currency, the increase in adjusted operating income in the third quarter and first nine months of 2022 compared to the same periods of 2021 is primarily due to higher net investment income and premium income, partially offset by higher operating expenses. The benefit ratio for our UnumUK line of business was 78.6 percent and 82.9 percent in the third quarter and first nine months of 2022, respectively, compared to 79.2 percent and 79.1 percent in the same periods of 2021.Unum International sales, as measured inU.S. dollars, increased 66.4 percent and 36.9 percent in the third quarter and first nine months of 2022, respectively, compared to the same periods of 2021. UnumUK sales, as measured in local currency increased 106.0 percent and 55.6 percent in the third quarter and first nine months of 2022, respectively, relative to the same periods of 2021. Our Colonial Life segment reported adjusted operating income of$90.4 million and$281.6 million in the third quarter and first nine months of 2022, respectively, compared to$80.1 million and$249.2 million in the third quarter and first nine months of 2021, respectively. The increase in adjusted operating income in the third quarter and first nine months of 2022 compared to the same periods of 2021 is primarily due to favorable benefits experience and premium income, partially offset by higher operating expenses and lower net investment income. The benefit ratio for Colonial Life was 46.8 percent and 47.9 percent in the third quarter and first nine months of 2022, respectively, compared to 55.9 percent and 54.3 percent in the same periods of 2021. Colonial Life sales increased 3.2 percent and 7.8 percent in the third quarter and first nine months of 2022, respectively, compared to the same periods of 2021. Our Closed Block segment reported income before income tax and net investment gains and losses of$18.9 million and$159.0 million in the third quarter and first nine months of 2022, respectively, which includes the amortization of the cost of reinsurance related to the Closed Block individual disability reinsurance transaction, compared to income before income tax and net investment gains and losses of$56.5 million and$85.7 million in the same periods of 2021, which includes the reserve increases related to the assumption updates during the third quarter of 2021, impacts related to the second phase of the Closed Block individual disability reinsurance transaction during the first quarter of 2021, and the amortization of the cost of reinsurance. Excluding these items, our Closed Block segment reported adjusted operating income of$34.1 million and$207.5 million in the third quarter and first nine months of 2022, respectively, compared to$109.8 million and$318.0 million in the same periods of 2021. The long-term care interest adjusted loss ratio was less favorable in the third quarter and first nine months of 2022 relative to the same periods of 2021, which excludes the reserve increase related to the assumption update in the third quarter of 2021. The interest adjusted loss ratio for individual disability was less favorable during the third quarter and first nine months of 2022 relative to the same periods of 2021, which excludes the reserve increase related to the assumption update in the third quarter of 2021 and the reserve recognition impact from the reinsurance transaction during the first quarter of 2021. See "Closed Block Individual Disability Reinsurance Transaction" contained herein for further discussion. A rising interest rate environment could continue to positively impact our yields on new investments, but could also continue to create unrealized losses in our current holdings. Our net investment income has been pressured as the majority of our investments were made at a decreasing level of interest rates indicative of the prevailing trend over the last decades. As ofSeptember 30, 2022 , we do not hold any securities with a decline in fair value below amortized cost which we intend to sell and it is not more likely than not that we will be required to sell before recovery in amortized cost. The net unrealized loss on our fixed maturity securities was$3.6 billion atSeptember 30, 2022 , compared to a$5.9 billion net unrealized gain as ofDecember 31, 2021 , with the decrease due primarily to an increase inU.S. Treasury rates and credit spreads. The earned book yield on our investment portfolio was 4.59 percent for the first nine months of 2022 compared to a yield of 4.85 percent for full year 2021. We believe our capital and financial positions are strong. AtSeptember 30, 2022 , the risk-based capital (RBC) ratio for our traditionalU.S. insurance subsidiaries, calculated on a weighted average basis using theNAIC Company Action Level formula, was approximately 415 percent. During the first nine months of 2022, we repurchased 4.2 million shares ofUnum Group common stock under our share repurchase program, at a cost of approximately$138 million . Our weighted average common shares outstanding, assuming dilution, equaled 201.7 million and 205.1 million for the third quarters of 2022 and 2021, respectively, and 202.5 million and 205.1 million for the first nine months of 2022 and 2021, respectively. As ofSeptember 30, 2022 ,Unum Group and our intermediate holding companies had available holding company liquidity of$1,079 million that was held primarily in bank deposits, commercial paper, money market funds, corporate bonds, municipal bonds and asset backed securities. See Note 10 of the "Notes to Consolidated Financial Statements" contained herein in Item 1. 70 --------------------------------------------------------------------------------
Coronavirus Disease 2019 (COVID-19)
COVID-19 continues to cause disruption to the global economy and has unfavorably impacted our company as well as the overall insurance industry. During the first nine months of 2022, we have experienced lower mortality in our life products lines, resulting primarily from lessening impacts of COVID-19 on our insured population compared to the same period of 2021. Due to the volatile and unprecedented nature of these events, we still cannot fully estimate the ultimate impact of the COVID-19 pandemic. We continue to closely monitor pandemic trends that have and may continue to have adverse impacts on our business.
Inflation Reduction Act
InAugust 2022 , the Inflation Reduction Act (IRA) was signed into law in theU.S. and includes certain corporate tax provisions effectiveJanuary 1, 2023 . It imposes a new 15 percent corporate alternative minimum tax (CAMT) on adjusted financial statement income (AFSI) on corporations that have average AFSI over$1.0 billion in any prior three-year period, starting with years 2020 to 2022. We anticipate that our company will be an applicable corporation as early as 2023. We do not expect that any CAMT incurred would impact earnings since it would be offset with a credit toward regular income tax in subsequent years. We continue to monitor the ongoing guidance issued by the United States Treasury. The IRA also imposes a one percent excise tax on the fair market value of corporate stock repurchases afterDecember 31, 2022 . This excise tax would be recorded as part of the cost basis of treasury stock. We have not recorded any tax impact from the enactment of the IRA as ofSeptember 30, 2022 .
2022 Reserve Assumption Updates
During the third quarter of 2022, we completed our annual review of policy and claim reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the third quarter of 2022, we updated our reserve assumptions to reflect our current estimate of future benefit obligations and determined that our claim reserves in our Unum US group long-term disability product line and our waiver of premium reserves for our Unum US group life product line should be reduced by$121.0 million and$34.0 million before tax, or$95.6 million and$26.9 million after tax, respectively, due primarily to sustained improvement in claim recovery trends since our last assumption update, partially offset by lower social security benefit offsets for our group long-term disability product line. We also increased our claim reserves for the reinsured portion of our Closed Block individual disability product line by$193.9 million before tax, or$153.2 million after tax, resulting primarily from updates to mortality assumptions for the advanced age portion of our claimant population. This increase is entirely related to the block that was ceded as a part of the Closed Block individual disability reinsurance transaction withCommonwealth Annuity and Life Insurance Company (Commonwealth) and as a result, a corresponding increase was reported in our consolidated balance sheet as a reinsurance recoverable, however there was no net impact on our consolidated results of operations for the period. The amortization of the cost of reinsurance related to the Closed Block individual disability reinsurance transaction is based upon expected claim reserve patterns and as such there was a resulting change in the timing of the amortization of the cost of reinsurance.
2021 Reserve Assumption Updates
During the third quarter of 2021, we completed our annual review of policy and claim reserve adequacy, which incorporated our most recent experience and included a review of all material assumptions. Based on our analysis, during the third quarter of 2021, we updated our reserve assumptions to reflect our current estimate of future benefit obligations and determined that our claim reserves should be reduced by$215.0 million before tax, or$169.9 million after tax, in our Unum US group long-term disability product line due primarily to sustained improvement in claim recovery trends since our last assumption update. We also increased our claim reserves for our Closed Block long-term care and individual disability product lines by$2.1 million and$6.4 million before tax, or$1.7 million and$5.1 million after tax, respectively. We determined that our policy reserves should be increased by$25.1 million before tax, or$19.8 million after tax, in our Closed Block group pension product line to reflect updated discount rate assumptions.
Impairment Loss on
During the third quarter of 2021, we recognized an impairment loss of$12.1 million before tax, or$9.6 million after tax, for previously capitalized internal-use software that we no longer plan to utilize. We determined that this internal-use software would no longer be developed in order to focus our efforts on the development of software that better supports our long-term 71 --------------------------------------------------------------------------------
strategic goals. For further information related to the impairment loss on
internal-use software, see Note 12 of the "Notes to Consolidated Financial
Statements" contained in Item 1.
Impairment Loss on ROU Asset
During the second quarter of 2021, we recognized an impairment loss of$13.9 million , or$11.0 million after tax, on the ROU asset related to one of our operating leases for office space that we do not plan to continue using to support our general operations. The impairment loss was recorded as a result of a decrease in the fair value of the ROU asset compared to its carrying value. For further information related to the impairment loss on the ROU asset, see Note 12 of the "Notes to Consolidated Financial Statements" contained in Item 1.
Closed Block Individual Disability Reinsurance Transaction
InDecember 2020 , we completed the first phase of a reinsurance transaction, pursuant to which Provident, Paul Revere, andUnum America , wholly-owned domestic insurance subsidiaries ofUnum Group , and collectively referred to as "the ceding companies", each entered into separate reinsurance agreements with Commonwealth, to reinsure on a coinsurance basis effective as ofJuly 1, 2020 , approximately 75 percent of the Closed Block individual disability business, primarily direct business written by the ceding companies. InMarch 2021 , we completed the second phase of the reinsurance transaction, pursuant to which the ceding companies and Commonwealth amended and restated their respective reinsurance agreements to reinsure on a coinsurance and modified coinsurance basis effective as ofJanuary 1, 2021 , a substantial portion of the remaining Closed Block individual disability business that was not ceded inDecember 2020 , primarily business previously assumed by the ceding companies. Commonwealth established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreements. InDecember 2020 ,Provident Life and Casualty Insurance Company (PLC), also a wholly-owned domestic insurance subsidiary ofUnum Group , entered into an agreement with Commonwealth whereby PLC will provide a 12-year volatility cover to Commonwealth for the active life cohort (ALR cohort). As part of this agreement, PLC received a payment from Commonwealth of$62.1 million . OnMarch 31, 2021 , PLC and Commonwealth amended and restated this agreement to incorporate the ALR cohort related to the additional business that was reinsured between the ceding companies and Commonwealth as part of the second phase of the transaction. As part of the amended and restated volatility cover, PLC received a payment from Commonwealth of$17.9 million . At the end of the 12-year coverage period, Commonwealth will retain the remaining incidence and claims risk on the ALR cohort of the ceded business. In connection with the second phase of the reinsurance transaction which occurred inMarch 2021 , Commonwealth paid a ceding commission to the ceding companies of$18.2 million . The ceding companies transferred assets of$767.0 million , which consisted primarily of cash and fixed maturity securities. In addition, we recognized the following in the first quarter of 2021 related to the second phase: •Net realized investment gains totaling$67.6 million , or$53.4 million after tax, related to the transfer of investments. •Increase in benefits and change in reserves for future benefits of$133.1 million , or$105.1 million after tax, resulting from the realization of previously unrealized investment gains and losses recorded in accumulated other comprehensive income (loss). •Transaction costs totaling$6.2 million , or$5.0 million after tax. •Reinsurance recoverable of$990.0 million related to the policies on claim status (DLR cohort). •Payable of$307.2 million related to the portfolio of invested assets associated with the business ceded on a modified coinsurance basis. •Cost of reinsurance, or prepaid reinsurance premium, of$43.1 million related to the DLR cohort. The total cost of reinsurance recognized on a combined basis for the first and second phases was$854.8 million for which we amortized$15.2 million and$48.5 million , or$12.1 million after tax and$38.4 million after tax, during the three and nine month periods endedSeptember 30, 2022 , respectively, compared to$19.7 million and$59.4 million , or$15.5 million after tax and$46.8 million after tax, during the three and nine month periods endedSeptember 30, 2021 , respectively. •Deposit asset of$5.0 million related to the ALR cohort. The total deposit asset recognized on a combined basis for the first and second phases was$91.8 million . We released approximately$200 million of capital during the first quarter of 2021. See Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion on the impacts related to this reinsurance transaction. 72 --------------------------------------------------------------------------------
OnJanuary 31, 2020 , an official bill was passed formalizing the withdrawal of theU.K. from theEuropean Union (EU). A deal was reached onDecember 24, 2020 on the future trading relationship with the EU, which focused primarily on the trading of goods rather than theU.K.'s service sector. A memorandum of understanding on regulatory cooperation was signed by theU.K. and EU inMarch 2021 , but no agreement on the equivalence of the regulatory regimes has yet been reached. TheU.K. government is now reviewing the regulatory framework of financial services companies which may result in changes toU.K. regulatory capital orU.K. tax regulations. We do not expect that the underlying operations of ourU.K. business, nor the Polish business which is in the EU, will be significantly impacted by the withdrawal, but it is possible that we may experience some short-term volatility in financial markets, which could impact the fair value of investments, our solvency ratios, or the British pound sterling to dollar exchange rate.
InJune 2021 , the Finance Act 2021 was enacted, resulting in aU.K. tax rate increase from 19 percent to 25 percent, effectiveApril 1, 2023 , which resulted in$24.2 million of additional tax expense in operating earnings for the revaluation of our deferred tax assets and liabilities in the second quarter of 2021. TheU.K. tax rate increase may cause volatility in our effective tax rate prior to theApril 1, 2023 effective date as a result of changes in the deferred tax balance related to our UnumUK business.
Consolidated Company Outlook
We believe our strategy of providing financial protection products at the
workplace puts us in a position of strength. The products and services we
provide have never been more important to employers, employees and their
families, especially given the COVID-19 pandemic. We continue to fulfill our
corporate purpose of helping the working world thrive throughout life's moments
by providing excellent service to people at their time of need. Our strategy
remains centered on growing our core businesses, through investing and
transforming our operations and technology to anticipate and respond to the
changing needs of our customers, expanding into new adjacent markets through
meaningful partnerships and effective deployment of our capital across our
portfolio.
Our near-term results will be influenced by COVID trends, specifically the
mortality rate in our insured population and the rate and severity of
infections. As the pandemic impacts have lessened in the first nine months of
2022, we have experienced recovery in our core business earnings from the
underlying strength of our business. We expect positive operating trends in our
core businesses during 2022 in comparison to the prior year, with solid premium
growth and improved claim experience.
The rising interest rate environment could continue to positively impact our
yields on new investments, but could also continue to create unrealized losses
in our current holdings. We also may continue to experience further volatility
in miscellaneous investment income primarily related to bond calls and changes
in partnership net asset values.
As part of our discipline in pricing and reserving, we continuously monitor
emerging claim trends and interest rates. We will continue to take appropriate
pricing actions on new business and renewals that are reflective of the current
environment and may continue to utilize derivative financial instruments to
manage interest rate risk.
