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Unum Group
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Good day and welcome to the Unum 4Q 2018 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Tom White, Head of Investor Relations. Please go ahead sir.
Great. Thank you, Amanda. Good morning, everyone and welcome to the fourth quarter 2018 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical facts. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K as well as our subsequently filed quarterly reports on Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com.
I remind you that statements in today’s call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. The presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today’s presentation can be found in our statistical supplement on our website also in the Investors section.
As you saw in yesterday afternoon’s earnings release, for the fourth quarter of 2018, Unum reported net income of $249.1 million or $1.15 per diluted common share. Net income included a net realized investment loss of $32.6 million or $0.15 per diluted common share. So, after-tax, adjusted operating earnings were $281.7 million or $1.30 per diluted common share. For full year 2018, net income was $523.4 million or $2.38 per diluted common share. Net income includes a net realized investment loss of $28.5 million or $0.12 per diluted common share and the reserve charge in the long-term care line which reduced net income by $593.1 million or $2.70 per diluted common share. So, after-tax adjusted operating income was $1.145 billion or $5.20 per diluted common share.
As background in the fourth quarter 2017, the net income was $266.9 million or $1.19 per diluted common share. Included in net income were impacts related to the U.S. tax reform bill, the revaluation of our net deferred tax liabilities at the newly enacted rate of 21% and the one-time tax on undistributed and previously untapped foreign earnings and profits, which resulted in net tax benefits of $31.5 million or $0.14 per diluted common share and included a net loss of $25.4 million or $0.11 per diluted common share related to the settlement of a third-party review conducted on behalf of the number of state treasurers concerning unclaimed death benefits. The net after-tax realized investment gain on our investment portfolio was $7.2 million or $0.03 per diluted common share. So after-tax adjusted operating income, which excludes these items was $253.6 million or $1.13 per diluted common share again in the fourth quarter of 2017.
For full year 2017, net income was $994.2 million or $4.37 per diluted common share. Included in net income was a net realized investment gain of $25.3 million, which is $0.11 per diluted common share. So excluding the two items related to the U.S. tax reform bill and the unclaimed death benefit reserve adjustment, the adjusted after-tax operating income was $976.2 million or $4.29 per diluted common share. And finally, in the fourth quarter of 2017, we recorded a $19.5 million reserve release or $12.7 million after-tax related to our Unum U.S. individual disability line which was included in our fourth quarter and full year 2017 adjusted operating income.
Participating in this morning’s conference call our Unum’s President and CEO, Rick McKenney, our CFO, Jack McGarry as well as the CEOs of our business segments Mike Simonds for Unum U.S., Peter O'Donnell for Unum International, Tim Arnold for Colonial Life and Steve Zabel for the Closed Block.
And now I will turn the call over to Rick for his comments.
Great. Thank you, Tom and good morning everyone. We ended 2018 on a solid note. As our fourth quarter results demonstrated the continuation of the many positive operating trends we have seen over the past several quarters. As Tom detailed our after tax adjusted operating income totaled $281.7 million or $1.30 per share, an increase of 15% from $1.13 per share in the year ago quarter. For the full year our adjusted operating income per share increased by 21.2% to $5.20. Excluding 2017 Unum U.S. individual disability reserve release adjusted operating income per share increased 22.6%, which put us in the upper end of our original outlook range of 17% to 23%. The operating trends in our core businesses remained healthy.
We continue to see good levels of premium growth including 5% growth in Unum U.S., 7% growth in Colonial Life and 14% growth in the Unum International segment which now includes the Unum Poland acquisition that we closed at the beginning of the fourth quarter which is now an addition to our Unum UK business. These trends reflect our disciplined approach to sales growth and our ongoing management of our current customers. In addition to solid premium growth we continue to see generally stable benefits experience across the major product lines in our core businesses. This drives the continuation of the very healthy margins we have been experiencing in these business lines and the strong cash flow generation that goes with it, which all supports our financial flexibility. Also in the fourth quarter we saw improved results from our Closed Block segment particularly in the long-term care line. The loss ratio for long-term care was at 83.2% which we were pleased to see. As we roll into a full year on our new reserving basis we think attractiveness on our rolling four quarters is more appropriate. Until then we are encouraged that for the second half of 2018 the loss ratio for long-term care was 85.4%, at the lower end of our long-term expected range. Jack will provide additional details on these results as well as updates on other important aspects of the LTC business.
