Executive Vice President & Chief Financial Officer at Unum Group
Great. Thank you, Rick and good morning to everybody. As Rick made clear, we are very pleased with both the operating results and strategic actions advanced in the third quarter. As you may recall, the most severe impacts from the pandemic recorded in the second quarter and these impacts continue to a more endemic state during the third quarter. Coupled with an increasingly favorable interest rate environment, the third quarter performance provides a strong position as we continue through the back half of the year.
As I cover the results, I will primarily focus on an analysis of our third quarter results compared to the second quarter of 2022, allowing me to describe how our business lines have been progressing. For items such as premium and sales growth, I will tend to focus more on year-over-year comparisons. I will also describe our adjusted operating income results, excluding the impacts from our GAAP reserve assumption updates which typically occurred during the third quarter. As we outlined in the press release, the reserve decrease related to our annual reserve assumption update totaled $155 million before tax or $122.5 million after tax and was comprised of releases in both Unum US group long-term disability and group life.
The biggest component of the actuarial reserve review was a release of $121 million before tax in the Unum US group long term disability line. Claim reserves should represent our best estimate of the future liability. And since the last GAAP reserve review, high levels of performance and continued investment in our operations give us confidence these trends are sustainable. As such, these reserves have been adjusted to better reflect the expected cost of claims. This reserve update will have little impact on our forward expectations for earnings or the expected benefit ratios.
Although the impact of these reserve updates are excluded from adjusted operating income, they did contribute $0.61 per share to the company's book value. I would note that more broadly, we have completed our GAAP reserve adequacy work subject to external audit and all impacts are reflected in these third quarter results. Third quarter earnings were very strong, finishing above the improved outlook we provided last quarter and moderating from some record-breaking results in the second quarter. Before getting into the individual segments, I'd like to provide some broader context on the quarter and frame up some of the key themes of the performance we saw.
First, the sustained success is driven in part by our ability to take advantage of the favorable operating environment we are in. Wages and payrolls or natural growth bolstered U.S. group results and supported our ability to get top line growth back in line with historical norms. Also, we recorded another group disability benefit ratio well below our long-term expectations as claim recoveries continue to outperform our expectations. Not only does this dynamic aid our operating results, we now expect favorability to persist in the near term.
The run-up in interest rates benefits us in a number of ways, including better new money rates for our investments which outpaced our portfolio yields in the third quarter as well as providing us the opportunity to reduce risk in LTC through hedging, a topic I will spend some time on later. Second, after more than 2 years of significant impacts from the pandemic, we are seeing the shift to a more endemic state with impact staying at a lower, more stable level than we've seen over the last several quarters.
U.S. deaths in the third quarter were estimated at $40,000, a slight increase from second quarter but much lower compared to what we have seen prior to that. The stabilized mortality also means more normal results for our long-term care block which benefited throughout the pandemic. In addition, as a proportion of COVID-19 deaths in the working age population remained around 15% for the quarter, our core businesses should see less impact. With those factors in mind, I'll begin my review of our operating performance with the Unum US segment.
Adjusted operating income decreased to $275 million in the third quarter of 2022 compared to $295.4 million in the second quarter. This was driven primarily by lower earnings in Group Life and AD&D lines, partially offset by increasingly strong levels of operating income from the group disability line. The group disability line reported an excellent quarter with adjusted operating income increasing to $129.8 million in the third quarter of 2022 compared to $107.5 million in the second quarter. The biggest driver of the earnings improvement was favorable benefits experience which produced further improvement in the benefit ratio to 62.7% for the third quarter. This result marks consecutive quarters of very favorable claim recoveries in the group long-term disability product line. We are very pleased with how this block is performing. And in this environment, we believe the group disability loss ratio will be in the mid- to high 60% range in the fourth quarter.
