Unum Group: Capital Strength and Core Growth Drive Double-Digit EPS Outlook (UNM)

Executive Summary / Key Takeaways

  • Unum Group, a leader in workplace benefits, is strategically focused on growing its core U.S., U.K., and Poland businesses through technology investments and enhanced distribution, while actively managing its legacy long-term care block.
  • The company demonstrated robust financial performance in 2024, achieving 10% adjusted EPS growth and 5% core premium growth, supported by strong margins in Group Disability and Life, which are expected to be durable in the near-to-midterm.
  • A significant reinsurance transaction with Fortitude Re, effective January 1, 2025, ceding portions of LTC and IDI business, is a key strategic step to reduce legacy risk, enhance financial flexibility, and is expected to generate approximately $100 million in capital benefits.
  • Unum's strong capital generation from core operations, coupled with no expected future capital contributions to the LTC block, has resulted in significant balance sheet strength (RBC ~460%, holding company liquidity >$2.2B) enabling substantial capital return to shareholders, including a $1 billion share repurchase authorization.
  • Management projects continued momentum into 2025, with an outlook for 8% to 12% adjusted EPS growth, 5% to 10% core sales growth, and 4% to 7% core premium growth, underpinned by favorable macro conditions, operational performance, and the benefits of strategic investments.

Unum's Foundation: Workplace Benefits and Strategic Evolution

Unum Group operates as a focused provider of financial protection benefits, primarily serving the workplace market in the United States, the United Kingdom, and Poland. This strategic concentration on employee benefits is central to the company's purpose, aiming to support the working world by protecting individuals from the financial impact of illness, injury, or loss of life. Over its history, Unum has built a durable franchise by navigating various market cycles and adapting its business model. A key aspect of this evolution has been the management of legacy blocks of business, particularly long-term care (LTC), which differs significantly from its core offerings and has required dedicated focus and capital.

The company's strategy is centered on leveraging its expertise and market position to drive growth in its core segments while actively addressing the risks associated with its closed blocks. This involves continuous investment in operational capabilities, technology, and distribution channels to enhance the customer and broker experience. Unum aims to differentiate itself through service quality, integrated solutions, and a disciplined approach to pricing and risk management.

Technological Edge and Competitive Positioning

Unum's competitive standing is significantly shaped by its investments in technology and digital capabilities, which serve as key differentiators in the marketplace. The company is actively developing and deploying solutions aimed at enhancing the entire benefits lifecycle, from enrollment to claims processing and administration. Key initiatives include the HR Connect platform, designed for seamless integration with employer human capital management (HCM) systems, and the Total Leave solution, which addresses the complex and growing need for efficient leave management. The Gather platform modernizes enrollment and benefits administration, particularly benefiting the Colonial Life segment and enabling cross-selling of Unum's group products. Agent Assist technology supports the Colonial Life independent sales force with tools for lead generation and workflow management. In the U.K., Unum has launched a claims portal for large customers, noted as a first of its kind by a disability insurer in that market, and offers value-added services like Help@Hand.

These technological advancements provide tangible benefits. While specific quantifiable metrics for all platforms are not detailed, management commentary highlights that these capabilities contribute to a differentiated customer experience, improved ease of doing business, and enhanced productivity for agents and administrators. This focus on digital integration and service innovation helps Unum compete effectively against both traditional insurers and newer entrants. Traditional competitors like MetLife (MET), Prudential Financial (PRU), and Lincoln National (LNC) also invest in digital tools and platforms, leveraging their scale and broader product portfolios. However, Unum's specialized focus on employee benefits allows for deeper integration and tailored solutions within this niche. Aflac (AFL), primarily focused on supplemental benefits, also competes in the voluntary space, but Unum's comprehensive disability and life offerings, coupled with its integrated platforms, provide a distinct value proposition, particularly in the group market. New entrants, often insurtech firms, may offer lower costs or specific digital features, but they typically lack the breadth of product, established distribution networks, and complex claims management expertise that Unum possesses, particularly in disability. Unum's investment in capabilities like leave management creates a competitive moat by solving critical, complex problems for employers, making its offerings stickier and supporting higher persistency rates compared to more commoditized products.