Our business is well-diversified by geography within our markets, industry
exposures and case size, and we continue to analyze and employ strategies that
we believe will help us navigate the current environment. These strategies allow
us to maintain financial flexibility to support the needs of our businesses,
while also returning capital to our shareholders. We have strong core businesses
that have a track record of generating significant capital, and we will continue
to invest in our operations and expand into adjacent markets where we can best
leverage our expertise and capabilities to capture market growth opportunities
as those opportunities emerge. We believe that consistent operating results,
combined with the implementation of strategic initiatives and the effective
deployment of capital, will allow us to meet our financial objectives.
Further discussion is included in "Reconciliation of Non-GAAP and Other
Financial Measures," "Consolidated Operating Results," "Segment Results,"
"Investments," and "Liquidity and Capital Resources" contained herein in this
Item 2 and in the "Notes to Consolidated Financial Statements" contained herein
in Item 1.
73
--------------------------------------------------------------------------------
Reconciliation of Non-GAAP and Other Financial Measures
We analyze our performance using non-GAAP financial measures. A non-GAAP financial measure is a numerical measure of a company's performance, financial position, or cash flows that excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance withU.S. generally accepted accounting principles (GAAP). The non-GAAP financial measure of "after-tax adjusted operating income" differs from net income as presented in our consolidated operating results and income statements prepared in accordance with GAAP due to the exclusion of investment gains or losses and the amortization of the cost of reinsurance as well as certain other items as specified in the reconciliations below. Investment gains or losses primarily include realized investment gains or losses, expected investment credit losses, and gains or losses on derivatives. We believe after-tax adjusted operating income is a better performance measure and better indicator of the profitability and underlying trends in our business. Investment gains or losses depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. Our investment focus is on investment income to support our insurance liabilities as opposed to the generation of investment gains or losses. Although we may experience investment gains or losses which will affect future earnings levels, a long-term focus is necessary to maintain profitability over the life of the business since our underlying business is long-term in nature, and we need to earn the interest rates assumed in calculating our liabilities. As previously discussed, we have exited a substantial portion of our Closed Block individual disability product line through the two phases of the reinsurance transaction that were executed inDecember 2020 andMarch 2021 . As a result, we exclude the amortization of the cost of reinsurance that was recognized upon the exit of the business related to the DLR cohort of policies. We believe that the exclusion of the amortization of the cost of reinsurance provides a better view of our results from our ongoing businesses. We may at other times exclude certain other items from our discussion of financial ratios and metrics in order to enhance the understanding and comparability of our operational performance and the underlying fundamentals, but this exclusion is not an indication that similar items may not recur and does not replace net income or net loss as a measure of our overall profitability. See "Executive Summary" contained herein in Item 2 and Notes 7 and 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion regarding the items specified in the reconciliations below. 74 --------------------------------------------------------------------------------
A reconciliation of GAAP financial measures to our non-GAAP financial measures
is as follows:
Three Months Ended
2022 2021
(in millions) per share * (in millions) per share *
Net Income $ 410.7 $ 2.04 $ 328.6 $ 1.60
Excluding:
Net Investment Loss (net of tax benefit of
$1.0 ; $-) (3.4) (0.02) (0.1) -
Amortization of the Cost of Reinsurance (net of
tax benefit of $3.1 ; $4.2 ) (12.1) (0.06) (15.5) (0.08)
Net Reserve Decrease Related to Reserve
Assumption Updates (net of tax expense of
$32.5 ; $38.1 ) 122.5 0.61 143.3 0.70
Impairment Loss on Internal-Use Software (net
of tax benefit of $-; $2.5 ) - - (9.6) (0.05)
After-tax Adjusted Operating Income $ 303.7 $ 1.51 $ 210.5 $ 1.03
* Assuming Dilution
Nine Months Ended
2022 2021
(in millions) per share * (in millions) per share *
Net Income $ 1,034.6 $ 5.11 $ 664.5 $ 3.24
Excluding:
Net Investment Gains and Losses
Net Realized Investment Gain Related to
Reinsurance Transaction (net of tax expense of
$-; $14.2 ) - - 53.4 0.26
Net Investment Gain (Loss), Other (net of tax
expense (benefit) of $(5.2) ; $3.8 ) (17.1) (0.09) 14.0 0.07
Total Net Investment Gain (Loss) (17.1) (0.09) 67.4 0.33
Items Related to Closed Block Individual
Disability Reinsurance Transaction
Change in Benefit Reserves and Transaction Costs
(net of tax benefit of $-; $29.2 ) - - (110.1) (0.53)
Amortization of the Cost of Reinsurance (net of
tax benefit of $10.1 ; $12.6 ) (38.4) (0.19) (46.8) (0.24)
Total Items Related to Closed Block Individual
Disability Reinsurance Transaction (38.4) (0.19) (156.9) (0.77)
Net Reserve Decrease Related to Reserve
Assumption Updates (net of tax expense of $32.5 ;
$38.1 ) 122.5 0.61 143.3 0.70
Impairment Loss on Internal-Use Software (net of
tax benefit of $-; $2.5 ) - - (9.6) (0.05)
Cost Related to Early Retirement of Debt (net of
tax benefit of $-; $14.1 ) - - (53.2) (0.26)
Impairment Loss on ROU Asset (net of tax benefit
of $-; $2.9 ) - - (11.0) (0.05)
Impact of U.K. Tax Rate Increase - - (24.2) (0.12)
After-tax Adjusted Operating Income $ 967.6 $ 4.78 $ 708.7 $ 3.46
* Assuming Dilution
75
-------------------------------------------------------------------------------- We measure and analyze our segment performance on the basis of "adjusted operating revenue" and "adjusted operating income" or "adjusted operating loss", which differ from total revenue and income before income tax as presented in our consolidated statements of income due to the exclusion of investment gains and losses and the amortization of the cost of reinsurance as well as other items as specified in the reconciliations below. These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for total revenue, income before income tax, or net income.
A reconciliation of total revenue to "adjusted operating revenue" and income
before income tax to "adjusted operating income" is as follows:
Three Months Ended September 30 Nine Months Ended September 30
2022 2021 2022 2021
(in millions of dollars)
Total Revenue $ 2,961.9 $ 2,969.7 $ 8,985.3 $ 9,034.7
Excluding:
Net Investment Gain (Loss) (4.4) (0.1) (22.3) 85.4
Adjusted Operating Revenue $ 2,966.3 $ 2,969.8 $ 9,007.6 $ 8,949.3
Income Before Income Tax $ 515.3 $ 409.9 $ 1,270.5 $ 871.3
Excluding:
Net Investment Gains and Losses
Net Realized Investment Gain Related to
Reinsurance Transaction - - - 67.6
Net Investment Gain (Loss), Other (4.4) (0.1) (22.3) 17.8
Total Net Investment Gain (Loss) (4.4) (0.1) (22.3) 85.4
Items Related to Closed Block Individual
Disability Reinsurance Transaction
Change in Benefit Reserves and Transaction
Costs - - - (139.3)
Amortization of the Cost of Reinsurance (15.2) (19.7) (48.5) (59.4)
Total Items Related to Closed Block
Individual Disability Reinsurance Transaction (15.2) (19.7) (48.5) (198.7)
Net Reserve Decrease Related to Reserve
Assumption Updates 155.0 181.4 155.0 181.4
Impairment Loss on Internal-Use Software - (12.1) - (12.1)
Cost Related to Early Retirement of Debt - - - (67.3)
Impairment Loss on ROU Asset - - - (13.9)
Adjusted Operating Income $ 379.9 $ 260.4 $ 1,186.3 $ 896.5
Critical Accounting Estimates
We prepare our financial statements in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. Estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in our financial statements. The accounting estimates deemed to be most critical to our financial position and results of operations are those related to reserves for policy and contract benefits, deferred acquisition costs, valuation of investments, pension and postretirement benefit plans, income taxes, and contingent liabilities. There have been no significant changes in our critical accounting estimates during the nine months endedSeptember 30, 2022 . 76 -------------------------------------------------------------------------------- For additional information, refer to our significant accounting policies in Note 1 of the "Notes to Consolidated Financial Statements" in Part II, Item 8 and "Critical Accounting Estimates" in Part II, Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2021 .
Accounting Developments
In 2018, theFinancial Accounting Standards Board issued Accounting Standard Update 2018-12, "Targeted Improvements to the Accounting for Long-Duration Contracts". This update significantly amends the accounting and disclosure requirements for long-duration insurance contracts. These changes include a requirement to review and, if necessary, update cash flow assumptions used to measure the liability for future policy benefits for traditional and limited-payment contracts at least annually, with changes recognized in earnings. In addition, we will be required to update the discount rate assumption at each reporting date using a yield that is reflective of an upper-medium grade fixed-income instrument, with changes recognized in other comprehensive income (loss) (OCI). These changes result in the elimination of the provision for risk of adverse deviation and premium deficiency (or loss recognition) testing. We will adopt this guidance effectiveJanuary 1, 2023 using the modified retrospective approach with changes applied as of the beginning of the earliest period presented orJanuary 1, 2021 , also referred to as the transition date. We are continuing our implementation efforts and are evaluating the effects of complying with this update. We expect that the most significant impact at the transition date will be the requirement to update the discount rate assumption to reflect an upper-medium grade fixed-income instrument, which will be generally equivalent to a single-A interest rate matched to the duration of our insurance liabilities and will result in a decrease to accumulated other comprehensive income (loss) (AOCI) within our total stockholders' equity balance of approximately$6.5 billion to$7 billion as ofJanuary 1, 2021 . In order to illustrate the sensitivity of this adjustment, if we had used interest rates as ofSeptember 30, 2022 , the transition adjustment would have been a decrease to AOCI and total stockholders' equity of approximately$0.5 billion to$1 billion . The decrease in AOCI is driven primarily by the difference between the discount rate currently applied, which is based on an expected investment yield from our current investment strategy, and the single-A discount rate that will be required for our longest duration products. Our investment strategy reflects the illiquid nature of the majority of our liability cash flows and results in yields in the investment portfolios supporting the cash outflows required for these products that are generally higher than a single-A yield. In addition, the discount rate applied to reserves for our longest duration products such as long-term care, includes an assumption for long-term yields rising to more historical levels. After the transition date, we will be required to update the discount rate each subsequent reporting period with changes recorded in OCI and expect that this could have a material impact on OCI.
We expect that the recast of our net income for 2021 will result in a net
favorable impact due primarily to the following changes:
•Updating the lifetime cohort net premium ratios (lifetime loss ratio) for
actual experience each reporting period will generally cause earnings patterns
to be more consistent from period to period, with variances in experience
reflected in earnings over the cohort lifetime. We expect this to result in an
unfavorable impact to income for 2021. Our Unum US supplemental and voluntary,
Colonial Life, and certain of our Closed Block product lines were most affected
by this change due to generally favorable benefits experience observed during
2021.
•Alignment of amortization of deferred acquisition costs to a constant level
basis and modification of amortization periods to reflect the expected term of
the related contracts could result in either higher or lower income for the
affected product lines. We expect this to result in a net favorable impact to
income for 2021. Our Unum US and Colonial Life product lines were most affected
by this change with an overall increased amortization period.
•Accelerated recognition of the provision for adverse deviation or other
differences from current best estimate values for policies issued prior to the
transition date and due to not establishing the provision for policies issued on
or after the transition date will generally result in higher income most notably
in the initial years after the transition date. We expect this to result in a
favorable impact to income for 2021. Our Unum US supplemental and voluntary and
Colonial Life product lines were most affected by this change.
•Establishing reserves for claims incurred on or after the transition date at
interest rates prescribed by the update could result in either higher or lower
income for the affected product lines depending on the policy issue date and the
interest rate environment at that time. We expect this to result in an
unfavorable impact to income for 2021. Certain of our Unum US and Closed Block
product lines were most affected by this change.
77
--------------------------------------------------------------------------------
•Updating cash flow assumptions. We expect this to result in a favorable impact
to income for 2021. Certain of our Unum US, Colonial Life, and Closed Block
product lines were most affected by this change.
•Applying non-contemporaneous reinsurance accounting to the second phase of our Closed Block individual disability reinsurance transaction which was completed in the first quarter of 2021. The primary impacts of this change are: •Reversing the increase in benefits and change in reserves for future benefits resulting from the realization of previously unrealized investment gains and losses previously recorded in AOCI that will be removed as of the transition date which will have a favorable impact on income for 2021. •Remeasuring the ceded reserves as a separate cohort of reserves at interest rates prescribed by the update and the resulting change to the cost of reinsurance. We expect the differential in the discount rate applied to the direct and ceded cohorts of business will result in an unfavorable impact to income for 2021 partially offset by a decrease in the amortization of the cost of reinsurance as a result of a lower cost of reinsurance. We expect that all of the above changes will continue to impact our earnings in periods subsequent to 2021 to varying degrees and over varying time periods with the exception of the one-time impact related to not recognizing the increase in benefits and change in reserves for future benefits resulting from the realization of previously unrealized investment gains and losses previously recorded in AOCI related to the second phase of our Closed Block individual disability reinsurance transaction.
This update will also significantly expand our disclosures. We do not have
products with market risk benefits.
Although this update will significantly impact our GAAP-based financial position and results of operations, the update will not impact cash flows, statutory-based financial position or results of operations, or our view of our businesses.
See Note 2 of the "Notes to Consolidated Financial Statements" contained herein
in Item 1 for further information on accounting developments.