With this good financial performance our capital metrics remains in healthy shape as we close out 2018. The RBC ratio for our traditional U.S. insurance companies was in line with our expectations and holding company cash remains above our targeted levels. We have resumed our share repurchase activity in the fourth quarter with $150 million of repurchases finishing the year with a total of $350 million. 2018 was certainly an eventful year for the company in many ways. We are proud of the accomplishments of the core business lines not only the strong financial performance we have seen throughout the year, but also the strategic positioning we enjoy in our markets which positioned us well going forward. Additionally, we continue make investments in our capabilities to ensure there is continued success. Obviously, there was considerable noise which created volatility in the market regarding long-term care. We understand the focus on this product line and I believe we responded in responsible and transparent way.
With the third quarter reserve update we expanded our disclosure to give investors a basis for understanding the reserve assumptions we are making relative to the experience we have seen. This was in addition to the key attributes we have talked about for the block. We have been pleased with the overall performance of the block in the second half of 2018 relative to our new assumption set as well as the progress we are making and managing it over the longer term. We are working diligently to ensure that long-term care does not overshadow our core business segments and mask what we believe is a valuable franchise that serves a growing need in our society and delivers real value to our shareholders. As we look to 2019, we look forward to continuing to grow our company and protect more people. I have had the opportunity to meet with our sales teams over the last few weeks and the view is one of optimism for the year. I would also reiterate that our operating earnings per share growth expectations for 2019 are consistent with our investor meeting which is in this 4% to 7% range for the year.
So now I will ask Jack to cover the details of the fourth quarter results. Jack?
Thank you, Rick and good morning everyone. As Rick said in his comments, we feel very good about the operating results for the fourth quarter. In my comments, I will provide additional detail on our performance and give an update on our capital metrics as we close out 2018.
Looking at our operating results for the fourth quarter, I will begin with Unum U.S. It was another good quarter with positive trends in premium income, very good persistency in our group lines and stable benefit ratios across our major business lines. These operating results offset a decline in net investment income largely from lower portfolio yields and lower miscellaneous investment income. Within Unum U.S. adjusted operating income for good visibility declined by 6.9% to $80.7 million in the fourth quarter. We saw good premium growth of 2.9% and stable benefits experience compared to the year ago quarter with the benefit ratio at 76.2% compared to 76.3% in the year ago quarter. Net investment income declined by 9.3% compared to the year ago quarter. This decline was driven by the recent trend of reduced assets back in the line and a lower portfolio yield on those assets as well as a decline in miscellaneous investment income.
As we have said previously, miscellaneous investment income will be volatile from quarter-to-quarter and this quarter was below last year and well below that in the third quarter of 2018. With an average level of miscellaneous investment income, we would expect the group disability line to generate quarterly adjusted operating income in the mid $80 million range. This quarter’s risk results were consistent with that expectation.
The group life and AD&D line had strong results for the fourth quarter, with adjusted operating income of $64.3 million, an increase of 12.8% from the year ago quarter after adjusting for the unclaimed death benefit reserve increase recorded in 2017. Premium income increased 7.6% driven primarily by improved persistency, which increased in the group product line to 91.2% for 2018 compared to 88% in 2017. The benefit ratio was slightly higher at 71.6% in the fourth quarter compared to the adjusted loss ratio of 71.3% in the year ago quarter due primarily to higher claims incidence.
The supplemental and voluntary lines also generated strong results, with adjusted operating income of $103.7 million in the fourth quarter. The fourth quarter of 2017 adjusted operating income included the reserve release in the individual disability product line and adjusting for that, the adjusted operating income for this line increased 2.7% compared to last year. Premium income increased 6.3% for the third quarter due primarily to higher sales in the voluntary benefits and individual disability and growth in dental and vision product line as we expand its distribution. Adjusting for last year’s reserve impacts, benefits experience for our major product lines was generally favorable. In IDI, we experienced favorable mortality and claim recoveries and in voluntary benefits, we saw favorable experience in our disability and accident lines of business. The dental and vision results were in line with our expectations though the benefit ratio was higher in the fourth quarter of 2018 than the favorable experience of last year.
