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Unum Has 4th Quarter Net Income Drop Due To Investment Loss

Wednesday, February 6, 2019

 Unum Group reported net income of $249.1 million ($1.15 per diluted common share) for the fourth quarter of 2018, compared to net income of $266.9 million ($1.19 per diluted common share) for the fourth quarter of 2017. 

Included in net income for the fourth quarter of 2018 is a net after-tax realized investment loss of $32.6 million ($0.15 per diluted common share) on the Company’s investment portfolio.  Excluding the net after-tax realized investment loss, after-tax adjusted operating income was $281.7 million ($1.30 per diluted common share) in the fourth quarter of 2018.  Net income, for the fourth quarter of 2017, included a net after-tax realized investment gain of $7.2 million ($0.03 per diluted common share) and the impacts from tax reform, which resulted in the revaluation of our net deferred tax liabilities at the newly enacted rate of 21 percent generating a tax benefit of $97.9 million ($0.44 per diluted common share), and the one-time tax on undistributed and previously untaxed foreign earnings and profits resulting in a tax expense of $66.4 million ($0.30 per diluted common share).  Net income, for the fourth quarter of 2017, also included a net loss related to the settlement of a third party review conducted on behalf of a number of state treasurers concerning unclaimed death benefits of $25.4 million ($0.11 per diluted common share).  Excluding the net after-tax realized investment gain, the impacts from tax reform, and the reserves established for unclaimed death benefits, after-tax adjusted operating income was $253.6 million ($1.13 per diluted common share) in the fourth quarter of 2017.

“Our fourth quarter results again reflected the positive trends in our core businesses with good premium growth and stable benefits experience.  These trends continue to produce solid margins and strong cash flow," said Richard P.

McKenney, president and chief executive officer. “This operating performance reflects the disciplined execution of our plans and the strategic positioning we enjoy in our markets.  I continue to be proud of the efforts of our employees as we provide important protections and services to our customers and their families.

"We measure and analyze our segment performance on the basis of 'adjusted operating income' or 'adjusted operating loss', which differ from income before income tax as presented in our consolidated statements of income due to the exclusion of net realized investment gains and losses and certain other items.  In the fourth quarter of 2017, adjusted operating income also excluded the before-tax unclaimed death benefits reserve increase of $39 million for which $18.5 million was included in Unum US group life, $8.1 million was included in Unum US voluntary life, and $12.4 million was included in Colonial Life voluntary life.  These performance measures are in accordance with GAAP guidance for segment reporting, but they should not be viewed as a substitute for income before income tax or net income.

Unum US Segment 
Unum US reported adjusted operating income of $248.7 million in the fourth quarter of 2018, a decrease of 5.9 percent compared to adjusted operating income of $264.2 million in the fourth quarter of 2017.  Included in adjusted operating income for the fourth quarter of 2017 is a reserve release of $19.5 million in the individual disability product line resulting from our annual review of reserve adequacy, which reflects the recognition of updated morbidity assumptions in our disabled life reserves.  Premium income for the segment increased 5.2 percent to $1,435.1 million in the fourth quarter of 2018, compared to premium income of $1,364.5 million in the fourth quarter of 2017.  Net investment income for the segment declined 7.1 percent to $187.7 million in the fourth quarter of 2018, compared to $202.1 million in the fourth quarter of 2017.

Within the Unum US operating segment, the group disability line of business reported a 6.9 percent decline in adjusted operating income to $80.7 million in the fourth quarter of 2018, compared to $86.7 million in the fourth quarter of 2017.  Premium income in group disability increased 2.9 percent to $622.1 million in the fourth quarter of 2018, compared to $604.8 million in the fourth quarter of 2017, with growth in the in-force block of business resulting from improved persistency.  Net investment income declined by 9.3 percent to $102.7 million in the fourth quarter of 2018, compared to $113.2 million in the fourth quarter of 2017, due to a lower portfolio yield, a decrease in the level of invested assets, and a decline in miscellaneous investment income.  The benefit ratio for the fourth quarter of 2018 was 76.2 percent, compared to 76.3 percent in the fourth quarter of 2017, reflecting higher recoveries in the long-term disability line of business.  Group long-term disability sales were $147.3 million in the fourth quarter of 2018, an increase of 16.7 percent from $126.2 million in the fourth quarter of 2017.  Group short-term disability sales were $80.9 million in the fourth quarter of 2018, a decrease of 17.0 percent from $97.5 million in the fourth quarter of 2017.  Persistency in the group long-term disability line of business was 90.9 percent for full year 2018, compared to 89.9 percent for full year 2017.  Persistency in the group short-term disability line of business was 87.2 percent for full year 2018, compared to 86.6 percent for full year 2017.