78
--------------------------------------------------------------------------------
Consolidated Operating Results
(in millions of dollars)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Revenue
Premium Income $ 2,391.7 1.6 % $ 2,353.7 $ 7,212.3 1.5 % $ 7,106.4
Net Investment Income 511.6 (7.0) 550.2 1,597.8 (3.9) 1,662.4
Net Investment Gain (Loss) (4.4) N.M. (0.1) (22.3) N.M. 85.4
Other Income 63.0 (4.4) 65.9 197.5 9.4 180.5
Total Revenue 2,961.9 (0.3) 2,969.7 8,985.3 (0.5) 9,034.7
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 1,579.3 (10.0) 1,753.9 5,181.3 (8.4) 5,659.2
Commissions 271.5 5.1 258.3 819.1 5.3 777.9
Interest and Debt Expense 47.0 5.1 44.7 141.3 5.1 134.4
Cost Related to Early Retirement of
Debt 4.2 N.M. - 4.2 (93.8)
67.3
Deferral of Acquisition Costs (139.4) 8.4 (128.6) (419.1) 7.8 (388.9) Amortization of Deferred Acquisition Costs 150.8 9.0 138.4 449.5 2.0 440.8 Compensation Expense 285.9 18.3 241.6 794.1 9.4 725.9 Other Expenses 247.3 (1.7) 251.5 744.4 (0.3) 746.8 Total Benefits and Expenses 2,446.6 (4.4) 2,559.8 7,714.8 (5.5) 8,163.4 Income Before Income Tax 515.3 25.7 409.9 1,270.5 45.8 871.3 Income Tax Expense 104.6 28.7 81.3 235.9 14.1 206.8 Net Income$ 410.7 25.0$ 328.6 $ 1,034.6 55.7$ 664.5
N.M. = not a meaningful percentage
Fluctuations in exchange rates, particularly between the British pound sterling and theU.S. dollar for ourU.K. operations, have an effect on our consolidated financial results. In periods when the pound weakens relative to the preceding period, translating pounds into dollars decreases current period results relative to the prior period. In periods when the pound strengthens, translating pounds into dollars increases current period results relative to the prior period. The weighted average pound/dollar exchange rate for our UnumUK line of business was 1.169 and 1.380 for the three months endedSeptember 30, 2022 and 2021, and 1.246 and 1.385 for the nine months endedSeptember 30, 2022 and 2021, respectively. If the 2021 results for ourU.K. operations had been translated at the exchange rates of 2022, our adjusted operating revenue and adjusted operating income by segment would have been lower by approximately$29 million and$4 million , respectively, in the third quarter of 2021 and lower by approximately$57 million and$8 million , respectively, in the first nine months of 2021. However, it is important to distinguish between translating and converting foreign currency. Except for a limited number of transactions, we do not actually convert pounds into dollars. As a result, we view foreign currency translation as a financial reporting item and not a reflection of operations or profitability in theU.K. Premium income for our principal operating business segments in the third quarter and first nine months of 2022 increased compared to the same periods of 2021, primarily due to in-force block growth and higher overall sales. Premium income continues to decline, as expected, in our Closed Block segment. Net investment income decreased in the third quarter and first nine months of 2022 compared to the same periods of 2021 primarily due to lower miscellaneous investment income, partially offset by a higher level of invested assets and higher investment income from inflation index-linked bonds held by UnumUK . Also impacting the comparison for the first nine months of 2022 is a decline in the yield on invested assets. 79 -------------------------------------------------------------------------------- Credit losses on fixed maturity securities were$0.5 million during the third quarter of 2022 and we did not recognize any credit losses on fixed maturity securities during the third quarter of 2021. Credit losses on fixed maturity securities during the first nine months of 2022 and 2021 were$4.6 million and$9.3 million , respectively. Also included in net investment gains and losses were changes in the fair value of an embedded derivative in a modified coinsurance arrangement, which resulted in investment gains (losses) of$14.9 million and$2.6 million in the third quarters of 2022 and 2021, respectively, and$10.7 million and$21.2 million in first nine months of 2022 and 2021, respectively. The changes in the embedded derivative are primarily driven by movements in credit spreads in the overall investment market. Also included in the net investment gains and losses for the first nine months of 2021 is a net realized investment gain of$67.6 million related to the transfer of investments in the second phase of the Closed Block individual disability reinsurance transaction. See Note 4 in the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further information on investment gains and losses. Other income is primarily comprised of fee-based service products in the Unum US segment, which include leave management services and administrative services only (ASO) business, and the underlying results and associated net investment income of certain assumed blocks of individual disability reinsured business in the Closed Block segment. Overall benefits experience was favorable in the third quarter and first nine months of 2022 relative to the same periods of 2021. Overall benefits experience includes the impact of the reserve assumption updates in our Unum US group disability and Unum US group life product lines in the third quarter and first nine months of 2022 and in our Unum US group disability product line and Closed Block segment in the third quarter and first nine months of 2021. Also included in the overall benefits experience for the first nine months of 2021 is the reserve recognition impact from the second phase of the Closed Block individual disability reinsurance transaction that occurred during the first quarter of 2021. The benefits experience for each of our operating business segments is discussed more fully in "Segment Results" as follows. Commissions and the deferral of acquisition costs were higher during the third quarter and first nine months of 2022 compared to the same periods of 2021 driven primarily by in-force block growth and higher sales in our Colonial Life and Unum US segments. The increase in amortization of deferred acquisition costs in the third quarter of 2022 compared to the same period of 2021 is due primarily to a higher level of policy terminations in our Colonial Life segment and our Unum US voluntary benefits product line. The increase in the amortization of deferred acquisition costs in the first nine months of 2022 compared to the same period of 2021 is due to a higher level of policy terminations for our Colonial Life segment, partially offset by a lower level of policy terminations in the Unum US voluntary benefits product line. Cost related to early retirement of debt for the third quarter and first nine months of 2022 includes costs associated with the redemption of$350.0 million aggregate principal amount of our 4.000% senior notes due 2024 and costs related to the retirement of$14.0 million aggregate liquidation amount of the 7.405% capital securities due 2038 issued by Provident Financing Trust I (the Trust), which resulted in the reduction of a corresponding principal amount of our 7.405% junior subordinated debt securities due 2038 then held by the Trust. Cost related to early retirement of debt for the first nine months of 2021 includes costs associated with the redemption of$500.0 million aggregate principal amount of our 4.500% senior notes due 2025. See Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further information. Other expenses and compensation expense, on a combined basis, increased in the third quarter and first nine months of 2022 compared to the same periods of 2021 due to an increase in employee-related costs, operational investments in the business, and growth in our fee-based service products. Also contributing to the increase for the first nine months of 2022 compared to the same period of 2021 is a larger decrease in the allowance for expected credit losses on premium receivable balances during the first nine months of 2021 compared to the same period of 2022. Partially offsetting the increase in expenses for the first nine months of 2022 compared to the same period of 2021 are costs related to the second phase of the Closed Block individual disability reinsurance transaction that occurred in the first quarter of 2021 as well as a reduction in the amortization of the cost of reinsurance in the third quarter and first nine months of 2022. Our effective income tax rates for the third quarter and first nine months of 2022 were 20.3 percent and 18.6 percent of income before income tax, respectively, compared to 19.8 percent and 23.7 percent for the same prior year periods. Our effective income tax rates differed from theU.S. statutory rate of 21 percent in effect for the third quarter and first nine months of 2022 primarily due to the foreign tax rate differential and partially offset by global intangible low-taxed income tax. Our effective income tax rates differed from theU.S. statutory rate of 21 percent in effect for the third quarter and first nine months of 2021 primarily due to unfavorable global intangible low-taxed income tax and favorable adjustments to our prior year tax return. Also impacting the difference between the effective tax rate and theU.S. statutory rate in effect for the first nine months of 2021 was the unfavorable impact of theU.K. tax rate increase. See note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further information. 80 --------------------------------------------------------------------------------
Consolidated Sales Results
Shown below are sales results for our three principal operating business
segments.
(in millions)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Unum US $ 157.5 11.0 % $ 141.9 $ 645.4 14.9 % $ 561.9
Unum International $ 40.1 66.4 % $ 24.1 $ 110.1 36.9 % $ 80.4
Colonial Life $ 115.9 3.2 % $ 112.3 $ 338.1 7.8 % $ 313.6
Sales shown in the preceding chart generally represent the annualized premium
income on new sales which we expect to receive and report as premium income
during the next 12 months following or beginning in the initial quarter in which
the sale is reported, depending on the effective date of the new sale. Sales do
not correspond to premium income reported as revenue in accordance with GAAP.
This is because new annualized sales premiums reflect current sales performance
and what we expect to recognize as premium income over a 12 month period, while
premium income reported in our financial statements is reported on an "as
earned" basis rather than an annualized basis and also includes renewals and
persistency of in-force policies written in prior years as well as current new
sales.
Sales, persistency of the existing block of business, employment and salary
growth, and the effectiveness of a renewal program are indicators of growth in
premium income. Trends in new sales, as well as existing market share, also
indicate the potential for growth in our respective markets and the level of
market acceptance of price levels and new product offerings. Sales results may
fluctuate significantly due to case size and timing of sales submissions.
See "Segment Results" as follows for a discussion of sales by segment.
81 --------------------------------------------------------------------------------
Segment Results
Our reporting segments are comprised of the following: Unum US,
International
Unum US Segment
The Unum US segment is comprised of the group disability, group life and
accidental death and dismemberment, and supplemental and voluntary lines of
business. The group disability line of business includes long-term and
short-term disability, medical stop-loss, and fee-based service products. The
supplemental and voluntary line of business includes voluntary benefits,
individual disability, and dental and vision products.
Unum US Operating Results
Shown below are financial results for the Unum US segment. In the sections
following, financial results and key ratios are also presented for the major
lines of business within the segment.
(in millions of dollars, except
ratios)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Premium Income $ 1,559.6 3.9 % $ 1,500.8 $ 4,676.8 2.8 % $ 4,548.7
Net Investment Income 170.6 (3.2) 176.2 509.4 (5.6) 539.5
Other Income 49.0 12.6 43.5 146.8 17.3 125.2
Total 1,779.2 3.4 1,720.5 5,333.0 2.3 5,213.4
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 834.1 (12.2) 950.2 2,912.4 (8.3) 3,175.6
Commissions 151.3 5.4 143.5 458.6 4.5 439.0
Deferral of Acquisition Costs (66.2) 8.3 (61.1) (199.4) 3.1 (193.4)
Amortization of Deferred
Acquisition Costs 75.3 5.9 71.1 228.0 (6.4) 243.7
Other Expenses 354.7 13.2 313.3 1,036.4 9.1 950.0
Total 1,349.2 (4.8) 1,417.0 4,436.0 (3.9) 4,614.9
Income Before Income Tax and Net
Investment Gains and Losses 430.0 41.7 303.5 897.0 49.9
598.5
Reserve Assumption Updates (155.0) 27.9 (215.0) (155.0) 27.9
(215.0)
Adjusted Operating Income$ 275.0 N.M.$ 88.5 $ 742.0 93.5
Operating Ratios (% of Premium Income): Benefit Ratio1 63.4 % 77.6 % 65.6 % 74.5 % Other Expense Ratio 22.7 % 20.9 % 22.2 % 20.9 % Adjusted Operating Income Ratio 17.6 % 5.9 % 15.9 %
8.4 %
1Excludes the
assumption updates that occurred during the third quarters of each year.
N.M. = not a meaningful percentage
82 --------------------------------------------------------------------------------
Unum US Group Disability Operating Results
Shown below are financial results and key performance indicators for Unum US
group disability.
(in millions of dollars, except
ratios)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Premium Income
Group Long-term Disability $ 480.9 6.5 % $ 451.4 $ 1,419.2 3.8 % $ 1,367.7
Group Short-term Disability 232.2 9.3 212.4 685.9 7.0 641.2
Total Premium Income 713.1 7.4 663.8 2,105.1 4.8 2,008.9
Net Investment Income 84.8 (9.1) 93.3 262.6 (7.8) 284.7
Other Income 48.4 15.0 42.1 143.5 18.2 121.4
Total 846.3 5.9 799.2 2,511.2 4.0 2,415.0
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 326.0 5.6 308.6 1,301.3 (1.0) 1,314.3
Commissions 52.1 6.1 49.1 158.0 4.5 151.2
Deferral of Acquisition Costs (12.9) 4.9 (12.3) (38.1) 1.9 (37.4)
Amortization of Deferred
Acquisition Costs 13.1 1.6 12.9 38.6 - 38.6
Other Expenses 217.2 16.5 186.4 630.5 10.7 569.8
Total 595.5 9.3 544.7 2,090.3 2.6 2,036.5
Income Before Income Tax and Net
Investment Gains and Losses 250.8 (1.5) 254.5 420.9 11.2
378.5
Reserve Assumption Updates (121.0) 43.7 (215.0) (121.0) 43.7
(215.0)
Adjusted Operating Income$ 129.8 N.M.$ 39.5 $ 299.9 83.4 $
163.5
Operating Ratios (% of Premium Income): Benefit Ratio1 62.7 % 78.9 % 67.6 % 76.1 % Other Expense Ratio 30.5 % 28.1 % 30.0 % 28.4 % Adjusted Operating Income Ratio 18.2 % 6.0 % 14.2 % 8.1 % Persistency: Group Long-term Disability 90.7 % 89.8 % Group Short-term Disability 89.2 % 87.1 %
1Excludes the
the assumption updates that occurred during the third quarters of each year.
N.M. = not a meaningful percentage
Premium income was higher in the third quarter and first nine months of 2022
compared to the same periods of 2021 driven primarily by in-force block growth
and favorable persistency. Net investment income was lower in the third quarter
and first nine months of 2022 relative to the same periods of 2021 due primarily
to lower miscellaneous investment income and a decrease in the yield on invested
assets. Other income increased in the third quarter and first nine months of
2022 compared to the same periods of 2021 due primarily to continued growth in
our fee-based service products.
83
--------------------------------------------------------------------------------
Benefits experience, excluding the impacts of the reserve assumption updates,
was favorable in the third quarter and first nine months of 2022 compared to the
same periods of 2021 due primarily to favorable claim recoveries in our group
long-term disability product line as well as lower claims incidence in both the
group short-term and long-term disability product lines.
Commissions were higher in the third quarter and first nine months of 2022
compared to the same periods of 2021 due primarily to in-force block growth and
favorable persistency. The deferral of acquisition costs was higher in the third
quarter and first nine months of 2022 compared to the same periods of 2021 due
primarily to higher sales. The amortization of deferred acquisition costs was
generally consistent in the third quarter and first nine months of 2022 with the
same periods of 2021. Our other expense ratio increased in the third quarter and
first nine months of 2022 compared to the same periods of 2021 due primarily to
increases in employee-related costs, growth in our fee-based service products,
and operational investments in our business.
84
--------------------------------------------------------------------------------
Unum US Group Life and Accidental Death and Dismemberment Operating Results
Shown below are financial results and key performance indicators for Unum US
group life and accidental death and dismemberment.
(in millions of dollars, except
ratios)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Premium Income
Group Life $ 417.7 3.3 % $ 404.2 $ 1,249.9 1.7 % $ 1,228.8
Accidental Death & Dismemberment 43.8 10.6 39.6 129.7 5.4 123.0
Total Premium Income 461.5 4.0 443.8 1,379.6 2.1 1,351.8
Net Investment Income 25.3 4.1 24.3 75.1 (1.3) 76.1
Other Income 0.4 (20.0) 0.5 1.2 (7.7) 1.3
Total 487.2 4.0 468.6 1,455.9 1.9 1,429.2
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 325.8 (27.0) 446.6 1,052.8 (17.8) 1,281.2
Commissions 38.8 6.6 36.4 113.7 4.2 109.1
Deferral of Acquisition Costs (9.0) 1.1 (8.9) (26.9) (1.5) (27.3)
Amortization of Deferred Acquisition
Costs 8.3 (12.6) 9.5 24.8 (13.6) 28.7
Other Expenses 58.4 12.1 52.1 168.7 7.0 157.7
Total 422.3 (21.2) 535.7 1,333.1 (14.0) 1,549.4
Income (Loss) Before Income Tax and
Net Investment Gains and Losses 64.9 196.7 (67.1) 122.8 N.M. (120.2)
Reserve Assumption Update (34.0) N.M. - (34.0) N.M. -
Adjusted Operating Income (Loss) $ 30.9 146.1 $ (67.1) $ 88.8 173.9 $
(120.2)
Operating Ratios (% of Premium Income): Benefit Ratio1 78.0 % 100.6 % 78.8 % 94.8 % Other Expense Ratio 12.7 % 11.7 % 12.2 % 11.7 % Adjusted Operating Income (Loss) Ratio 6.7 % (15.1) % 6.4 % (8.9) % Persistency: Group Life 89.2 % 89.9 % Accidental Death & Dismemberment 88.1 %
89.3 %
1Excludes the
third quarter of 2022.