Core Business Momentum and Performance Drivers

Unum's core operating segments – Unum US, Unum International, and Colonial Life – demonstrated solid performance and growth momentum. In the first quarter of 2025, Unum US reported premium income of $1,780.9 million, a 4.3% increase year-over-year, contributing to adjusted operating income of $329.1 million. While adjusted operating income decreased compared to the prior year quarter, this was primarily attributed to unfavorable benefits experience in Group Disability and higher expenses, partially offset by premium growth. The Group Disability benefit ratio increased to 59.7% in Q1 2025 from 56.8% in Q1 2024, driven by higher incidence, though recoveries remained favorable. Management views this as near-term volatility within the expected low 60s range for the full year. Group Life and AD&D also saw a slightly elevated benefit ratio at 69.3% but remained near the expected 70% range. Supplemental and Voluntary results were impacted by less favorable benefits experience in voluntary products, though individual disability showed favorable recoveries.

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Unum International continued its strong trajectory, with premium income growing 6.5% to $246.7 million in Q1 2025, resulting in adjusted operating income of $38.7 million. Unum UK, the largest part of this segment, saw its adjusted operating income increase to £29.5 million, supported by premium growth and favorable benefits experience (benefit ratio of 67.1%). Unum Poland also contributed significantly with 18% premium growth in Q1 2025. While Q1 2025 sales for the segment were down significantly year-over-year, this was attributed to volatility from large case timing, and management remains optimistic about achieving full-year sales targets.

Colonial Life reported premium income of $457.3 million in Q1 2025, up 2.3%, and adjusted operating income of $115.7 million. The segment's benefit ratio was favorable at 47.7%. Sales increased 2.2% in Q1 2025, a positive sign after slower growth in prior periods, with strong performance in the public sector and new agent recruiting. Management is encouraged by the momentum and expects sales to resurge to the 5% to 10% growth range.

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Across the core segments, premium growth is supported by prior period sales, strong persistency (often exceeding 90% in Group lines), and natural growth from increases in covered lives and wages (estimated at 2-4%). While persistency may normalize slightly from recent exceptional levels, the combination of new sales, retention, and natural growth underpins the expectation for continued premium expansion in the 4% to 7% range.

Managing the Legacy: The Closed Block and Risk Transfer

The Closed Block segment, primarily comprising legacy long-term care policies, remains a distinct area of focus for Unum. This block is no longer actively marketed and is in runoff. In Q1 2025, the segment reported premium income of $218.0 million, a decrease as expected due to policyholder lapses. Income before income tax and net investment gains and losses was $8.0 million, with adjusted operating income of $24.4 million. The segment's performance can be volatile, influenced by claims experience and investment returns, particularly from alternative assets. The LTC net premium ratio increased to 94.7% in Q1 2025, reflecting modestly unfavorable benefits experience in uncapped cohorts and prior assumption updates, partially offset by favorable claimant mortality. While incidence remains somewhat elevated compared to long-term expectations, management observes that it is dissipating.

Unum has taken significant steps to actively manage this block and reduce its exposure. Actions include implementing premium rate increases (achieving approximately 25% of the current program target as of Q2/Q3 2024), expanding interest rate hedging programs (approximately $2.4 billion notional at the end of Q2 2024, targeting a portion of future cash flows), and pursuing risk transfer opportunities. A key development is the master transaction agreement with Fortitude Reinsurance Company Ltd., announced in February 2025 and closed on July 1, 2025. This agreement, effective January 1, 2025, involves ceding approximately 21% of the total Closed Block LTC future policy benefits and 15% of Unum US individual disability future policy benefits. The transaction is expected to result in a $430.0 million pre-tax ceding commission paid to Fortitude Re and involves the transfer of fixed maturity securities with an amortized cost of $3,159.4 million and a fair value of $3,274.8 million as of March 31, 2025. This strategic move is aimed at reducing the footprint and increasing the predictability of outcomes for the legacy business. Management is committed to no longer needing capital contributions to the LTC block, supported by a substantial protection buffer (approximately $2.6 billion as of Q4 2024) between statutory reserves plus excess capital at Fairwind and their best estimate reserves.

