2025 Q3 Earnings Call Contradictions: Actuarial Assumptions, Disability Business, and Capital Deployment Strategy

Date of Call: None provided

Financials Results

• EPS: $2.09 per share (adjusted after-tax operating income per share), down from $2.13 a year ago; quarter EPS impacted by approximately $0.10 from Closed Block assumption/ NPR changes

Guidance:

• Expect no future capital contributions for long term care; statutory reserve impact expected to be minimal.
• Target year-end holding company liquidity above $2.0B and traditional RBC >425% (currently ~455%).
• Q4 EPS impact from the Closed Block NPR change similar to Q3 (~$0.10); expect this effect to continue into Q4.
• Continue to pursue premium rate increases (state-by-state) over next 3–5 years to realize actuarially justified pricing; program expanded in the review.
• Repurchases/dividends: on track to repurchase at the top end of $500M–$1B range and to return ~ $1.3B total capital in 2025.
• Group disability planning assumption for Q4 ~62% benefit ratio; early view that low-60s is a reasonable planning range for 2026.

Business Commentary:

* Core Business Performance: - Unum's core operations premium grew 2.9% in Q3, driven by strong persistency that exceeded expectations, with a persistency rate of 89.8% for total group and 78.7% for Colonial Life. - The growth was supported by disciplined pricing and risk selection strategies, resulting in ROE for core operations of near 20%.

• Long-Term Care Block Restructuring:
• The reserve assumption review led to a $478.5 million increase in reserves, primarily affecting long-term care, with an increase of $643.1 million.

• This was driven by strategic actions, including the removal of the morbidity and mortality improvement assumption, the cessation of new employee coverage, and the expansion of premium rate increase plans, aimed at reducing risk and managing the legacy block.

• Statutory Reserve Impact:

• The assumption changes resulted in an increase in the closed block's future lifetime loss ratio, impacting quarterly earnings by approximately $10,000,000.

• Despite this, the statutory reserve impact is minimal, with no additional capital contributions needed, indicating a stable capital position.

• Capital Return and Shareholder Value:

• Unum returned nearly $1 billion to shareholders through share repurchases and dividends in the first nine months of 2025, with plans to return approximately $1,300,000,000 by year-end.
• This strong capital management reflects their commitment to enhancing shareholder value, supported by robust earnings and liquidity positions.

  Sentiment Analysis:

  Overall Tone: Positive

  • Management repeatedly emphasized core business strength and capital flexibility: "core businesses...delivered consistent performance"; year-to-date premium growth ~4%, core ROE near 20%, holding company liquidity $2.0B and RBC >450%. They framed the Closed Block actions as derisking and strategic steps enabling no future capital needs and continued shareholder returns.

Q&A:

• Question from Ryan Krueger (KBW): Can you give more color on how the VLTC assumption review moved through statutory results — how to think about changes coming through stat and offsets from future premium rate actions? And follow-up: you originally planned to upstream $200M out of Fairwind after the LTC transaction — are you keeping it there and why?
  Response: Adjustments largely flow through Fairwind protections so reported statutory reserves in Fairwind were not materially changed; modest statutory impact in Tennessee was assessed and is de minimis to capital plans. Current intent is to keep the funds in Fairwind given robust ~$2.0B protections.

• Question from Tom Gallagher (Evercore ISI): The ~$500M change tied to actuarially justified rate increases — are those increases driven mainly by the removal of morbidity/mortality improvement assumptions and group-life contract changes? Also, were these changes driven by experience or prudence/how will regulators view them?
  Response: The expanded rate program reflects the aggregate assumption updates (including removal of morbidity improvement) and is the result of observed post‑COVID experience and modeling uncertainty; changes are actuarially supported, viewed as prudent to derisk assumptions, and will be presented to regulators with historical precedent for approval.