N.M. = not a meaningful percentage
Premium income was higher in the third quarter and first nine months of 2022
compared to the same periods of 2021 driven by in-force block growth, partially
offset by lower persistency. Net investment income was higher in the third
quarter of 2022 relative to the same period of 2021 due primarily to an increase
in the yield on invested assets and an increase in the level of invested assets,
partially offset by lower miscellaneous investment income. Net investment income
was lower in the first nine months of 2022 relative to the same period of 2021
due primarily to lower miscellaneous investment income, partially offset by an
increase in the level of invested assets.
85
--------------------------------------------------------------------------------
Benefits experience, excluding the impacts of the reserve assumption update, was
favorable in the third quarter and first nine months of 2022 compared to the
same periods of 2021 largely due to lower mortality in the group life product
line, resulting primarily from lessening impacts of COVID-19 on our insured
population.
Commissions were higher in the third quarter and first nine months of 2022
compared to the same periods of 2021 due primarily to in-force block growth. The
deferral of acquisition costs was generally consistent in the third quarter and
first nine months of 2022 with the same periods of 2021. The amortization of
deferred acquisition costs decreased in the third quarter and first nine months
of 2022 compared to the same periods of 2021 due to a decline in the level of
the deferred asset. The other expense ratio increased in the third quarter and
first nine months of 2022 compared to the same periods of 2021 due primarily to
an increase in employee-related costs and operational investments in our
business.
Unum US Supplemental and Voluntary Operating Results
Shown below are financial results and key performance indicators for Unum US
supplemental and voluntary product lines.
(in millions of dollars, except
ratios)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Premium Income
Voluntary Benefits $ 199.0 (5.1) % $ 209.6 $ 635.2 (0.8) % $ 640.4
Individual Disability 118.9 2.8 115.7 350.3 1.5 345.0
Dental and Vision 67.1 (1.2) 67.9 206.6 2.0 202.6
Total Premium Income 385.0 (2.1) 393.2 1,192.1 0.3 1,188.0
Net Investment Income 60.5 3.2 58.6 171.7 (3.9) 178.7
Other Income 0.2 (77.8) 0.9 2.1 (16.0) 2.5
Total 445.7 (1.5) 452.7 1,365.9 (0.2) 1,369.2
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 182.3 (6.5) 195.0 558.3 (3.8) 580.1
Commissions 60.4 4.1 58.0 186.9 4.6 178.7
Deferral of Acquisition Costs (44.3) 11.0 (39.9) (134.4) 4.4 (128.7)
Amortization of Deferred
Acquisition Costs 53.9 10.7 48.7 164.6 (6.7) 176.4
Other Expenses 79.1 5.7 74.8 237.2 6.6 222.5
Total 331.4 (1.5) 336.6 1,012.6 (1.6) 1,029.0
Adjusted Operating Income $ 114.3 (1.6) $ 116.1 $ 353.3 3.9 $ 340.2
Operating Ratios (% of Premium
Income):
Benefit Ratios:
Voluntary Benefits 42.6 % 46.6 % 41.2 % 43.3 %
Individual Disability 40.0 % 40.1 % 41.3 % 43.6 %
Dental and Vision 74.5 % 75.0 % 73.6 % 75.1 %
Other Expense Ratio 20.5 % 19.0 % 19.9 % 18.7 %
Adjusted Operating Income Ratio 29.7 % 29.5 % 29.6 % 28.6 %
Persistency:
Voluntary Benefits 75.1 % 75.4 %
Individual Disability 89.2 % 88.4 %
Dental and Vision 81.4 % 86.3 %
86
--------------------------------------------------------------------------------
Premium income was lower in the third quarter of 2022 compared to the same
period of 2021, due primarily to lower persistency in both the voluntary
benefits and dental and vision product lines, partially offset by higher sales
in both the individual disability and voluntary benefits product lines. Premium
income was generally consistent in the first nine months of 2022 compared to the
same period of 2021 with higher sales in the individual disability product line,
mostly offset by lower persistency in the voluntary benefits product line. Net
investment income was higher in the third quarter of 2022 compared to the same
period of 2021 due to an increase in the yield on invested assets. Net
investment income was lower in the first nine months of 2022 compared to the
same period of 2021 due to lower miscellaneous investment income and a decrease
in the level of invested assets, partially offset by an increase in the yield on
invested assets.
Benefits experience for voluntary benefits was favorable in the third quarter
and first nine months of 2022 compared to the same periods of 2021 due to
favorable claims experience in all products, including within the life product
line, resulting primarily from lessening impacts of COVID-19 on our insured
population. Benefits experience for the individual disability product line was
favorable in the third quarter and first nine months of 2022 compared to the
same periods of 2021 due primarily to lower claims activity. Benefits experience
for the dental and vision product line was favorable in the third quarter and
first nine months of 2022 due primarily to lower claims incidence.
Commissions and deferral of acquisition costs were higher in the third quarter
and first nine months of 2022 compared to the same periods of 2021 due primarily
to higher sales in the individual disability product line. Also contributing to
the increase in commissions for the first nine months of 2022 compared to the
same period of 2021 were higher sales in the voluntary benefits product line.
The amortization of deferred acquisition costs was higher in the third quarter
of 2022 compared to the same period of 2021 due to a higher level of policy
terminations, and decreased in the first nine months of 2022 relative to the
same period of 2021 due to a lower level of policy terminations, primarily in
the voluntary benefits product line. Our other expense ratio increased in the
third quarter and first nine months of 2022 compared to the same periods of 2021
due primarily to an increase in employee-related costs and an increase in
operational investments in our business. Also contributing to the increase for
the first nine months of 2022 compared to the same period of 2021 is a larger
decrease in the allowance for expected credit losses on premium receivable
balances during the first nine months of 2021 compared to the same period of
2022.
87
--------------------------------------------------------------------------------
Sales
(in millions of dollars)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Sales by Product
Group Disability and Group Life
and AD&D
Group Long-term Disability $ 35.4 35.1 % $ 26.2 $ 139.2 40.2 % $ 99.3
Group Short-term Disability 18.3 (15.3) 21.6 82.4 7.2 76.9
Group Life and AD&D 26.9 1.1 26.6 137.5 14.0 120.6
Subtotal 80.6 8.3 74.4 359.1 21.0 296.8
Supplemental and Voluntary
Voluntary Benefits 40.5 19.1 34.0 188.8 5.7 178.7
Individual Disability 25.9 23.9 20.9 64.9 22.9 52.8
Dental and Vision 10.5 (16.7) 12.6 32.6 (3.0) 33.6
Subtotal 76.9 13.9 67.5 286.3 8.0 265.1
Total Sales $ 157.5 11.0 $ 141.9 $ 645.4 14.9 $ 561.9
Sales by Market Sector
Group Disability and Group Life
and AD&D
Core Market (< 2,000 employees) $ 58.7 27.9 % $ 45.9 $ 228.5 21.9 % $ 187.5
Large Case Market 21.9 (23.2) 28.5 130.6 19.5 109.3
Subtotal 80.6 8.3 74.4 359.1 21.0 296.8
Supplemental and Voluntary 76.9 13.9 67.5 286.3 8.0 265.1
Total Sales $ 157.5 11.0 $ 141.9 $ 645.4 14.9 $ 561.9
Group sales increased during the third quarter of 2022 compared to the same
period of 2021 due to higher sales to new and existing customers in the core
market, which we define as employee groups with fewer than 2,000 employees,
partially offset by lower sales to new customers in the large case market. Group
sales increased during the first nine months of 2022 compared to the same period
of 2021 due to higher sales to new and existing customers in the core market and
higher sales to existing customers in the large case market. Despite the overall
increase in group sales, we are continuing to experience strong competition for
new customers in the large case market. The sales mix in the group market sector
for the first nine months of 2022 was approximately 63 percent core market
and 37 percent large case market.
Voluntary benefits sales increased during the third quarter and first nine
months of 2022 compared to the same periods of 2021 due primarily to higher
sales to existing customers in the core market and higher sales to new customers
in the large case market. Individual disability sales, which are primarily
concentrated in the multi-life market, increased in the third quarter and first
nine months of 2022 compared to the same periods of 2021 due to higher sales to
both new and existing customers. Dental and vision sales decreased during the
third quarter and first nine months of 2022 compared to the same periods of 2021
due to lower sales to new customers, partially offset by higher sales to
existing customers.
88
--------------------------------------------------------------------------------
Segment Outlook
We remain committed to offering consumers a broad set of financial protection benefit products at the worksite. During 2022, we will continue to invest in a unique customer experience defined by simplicity, empathy, and deep industry expertise through the increased utilization of digital capabilities and technology to enhance enrollment, underwriting, and claims processing. In addition, we will continue to focus on the expansion of our portfolio of products. In particular, with respect to smaller employers, we will continue to provide comprehensive consumer-focused products, enhance our distribution model, and utilize our digital tools to bring industry leading enrollment capabilities and a fully integrated customer experience. Our differentiated offerings and significant investment in leave management services provides substantial growth opportunities, particularly with larger employers, and stronger persistency in our core products. We believe our active client management, integrated customer experience across our product lines, and strong risk management, will enable us to continue to grow our market over the long-term. Our near-term results will be influenced by pandemic trends, specifically the mortality rate in our insured population along with the level and severity of infection rates. As the pandemic impacts have lessened, we experienced a recovery in earnings given the underlying strength of our business. We expect full year premium income to grow at a higher rate than 2021, partially due to in-force block growth as a result of wage inflation and an increase in the number of lives covered for our group products. While we expect our claim experience to continue to improve as impacts from COVID-19 lessen, we may also continue to experience claims volatility, particularly in our group disability and group and voluntary life products. We may also experience potential disruption in our overall claims processing activity, which can result in short-term unfavorable experience. Furthermore, we could continue to experience an increase in the volume of activity associated with our leave management services which would lead to an increase in expenses. A rising interest rate environment could continue to positively impact our yields on new investments but could also continue to create further unrealized losses in our current holdings. Our net investment income may continue to be impacted by volatility in miscellaneous investment income. As part of our discipline in pricing and reserving, we continuously monitor emerging claim trends and interest rates. We will continue to take appropriate pricing actions on new business and renewals that are reflective of the current environment.
We continuously monitor key indicators to assess our risks and adjust our
business plans accordingly.
89 --------------------------------------------------------------------------------
Unum International Segment
The Unum International segment is comprised of our operations in both theUnited Kingdom and Poland. Our UnumUK products include insurance for group long-term disability, group life, and supplemental lines of business, which includes dental, individual disability, and critical illness products. OurUnum Poland products include insurance for individual and group life with accident and health riders.Unum International's products are sold primarily through field sales personnel and independent brokers and consultants.
Operating Results
Shown below are financial results and key performance indicators for theUnum International segment. (in millions of dollars, except ratios) Three Months Ended September 30 Nine Months Ended September 30 2022 % Change 2021 2022 % Change 2021 Adjusted Operating Revenue Premium Income Unum UK Group Long-term Disability$ 89.8 (11.6) %$ 101.6 $ 287.5 (5.4) %$ 303.8 Group Life 35.0 20.3 29.1 100.5 19.1 84.4 Supplemental 27.4 (3.2) 28.3 85.8 1.9 84.2 Unum Poland 21.1 (6.6) 22.6 66.7 (0.6) 67.1 Total Premium Income 173.3 (4.6) 181.6 540.5 0.2 539.5 Net Investment Income 37.0 11.8 33.1 122.3 29.0 94.8 Other Income 0.2 (50.0) 0.4 0.7 16.7 0.6 Total 210.5 (2.1) 215.1 663.5 4.5 634.9 Benefits and Expenses Benefits and Change in Reserves for Future Benefits 131.1 (6.1) 139.6 432.8 3.9 416.6 Commissions 15.0 7.9 13.9 44.9 10.3 40.7 Deferral of Acquisition Costs (2.9) (12.1) (3.3) (9.3) (3.1) (9.6) Amortization of Deferred Acquisition Costs 1.2 (40.0) 2.0 5.8 (4.9) 6.1 Other Expenses 36.2 2.0 35.5 107.3 4.7 102.5 Total 180.6 (3.8) 187.7 581.5 4.5 556.3 Adjusted Operating Income$ 29.9 9.1$ 27.4 $ 82.0 4.3$ 78.6 Foreign Currency Translation The functional currencies of UnumUK andUnum Poland are the British pound sterling and Polish zloty, respectively. Premium income, net investment income, claims, and expenses are received or paid in the functional currency, and we hold functional currency-denominated assets to support functional currency-denominated policy reserves and liabilities. We translate functional currency-denominated financial statement items into dollars for our consolidated financial reporting. We translate income statement items using an average exchange rate for the reporting period, and we translate balance sheet items using the exchange rate at the end of the period. We report unrealized foreign currency translation gains and losses in accumulated other comprehensive income (loss) in our consolidated balance sheets. Fluctuations in exchange rates impactUnum International's reported financial results and our consolidated financial results. In periods when the functional currency strengthens relative to the preceding period, translation increases current period results relative to the prior period. In periods when the functional currency weakens, translation decreases current period results relative to the prior period. 90 --------------------------------------------------------------------------------
Unum
Shown below are financial results and key performance indicators for the UnumUK product lines in functional currency. (in millions of pounds, except ratios) Three Months Ended September 30 Nine Months Ended September 30 2022 % Change 2021 2022 % Change 2021 Adjusted Operating Revenue Premium Income Group Long-term Disability £ 76.2 3.4 %
£ 73.7 £ 228.4 4.1 % £ 219.3 Group Life 29.8 41.2 21.1 80.3 31.9 60.9 Supplemental 23.4 13.6 20.6 68.4 12.5 60.8 Total Premium Income 129.4 12.1 115.4 377.1 10.6 341.0 Net Investment Income 29.9 32.9 22.5 93.3 45.3 64.2 Other Income - N.M. 0.2 0.1 (50.0) 0.2 Total 159.3 15.4 138.1 470.5 16.1 405.4 Benefits and Expenses Benefits and Change in Reserves for Future Benefits 101.7 11.3 91.4 312.8 16.0 269.6 Commissions 9.1 21.3 7.5 26.0 20.4 21.6 Deferral of Acquisition Costs (1.0) (16.7) (1.2) (3.3) 3.1 (3.2) Amortization of Deferred Acquisition Costs 0.6 (50.0) 1.2 3.7 (2.6) 3.8 Other Expenses 25.3 21.6 20.8 69.2 15.7 59.8 Total 135.7 13.4 119.7 408.4 16.2 351.6 Adjusted Operating Income £ 23.6 28.3 £ 18.4 £ 62.1 15.4 £ 53.8 Weighted Average Pound/Dollar Exchange Rate 1.169 1.380 1.246 1.385 Operating Ratios (% of Premium Income): Benefit Ratio 78.6 % 79.2 % 82.9 % 79.1 % Other Expense Ratio 19.6 % 18.0 % 18.4 % 17.5 % Adjusted Operating Income Ratio 18.2 % 15.9 % 16.5 % 15.8 %
Persistency:
Group Long-term Disability 84.9 % 88.9 % Group Life 88.2 % 86.0 % Supplemental 92.3 % 89.9 %
N.M. = not a meaningful percentage
Premium income was higher in the third quarter and first nine months of 2022
compared to the same periods of 2021 due to in-force block growth and sales
growth in the group life product line.