Sales for Unum U.S. in the fourth quarter declined by 1.2% primarily driven by lower sales in the large case group lifeline and in short-term disability where the year-over-year comparison was challenging given the $22.6 million of sales in the fourth quarter of 2017 from an update to the New York Disability law for pace and relief. We saw positive signs in the fourth quarter sales results, including solid improvement in sales for group LTD which increased by 16.7%, strong sales in individual disability, which increased by 14.7% and the ongoing distribution expansion for dental and vision products, which increased sales by 33.5%. Persistency in the U.S. group lines was also a bright spot increasing to 90.3% for 2018 compared to 88.5% in 2017.
With the closing of the acquisition of Unum Poland, we are now reporting the Unum International segment, which includes our Unum UK and Unum Poland business lines. Adjusted operating income for this segment totaled $30.4 million for the fourth quarter, an increase of 2.4% over last year. Premium income in dollars increased by 14.2% due to the inclusion of Unum Poland in the fourth quarter and growth in Unum UK in local currency. Unum UK growth benefited from rate increases in the group LTD line and higher persistency which was offset somewhat by a lower exchange rate. The reported benefit ratio improved to 72.4% in the fourth quarter of 2018 from 75.7% in the year ago quarter. This improvement was primarily driven by favorable benefits we experienced with UK supplemental in group LTD line along with the inclusion of Unum Poland, Unum International sales were $24.7 million in the fourth quarter compared to $24.5 million in the year ago quarter.
On a local currency basis Unum UK sales declined by 9.8% on lower sales in the large case segment which were functionally offset by growth in the small case market and in critical illness product line. We were very encouraged that persistency for the Unum UK business improved to 88.6% in 2018 from 86.9% in 2017 given the level of rate increases we have put through the block in 2018. Colonial Life again produced strong results with adjusted operating income in the fourth quarter of $85.4 million, an increase of 8% from the year ago quarter adjusting for the before tax unclaimed debt benefit reserve increase of $12.4 million for the light product line. Premium growth continues at a very good pace increasing by 7.3% in the quarter reflecting strong prior period sales growth. Benefits experience was stable at 51.6%, again adjusting the year ago quarter for the reserve increase. In addition the expense ratio for Colonial Life declined to 18.7% for the fourth quarter of 2018 from 19.5% a year ago. This was encouraging as we continued to invest in territory expansion, expanding our digital capabilities in the dental product rollout.
Sales at Colonial Life increased 2.3% in the fourth quarter compared to the year ago quarter. The introduction of the dental products earlier this year continues to help sales growth along with the favorable trends in the core commercial market. These favorable trends were partially offset this quarter by lower sales from the public sector market in the large case market. For full year 2018 sales for Colonial Life increased by 8% following growth of 7.5% of full year 2017.
Moving to the Closed Block, adjusted operating income increased 5.1% to $34.8 million in the fourth quarter. As expected premium income continued to decline in this segment declining 4.5% in the fourth quarter primarily due to the ongoing policy terminations and maturities for the individual disability line. Net investment income increased by 1.3% in the fourth quarter driven by an increase in the level of invested assets and slightly higher miscellaneous investment income, which was partially offset by a low portfolio yield on these assets. In the individual disability product line the interest adjusted loss ratio remained steady at 81.2% for the fourth quarter of 2018 and 2017. For the full year the interest adjusted loss ratio improved to 80.4% in 2018 from 82.4% in full year 2017. The results of the long-term care business lines of the fourth quarter reflected new reserve assumptions we adopted in the third quarter of 2018.
On this updated reserve basis the interest adjusted benefit ratio for long-term care was 83.2% in the fourth quarter which is favorable to the range we outlined for you of 85% to 90% primarily due to strong improvement in the level of submitted claims. The interest adjusted benefit ratio in the year ago quarter was 93.1%, but is not comparable given the reserve basis change. For the second half of 2018, the interest adjusted loss ratio for long-term care was 85.4%. While the results of this block to be measured over a long timeframe, we were very pleased with the performance of the block relative to our new reserve assumptions for the second half of the year. Since we developed our new reserve assumption set in the third quarter of 2018, we made strong progress related to our LTC premium rate increase assumption of $1.4 billion of margin. Since we have set that assumption, we have secured rate increases that provide margin of just over $500 million and includes significant approved increases from California on both our individual and group product filings.