Results for Unum US Group Life and AD&D declined from last quarter, with adjusted operating income of $30.9 million for the third quarter of 2022 compared to $67.3 million in the second quarter. This quarter-to-quarter decrease was driven by a higher average claim size and also reflected a lack of favorable IBNR runout which was experienced in the second quarter but wasn't expected to recur. For our group life block, we estimate that COVID-related mortality claims totaled approximately 200 and were generally in line with the second quarter. Non-COVID-related mortality did pressure results due to a slight increase in average claim size while the AD&D line experienced more normalized results after a strong second quarter. So looking ahead, assuming national COVID-related mortality continues at its current levels and we see some moderation in volatility from non-COVID mortality, we would expect the benefit ratio for this line to run in the mid-70% range.
So moving on, adjusted operating income in the Unum US supplemental and voluntary lines continued its strong performance in the third quarter at $114.3 million, a slight decrease from the very favorable result of $120.6 million in the second quarter. This result was driven by the voluntary benefits line of business, partially offset by the individual disability block of business which produced another excellent quarter with a benefit ratio further improving from the strong result of 41.3% in the second quarter to 40% in the third quarter.
Finally, results for the dental and vision line were slightly below second quarter results as the benefit ratio increased to 74.5% compared to 72.9%. As evidenced by results this quarter and for the first 9 months of the year, the supplemental and voluntary lines continue to perform very well and contribute high levels of operating income to the company. Looking ahead, we anticipate fourth quarter results to be roughly in line with this quarter's result.
So turning to premium trends and drivers. We are very pleased to see the momentum experienced in the first half of the year for Unum US continue into the third quarter, with growth in premium income of 3.9% on a year-over-year basis compared to the 3.3% increase we saw in the second quarter. This momentum was exceptionally strong in the group disability line with year-over-year growth of 7.4% in the third quarter compared to 5.1% in the second quarter, driven by sustained high levels of natural growth.
Sales growth for Unum US was solid with an increase of 11% year-over-year in the third quarter and 14.9% for the first 9 months of the year. Underpinning these growth trends, sales in our supplemental and voluntary lines grew 13.9%, driven by sharp year-over-year growth in our individual disability and voluntary benefits lines which grew 23.9% and 19.1%, respectively and the group disability line which grew 12.3%. From a market perspective, we saw particularly strong results in our core market segment which are those employers under 2,000 lives, offsetting lower sales in large case.
Persistency continued to remain generally stable with some variation by line of business with our total group block at 89.7% for the third quarter. As noted, the current operating environment is one that is very favorable for our business. One example of this is the contribution from natural growth in our group product lines. This quarter, natural growth continued to accelerate for us, increasing to more than 5% on a year-over-year basis in the third quarter. Taken together, we are very pleased with the top line growth trends we are experiencing in Unum US and believe the good momentum we've experienced will continue to persist as we look ahead to the fourth quarter.
Moving to the Unum International segment, adjusted operating income for the third quarter increased to $29.9 million from the $24.9 million in the second quarter in the face of a weaker pound to dollar exchange rate. Adjusted operating income for the Unum UK business improved in the third quarter to GBP23.6 million compared to GBP19.3 million in the second quarter. The reported benefit ratio for Unum UK was 78.6% in the third quarter compared to 89.7% in the second quarter. As has happened in the past few quarters, the high levels of inflation experienced in the U.K. distorted the reported benefit ratio again this quarter.
As a reminder, a significant portion of our policies in the U.K. have an inflation rider which are backed by inflation-linked gilts. Inflation link benefits are capped but the income we receive from the link gilts is not which benefits us in periods of very high inflation. Adjusted for this impact, the underlying benefits experienced in the third quarter was still slightly improved from the second quarter as benefits experienced in the group disability line offset an increase in Group Life claims.
For Unum Poland, third quarter adjusted operating income was higher than second quarter and we remain pleased with the growth and performance of the operation and humbled by the resolve of our people. Premium income for our Unum International business segment declined on a year-over-year basis in dollars but continues to show solid growth on a local currency basis.