• Question from Joel Herwitz (Dowling): How do the assumption changes affect the PDR and what remains in the PDR after reinsurance/interest changes; what portion of the $2.0B protection is excess reserves vs capital? Also, on group disability, what drove the quarter's incidents and recoveries and what supports further reserve releases?
  Response: PDR is less central post-transaction because statutory reported reserves remain locked above best-estimate; the $2.0B protection change relates to best-estimate reserve movements and did not reduce excess capital in the protection. For group disability, recoveries have been strong and stable, enabling GAAP reserve releases this quarter; management views higher recoveries as sustainable but will consider statutory adjustments in Q4.

• Question from Elyse Greenspan (Wells Fargo): Do the LTC actions better position you for future risk-transfer transactions and what's your view on group disability — could Q4/2026 be better than the low-60s guide?
  Response: Yes — the assumption simplifications (including removing new lives) make the block simpler to model and more attractive to counterparties; the market is constructive and Unum will remain active. For group disability, 62% is a reasonable Q4 planning assumption with normal quarterly volatility; full-year 2026 commentary will come with next-year outlook.

• Question from Alex Scott (Barclays): What is the pricing environment heading into enrollment and are you seeing pressure on lead management or repricing that will affect loss ratios?
  Response: Pricing remains competitive but stable; Unum’s technology and service (HR Connect/Total Leave) support a value-based, fair pricing environment — PFML and lead management are normal dynamics that are actively managed and have not produced structural repricing pressure.

• Question from Suneet Kamath (Jefferies): Please unpack the premium rate increase program tied to the reserve review — how does it compare to past requests, the timeframe, and is there a haircut assumption? Also, update on recoveries.
  Response: Approach is consistent with past state-by-state programs (implementation typically 3–5 years); management used prudent actuarial estimates based on historical approval experience (over $5B PV of approvals historically) and did not signal an extra haircut beyond normal conservatism. Recoveries remain stable and operationally sustainable.

• Question from Jack Madden (BMO Capital Markets): Now that the review is done and capital is healthy, could buybacks ramp next year and what other uses of cash may come into play? Also, how sustainable is underlying premium growth (Unum US ~3% natural growth)?
  Response: Capital priorities remain: invest in the core first, selective capability M&A second, then shareholder returns; board will assess future buybacks but current actions are at the top end of announced 2025 range. Natural premium growth around ~3% is sustainable supported by strong persistency and sales momentum.

• Question from Wilma Berthas (Raymond James): Why continue to report Closed Block/LTC earnings despite the block having lost capital over time?
  Response: Regulatory/GAAP segmentation requires reporting; treating LTC as a Closed Block provides clearer disclosure. Importantly, current analysis shows no statutory capital needs and the block remains a focus on cash-generation and de‑risking actions.

• Question from Wes Carmichael (Autonomous Research): Can you size the gross impacts of removing morbidity improvement vs removing mortality improvement? And does the NPR increase raise quarterly volatility as more cohorts become capped under LDTI?
  Response: They did not separately disclose gross splits because morbidity and mortality improvements are interrelated in the experience set; NPR rose (94.9% → 97.6%) which reduces future margins and can increase quarter-to-quarter volatility for Closed Block results depending on which cohorts are realized.

• Question from Tracy Benkowitz (Wolfe Research): For the Q4 statutory reserve review, will you be evaluating the same factors as the Q3 GAAP update, and does morbidity improvement removal reflect impacts from medical advances (e.g., GLP-1s)?
  Response: The statutory work has already incorporated the third-quarter GAAP changes and will be booked in Q4; morbidity improvement removal was driven by post‑COVID volatility and modeling uncertainty rather than attribution to single causes like GLP‑1s, which management would only reflect after seeing sustained block-level impact.

• Question from Maxwell Fisher (Truist): Any update on government shutdown impacts — are you seeing effects on new disability awards?
  Response: No current operational impact observed; contingency plans exist but right now 'all systems go' and no material change in awards.

• Question from Josh Shanker (Bank of America): You removed future new-employee coverage on existing group LTC cases (a profitable component) and took a ~$200M reserve increase — why forgo profitable future premium to shrink the book?
  Response: The change stops adding new lives to legacy group LTC cases (we stopped writing new cases in 2012) to accelerate reduction of the Closed Block and simplify long-term risk management; management accepted forgone margin to advance strategic objectives and reduce future modeling/operational risk.