In addition, the new money yields for the long-term care portfolio we achieved in the fourth quarter exceeded the 5.5% new money yields assumption embedded in our updated reserve assumptions. For our other U.S. businesses, new money yields for the fourth quarter were slightly higher than the third quarter, but remained below our portfolio yields, so we expect to continue to see some pressure on the portfolio yields in overall net investment income.
Wrapping up with the corporate segment, the adjusted operating loss was higher in the fourth quarter at $48.2 million compared to a loss of $33.2 million in the year ago quarter. Expenses in this segment ran higher than usual and included some acquisition related and corporate development expenses we view as one-time in nature. Going forward, we anticipate quarterly losses in this segment to average in the mid $40 million range. Statutory earnings for our traditional U.S. insurance companies remain at good levels and generated strong level of cash flow for the company.
For the fourth quarter, statutory after-tax operating earnings totaled $215 million compared to $220 million in the year ago quarter. Full year 2018 statutory after-tax operating earnings totaled $916 million compared to $812 million in 2017. As a result, we finished 2018 in a strong cash position. The risk-based capital ratio for our U.S. traditional life insurance companies was approximately 370%, which was in line with our expectations. The decline from the 386% at year end 2017 was largely due to the impacts of tax reform on the RBC formula. Our actual level of total adjusted capital, the numerator of the RBC formula, increased by approximately 4% during the year. We feel very good about the absolute level of capital in the company as well as the enhancement to our cash flows resulting from tax reform. Cash at our holding companies totaled $602 million at the end of the year comfortably above our projected 2019 fixed cost estimate of approximately $430 million. We resumed our share buyback program in the fourth quarter with $150 million of repurchases putting us at $350 million for full year 2018.
I will conclude my comments this morning by reiterating Rick’s earlier comments that our expectation for growth and adjusted operating income per share in the 4% to 7% range for the full year 2019. The base of the adjusted operating earnings from 2018 is $5.20 per share, which excludes the net realized investment losses and reserve increase for long-term care from our 2018 net income. This is consistent with the view we shared with you at our outlook meeting in December.
Now, I will turn the call back to Rick for his closing comments.
Great. Thank you, Jack. So to sum it up, it was the solid quarter for the company and one that I feel gives us good momentum going into 2019. We are very pleased with the operating trends we are seeing in our core businesses which we believe reflected disciplined execution of our plans and the strong position we enjoy in our markets. We are also pleased to have completed the LTC reserve update last year. I am particularly encouraged by the performance of the block relative to those new assumptions in the second half of the year. We will now move to your questions. So I will ask the operator to begin the Q&A session. Amanda?
Thank you. [Operator Instructions] We will take our first question from Josh Shanker with Deutsche Bank.
Yes, thank you very much. Good morning.
Good morning, Josh.
I wanted to just sense on how the competitive landscape is shaping up. There has been a lot of consolidation in the markets over the past couple of years and of course tax reform changed the profitability profile of the disability business, business in general given the long-term contracts associated with that is probably a 3-year-old, which really knows impact, but one of your competitors said that their pipeline for growth looks really good the other day. And I was trying to figure out what that means for incumbents, what that means for new interims and how do things look compare to where they were 2 years ago?
Great. Thank you, Josh. We will turn over to Mike to talk about the Unum U.S. position.
Thanks, Rick and good morning Josh. I think I started with the fact that all the prior companies heading into the consolidation we are calling on the same brokers and consultants and competing for the same employer groups in the market. So post consolidation I would say we see fewer players on any particular case, but players that are more concentrated and better able and I think more likely to use their scale to invest in capabilities as the basis of competition over a strong emphasis on just say pricing and underwriting. And I think I would see that as a positive in the long run for the industry’s growth and return profile. To your question, I take you back to sort of the fundamentals of the industry where we see – we are seeing demand for what we do growing, then whether that’s continued change in the health insurance landscape with bigger deductibles and more exposure for employees getting filled through voluntary products. We are increasing complexity when it comes to things like leave and disability and where we could come in and help solve for that complexity for employers. We are focused on those needs. We are disciplined player. We have got market leading positions. And so as you see fewer more concentrated in the basis of competition shifts more and more towards capability, I think that’s very good news for us in the long run and for the industry. To your question on new entrants, I do see that some of those barriers to entry increasing not necessarily in terms of putting product on the street that remains pretty simple undertaking, but kind of amass the capabilities around the data, the technology and the expertise. I would say the bar is going up through this consolidation cycle. And then last I think you asked about tax reform...