The group life and accidental death and dismemberment line of business reported adjusted operating income of $64.3 million in the fourth quarter of 2018, an increase of 12.8 percent compared to adjusted operating income of $57.0 million in the fourth quarter of 2017.  Premium income for this line of business increased 7.6 percent to $433.5 million in the fourth quarter of 2018, compared to $402.8 million in the fourth quarter of 2017, primarily due to favorable persistency and strong prior period sales.  Net investment income declined 4.0 percent to $26.1 million in the fourth quarter of 2018, compared to $27.2 million in the fourth quarter of 2017, primarily due to a decline in yield on invested assets which was partially offset by an increase in the level of invested assets.  The benefit ratio in the fourth quarter of 2018 was 71.6 percent, compared to the benefit ratio of 71.3 percent, excluding the unclaimed death benefits reserve increase, for the fourth quarter of 2017, reflecting higher incidence in the group life product line.  Sales of group life and accidental death and dismemberment products decreased 13.9 percent in the fourth quarter of 2018 to $153.9 million, compared to $178.7 million in the fourth quarter of 2017.  Persistency in the group life line of business was 91.2 percent for full year 2018, compared to 88.0 percent for full year 2017.

The supplemental and voluntary line of business reported a decrease of 13.9 percent in adjusted operating income to $103.7 million in the fourth quarter of 2018, compared to adjusted operating income of $120.5 million in the fourth quarter of 2017, which includes the $19.5 million reserve release in the individual disability product line.  Premium income for supplemental and voluntary increased 6.3 percent to $379.5 million in the fourth quarter of 2018, compared to $356.9 million in the fourth quarter of 2017.  This increase was primarily driven by higher sales, including growth in the dental and vision product line where we continue to expand its distribution.  Net investment income decreased 4.5 percent to $58.9 million in the fourth quarter of 2018, compared to $61.7 million in the fourth quarter of 2017, primarily due to a lower portfolio yield and lower miscellaneous investment income, partially offset by an increase in invested assets.  The benefit ratio for the individual disability product line was 51.2 percent for the fourth quarter of 2018, compared to 34.4 percent for the fourth quarter of 2017, which includes the $19.5 million reserve release.  The benefit ratio for voluntary benefits was 43.6 percent in the fourth quarter of 2018, compared to a benefit ratio of 44.8 percent, excluding the unclaimed death benefits reserve increase, in the fourth quarter of 2017, primarily due to favorable experience in our disability and accident lines of business.  The benefit ratio for dental and vision was 67.3 percent for the fourth quarter of 2018, compared to 64.6 percent for the fourth quarter of 2017.  Although the benefit ratio for dental and vision was less favorable compared to the fourth quarter of 2017, it was in line with our expectations.  Relative to the fourth quarter of 2017, sales in the individual disability line of business increased 14.7 percent in the fourth quarter of 2018 to $20.3 million.  Sales in the voluntary benefits line of business increased 6.5 percent in the fourth quarter of 2018 to $54.1 million.  Sales in the dental and vision line totaled $33.1 million for the fourth quarter of 2018, an increase of 33.5 percent compared to the fourth quarter of 2017.  Persistency in the individual disability product line was 90.3 percent for full year 2018, compared to 91.0 percent for full year 2017.  Persistency in the voluntary benefits product line was 75.9 percent for full year 2018, compared to 77.5 percent for full year 2017.  Persistency in the dental and vision product line was 84.5 percent for full year 2018 compared to 85.4 percent for 2017.

Unum International Segment
In connection with our acquisition of Pramerica Zycie TUiR S.A., (which we subsequently renamed Unum Zycie TUiR S.A. and refer to as Unum Poland) in the fourth quarter of 2018, we changed the name of our Unum UK segment to Unum International.  The Unum International segment is now comprised of our operations in the United Kingdom (the Unum UK line of business) and Poland (the newly acquired Unum Poland line of business).  Unum Poland’s results are included within the supplemental product line of the Unum International segment.

The Unum International segment reported adjusted operating income of $30.4 million in the fourth quarter of 2018, an increase of 2.4 percent from $29.7 million in the fourth quarter of 2017.
Premium income increased by 14.2 percent to $152.3 million in the fourth quarter of 2018, compared to $133.4 million in the fourth quarter of 2017, primarily due to the addition of Unum Poland in the fourth quarter of 2018.  Net investment income was $31.1 million in the fourth quarter of 2018, compared to $31.9 million in the fourth quarter of 2017.

Sales increased by 0.8 percent to $24.7 million in the fourth quarter of 2018, compared to $24.5 million in the fourth quarter of 2017.