Contradiction Point 1

Actuarial Assumptions and Experience Trends

It highlights inconsistencies in the company's approach to actuarial assumptions and their relationship to experience trends, which could impact financial projections and risk assessments.

Did your block's experience justify these long-term assumption changes in morbidity and mortality? Or was it driven by future uncertainty and prudence? - Tom Gallagher(Evercore ISI)

2025Q3: The changes were based on the experience since going through COVID, which created modeling uncertainty. The decision to remove morbidity improvement was due to a lack of modeling confidence in recent experience trends. - Steve Zabel(CFO)

What are the underlying drivers of the elevated group disability claims and the change in guidance, and whether they persist into July? - Michael Augustus Ward(UBS Investment Bank)

2025Q2: We expect a higher number of incidents at this point due to COVID, just given that from what we've seen in recent months, it looks like it's sort of a little bit more of an older group than we've experienced in the past. - Steven Andrew Zabel(CFO)

Contradiction Point 2

Disability Business Sustainability

It involves differing expectations about the sustainability of the company's disability business performance, which is critical for financial forecasting and investor confidence.

Will the elevated persistency from Q1 continue in disability insurance? How should we assess the business's loss ratio beyond 2025? - Elyse Beth Greenspan(Wells Fargo Securities, LLC)

2025Q3: Our disability business is high-returning, with persistency helping premiums. The second quarter keeps premium growth on track. For the coming years, we don't expect operational performance to change. - Richard Paul McKenney(CEO) and Steven Andrew Zabel(CFO)

Regarding disability insurance, will the elevated persistency from Q1 continue? How should we model the business's loss ratio beyond 2025? - Elyse Beth Greenspan(Wells Fargo Securities, LLC)

2025Q2: Our disability business is high-returning, with persistency helping premiums. The second quarter keeps premium growth on track. For the coming years, we don't expect operational performance to change. - Richard Paul McKenney(CEO) and Steven Andrew Zabel(CFO)

Contradiction Point 3

Reserve Assumptions and Rate Increases

It involves changes in actuarial assumptions and their impact on rate increase requests, which are crucial for financial planning and regulatory compliance.

Are the $500 million in actuarially justified rate increases the primary drivers of the rate increase requests? - Tom Gallagher(Evercore ISI)

2025Q3: The actuarial changes, particularly the removal of morbidity and mortality improvement assumptions and changes in group life contracts, are the key drivers. - Steve Zabel(CFO)

Can you quantify the reserve release in the Valens segment? - Thomas Gallagher(Evercore ISI)

2025Q1: Our reserve review processes were working well throughout the year. As a result, our reserve charges were consistent with our planning assumptions. - Steve Zabel(CFO)

Contradiction Point 4

Capital Deployment and M&A Strategy

It involves the company's strategy for capital deployment and acquisitions, which are critical for growth and investor expectations.

Originally planned to transfer $200M from Fairwind after LTC transaction. Are you now keeping it in Fairwind? What's the rationale? - Ryan Krueger (KBW)

2025Q3: We don't feel the need to move capital out of Fairwind at this point. - Steve Zabel(CFO)

Are you setting aside any capital buffer for potential M&A, and what potential growth transactions are you considering? - Elyse Greenspan (Wells Fargo)

2024Q4: We have flexibility with the cash and capital that's generated to both pay down debt, to invest in shareholder returns, to do an M&A. - Rick McKenney(CEO)

Contradiction Point 5

Disability Experience and Recovery Rates Post-Pandemic

It involves the trend of disability incidents and recovery rates post-pandemic, which are critical for underwriting and pricing strategies.

Can you share details on group disability incidents and recoveries observed during the quarter? - Joel Herwitz(Dowling & Partners)

2025Q3: We're pleased with the group disability benefit ratio, with consistent recovery trends. - Steve Zabel(CFO)

How have disability and recovery rates changed post-pandemic? - Joel Hurwitz(Dowling & Partners)

2025Q1: Incidents returned to pre-pandemic levels by the end of '23. Recovery rates improved steadily throughout the pandemic, maintaining stability in first quarter '25. - Steve Zabel(CFO)