Net investment income was higher in the third quarter and first nine months of
2022 compared to the same periods of 2021 due primarily to higher investment
income from inflation index-linked bonds. Our investments in inflation
index-linked bonds support the claim reserves associated with certain group
policies that provide for inflation-linked increases in benefits. The change in
net investment income attributable to these index-linked bonds is partially
offset by a change in the reserves for future claim payments related to the
inflation index-linked group long-term disability and group life policies.
91
--------------------------------------------------------------------------------
Benefits experience was favorable in the third quarter of 2022 compared to the
same period of 2021 due primarily to inflation index-linked experience for our
group life and group long-term disability products, partially offset by higher
claim incidence in our supplemental product line. Due to rising inflation, many
of our claims reached the maximum annual inflation index-linked adjustment in
the first half of 2022, resulting in a decrease in inflation-related benefit
adjustments in the third quarter of 2022 compared to the same period of 2021.
Benefits experience was unfavorable in the first nine months of 2022 compared to
the same periods of 2021 due primarily to higher inflation index-linked
experience, higher claims incidence in the group long-term disability product
line, and higher claim incidence in our supplemental product line.
Commissions increased in the third quarter and first nine months of 2022
compared to the same periods of 2021 due primarily to in-force block growth. The
deferral of acquisition costs were generally consistent in the third quarter and
first nine months of 2022 compared to the same periods of 2021. The amortization
of deferred acquisition costs decreased during the third quarter and first nine
months of 2022 compared to the same periods of 2021 due primarily to a decline
in the level of deferred asset. The other expense ratio was higher in the third
quarter and first nine months of 2022 compared to the same periods of 2021 due
to an increase in employee-related costs and an increase in operational
investments in our business.
92
--------------------------------------------------------------------------------
Sales
(in millions of dollars and
pounds)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Unum International Sales by
Product
Unum UK
Group Long-term Disability $ 6.4 (36.6) % $ 10.1 $ 35.2 5.4 % $ 33.4
Group Life 28.1 N.M. 6.8 49.0 114.0 22.9
Supplemental 2.2 (40.5) 3.7 14.5 6.6 13.6
Unum Poland 3.4 (2.9) 3.5 11.4 8.6 10.5
Total Sales $ 40.1 66.4 $ 24.1 $ 110.1 36.9 $ 80.4
Unum International Sales by Market
Sector
Unum UK
Group Long-term Disability and
Group Life
Core Market (< 500 employees) $ 9.3 - % $ 9.3 $ 32.8 7.5 % $ 30.5
Large Case Market 25.2 N.M. 7.6 51.4 99.2 25.8
Subtotal 34.5 104.1 16.9 84.2 49.6 56.3
Supplemental 2.2 (40.5) 3.7 14.5 6.6 13.6
Unum Poland 3.4 (2.9) 3.5 11.4 8.6 10.5
Total Sales $ 40.1 66.4 $ 24.1 $ 110.1 36.9 $ 80.4
Unum UK Sales by Product
Group Long-term Disability £ 5.5 (25.7) % £ 7.4 £ 27.6 14.5 % £ 24.1
Group Life 23.5 N.M. 4.9 39.7 140.6 16.5
Supplemental 1.9 (29.6) 2.7 11.3 14.1 9.9
Total Sales £ 30.9 106.0 £ 15.0 £ 78.6 55.6 £ 50.5
Unum UK Sales by Market Sector
Group Long-term Disability and
Group Life
Core Market (< 500 employees) £ 7.9 17.9 % £ 6.7 £ 25.9 17.7 % £ 22.0
Large Case Market 21.1 N.M. 5.6 41.4 122.6 18.6
Subtotal 29.0 135.8 12.3 67.3 65.8 40.6
Supplemental 1.9 (29.6) 2.7 11.3 14.1 9.9
Total Sales £ 30.9 106.0 £ 15.0 £ 78.6 55.6 £ 50.5
N.M. = not a meaningful percentage
The following discussion of sales results relates only to our Unum
lines and is based on functional currency.
Group long-term disability sales decreased in the third quarter of 2022 compared
to the same period of 2021 driven by lower sales to new customers in both the
large case market and the core market, which we define as employee groups with
fewer than 500 employees, partially offset by higher sales to existing customers
in the core market. Group long-term disability sales were higher in the first
nine months of 2022 compared to the same period of 2021 driven by higher sales
to new customers in the large case market and existing customers in the core
market, partially offset by lower sales to new customers in the core market.
Group life sales increased in the third quarter and first nine months of 2022
compared to the same periods of 2021 driven primarily by higher sales to new
customers in the large case market.
93
--------------------------------------------------------------------------------
Supplemental sales decreased in the third quarter of 2022 compared to the same
period of 2021 due primarily to lower sales in both the critical illness and
dental product lines. Supplemental sales increased in the first nine months of
2022 compared to the same period of 2021 due primarily to higher sales in the
dental product line, partially offset by lower sales in the critical illness
product line.
Segment Outlook
We are committed to driving growth in the Unum International segment and will
build on the capabilities that we believe will generate growth and profitability
in our businesses over the long term. For our Unum UK line of business,
achieving growth within our existing portfolio of products remains a priority.
We will focus on delivering a high quality service and building best in class
health and wellbeing services to continue to improve retention of our key
customers and drive growth in small case business. We will also maintain our
disciplined sales approach. Within our Unum Poland line of business, we will
leverage our U.S. and U.K. expertise to grow existing distribution channels and
expand our current product offerings. We continue to invest in digital
capabilities, technology, and product enhancements which we believe will drive
sustainable growth over the long term.
In 2022, we expect strong premium growth, but recognize that we could continue
to experience claims volatility across our lines of business as pandemic impacts
lessen. Despite ongoing economic uncertainty, we believe we are well positioned
to capitalize on future growth opportunities as the operating environment
improves. As part of our continued pricing discipline and our reserving
methodology, we continuously monitor emerging interest rate experience and
adjust our pricing and reserve discount rates, as appropriate. We will likely
continue to experience higher net investment income and fluctuations in our
benefit ratio due to the higher level of inflation in the U.K. we expect to
continue during the year. We continuously monitor key indicators to assess our
risks and adjust our business plans accordingly to respond to external
challenges.
94
--------------------------------------------------------------------------------
Colonial Life Segment
The Colonial Life segment includes insurance for accident, sickness, and disability products, which includes our dental and vision products, life products, and cancer and critical illness products issued primarily byColonial Life & Accident Insurance Company and marketed to employees, on both a group and an individual basis, at the workplace through an independent contractor agent sales force and brokers. Operating Results Shown below are financial results and key performance indicators for the Colonial Life segment. (in millions of dollars, except ratios) Three Months Ended September 30 Nine Months Ended September 30 2022 % Change 2021 2022 % Change 2021 Adjusted Operating Revenue Premium Income Accident, Sickness, and Disability$ 236.1 (0.8) %$ 238.0 $ 714.0 (0.2) %$ 715.1 Life 100.2 5.9 94.6 303.2 5.5 287.3 Cancer and Critical Illness 87.0 (1.4) 88.2 264.4 - 264.5 Total Premium Income 423.3 0.6 420.8 1,281.6 1.2 1,266.9 Net Investment Income 38.6 (25.5) 51.8 115.4 (12.0) 131.1 Other Income 0.3 - 0.3 0.8 - 0.8 Total 462.2 (2.3) 472.9 1,397.8 (0.1) 1,398.8 Benefits and Expenses Benefits and Change in Reserves for Future Benefits 198.0 (15.8) 235.2 613.8 (10.8) 688.2 Commissions 86.0 6.8 80.5 258.0 8.9 236.9 Deferral of Acquisition Costs (70.3) 9.5 (64.2) (210.4) 13.2 (185.9) Amortization of Deferred Acquisition Costs 74.3 13.8 65.3 215.7 12.9 191.0 Other Expenses 83.8 10.3 76.0 239.1 9.0 219.4 Total 371.8 (5.3) 392.8 1,116.2 (2.9) 1,149.6 Adjusted Operating Income$ 90.4 12.9$ 80.1 $ 281.6 13.0$ 249.2 Operating Ratios (% of Premium Income): Benefit Ratio 46.8 % 55.9 % 47.9 % 54.3 % Other Expense Ratio 19.8 % 18.1 % 18.7 % 17.3 % Adjusted Operating Income Ratio 21.4 % 19.0 % 22.0 %
19.7 %
Persistency:
Accident, Sickness, and Disability 73.8 % 75.6 % Life 85.1 % 84.9 % Cancer and Critical Illness 82.3 % 82.1 % Premium income in the third quarter and first nine months of 2022 was favorable compared to the same periods of 2021, due to higher sales in prior periods, partially offset by lower overall persistency. Net investment income decreased during the third quarter and first nine months of 2022 relative to the same periods of 2021 due to lower miscellaneous investment income and a decline in the yield on invested assets, partially offset by an increase in the level of invested assets.
Benefits experience during the third quarter and first nine months of 2022 was
favorable compared to the same periods of 2021 across all product lines.
95 -------------------------------------------------------------------------------- Commissions and the deferral of acquisition costs were higher in the third quarter and first nine months of 2022 relative to the same periods of 2021 due to higher sales in prior periods. The amortization of deferred acquisition costs was higher during the third quarter and first nine months of 2022 relative to the same periods of 2021 due to a higher level of policy terminations primarily in the accident, sickness, and disability product line. The other expense ratio was higher in the third quarter and first nine months of 2022 relative to the same periods of 2021 due primarily to an increase in operational investments in our business and an increase in employee-related costs. Also impacting the comparison for the first nine months of 2022 is a decrease in the allowance for expected credit losses on premium receivable balances during the first nine months of 2021 that did not recur during the same period of 2022.
Sales
(in millions of dollars)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Sales by Product
Accident, Sickness, and
Disability $ 71.4 2.3 % $ 69.8 $ 210.0 6.9 % $ 196.4
Life 27.9 5.7 26.4 80.4 9.8 73.2
Cancer and Critical Illness 16.6 3.1 16.1 47.7 8.4 44.0
Total Sales $ 115.9 3.2 $ 112.3 $ 338.1 7.8 $ 313.6
Sales by Market Sector
Commercial
Core Market (< 1,000 employees) $ 73.4 1.5 % $ 72.3 $ 225.4 8.8 % $ 207.2
Large Case Market 10.7 (25.2) 14.3 36.3 (16.4) 43.4
Subtotal 84.1 (2.9) 86.6 261.7 4.4 250.6
Public Sector 31.8 23.7 25.7 76.4 21.3 63.0
Total Sales $ 115.9 3.2 $ 112.3 $ 338.1 7.8 $ 313.6
Commercial market sales decreased in the third quarter of 2022 compared to the
same period of 2021 due to lower sales to existing customers in the large case
market, partially offset by higher sales to existing customers in the core
market, which we define as accounts with fewer than 1,000 employees. Commercial
market sales increased in the first nine months of 2022 compared to the same
period of 2021 due to higher sales to existing customers in the core market,
partially offset by lower sales to both new and existing customers in the large
case market. Public sector market sales increased in the third quarter and first
nine months of 2022 compared to the same periods of 2021 due to higher sales to
both new and existing customers. The number of new accounts decreased 4.0
percent and 4.6 percent, respectively, in the third quarter and first nine
months of 2022 compared to the same periods of 2021. The average new case size
increased 9.5 percent and 2.9 percent, respectively, in the third quarter and
first nine months of 2022 compared to the same periods of 2021.
Segment Outlook
We remain committed to providing employees and their families with simple,
modern, and personal benefit solutions. During 2022, we will continue to utilize
our strong distribution system of independent agents, benefit counselors and
broker partnerships. We will also continue to invest in new solutions and
digital capabilities to expand our reach and effectiveness, driving growth and
improving productivity while enhancing the customer experience. In 2022, we will
continue to bring an enhanced engagement and enrollment platform to market
enabling deeper connections with employees through the enrollment process as
well as maintaining stronger relationships throughout the customer lifecycle. We
believe our distribution system, customer service capabilities, digital and
virtual tools, and ability to serve all market sizes position us well for future
growth.
In 2022, we expect positive operating trends with full year premium income
growth compared to the prior year, but at a rate that is below pre-pandemic
levels. While we expect our claim experience to continue to improve as impacts
from COVID-19 lessen, we could continue to experience claims volatility,
particularly in our life and disability products. Our net investment income may
continue to be impacted by volatility in miscellaneous investment income. While
we believe our underlying profitability will remain strong, current economic
conditions and increasing competition in the voluntary workplace market are
risks to achievement of our business plans. We continuously monitor key
indicators to assess our risks and adjust our business plans accordingly.
96
--------------------------------------------------------------------------------
Closed Block Segment
The Closed Block segment consists of group and individual long-term care, individual disability, and other insurance products no longer actively marketed. We discontinued offering individual long-term care in 2009 and group long-term care in 2012. Individual disability in this segment generally consists of policies we sold prior to the mid-1990s and entirely discontinued selling in 2004. As ofMarch 2021 , we ceded a significant portion of this individual disability business to a third party reinsurer. See "Executive Summary" herein Item 2 for further discussion. Other insurance products include group pension, individual life and corporate-owned life insurance, reinsurance pools and management operations, and other miscellaneous product lines.
Operating Results
Shown below are financial results and key performance indicators for the Closed
Block segment.