Unum UK generated premium growth of 12.1% on a year-over-year basis in the third quarter and our Poland operation produced growth of 14.2% in local currency. Both businesses continue to generate very high levels of year-over-year sales growth in the third quarter with Unum UK up 106% and Unum Poland up 21.8% in local currency. Next, adjusted operating income for the Colonial Life segment was $90.4 million compared to $101.1 million in the second quarter, a strong result following one of the highest results on record last quarter. The benefit ratio continued to perform below historical trends and improved to 46.8% in the third quarter from 47.6% in the second quarter. We continue to anticipate the benefit ratio will trend towards the 48% to 50% range for the remainder of 2022. Despite the improved benefit ratio expenses increased slightly, reflecting both investments in our people and technology.
Although expenses in this segment were higher, expenses for the total company as measured by the expense ratio are still below the outlook we gave at our Investor Day of being up 125 to 175 basis points for the full year. And we do expect to trend to the low end of that guided range for the full year. For Colonial Life's top line, we have previously indicated it will take a couple of years to return to pre-pandemic levels of premium growth. This quarter's result trended in a positive direction, growing approximately 1% over prior year and demonstrated the strong sales recovery we have been experiencing over the past several quarters, with sales increasing 7.8% for the first 9 months of the year and 3.2% for the third quarter. We feel very good with the progress we've made to build back premium income to pre-pandemic levels for this business. This is evidenced by premium income on a trailing 12-month basis, exceeding that of full year 2019 by 1.2%.
In the Closed Block segment, adjusted operating income, excluding the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction was $34.1 million compared to $79.3 million in the second quarter. The decline largely reflects lower miscellaneous investment income which fell $36.4 million from the second quarter as income from our alternative investment portfolio moderated as expected. I'll speak more to this portfolio in a few moments. For benefits experience, long-term care remains stable with the adjusted -- interest adjusted loss ratio at 85.7% compared to 85.9% in the second quarter and 81% on a 12-month rolling basis. As the pandemic transitions to an endemic, we will continue to monitor how mortality plays through this block.
The level of performance for LTC this quarter is consistent with our long-term expectations of an interest-adjusted loss ratio between 85% and 90%, while our prior 12-month ratio remains below the range due to pandemic-related claim of mortality. For the Closed Block individual disability line, the interest adjusted loss ratio decreased to 77.5% from 79.5% last quarter, remaining within our long-term expectations. Assuming a normal environment, we generally expect Closed Block adjusted operating earnings to be in the $45 million to $55 million range subject to volatility in income from the alternative asset portfolio.
So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $49.5 million compared to $36.9 million in the second quarter, primarily driven by higher expenses, including those related to debt management activity. Going forward, we anticipate quarterly losses in this segment in the $40 million to $45 million range.
Regarding debt management, last quarter, we announced our intention to call $350 million in notes due to mature in 2024 and refinance it with the proceeds of a 5-year bank term loan facility which was priced very attractively compared to market spreads. This transaction allowed us to effectively extend the maturity by 3 years for going the need to issue at current spread levels.
Moving now to investments. We continue to see a great environment for new money yields given the continued run-up in interest rates and widening in corporate bond spreads so far this year. In the third quarter, the 10-year treasury increased 81 basis points and its upward trend continued into October. With these factors at play, new money rates continue to increase and now exceed product portfolio yields. Miscellaneous investment income decreased in the third quarter to $18 million compared to $57 million in the second quarter.
Second quarter results benefited from our highest level of alternative investment income on record at $54 million. Last quarter, we guided for this result to moderate down below our run rate expectation of $20 million to $25 million due to the market volatility seen in the second quarter. Despite this volatility, income from our portfolio was solid, posting $13 million of earnings as our exposure to real assets continues to benefit us in this economic environment. We believe this strong result -- we believe this result is a strong testament to our approach with alternative asset investments and we have been very pleased with its performance throughout the pandemic. We have started to build a high-performing portfolio that is diversified, defensive and supportive of our long-duration liabilities.
So looking ahead, our current estimate is that fourth quarter alternative asset income will be below our run rate expectation and likely below third quarter results but still positive. Miscellaneous investment income from traditional bond calls was up slightly from the second quarter but remains below the unusually high volume seen in 2021, while lower bond calls pressure net investment income in the short run, maintaining higher than market yielding securities is beneficial to our portfolio yields.