The Unum UK line of business reported adjusted operating income, in local currency, of £22.2 million in the fourth quarter of 2018, a decrease of 0.9 percent from £22.4 million in the fourth quarter of 2017.  Premium income was £104.9 million in the fourth quarter of 2018, an increase of 4.4 percent from £100.5 million in the fourth quarter of 2017, driven by favorable persistency and rate increases in group long-term disability.  Net investment income was £22.9 million in the fourth quarter of 2018, a decrease of 5.0 percent from £24.1 million in the fourth quarter of 2017, due to a lower yield on fixed-rate bonds and lower income from inflation-linked bonds, partially offset by growth in the level of invested assets.  The benefit ratio in the fourth quarter of 2018 was 74.6 percent, compared to 75.8 percent in the fourth quarter of 2017, reflecting favorable benefits experience in the supplemental and group long-term disability product lines.  Sales decreased by 9.8 percent to £16.6 million compared to £18.4 million in the fourth quarter of 2017.  Persistency in the group long-term disability line of business was 87.8 percent for full year 2018, compared to 87.4 percent for full year 2017.  Persistency in the group life line of business was 88.5 percent for full year 2018, compared to 84.1 percent for full year 2017.  Persistency in the supplemental line of business was 93.1 percent for full year 2018 compared to 91.0 percent for full year 2017.

Colonial Life Segment
Colonial Life reported an 8.0 percent increase in adjusted operating income to $85.4 million in the fourth quarter of 2018, compared to adjusted operating income of $79.1 million in the fourth quarter of 2017.

Premium income for the fourth quarter of 2018 increased 7.3 percent to $410.1 million, compared to $382.1 million in the fourth quarter of 2017, primarily driven by sales growth which offset a lower level of persistency.  Net investment income totaled $37.0 million in the fourth quarter of 2018, compared to $37.1 million in the fourth quarter of 2017, primarily driven by a lower portfolio yield on invested assets and lower miscellaneous investment income, partially offset by an increase in the level of invested assets.  The benefit ratio in the fourth quarter of 2018 was 51.6 percent, which was in line with the benefit ratio, excluding the unclaimed death benefits reserve increase, in the fourth quarter of 2017, with favorable experience in the life line of business offset by unfavorable experience ratio in the cancer and critical illness lines of business.

Sales increased 2.3 percent to $204.4 million in the fourth quarter of 2018 from $199.8 million in the fourth quarter of 2017, driven by increased sales in the core commercial market segment.  Persistency in Colonial Life was 78.1 percent for full year 2018 and 78.9 percent for full year 2017.

Closed Block Segment
The Closed Block segment reported adjusted operating income of $34.8 million in the fourth quarter of 2018, compared to $33.1 million in the fourth quarter of 2017.
Premium income for this segment declined 4.5 percent in the fourth quarter of 2018 compared to the fourth quarter of 2017, primarily due to expected policy terminations and maturities for the individual disability line of business which was partially offset by a slight increase in premium income for the long-term care line of business resulting from premium rate increases on certain in-force policies.  Net investment income increased 1.3 percent to $345.8 million in the fourth quarter of 2018, compared to $341.5 million in the fourth quarter of 2017, primarily driven by an increase in the level of invested assets and higher miscellaneous investment income, which was partially offset by a lower portfolio yield on invested assets.  The interest adjusted loss ratio for the individual disability line of business was 81.2 percent in the fourth quarter of 2018, which was consistent with the fourth quarter of 2017.  The interest adjusted loss ratio for the long-term care line of business was 83.2 percent in the fourth quarter of 2018 and is not comparable to 93.1 percent in the fourth quarter of 2017 due to the update in our reserve assumptions in the third quarter of 2018, but was generally consistent with our expectations in the second half of 2018, with an interest-adjusted loss ratio of 85.4 percent.

Corporate Segment
The Corporate segment reported an adjusted operating loss of $48.2 million for the fourth quarter of 2018, compared to an adjusted operating loss of $33.2 million in the fourth quarter of 2017, primarily driven by higher expenses.

OTHER INFORMATION
Shares Outstanding
The Company’s weighted average number of shares outstanding, assuming dilution, was 217.4 million for the fourth quarter of 2018, compared to 224.8 million for the fourth quarter of 2017.  Shares outstanding totaled 214.6 million at December 31, 2018.  During the fourth quarter of 2018, the Company repurchased approximately 4.3 million shares at a cost of approximately $150 million.

Capital Management
At December 31, 2018, the weighted average risk-based capital ratio for the Company’s traditional U.S. insurance companies was approximately 370 percent and cash and marketable securities in the holding companies equaled $602 million.

Book Value
Book value per common share as of December 31, 2018 was $40.19, compared to $43.02 at December 31, 2017.

Outlook
The Company expects after-tax adjusted operating income growth per share for full-year 2019 to be within the range of 4 percent to 7 percent.


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