97
--------------------------------------------------------------------------------
(in millions of dollars, except
ratios)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Premium Income
Long-term Care $ 174.5 (0.9) % $ 176.1 $ 523.0 (1.0) % $ 528.4
Individual Disability 59.5 (17.7) 72.3 185.3 (14.5) 216.8
All Other 1.5 (28.6) 2.1 5.1 (16.4) 6.1
Total Premium Income 235.5 (6.0) 250.5 713.4 (5.0) 751.3
Net Investment Income 251.4 (11.7) 284.6 817.7 (6.7) 876.5
Other Income 13.1 (32.1) 19.3 45.6 (8.4) 49.8
Total 500.0 (9.8) 554.4 1,576.7 (6.0) 1,677.6
Benefits and Expenses
Benefits and Change in Reserves for
Future Benefits 416.1 (3.0) 428.9 1,222.3 (11.4) 1,378.8
Commissions 19.2 (5.9) 20.4 57.6 (6.0) 61.3
Other Expenses 45.8 (5.8) 48.6 137.8 (9.2) 151.8
Total 481.1 (3.4) 497.9 1,417.7 (10.9) 1,591.9
Income Before Income Tax and Net
Investment Gains and Losses 18.9 (66.5) 56.5 159.0 85.5 85.7
Long-term Care Reserve Increase - N.M. 2.1 - N.M. 2.1
Individual Disability Reserve
Increase - N.M. 6.4 - N.M. 6.4
Group Pension Reserve Increase - N.M. 25.1 - N.M. 25.1
Impacts from Closed Block
Individual Disability Reinsurance
Transaction - - - - N.M. 139.3
Amortization of the Cost of
Reinsurance 15.2 (22.8) 19.7 48.5 (18.4) 59.4
Adjusted Operating Income $ 34.1 (68.9) $ 109.8 $ 207.5 (34.7) $ 318.0
Interest Adjusted Loss Ratios:
Long-term Care1 85.7 % 74.8 % 80.6 % 75.7 %
Individual Disability2 77.5 % 58.2 % 78.6 % 65.6 %
Operating Ratios (% of Premium
Income):
Other Expense Ratio3 13.0 % 11.5 % 12.5 % 11.5 %
Income Ratio 8.0 % 22.6 % 22.3 % 11.4 %
Adjusted Operating Income Ratio 14.5 % 43.8 % 29.1 % 42.3 %
Persistency:
Long-term Care 95.4 % 95.5 %
Individual Disability 86.4 % 86.5 %
1Excludes the $2.1 million reserve increase from the third quarter and first nine months of 2021 related to the assumption update that occurred
during the third quarter of 2021.
2Excludes the $133.1 million reserve recognition from the first nine months of 2021 related to the second phase of the reinsurance transaction that
occurred during the first quarter of 2021. Also excludes the $6.4 million reserve increase from the third quarter and first nine months of 2021
related to the assumption update that occurred during the third quarter of 2021.
3Excludes amortization of the cost of reinsurance from the third quarter and first nine months of 2022 and 2021. Also excludes $6.2 million of
transaction costs from the first nine months of 2021 related to the reinsurance transaction that occurred during the first quarter of 2021.
N.M. = not a meaningful percentage
98 -------------------------------------------------------------------------------- Premium income for long-term care decreased in the third quarter and first nine months of 2022 relative to the same periods of 2021 due to policy terminations and maturities, partially offset by rate increases. We continue to file requests with various state insurance departments for premium rate increases on certain of our individual and group long-term care policies which reflect assumptions as of the date of filings. In states for which a rate increase is submitted and approved, we routinely provide customers options for coverage changes or other approaches that might fit their current financial and insurance needs. Premium income for individual disability decreased in the third quarter and first nine months of 2022 compared to the same periods of 2021 due to policy terminations and maturities. Net investment income was lower during the third quarter and first nine months of 2022 relative to the same periods of 2021 due to lower miscellaneous investment income, partially related to smaller increases in the net asset values (NAV) on our private equity partnerships, and a decline in the yield on invested assets, partially offset by an increase in the level of invested assets. Other income primarily includes the underlying results and associated net investment income of certain assumed blocks of individual disability business. The interest adjusted loss ratio for long-term care, excluding the reserve increase related to the assumption update in the third quarter of 2021, was less favorable during the third quarter and first nine months of 2022 relative to the same periods of 2021 driven by higher submitted claims. The interest adjusted loss ratio for long-term care for the rolling twelve months was 81.0 percent. The interest adjusted loss ratio for individual disability, excluding the reserve increase related to the assumption update in the third quarter of 2021 and the reserve recognition impact from the reinsurance transaction in the first quarter of 2021, was unfavorable during the third quarter and first nine months of 2022 relative to the same periods of 2021 due primarily to volatility as a result of the relatively small amount of business retained. The other expense ratio, excluding certain transaction costs incurred and the amortization of the cost of reinsurance related to the previously discussed reinsurance transaction, was higher in the third quarter and first nine months of 2022 compared to the same periods of 2021 due primarily to a decline in the expense allowance related to the ceded block of individual disability business.
Segment Outlook
We will continue to execute on our well-defined strategy of implementing long-term care premium rate increases, efficient capital management, improved financial analysis, and operational effectiveness. We will continue to explore structural options to enhance financial flexibility. Despite continued anticipated premium rate increases in our long-term care business, we expect overall premium income and adjusted operating revenue to decline over time as these closed blocks of business wind down. We will likely experience volatility in net investment income due to fluctuations of miscellaneous investment income, driven by bond calls and the increased allocation towards alternative assets, primarily private equity partnership investments, in the long-term care product line portfolio. We record changes in our share of the net asset value (NAV) of the partnerships in net investment income. We receive financial information related to our investments in partnerships and generally record investment income on a one-quarter lag in accordance with our accounting policy. As these net asset values are volatile and can fluctuate materially with changes in market economic conditions, there may possibly be significant movements up or down in future periods as conditions change. We continuously monitor key indicators to assess our risks and adjust our business plans, including utilization of derivative financial instruments to manage interest rate risk. Profitability of our long-tailed products is affected by claims experience related to mortality and morbidity, resolutions, investment returns, premium rate increases, and persistency. We believe that the interest adjusted loss ratio for long-term care will be relatively flat over the long term, but may continue to experience quarterly volatility, particularly in the near term as our claim block matures and as we continue the implementation of premium rate increases. Specific to our long-term care line of business, which is in loss recognition and should report levels of benefits plus operating expenses that equal the gross premium reported, we expect the long term interest adjusted loss ratio to be in the 85 to 90 percent range with some quarterly volatility. Claim resolution rates, which measure the resolution of claims from recovery, deaths, settlements, and benefit expirations, are very sensitive to operational and external factors and can be volatile. Our claim resolution rate assumption used in determining reserves is our expectation of the resolution rate we will experience over the life of the block of business and will vary from actual experience in any one period. It is possible that variability in any of our reserve assumptions, including, but not limited to, interest rates, mortality, morbidity, resolutions, premium rate increases, benefit change elections, and persistency, could result in a material impact on the adequacy of our reserves, including adjustments to reserves established under loss recognition. As a result of the execution of the reinsurance transaction related to our Closed Block individual disability line of business where we have fully ceded a significant portion of this business, we expect that the primary impact on earnings will be the amortization of the cost of reinsurance for that agreement which we expect will be approximately$64 million for 2022. The cost of reinsurance will continue to be amortized on a declining trajectory consistent with the expected run-off pattern of the 99 -------------------------------------------------------------------------------- ceded reserves, which we estimate to be approximately 25 years. Due to the relatively small amount of business that has been retained, we expect that the interest adjusted loss ratio will be more volatile from period to period and we expect minimal earnings related to the retained business. 100 --------------------------------------------------------------------------------
Corporate Segment
The Corporate segment includes investment income on corporate assets not
specifically allocated to a line of business, interest expense on corporate
debt, and certain other corporate income and expenses not allocated to a line of
business.
Operating Results
(in millions of dollars)
Three Months Ended September 30 Nine Months Ended September 30
2022 % Change 2021 2022 % Change 2021
Adjusted Operating Revenue
Net Investment Income $ 14.0 N.M. $ 4.5 $ 33.0 61.0 % $ 20.5
Other Income 0.4 (83.3) 2.4 3.6 (12.2) 4.1
Total 14.4 108.7 6.9 36.6 48.8 24.6
Interest, Debt, and Other Expenses 63.9 (0.8) 64.4 163.4 (34.8) 250.7
Loss Before Income Tax and Net
Investment Gains and Losses (49.5) 13.9 (57.5) (126.8) 43.9 (226.1)
Impairment Loss on Internal-Use
Software - N.M. 12.1 - N.M. 12.1
Cost Related to Early Retirement
of Debt - - - - N.M. 67.3
Impairment Loss on ROU Asset - - - - N.M. 13.9
Adjusted Operating Loss $ (49.5) (9.0) $ (45.4) $ (126.8) 4.5 $ (132.8)
N.M. = not a meaningful percentage
Adjusted operating loss increased in the third quarter of 2022 relative to the same period of 2021, which excludes the impairment loss on internal-use software, due primarily to higher employee-related costs and an increase in interest and debt expenses, partially offset by favorable net investment income driven primarily by an increase in the yield on invested assets, and lower pension expenses. Adjusted operating loss decreased in the first nine months of 2022 relative to the same period of 2021, which excludes the impairment loss on internal-use software, the cost related to the early retirement of debt, and the impairment loss on the ROU asset, due to higher net investment income driven primarily by an increase in the yield on invested assets and lower pension expenses, partially offset by an increase in employee-related costs and an increase in interest and debt expenses. See Note 12 of the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion on the impairment loss on internal-use software, the cost related to early retirement of debt, and the impairment loss on the ROU asset.
Segment Outlook
We expect to continue to generate excess capital on an annual basis through the
statutory earnings in our insurance subsidiaries and believe we are well
positioned with flexibility to preserve our capital strength while also
returning capital to our shareholders. We may experience volatility in net
investment income based on both the composition and level of invested assets
that we allocate to our products from period to period.
101
--------------------------------------------------------------------------------
Investments
Overview
Investment activities are an integral part of our business, and profitability is significantly affected by investment results. We segment our invested assets into portfolios that support our various product lines. Generally, our investment strategy for our portfolios is to match the effective asset cash flows and durations with related expected liability cash flows and durations to consistently meet the liability funding requirements of our businesses. We seek to earn investment income while assuming risk in a prudent and selective manner, subject to constraints of quality, liquidity, diversification, and regulatory considerations. Our overall investment philosophy is to invest in a portfolio of high quality assets that provide investment returns consistent with that assumed in the pricing of our insurance products. Assets are invested predominately in fixed maturity securities. We manage our asset and liability cash flow match and our asset and liability duration match to manage interest rate risk. We may redistribute investments among our different lines of business, when necessary, to adjust the cash flow and/or duration of the asset portfolios to better match the cash flow and duration of the liability portfolios. Asset and liability portfolio modeling is updated on a quarterly basis and is used as part of the overall interest rate risk management strategy. Cash flows from the in-force asset and liability portfolios are projected at current interest rate levels and at levels reflecting an increase and a decrease in interest rates to obtain a range of projected cash flows under the different interest rate scenarios. These results enable us to assess the impact of projected changes in cash flows and duration resulting from potential changes in interest rates. Testing the asset and liability portfolios under various interest rate scenarios enables us to choose what we believe to be the most appropriate investment strategy, as well as to limit the risk of disadvantageous outcomes. Although we test the asset and liability portfolios under various interest rate scenarios as part of our modeling, the majority of our liabilities related to insurance contracts are not interest rate sensitive, and we therefore have minimal exposure to policy withdrawal risk. Our determination of investment strategy relies on long-term measures such as reserve adequacy analysis and the relationship between the portfolio yields supporting our various product lines and the aggregate discount rate assumptions embedded in the reserves. We also use this analysis in determining hedging strategies and utilizing derivative financial instruments to manage interest rate risk and the risk related to matching duration for our assets and liabilities. We do not use derivative financial instruments for speculative purposes. Our investment portfolio is well diversified by type of investment and industry sector. We have established an investment strategy that we believe will provide for adequate cash flows from operations and allow us to hold our securities through periods where significant decreases in fair value occur. We believe our emphasis on risk management in our investment portfolio has positioned us well and generally reduced the volatility in our results.