Yes, that’s exactly. Tax is a multiyear sales cycle.
Yes. I would say we will continue to watch pricing levels. We have been able to hold to the margins that we have been generating on a pre-tax basis as we talked about when tax reform was coming and implemented, it’s a relatively small share of premium and feel like we are generating enough value for clients that we are able to whether that competitive pressure pretty well.
Thank you and good luck in ‘19.
Thanks, Josh.
We will take our next question from Humphrey Lee with Dowling & Partners.
Good morning and thank you for taking my questions. In Jack’s remarks, you talked about you have made very good progress on rate increases in the fourth quarter, especially with the approval from California. For the remaining of the expected benefit from rate increases, what is your expectation for the timing of the remaining approval, I know it’s going to be more art and science, but if you can provide a feel in terms of how we should think about that?
Great. Thanks for the question, Humphrey. And I will just kind of summarize what did happen since the reserve assumption reset back last year. We did put margin into that reserve of $1.4 billion. We just announced that we have secured approvals totaling about $500 million of that margin. California was a significant portion of that. We also have others states that on the group side have exemptions from filing. So that makes up the majority of what was left there. We are in the process right now of filing our increases on our new program. Those began at the end of last year. Those will continue through the first half of this year. We also as we disclosed back last year we have quite a few pending rate increases. California was one of those. We will continue to work those. The majority of those are in states that have granted us approvals in the past, but capped them on an annual basis. And so that’s kind of just a process that we have to work over time. So I would say generally speaking, it’s going to be a long process with these. We will get them filed, the new ones filed the first half of this year, but these take months and years to kind of go through the pipeline and especially with some of these states that are on more of a multi-year approval process. This will be measured over years. So I would say we will continue to update periodically on what our progress is, but I would say what we are able to achieve was significantly influenced by what we did in California and I wouldn’t expect that to happen on a quarterly basis going forward.
Humphrey, I do think it’s worth noting that this is a big step forward for us and we feel very pleased about the results.
Yes. No doubt about it. California has always been a challenging state, so that’s good to hear you get a sizable approval from them, stay on LTC, incidence for this quarter seems to favorable, but I guess on a full year basis how was incidence – how do incidence look like for 2018, especially given kind of the first half of the year saw a little bit of elevation?
Yes. So we did have the spike in incidence. At the beginning of the year, it was kind of a hump that it crested in like the second quarter of 2018, third quarter was a decent quarter and then fourth quarter was a favorable. I would say overall for 2018, we feel very good about where new claim volumes came out relative to our new reserve assumptions set and are encouraged by the results we have saw in the second half of the year.
Got it. Thank you.
We will take our next question from Ryan Krueger with KBW.
Hi, good morning, one first, just one quick follow-up on long-term care, on the $500 million of rate increases can you give us a sense of how that compared to what you had assumed would occur within the reserves?
Yes. I would say Ryan, we are not going to disclose or discuss really where we are on a state by state expectation. Those expectations are across all 50 states. They will vary state by state and we are just looking to track to kind of the overall margins that we have estimated related to that. So that’s really how we will update going forward. It’s safe to say that we are very satisfied with the process that we went through in California and we are very satisfied with the result.
Okay, thanks. And then now that you have completed January 1 renewals, can you give us a sense of how persistency came through on the renewals if there was relatively stable I think you had previously talked about relative to 2018?
Mike?
Yes. Sure. Good morning Ryan and I would say in line with expectations to slightly favorable and as always we are going through the book and looking for pockets where we need to take great action that would be no exceptions for this year’s 11 and we were encouraged by the results.
Great. Thank you.
Thanks Ryan.
We will take our next question from John Nadel with UBS.
Hi, good morning. Thank you for taking my questions. Just a quick one following up on LTC so there was slightly more than $500 million benefit from premium rate increases, can you give us the sense I guess two fold, one, how much of that was actually from California finally coming through with an approval and how should we think about the split of that roughly $500 million benefit between individual and group?
Yes. This is Steve, we are not going to disclose exact amounts on how that $500 million breaks down. The majority of it was related to California both the individual and group filings in California were significant and we feel good about the approvals we got on both pieces of that. I would say the remainder of the $500 million as I noted is going to be related to the group policy filings on our new program. We do have some exempt states where we are not required to file so those are kind of counted as secured upfront. So I would say the majority of that $500 million non-California is mostly related to group.