Financial Strength, Capital Generation, and Deployment

Unum's core businesses are powerful generators of capital, providing a strong foundation for financial flexibility and shareholder returns. For the first quarter of 2025, the company reported statutory after-tax operating income of $489.8 million, which included a favorable impact from an internal LTC reinsurance transaction. The underlying run rate for statutory earnings is approximately $350 million per quarter, putting the company on pace to generate $1.3 billion to $1.6 billion in statutory earnings from traditional insurance subsidiaries annually. This robust generation, coupled with the expectation of no further capital contributions to the Closed Block, accrues to the holding company.

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As of March 31, 2025, holding company liquidity stood at a strong $2,214.5 million, and the RBC ratio for traditional U.S. insurance subsidiaries was approximately 460%. These metrics are well above the company's long-term targets, providing significant capacity for capital deployment. Unum's capital priorities are clear: first, invest in the business for organic growth and potential capability-driven M&A; second, return capital to shareholders.

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The company has demonstrated a commitment to increasing its common stock dividend, including a 15% increase in 2024 and a planned 10% increase effective Q3 2025. Share repurchases have also accelerated, with approximately $1 billion repurchased in 2024 and a new $1 billion authorization effective April 1, 2025. The dissolution of the pre-capitalized trust facility further underscores confidence in the balance sheet strength and efficiency of capital structure.

Investment performance supports the business, with the earned book yield at 4.25% in Q1 2025. While net investment income was stable, Q1 2025 saw significant net investment losses related to asset transfers for the Fortitude Re transaction. The investment portfolio is diversified, with a reduced exposure to high-yield securities, and management actively manages interest rate risk through hedging.

Outlook and Remaining Challenges

Looking ahead, Unum is optimistic about maintaining its momentum. Management projects adjusted EPS growth of 8% to 12% for 2025, building on the strong 2024 performance. This outlook is supported by expectations for core sales growth of 5% to 10% and core premium growth in the 4% to 7% range. The outlook assumes continued favorable macro conditions, including a healthy labor market and supportive interest rates, as well as sustained strong operating performance in the core segments, particularly durable margins in Group Disability and Life. Investments in technology and capabilities are expected to continue driving growth and efficiency, although the operating expense ratio is projected to increase slightly in 2025 due to these investments.

Key risks and challenges remain. Fluctuations in claims experience, particularly in long-tailed products like disability and LTC, can introduce volatility. While management is confident in current trends and operational capabilities, unforeseen changes in incidence, recovery, or mortality rates could impact results. Market conditions can affect investment returns and the valuation of the investment portfolio, including unrealized losses on fixed maturity securities if interest rates rise or credit spreads widen. Competition is a constant factor, with both traditional players and new entrants vying for market share, potentially pressuring pricing, though Unum's capabilities offer differentiation. Regulatory changes, including those related to global minimum tax or insurance capital requirements, could also impact financial results and flexibility. The successful execution of the Fortitude Re transaction and any future risk transfer initiatives are subject to regulatory approvals and closing conditions. Despite these risks, the company's strong capital position and active risk management strategies are designed to mitigate potential adverse impacts.

Conclusion

Unum Group enters 2025 from a position of strength, underpinned by a focused strategy, robust core business performance, and a significantly fortified balance sheet. The company's commitment to the workplace benefits market, supported by ongoing investments in technology and distribution, is driving consistent premium growth and industry-leading margins in its Unum US, Unum International, and Colonial Life segments. While the legacy Closed Block, particularly long-term care, presents ongoing management requirements, strategic actions like the recent reinsurance transaction with Fortitude Re are actively reducing this exposure and enhancing financial flexibility.

The strong capital generation from core operations, coupled with prudent risk management and a substantial capital buffer, provides ample capacity for both investing in future growth initiatives and returning significant capital to shareholders through dividends and share repurchases. Management's outlook for double-digit EPS growth in 2025 reflects confidence in the sustainability of current operating trends and the positive impact of strategic execution. While potential volatility in claims experience and market conditions persist, Unum's disciplined approach and strong financial position suggest it is well-equipped to navigate these challenges and continue delivering value.