Closed Block Individual Disability Reinsurance Transaction
As part of the second phase of the Closed Block individual disability reinsurance transaction entered into inDecember 2020 with Commonwealth, inMarch 2021 we transferred fixed maturity securities of$226.8 million on an amortized cost basis and$293.7 million on a fair value basis and we recorded a total realized investment gain from the transfer of these securities, including a related net gain from cash flow hedges of$67.6 million . See "Executive Summary" for further information on the reinsurance transaction contained herein in this Item 2. 102 --------------------------------------------------------------------------------
The fair values and associated unrealized gains and losses of our fixed maturity
securities portfolio, by industry classification, are as follows:
Fixed Maturity Securities - By Industry Classification
As of September 30, 2022
(in millions of dollars)
Fair Value with Gross Fair Value with
Net Unrealized Gross Unrealized Unrealized Gross Unrealized Gross
Classification Fair Value Gain (Loss) Loss Loss Gain Unrealized Gain
Basic Industry $ 2,528.8 $ (267.4) $ 2,030.1 $ 294.3 $ 498.7 $ 26.9
Capital Goods 3,192.3 (296.2) 2,306.7 356.3 885.6 60.1
Communications 2,134.2 (193.6) 1,452.3 262.2 681.9 68.6
Consumer Cyclical 1,350.3 (148.1) 1,093.9 164.5 256.4 16.4
Consumer Non-Cyclical 5,448.3 (590.1) 3,953.3 683.1 1,495.0 93.0
Energy 2,736.3 (131.2) 1,583.0 194.2 1,153.3 63.0
Financial Institutions 3,305.3 (527.4) 3,013.4 541.3 291.9 13.9
Mortgage/Asset-Backed 530.3 (24.7) 399.6 32.1 130.7 7.4
Sovereigns 809.1 (63.5) 263.8 99.8 545.3 36.3
Technology 1,554.8 (217.0) 1,428.6 223.7 126.2 6.7
Transportation 1,545.8 (198.2) 1,233.4 214.2 312.4 16.0
U.S. Government Agencies and
Municipalities 4,101.8 (651.3) 2,665.0 754.8 1,436.8 103.5
Public Utilities 4,910.9 (259.9) 2,744.6 386.6 2,166.3 126.7
Total $ 34,148.2 $ (3,568.6) $ 24,167.7 $ 4,207.1 $ 9,980.5 $ 638.5
103
-------------------------------------------------------------------------------- The following two tables show the length of time our investment-grade and below-investment-grade fixed maturity securities portfolios had been in a gross unrealized loss position as ofSeptember 30, 2022 and at the end of the prior four quarters. The relationships of the current fair value to amortized cost are not necessarily indicative of the fair value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of the relationships afterSeptember 30, 2022 . The increase in the unrealized loss on fixed maturity securities during the third quarter of 2022 was due primarily to an increase inU.S. Treasury rates. Unrealized Loss onInvestment-Grade Fixed Maturity Securities Length of Time in Unrealized Loss Position
(in millions of dollars)
2022 2021
September 30 June 30 March 31 December 31 September 30
Fair Value < 100% >= 70% of Amortized Cost <= 90 days$ 523.7 $ 514.7 $ 491.6 $ 29.9 $ 42.8 > 90 <= 180 days 879.0 1,177.1 199.5 29.4 0.2 > 180 <= 270 days 945.4 268.9 109.1 0.7 26.3 > 270 days <= 1 year 218.6 147.1 1.1 21.8 1.4 > 1 year <= 2 years 195.0 66.5 67.2 5.1 3.9 > 2 years <= 3 years 2.9 6.5 1.7 - - Sub-total 2,764.6 2,180.8 870.2 86.9 74.6 Fair Value < 70% >= 40% of Amortized Cost <= 90 days - 10.3 - - - > 90 <= 180 days 22.3 37.8 3.1 - - > 180 <= 270 days 564.2 80.6 3.7 - - > 270 days <= 1 year 427.4 39.4 - 1.5 - > 1 year <= 2 years 176.5 39.8 1.9 - - > 2 years <= 3 years 18.5 - - - - Sub-total 1,208.9 207.9 8.7 1.5 - Total$ 3,973.5 $ 2,388.7 $ 878.9 $ 88.4 $ 74.6 104
--------------------------------------------------------------------------------
Unrealized Loss on Below-Investment-Grade Fixed Maturity Securities
Length of Time in Unrealized Loss Position
(in millions of dollars)
2022 2021
September 30 June 30 March 31 December 31 September 30
Fair Value < 100% >= 70% of Amortized Cost <= 90 days$ 27.1 $ 73.4 $ 24.8 $ 0.8 $ 0.4 > 90 <= 180 days 58.5 92.8 5.9 0.3 - > 180 <= 270 days 103.8 13.5 1.9 - 2.0 > 270 days <= 1 year 15.2 3.3 - 2.2 2.1 > 1 year <= 2 years 3.8 0.2 1.8 2.5 2.6 > 2 years <= 3 years 0.7 1.4 3.7 0.3 0.2 > 3 years 3.4 2.9 7.9 5.6 4.8 Sub-total 212.5 187.5 46.0 11.7 12.1 Fair Value < 70% >= 40% of Amortized Cost > 90 <= 180 days - 6.1 - - - > 180 <= 270 days 5.0 3.4 - - - > 270 days <= 1 year - 1.4 - - - > 2 years <= 3 years 6.2 5.4 - - - > 3 years 9.9 9.1 - - - Sub-total 21.1 25.4 - - - Total$ 233.6 $ 212.9 $ 46.0 $ 11.7 $ 12.1 105
-------------------------------------------------------------------------------- As ofSeptember 30, 2022 , we held 86 investment-grade fixed maturity securities with a gross unrealized loss of$10.0 million or greater as shown in the chart below. Gross Unrealized Losses$10 Million or Greater on
As of September 30, 2022
(in millions of dollars)
Gross
Classification Fair Value Unrealized Loss Numbers of Issuers
Basic Industry $ 291.7 $ (69.6) 5
Capital Goods 332.5 (93.8) 7
Communications 409.7 (104.4) 7
Consumer Cyclical 281.0 (76.5) 5
Consumer Non-Cyclical 1,090.4 (237.8) 17
Energy 213.0 (43.6) 3
Financial Institutions 1,091.4 (230.4) 15
Mortgage/Asset-Backed 363.6 (31.5) 1
Sovereigns 239.5 (84.9) 2
Technology 417.7 (110.7) 8
Transportation 293.4 (92.2) 7
U.S. Government Agencies and Municipalities 161.5 (32.1) 3
Public Utilities 415.2 (100.1) 6
Total $ 5,600.6 $ (1,307.6) 86
At September 30, 2022 , we held two below investment-grade fixed maturity
securities with a gross unrealized loss greater than $10.0 million . The first
security is a pharmaceutical company and had a fair value of $36.0 million and a
gross unrealized loss of $14.2 million . The second security is an energy company
and had a fair value of $54.1 million and a gross unrealized loss of $10.2
million .
Unrealized losses on investment-grade fixed maturity securities principally
relate to changes in interest rates or changes in market or sector credit
spreads which occurred subsequent to the acquisition of the securities.
Below-investment-grade fixed maturity securities are generally more likely to
develop credit concerns than investment-grade securities. At September 30, 2022 ,
the unrealized losses in our below-investment-grade fixed maturity securities
were generally due to credit spreads in certain industries or sectors and, to a
lesser extent, credit concerns related to specific securities. For each specific
security in an unrealized loss position, we believe that there are positive
factors which mitigate credit concerns and that the securities for which we have
not recorded a credit loss will recover in value. We have the ability and intent
to continue to hold these securities to recovery of amortized cost and believe
that no credit losses have occurred.
During the third quarter of 2022, we recognized a realized loss of $12.6 million
on the sale of securities of a pharmaceutical company that was impacted by an
adverse ruling surrounding a patent held for its largest drug. We had no other
individual investment losses of $10.0 million or greater from credit losses or
sales of fixed maturity securities during the first nine months of 2022 or 2021.
As of September 30, 2022 , the amortized cost net of allowance for credit losses
and fair value of our below-investment-grade fixed maturity securities was
$2,242.0 million and $2,013.3 million , respectively, and our
below-investment-grade fixed maturity securities as a percentage of our total
investment portfolio decreased from 5.8 percent at December 31, 2021 to 4.8
percent at September 30, 2022 on a fair value basis. Below-investment-grade
securities are inherently riskier than investment-grade securities since the
risk of default by the issuer, by definition and as exhibited by bond rating, is
higher. Also, the secondary market for certain below-investment-grade issues can
be highly illiquid. Additional downgrades may occur, but we do not anticipate
any liquidity problems resulting from our investments in below-investment-grade
securities, nor do we expect these investments to adversely affect our ability
to hold our other investments to maturity.
106
--------------------------------------------------------------------------------
Our investments in issuers in foreign countries are chosen for specific portfolio management purposes, including asset and liability management and portfolio diversification across geographic lines and sectors to minimize non-market risks. In our approach to investing in fixed maturity securities, specific investments within foreign countries and industry sectors are evaluated for their market position and specific strengths and potential weaknesses. For each security, we consider the political, legal, and financial environment of the sovereign entity in which an issuer is domiciled and operates. The country of domicile is based on consideration of the issuer's headquarters, in addition to location of the assets and the country in which the majority of sales and earnings are derived. We do not have exposure to foreign currency risk, as the cash flows from these investments are either denominated in currencies or hedged into currencies to match the related liabilities. We continually evaluate our foreign investment risk exposure.
Mortgage Loans
The carrying value of our mortgage loan portfolio was$2,476.4 million and$2,560.4 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. Our investments in mortgage loans are carried at amortized cost less an allowance for expected credit losses which was$8.7 million and$8.3 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. Our mortgage loan portfolio is comprised entirely of commercial mortgage loans. Our mortgage loan portfolio is well diversified geographically and among property types. Due to conservative underwriting, the incidence of problem mortgage loans and foreclosure activity continues to be low. We held no impaired mortgage loans atSeptember 30, 2022 orDecember 31, 2021 . See Note 4 in the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion of our mortgage loan portfolio and the allowance for expected credit losses. Private Equity Partnerships The carrying value of our investments in private equity partnerships was$1,124.6 million and$978.6 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. These partnerships are passive in nature and represent funds that are primarily invested in private credit, private equity, and real assets. The carrying value of the partnerships is based on our share of the partnership's NAV and changes in the carrying value are recorded as a component of net investment income. We receive financial information related to our investments in partnerships and generally record investment income on a one-quarter lag in accordance with our accounting policy. We recorded net investment income totaling$12.6 million and$98.6 million for the partnerships in the third quarter and first nine months of 2022, respectively. The majority of our investments in partnerships are not redeemable. Distributions received from the funds arise from income generated by the underlying investments as well as the liquidation of the underlying investments. There is generally not a public market for these investments. We had$806.2 million of commitments for additional investments in the partnerships atSeptember 30, 2022 which may or may not be funded. See Note 3 in the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion of our private equity partnerships.
Derivative Financial Instruments
We use derivative financial instruments primarily to manage reinvestment, duration, foreign currency, and credit risks. Historically, we have utilized current and forward-starting interest rate swaps, options on forward-starting interest rate swaps andU.S. Treasury rates, current and forward-starting currency swaps, forward treasury locks, currency forward contracts, forward contracts on specific fixed income securities, and credit default swaps. During the first nine months of 2022, we entered into$679.0 million of notional forwardU.S. Treasury interest rate locks in our long-term care product line to manage our reinvestment risk. Credit exposure on derivatives is limited to the value of those contracts in a net gain position, including accrued interest receivable less collateral held. Our credit exposure on derivatives was$1.7 million atSeptember 30, 2022 . The carrying value of fixed maturity securities and cash collateral received from our counterparties was$13.7 million and$81.7 million atSeptember 30, 2022 , respectively. The carrying value of fixed maturity securities and cash collateral posted to our counterparties was$20.7 million and$6.1 million atSeptember 30, 2022 , respectively. We believe that our credit risk is mitigated by our use of multiple counterparties, all of which have an investment-grade credit rating, and by our use of cross-collateralization agreements. See Note 5 in the "Notes to Consolidated Financial Statements" contained herein in Item 1 for further discussion of our derivatives. 107 --------------------------------------------------------------------------------
Other
Our exposure to non-current investments, defined as invested assets which are delinquent as to interest and/or principal payments, totaled$13.2 million and$19.8 million on a fair value basis atSeptember 30, 2022 andDecember 31, 2021 , respectively. For further information see "Investments" in Part I, Item 1 and "Critical Accounting Estimates" and "Investments" in Part II, Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2021 , and Notes 3, 4, and 5 of the "Notes to Consolidated Financial Statements" contained herein in Item 1. 108 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
Our liquidity requirements are met primarily by cash flows provided from operations, principally in our insurance subsidiaries. Premium and investment income, as well as maturities and sales of invested assets, provide the primary sources of cash. Debt and/or securities offerings provide additional sources of liquidity. Cash is applied to the payment of policy benefits, costs of acquiring new business (principally commissions), operating expenses, and taxes, as well as purchases of new investments. We have established an investment strategy that we believe will provide for adequate cash flows from operations. We attempt to match our asset cash flows and durations with expected liability cash flows and durations to meet the funding requirements of our business. However, deterioration in the credit market may delay our ability to sell our positions in certain of our fixed maturity securities in a timely manner and adversely impact the price we receive for such securities, which may negatively impact our cash flows. Furthermore, if we experience defaults on securities held in the investment portfolios of our insurance subsidiaries, this will negatively impact statutory capital, which could reduce our insurance subsidiaries' capacity to pay dividends to our holding companies. A reduction in dividends to our holding companies could force us to seek external financing to avoid impairing our ability to pay dividends to our stockholders or meet our debt and other payment obligations. Our policy benefits are primarily in the form of claim payments, and we have minimal exposure to the policy withdrawal risk associated with deposit products such as individual life policies or annuities. A decrease in demand for our insurance products or an increase in the incidence of new claims or the duration of existing claims could negatively impact our cash flows from operations. However, our historical pattern of benefits paid to revenues is generally consistent, even during cycles of economic downturns, which serves to minimize liquidity risk. The liquidity requirements of the holding companyUnum Group include common stock dividends, interest and debt service, and ongoing investments in our businesses.Unum Group's liquidity requirements are met by assets held byUnum Group and our intermediate holding companies, dividends from primarily our insurance subsidiaries, and issuance of common stock, debt, or other capital securities and borrowings from our existing credit facility, as needed. As ofSeptember 30, 2022 ,Unum Group and our intermediate holding companies had available holding company liquidity of$1,079 million that was held primarily in bank deposits, commercial paper, money market funds, corporate bonds, municipal bonds and asset backed securities. No significant restrictions exist on our ability to use or access funds in any of ourU.S. or foreign intermediate holding companies. Dividends repatriated from our foreign subsidiaries are eligible for 100 percent exemption fromU.S. income tax but may be subject to withholding tax and/or tax on foreign currency gain or loss. As part of our capital deployment strategy, we may repurchase shares ofUnum Group's common stock, as authorized by our board of directors. InOctober 2021 , our board of directors authorized the repurchase of up to$250.0 million ofUnum Group's outstanding common stock throughDecember 2022 , with the timing and amount of repurchase activity to be based on market conditions and other considerations, including the level of available cash, alternative uses for cash, and our stock price. InFebruary 2022 , we entered into an accelerated share repurchase agreement with a financial counterparty to repurchase$50.0 million ofUnum Group's common stock in aggregate. As part of this transaction, we paid$50.0 million to the financial counterparty and received an initial delivery of 1.3 million shares of our common stock, which represented approximately 75 percent of the total delivery under the agreement. The final price adjustment settlement, along with the delivery of the remaining shares, occurred inApril 2022 , resulting in the delivery to us of 0.4 million additional shares. In total, we repurchased 1.7 million shares pursuant to theFebruary 2022 accelerated share repurchase agreement. During the nine months endedSeptember 30, 2022 , we repurchased 2.5 million shares in open market transactions at a cost of$87.5 million . As ofSeptember 30, 2022 , the remaining repurchase amount under the current share repurchase program was$62.5 million . See Note 10 of the "Notes to Consolidated Financial Statements" contained herein in Item 1. 109 --------------------------------------------------------------------------------
Closed Block Individual Disability Reinsurance Transaction
InDecember 2020 , we completed the first phase of a reinsurance transaction, pursuant to which Provident, Paul Revere, andUnum America , wholly-owned domestic insurance subsidiaries ofUnum Group and collectively referred to as "the ceding companies", each entered into separate reinsurance agreements with Commonwealth to reinsure, on a coinsurance basis effective as ofJuly 1, 2020 , approximately 75 percent of the Closed Block individual disability insurance business, primarily direct business written by the ceding companies. InMarch 2021 , we completed the second phase of the reinsurance transaction, pursuant to which the ceding companies and Commonwealth amended and restated their respective reinsurance agreements to reinsure on a coinsurance and modified coinsurance basis effective as ofJanuary 1, 2021 , a substantial portion of the remaining Closed Block individual disability business that was not ceded inDecember 2020 , primarily business previously assumed by the ceding companies. Commonwealth established and will maintain collateralized trust accounts for the benefit of the ceding companies to secure its obligations under the reinsurance agreements. In connection with the second phase of the reinsurance transaction inMarch 2021 , Commonwealth paid a ceding commission to the ceding companies of$18.2 million and the ceding companies transferred assets of$767 million , which consisted primarily of cash and fixed maturity securities. We released approximately$200 million of capital during the first quarter of 2021 as a result of the closing of the second phase of the transaction.
See "Executive Summary" contained herein in this Item 2 for further discussion
on the impacts related to this reinsurance transaction.