Okay, that’s helpful. And then just a quick question I guess on Colonial, good results underwriting margin did look pretty stable. Premium growth looks good, but sales did slow down. I am wondering if that’s more of a maybe a tough comparison on a year-over-year basis or if there is something that you would like to point out and if it changes any of your expectation as you think forward. I know you have been thinking about sort of high single-digit growth rate there?
Tim?
Yes, John, thank you for the question. So in the fourth quarter we are up against a very tough comparable from last year. We had approximately 10.5% growth rate in sales and over 10% growth rate in our large case segment. Large case can be volatile for us. It’s a very opportunistic market. We want to serve that marketplace, but we also want to make sure that we are seeing the same returns in the large case segment that we do in other places. Despite the tough overall comparison due to large case, we had a very good quarter in our direct part of the business. Our new case business in our below 500 life market, which were all up double-digits. So we are pleased with that. We feel great about our distribution system and our reach in the marketplace. Our product portfolio continues to resonate well in the marketplace with a full suite of both individual and group products. We have what we believe the very unique set of enrollment capabilities and services. Benefits education is increasingly important in the marketplace and we have over 7,000 benefits [indiscernible] who can help us with that. Our service delivery is second to none and it increasingly includes a full portfolio of digital solution. So, we are still optimistic about the marketplace and we still feel comfortable with the range we gave investors in December for 2019 growth.
Appreciate that. Thank you.
Thanks John.
We will take our next question from Jimmy Bhullar with JPMorgan.
Hi. First, I just had a question on trends in the UK business your results have been actually pretty good the last several quarters, but how much of it’s like the year-over-year Brexit to results in the business?
Peter. Brexit update.
Yes, happy to do that. Thanks Jimmy for the questions. So, I think there is a lot of hype around Brexit. It’s difficult to sort out the facts from what the PR agencies are trying to drive. Our view would be at a no deal Brexit, which would be effect of the UK economy and this is operating the UK economy. It’s still a possibility – a relatively low probability, the view from most of the commentators is that we will get a deal whether it’s between the May deal or some very until that during 2019. In terms of our exposure to that, we are not like some of the companies in the UK where we have significant offshore business and that’s a real complication. We are – we moved from that. So, it’s really about how the UK economy does and how business confidence goes. Our performance during the last couple of years of being actually through what we would say a pretty difficult environment, business confidence has been low. We are not seeing people put a lot of new benefits then and you saw some of that in our sales numbers in the quarter four. Although we are seeing good core growth we haven’t seen large case sort of come to market. So that’s winning in the smaller end, but large cases will be pretty competitive. So we are sticking to our persistency elements getting margin through the book ensuring that we are well placed. When monitoring Brexit trends we are not seeing anything that worries us at the moment as we will have to be pretty agile to respond to things. Our view would be that the guidance we gave you in December still holds even based on the start to the year given Brexit still remains uncertain.
Okay. And then just following up on PG&E, I think you wrote off accrued interest income this quarter, but you didn’t impair the bonds themselves. So if you could give us an idea on what your exposure is and then also the expected ongoing impact of the PG&E situation on your investment income for the rest of the year?
Yes. So we don’t actually write off the accrued interest. We stopped accruing it, because PG&E made it public that they weren’t going to pay the interest as a part of their bankruptcy filing. We have $107 million exposure in PG&E. When we wrote off our asset and when we stopped accruing interest, there was a small premium that we bought the bonds at initially that was like $400,000 or something, we wrote that premium off as well. Other than that, we feel pretty good about PG&E. We think its money good. We believe – our intent is a little bit to maturity. The market seems to be consistent with us. The bonds have rebounded pretty nicely of late. And so it is on our watch list. We are going to pay careful attention to it, but at least at this point, we think its good money and we will continue a little bit. From an annual net investment income perspective, it’s kind of in that $5 million to $6 million range. Relative to our annual net investment income, it’s pretty immaterial and we feel good about being able to hit. Our net investment income plans did despite this.
Okay, thank you.
We will take our next question from Alex Scott with Goldman Sachs.
