Fitch Ratings has upgraded the Insurer Financial Strength (IFS) ratings for Unum Group's (UNM) domestic subsidiaries to 'A' from 'A-' and UNM's Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB'.

The Rating Outlooks for all of UNM's ratings are Stable.

Key Rating Drivers

Rating Upgrade: The upgrade of UNM's ratings reflects improvement in the company's balance sheet fundamentals, including its capital metrics, while its profitability returned towards pre-pandemic levels. Additionally, long-term care (LTC) reserve adequacy improved as the company funds its premium deficiency reserve, generating reserve redundancy due to the higher interest rate environment, while holding company liquidity remains robust and above target.

Sizeable LTC Exposure: Longer term, rating concerns for UNM include continued outsized exposure to legacy LTC, although the business benefits from the higher interest rate environment. UNM is in the process of strengthening its statutory reserves by $3 billion over best estimate reserves through YE 2023, as the company added additional conservatism to key reserving assumptions.

UNM remains among the most exposed companies to LTC in Fitch's rated universe, with statutory LTC reserves representing over 3x its total adjusted capital. Favorably, the company implemented an interest risk hedge program in August of 2022 and continues to expand the program in 2023, to better manage the risk associated to the LTC business. Additionally, UNM has strong reserve margins on an enterprise level, including material sufficiency in its voluntary benefit products, which partially offsets concerns surrounding its LTC exposure.

Strong Capital Position: UNM's capitalization and leverage is viewed as strong, which considers its 'Strong' Prism score in 2022 and Risk-Based Capital (RBC) ratio of approximately 450% at 1H23, which exceeded its target of 350%. UNM's financial leverage ratio of 23% as of 1H23 is below prior periods and compares favorably with rating expectations. Debt maturities are viewed as well-laddered, with the next maturity of $275 million in 2025.

Strong Market Position: UNM's business profile is viewed as strong, which considers its scale, product breadth and generally low-risk new business profile, which is offset by its legacy LTC exposure. Diversification trails peers and UNM has above-average exposure to employment conditions given its group and voluntary benefits focus, which remains favorable but has potential downside risk with current economic headwinds.

Overweight Corporate Credit: UNM's investment portfolio is concentrated in corporate credit and is overweight in NAIC 2 bonds. Favorably, UNM risky asset ratio of 75% as of YE 2022 declined 9pp yoy, as the company opportunistically improved the credit quality of its portfolio, and trails the industry average of 96%. Favorably, UNM has below-average exposure to structured products and commercial mortgage loans. Fitch views the recent improvement in overall portfolio risk favorably, but notes the portfolio is vulnerable to migration in a credit market downturn with an above-average proportion of 'BBB' bonds in the portfolio, given the corporate credit concentration.

Stable Operating Performance: UNM's operating performance was stable with core earnings growth of 17% at 3Q23, and a very strong fixed-charge coverage of 10x at 2022YE. Operating performance is expected to see improvement for 2023FY, due to employment and wage growth. UNM's group life mortality experience improved in 2023 from earlier pandemic levels, and LTC is benefiting from the current interest rate environment.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Significant improvement to the company profile supported by a reduction in liability risk;

Improvement in UNM's capitalization and leverage score to 'a+' supported by a Prism score solidly in the 'Very Strong' category.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Decline in UNM's capitalization and leverage score to below 'a' stemming from a decline in its Prism score to below 'Strong', a decrease in RBC ratio to below 350% or an increase in financial leverage to above 28%;

Deterioration in financial results that includes a ROE below 9% and fixed-charge coverage ratio below 7x;

Deterioration in the reserve adequacy of the company's LTC block of business;

Holding company cash falls below management's target of approximately 1x fixed charges (interest expense plus common stock dividend).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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