Cash Available from Subsidiaries
Unum Group and certain of its intermediate holding company subsidiaries depend on payments from subsidiaries to pay dividends to stockholders, to pay debt obligations, and/or to pay expenses. These payments by our insurance and non-insurance subsidiaries may take the form of dividends, operating and investment management fees, and/or interest payments on loans from the parent to a subsidiary. Restrictions under applicable state insurance laws limit the amount of dividends that can be paid to a parent company from its insurance subsidiaries in any 12-month period without prior approval by regulatory authorities. For life insurance companies domiciled in theU.S. , that limitation generally equals, depending on the state of domicile, either ten percent of an insurer's statutory surplus with respect to policyholders as of the preceding year end or the statutory net gain from operations, excluding realized capital gains and losses, of the preceding year. The payment of dividends to a parent company from a life insurance subsidiary is generally further limited to the amount of unassigned funds. In connection with a financial examination ofUnum America , which closed at the end of the second quarter of 2020, theMaine Bureau of Insurance (MBOI) concluded thatUnum America's long-term care statutory reserves are deficient by$2,100 million as ofDecember 31, 2018 , the financial statement date of the examination period. The amount reserves are deficient by may increase or decrease over time based on changes in assumed reinvestment rates, policyholder inventories, rate increase activity, and the underlying growth in the locked in statutory reserve basis as well as updates to other long term actuarial assumptions. The MBOI granted permission toUnum America onMay 1, 2020 , to phase in the additional statutory reserves over seven years beginning with year-end 2020 and ending with year-end 2026. During the fourth quarter of 2020, reserves were deficient by approximately$2,290 million , prior to the 2020 phase-in adjustment. The increase in the reserve deficiency from the original$2,100 million as ofDecember 31, 2018 was primarily driven by changes in the assumed reinvestment rate. The 2020 phase-in amount was recorded in the fourth quarter of 2020 and was approximately$229 million , resulting in$2,061 million remaining to be phased in as ofDecember 31, 2020 . During the fourth quarter of 2021, reserves were deficient by approximately$2,748 million , prior to the 2021 phase in adjustment. The increase in the reserve deficiency from the balance as ofDecember 31, 2020 was primarily driven by changes in the assumed reinvestment rate. The 2021 phase in amount was recorded in the fourth quarter of 2021 and was approximately$438 million , resulting in approximately$2,310 million remaining to be phased in as ofDecember 31, 2021 . A$50 million phase-in amount was recorded in each of the first three quarters of 2022, resulting in approximately$2,160 million remaining to be phased in as ofSeptember 30, 2022 . The phase in amounts for 2020, 2021, and 2022 were funded using cash flows from operations and capital contributions fromUnum Group . The strengthening is incorporated by using explicitly agreed upon margins into our existing assumptions for annual statutory reserve adequacy testing. These actions add margin toUnum America's best estimate assumptions. Our long-term care reserves and financial results reported under generally accepted accounting principles are not affected by the MBOI's examination conclusion. We plan to fund the additional statutory reserves with expected cash flows and capital contributions fromUnum Group .Unum America cedes blocks of business toFairwind Insurance Company (Fairwind), which is an affiliated captive reinsurance subsidiary domiciled inthe United States . The ability of Fairwind to pay dividends toUnum Group will depend on its 110 -------------------------------------------------------------------------------- satisfaction of applicable regulatory requirements and on the performance of the business reinsured by Fairwind. Fairwind did not pay dividends in 2021 nor do we anticipate that Fairwind will pay dividends in 2022. During the first nine months of 2022,Unum Group made$465.0 million in capital contributions to Fairwind in connection with the premium deficiency reserve establishment during 2022. The ability ofUnum Group and certain of its intermediate holding company subsidiaries to continue to receive dividends from their insurance subsidiaries also depends on additional factors such as RBC ratios and capital adequacy and/or solvency requirements, funding growth objectives at an affiliate level, and maintaining appropriate capital adequacy ratios to support desired ratings. The RBC ratios for ourU.S. insurance subsidiaries atSeptember 30, 2022 are in line with our expectations and are significantly above the level that would require state regulatory action.Unum Group and/or certain of its intermediate holding company subsidiaries may also receive dividends from ourU.K. subsidiaries, the payment of which may be subject to applicable insurance company regulations and capital guidance in theU.K. Unum Limited is subject to the requirements of Solvency II, aEuropean Union (EU) directive that is part of retainedUK law pursuant to theEuropean Union (Withdrawal) Act 2018, which prescribes capital requirements and risk management standards for the European insurance industry. OurU.K. holding company is also subject to the Solvency II requirements relevant to insurance holding companies while, together with certain of its subsidiaries includingUnum Limited , the group (theUnum UK Solvency II Group ) is subject to group supervision under Solvency II.The Unum UK Solvency II Group received approval from theU.K. Prudential Regulation Authority to use its own internal model for calculating regulatory capital and also received approval for certain associated regulatory permissions including transitional relief as the Solvency II capital regime continues to be implemented. In connection with theU.K.'s exit from the EU, theU.K. government is reviewing the regulatory framework of financial services companies which may result in changes toU.K. regulatory capital orU.K. tax regulations. Recent economic conditions have caused volatility in our solvency ratios used to monitor capital adequacy.
The payment of dividends to the parent company from our subsidiaries also
requires the approval of the individual subsidiary's board of directors.
During 2022, we intend to maintain a level of capital in our insurance
subsidiaries above the applicable capital adequacy requirements and minimum
solvency margins.
Insurance regulatory restrictions do not limit the amount of dividends available for distribution from non-insurance subsidiaries except where the non-insurance subsidiaries are held directly or indirectly by an insurance subsidiary and only indirectly byUnum Group , which does not apply to our current entity structure.
Funding for Employee Benefit Plans
During the nine months endedSeptember 30, 2022 , we made contributions of$47.3 million and £2.9 million to ourU.S. andU.K. defined contribution plans, respectively, and expect to make additional contributions of approximately$28 million and £1 million during the remainder of 2022. We made no contributions to ourU.S. andU.K. qualified defined benefit pension plans during the nine months endedSeptember 30, 2022 and we do not expect to make any contributions to either plan during the remainder of 2022. We have met all minimum pension funding requirements set forth by the Employee Retirement Income Security Act. We have estimated our future funding requirements under the Pension Protection Act of 2006 and under applicableU.K. law and do not believe that any future funding requirements will cause a material adverse effect on our liquidity.
Debt, Term Loan Facility, Credit Facilities, and Other Sources of Liquidity
Our long-term debt balance at
deferred debt issuance costs of
unsecured senior notes and junior subordinated debt securities.
InSeptember 2022 , pursuant to privately negotiated transactions, we purchased, and the Provident Financing Trust I (the Trust) retired,$14.0 million aggregate liquidation amount of the Trust's 7.405% capital securities due 2038, which resulted in the reduction of a corresponding principal amount of our 7.405% junior subordinated debt securities due 2038 then held by the Trust. We incurred costs of$1.2 million related to the early retirement of the junior subordinated debt securities. InAugust 2022 , we entered into a five-year$350.0 million senior unsecured delayed draw term loan facility with a syndicate of lenders. Also inAugust 2022 , we drew the entire amount of the term loan facility, which is scheduled to mature inAugust 2027 . Amounts due under the term loan facility incur interest based on the prime rate, the federal funds rate or the Secured 111 -------------------------------------------------------------------------------- Overnight Financing Rate (SOFR). The proceeds from the term loan facility were used to redeem$350.0 million aggregate principal amount of our 4.000% senior notes due 2024. We incurred costs of$3.0 million related to the early retirement of these unsecured senior notes. InApril 2022 , we amended and restated our existing credit agreement providing for a five-year$500 million senior unsecured revolving credit facility with a syndicate of lenders. The credit facility, which was previously set to expire inApril 2024 , was extended throughApril 2027 . We may request that the lenders' aggregate commitments of$500 million under the facility be increased by up to an additional$200 million . Certain of our traditionalU.S. life insurance subsidiaries,Unum America , Provident, and Colonial Life, joined the agreement and may borrow under the credit facility, and we can elect to add additional insurance subsidiaries to the facility at any later date. Any obligation of a subsidiary under the credit facility is several only and not joint and is subject to an unconditional guarantee byUnum Group . We may also request, on up to two occasions, that the lenders' commitment termination dates be extended by one year. The credit facility provides for borrowings at an interest rate based on the prime rate, the federal funds rate or the SOFR. The credit facility also provides for the issuance of letters of credit subject to certain terms and limitations. AtSeptember 30, 2022 , there were no borrowed amounts outstanding under the credit facility and letters of credit totaling$0.4 million had been issued. We also have a five-year, £75 million senior unsecured standby letter of credit facility with a different syndicate of lenders, pursuant to which a syndicated letter of credit was issued in favor ofUnum Limited (as beneficiary), ourU.K. insurance subsidiary, and is available for drawings up to £75 million until its scheduled expiration inJuly 2026 . The credit facility provides for borrowings at an interest rate based on the prime rate or the federal funds rate. No amounts have been drawn on the letter of credit. If drawings are made in the future, we may elect to borrow such amounts from the lenders pursuant to term loans made under the credit facility. Borrowings under the term loan facility and the credit facilities are subject to financial covenants, negative covenants, and events of default that are customary. The term loan facility and each credit facility include financial covenants based on our leverage ratio and consolidated net worth. We are also subject to covenants that limit subsidiary indebtedness. We also have a 20-year facility agreement with aDelaware trust that gives us the right to issue and to sell to the trust, on one or more occasions, up to$400.0 million of 4.046% senior notes in exchange forU.S. Treasury securities held by the trust. These senior notes will not be issued unless and until the issuance right is exercised. The exercise of the issuance right triggers recognition of the senior notes on our consolidated balance sheets. We may also direct the trust to grant the right to exercise the issuance right with respect to all or a designated amount of the senior notes to one or more assignees (who are our consolidated subsidiaries or persons to whom we have an obligation). We pay a semi-annual facility fee to the trust at a rate of 2.225% per year on the unexercised portion of the maximum amount of senior notes that we could issue and sell to the trust and we reimburse the trust for its expenses. There are no significant financial covenants associated with any of our outstanding notes or debt securities. We continually monitor our compliance with our credit facility covenants and remain in compliance. We have not observed any current trends that would cause a breach of any of our credit facility covenants. See "Debt, Credit Facilities and Other Sources of Liquidity" and Note 8 of the "Notes to Consolidated Financial Statements" contained in Part II, Items 7 and 8, respectively, of our annual report on Form 10-K for the year endedDecember 31, 2021 for further discussion.
Commitments
AtSeptember 30, 2022 , we had unfunded unconditional commitments of$0.7 million to fund tax credit partnership investments and$8.4 million to fund the purchase of transferable state tax credits. These commitments are recognized as liabilities in our consolidated balance sheets, with a corresponding recognition of other long-term investments and other assets, respectively. In addition, we had commitments of$30.5 million to fund certain investments in private placement fixed maturity securities and$806.2 million to fund certain private equity partnerships. As ofSeptember 30, 2022 , we had$9.0 million of commercial mortgage loan commitments. With respect to our commitments and off-balance sheet arrangements, see the discussion under "Commitments" in Part II, Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2021 . During the first nine months of 2022, there were no substantive changes in our commitments, contractual obligations, or other off-balance sheet arrangements other than the changes noted herein. 112 --------------------------------------------------------------------------------
Transfers of Financial Assets
Our investment policy permits us to lend fixed maturity securities to unaffiliated financial institutions in short-term securities lending agreements, which increases our investment income with minimal risk. We account for all of our securities lending agreements and repurchase agreements as secured borrowings. As ofSeptember 30, 2022 , we held$100.1 million of cash collateral from securities lending agreements. The average cash collateral balance during the first nine months of 2022 was$96.4 million , and the maximum amount outstanding at any month end was$122.1 million . As ofSeptember 30, 2022 , we held$139.1 million of off-balance sheet securities lending agreements which were collateralized by securities that we were neither permitted to sell nor control. The average balance of these off-balance sheet transactions during the first nine months of 2022 was$186.6 million , and the maximum amount outstanding at any month end was$212.2 million . To manage our cash position more efficiently, we may enter into securities repurchase agreements with unaffiliated financial institutions. We generally use securities repurchase agreements as a means to finance the purchase of invested assets or for short-term general business purposes until projected cash flows become available from our operations or existing investments. We had no securities repurchase agreements outstanding atSeptember 30, 2022 , nor did we utilize any securities repurchase agreements during the first nine months of 2022. Our use of securities repurchase agreements and securities lending agreements can fluctuate during any given period and will depend on our liquidity position, the availability of long-term investments that meet our purchasing criteria, and our general business needs. Certain of ourU.S. insurance subsidiaries are members of regional FHLBs. As ofSeptember 30, 2022 , we owned$17.3 million of FHLB common stock and had outstanding advances of$118.5 million from the regional FHLBs which were used for the purpose of investing in either short-term investments or fixed maturity securities. As ofSeptember 30, 2022 , we have additional borrowing capacity of approximately$767.4 million from the FHLBs.
See Note 4 of the "Notes to Consolidated Financial Statements" contained herein
in Item 1 for further information.
JAMES RIVER GROUP HOLDINGS, LTD. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
KEMPER CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Advisor News
- Why timing the market is still a retirement mistake and what to do instead
- Business owners may be overlooking a key part of their financial picture
- How smart investments prepare clients for inflation
- Amid slew of corporate tax ideas, Newsom chose one likely to hit people’s premiums
- The biggest risk to your clients’ financial plans isn’t market volatility
More Advisor NewsAnnuity News
- Best’s Special Report: U.S. Life/Annuity Industry Sees Bottom-Line Growth Despite 18% Decline in Total Income in First-Quarter 2026
- Globe Life Inc. (NYSE: GL) Records 52-Week High Thursday Morning
- Fortitude Re Completes $500 Million FABN Issuance
- Reframing retirement income for greater certainty
- Jackson Introduces Dow Jones Industrial Average Index Option, Flexible Premiums, Six-Year Rate Guarantee in Latest Registered Index-Linked Annuity Launch
More Annuity NewsHealth/Employee Benefits News
- OC supervisors would be removed from CalOptima board under California bill
- Centene offers employee buyouts as insurance rolls shrink
- Studies from University of Illinois Chicago in the Area of Chronic Kidney Disease Described (Hyperkalemia and its treatment: real-world evidence and managed care considerations supporting use of potassium binders): Kidney Diseases and Conditions – Chronic Kidney Disease
- New Findings Reported from American Dental Association Describe Advances in Managed Care (Medicare Advantage Dental Benefits: Comprehensive Coverage Available In Fewer Than Half Of US Counties): Managed Care
- REPORT: 2M Illinoisans face $500 cut as Social Security faces cliff
More Health/Employee Benefits NewsLife Insurance News
- An Application for the Trademark “LIFE INSURANCE THAT ENHANCES LIFE” Has Been Filed by Pacific Life Insurance Company: Pacific Life Insurance Company
- AM Best Assigns Issue Credit Rating to Sammons Financial Group, Inc.’s New Senior Unsecured Notes
- How much money do Connecticut residents need to retire comfortably?
- Advocates: Life insurers potentially missing millions of deaths annually
- How much money do Connecticut residents need to retire comfortably?
More Life Insurance News