Hi, thanks. First question I had was just if you could provide an update on sort of the year-end statutory process for long-term care. And I guess more specifically if you could provide any commentary around how much margin you have in your asset adequacy test within Unum Life Insurance of America. And any kind of update you have on just how that process went in Fairwind, I guess specifically for the long-term care. I mean it looks from the RBC ratios and the cash contributions that there weren’t really any surprises from what you guys have previously laid out, but any commentary on how much more buffer you have in the two legal entities would be great?
Yes. So we have not tended to split those things out in the past. We tend to look at it because so much of that is in Fairwind we look at it in aggregate. We talked about the buffer we had at year end or when we did the update in September, we continue to grow that buffer. So we made contributions on a statutory basis. During the fourth quarter, we will continue to expect to grow that going forward where it’s in the high hundreds of millions. We feel comfortable with that. And again and I think the base of it is we feel very comfortable about the GAAP reserve assumptions, our best estimate reserve assumptions is having really taken a thorough view of where experience was merging and accommodated that view in our reserves. And so we feel very comfortable on the statutory basis. Our statutory reserves say have not been unlocked. We do have contributions in first UNM because of assets, adequacy testing and the very conservative view that New York takes to mostly the interest assumption rates on reserves, but again we feel comfortable with what we are.
In the high hundreds of millions that you mentioned was that in reference to the equity in Fairwind or is that sort of the margin in your gross premium valuation there?
No, that’s the stat gap difference.
Oh I see.
And that’s actually for the algorithm book, first UNM and Fairwind and actually PLNA, I guess it’s about $800 million.
And so would that be a reasonable way to think about the margin that you have in the stat reserves and Fairwind. I mean, I guess that is your best estimate I guess on GAAP, so would there be any differences in the way that you sort of value it instead in the way that you would sort of valuate in stat new cash flow testing?
That’s the aggregate book. So, it’s first UNM, Fairwind and PLNA. So that’s in total.
Okay, thanks.
[Operator Instructions] We will take our next question from Erik Bass with Autonomous Research.
Hi, thank you. I was hoping you could talk a bit more about competitive trends specifically in voluntary benefits. Growth has remained strong here for both you and others in the industry. I am just wondering if you are seeing any impact on pricing or is it more that competition picks up for some of the employer paid benefits is winning those mandates is really how you get access to growing voluntary?
Yes. So we will start with Mike in Unum U.S. and then we will go to Tim to talk about quarter like dynamics.
Yes, thanks. So actually you hit on it, from a UNM brand perspective, we do answer it primarily through the group lines and look to put the full offering together inclusive of voluntary. What I would say though is we have seen a very active market for new entrants in the voluntary space and we are watching pretty closely because we have seen some product pricing in commission structures emerge that to us they will appear long-term stable. So I think that does put a little bit of pressure primarily I would say in the large end of the market for us both in terms of new sales and also just watching that persistency closely on the in-force client base. And I’m sure, Tim, you’ve got some thoughts to add from a Colonial Life perspective?
Yes, I think we’re seeing a lot of the same trends. Appreciate the question, Erik. But the place where we’re probably seeing the most competitive pressure is in large end of the market and for us it’s less about price and more about some of the other factors that Mike talked about including compensation overall. So, we still feel very good about our value proposition due to the factors I’ve described earlier, but we are seeing more entrants in the space.
Thank you. And then kind of follow-up question on the investment portfolio, you did see a bit of an uptick in impairments this quarter. I was just hoping you could provide a little bit more detail on the drivers there, and wondering, if you’re seeing anything that makes you more cautious about credit broadly?
Yes, hey, we did have higher realized capital losses during the quarter than is typical. Couple of things, about half of that is our embedded derivative Big B adjustment, which on a non-reinsurance transaction would be the normal mark that would flow through AOCI, because it’s a reinsurance transaction, it actually come through realized gains and losses instead. So non-economic. It’s actually an unrealized gain for that Big B adjustment. I’d say the other – if you look at the other half of that charge, there is probably only half of that is actually credit market related. We did write-off some value on an energy holding, was not really a very remarkable amount. We also – we unwound a spread program that, that we had going and we sold the underlying assets on that. So, there was a realized loss, but that loss had been more than covered by operating gains during the existing – existence of this spread progress and a little bit of noise back and forth too. But I’d say, that the bulk of that loss is actually not kind of underlying credit driven.
Got it. No, no, when I look forward –
Yes. As we look at the portfolio today, I’ll just add to that, Erik, as we look at the portfolio, our watchlist still remains intact. We feel very good about the position we have across the portfolio today.