As discussion continues around the likelihood of a recession, I want to take a few moments to highlight the strength of our investment portfolio. First, we actively manage and monitor the profile of our investment portfolio which is comprised largely of corporate credit. As Rick mentioned, we have consistently experienced favorable default rates compared to industry averages and our exposures to asset classes, such as equities, commercial mortgage loans, CLOs, RMBS and many structured asset class categories are below industry averages given our liability profile and focus on corporate credit.
Second, since the end of 2020, we greatly decreased our exposure to below investment-grade securities from just under 9% of fixed maturity investments at amortized costs to just under 6%. And then lastly, year-to-date, we've experienced more upgrades than downgrades and currently view our portfolio as having more potential rising stars than fallen angels in the near term. While we will leave it to others to debate the probability and severity of a macro event, we feel confident with the position of our portfolio.
Moving now to capital, the financial strength of the company continues to build and remains in excellent shape. The weighted average risk-based capital ratio for our traditional U.S. insurance companies remain robust at approximately 415% and holding company liquidity was $1.1 billion at the end of the third quarter. Both of these metrics are well above our targeted levels and are expected to further strengthen in the fourth quarter.
Also, as previously disclosed, the upcoming C2 mortality factor changes that will be enacted at year-end will further bolster our capital metrics adding approximately 25 points of RBC as we benefit from how the update impacts Group Life products. Further, we anticipate another year-end dividend from First Unum in the $30 million to $50 million range which assumes a modest release of LTC asset adequacy reserves in that legal entity. These capital metrics have benefited from the rebound we are seeing in our statutory earnings results so far this year. Statutory after-tax operating income was $243.2 million for the third quarter and $725 million through the first 9 months of the year. These results put us on a track to achieve roughly $1 billion in statutory earnings this year, back in line with pre-pandemic levels.
Looking at capital deployment in the third quarter. we paid $66.1 million in common stock dividends and repurchased $42.6 million of our shares this quarter. Through the 9 months of the year, we've paid $189.5 million in dividends and bought back $137.5 million of our stock and continue to track towards repurchasing approximately $200 million for the full year. Capital contributions in the Fairwind subsidiary were $115 million in the third quarter and $465 million year-to-date. With the stable performance in the LTC block and the rise in interest rates this year, we continue to trend to the lower end or slightly below the range of $550 million to $650 million of capital contributions to Fairwind that we guided to at our February Investor Day.
On top of tempering 2022 capital contributions, higher rates are positive for LTC over the long term and provide us confidence in our ability to recognize the premium deficiency reserve at a faster pace than the original permitted practice. Higher rates also provide us attractive options to support this goal further through hedging activities. As you recall, last quarter, we executed interest rate hedges through long duration treasury forwards in our first Unum Block of LTC business. We have remained active, continuing these efforts in both the third quarter and into the fourth quarter.
As Rick described in the third quarter, we hedged cash flows in the Unum America Block which comprises approximately 80% of our LTC business. The series of trades totaled $500 million of notional hedges at an average 30-year treasury rate in the mid-3% range. Since the end of the quarter, we have again entered into additional -- an additional $100 million averaging over 4%. Again, these actions reduce uncertainty by narrowing the range of outcomes with this block of business and we will continue to actively explore ways to further reduce risk associated with our LTC block.
So I'll wrap up with a comment on our outlook for the year. After setting our guidance for growth in adjusted after-tax operating income per share at 4% to 7% in our February Investor Day, we raised it to 15% to 20% during the first quarter. Then after favorable second quarter results and a brighter outlook for the second half of the year, we raised the outlook again to a range of 40% to 45% off of our adjusted operating -- after-tax operating income per share of 2021 of $4.35. After contemplating third quarter results, we believe this range is still appropriate for 2022.
So now, I'll turn the call back to Rick for his closing comments and I look forward to your questions.