Okay, thank you.
We’ll take our next question from Tom Gallagher with Evercore ISI.
Good morning. Just had a few questions on the rate increase approval, the $500 million of net present value benefits. Can you give some high-level comments on whether the vast majority is, one-year, one-year approval meaning you get it all in the first year or is it we’re talking about most of it being staggered over a number of years? And also just curious, are there any, I guess, from what I’ve heard more recently, there has also been some contingencies on some of these approvals, where there is a prohibition against asking for rate requests for a number of years after it. So, any color on that, part of it as well?
Yes, Tom, this is Steve. We’re not trying to avoid the details of the increase. I’ll just give you the context that we still have a lot of consumer and group communication that needs to take place on the specifics – specifically around the California increase. And so at this point, we’d prefer to not get into the details and that’s something that eventually will become public California and normally post that on their website. But we’re going to be doing a lot of communication through the summer and into the fall, and we’d really like that to be the first time that our consumers, as well as our Groups kind of hear about the details.
Understood. How about – can I ask this question then, group versus individual, I guess, now it’s kind of going to be the first big push into group rate increases and it sounds like you’ve already gotten a decent amount there. Is there any difference in the both the process and the terms and conditions for the group versus individual or is it pretty similar?
Yes, this is Steve, again. I would say when it comes to the actuarial valuation, it’s consistent. The types of policy forms are consistent, kind of our pricing philosophy is relatively consistent as far as the types of risks. I’d say where it’s a little bit different just in the conversations with regulators. For the group policies, the – just absolute premiums are much lower just because of the relative benefits that are provided in those group policies. So, there’s not as much maybe sticker shock on just the absolute premium amounts. I’d say, the other thing is just the funding of the premiums themselves. Majority of our group business is employer funded, and so that creates a little bit different dynamic with the states, but I would say, by and large, the regulatory framework is really consistent between individual and group.
I’d remind you as well, Tom, that this is not our initial foray into group renewals. We had a very sizable renewal program associated with our 2014 filing driven by group and we’re very successful in the completion of that program.
Got it, Jack. And then final question just on – just in terms of the sales results in the quarter, you had strong group LTD, weaker results in short-term disability in Group Life. Can you comment about what’s going on behind the scenes there was kind of, I guess, some mixed sales picture?
Yes, thanks, Tom, it’s Mike. Appreciate the question and you summarized it well. Actually, pretty pleased with where we ended in the fourth quarter. So similar to Colonial Life, tough comp last year, we were actually up about 29% year-over-year in 4Q, in a couple of the lines where we really saw that outsized growth a year ago. One was the implementation of paid family leave in the State of New York, which was a one-time slug of new premium coming in, that came in through the short-term disability line, hence the negative compared to the 4Q ‘18. And then the other place was just some good large case life insurance activity. So, if we look at transactions over $5 million, we sort of saw little bit of a spike there, which is good when we can get it at our underwriting and pricing targets and as was the case in 4Q17. o that’s why Life and STD stand out, feel good about the LTD results. And then just to take you to the [indiscernible] line, it’s good to have voluntary benefit sales up about 6%, our multi-life IDI sales up about 15%, and then dental and vision, which can be a real contributor to our growth here this year was up about 34% in the quarter. So, we feel pretty good about the momentum as we go into 2019.
Alright. Thanks, Mike.
Got it.
We’ll take our next question from Mark Hughes with SunTrust.
Yes. Thank you. Just sort of curious, how much more momentum you see in the dental and vision product, you had good growth there as you’ve penetrated more of your network. Is that going to continue or is that going to settle down a little bit?
Mike love to talk about that. Mike?
I would love to talk about the dental, but Tim will chime in as well. This is a great Unum Group acquisition in play for us. It’s coming up on about 2 years with us. So, I mentioned sales growth of about 34%, and that’s consistent with what our expectations are coming here in 2019. Dental is a network business. So, as we have success through the Unum brand, through the Colonial Life brand, that improves our position in terms of adding provider to the network. We think at this point looking at some of the industry stats, we’ve actually got the fastest growing provider network in the industry and find ourselves comfortably in the top 10 there and able to compete on a national basis. So, we talked a little bit about it at our outlook meeting, but we do see dental as a very meaningful contributor to our sales growth in [indiscernible] and Colonial Life segments. Here at ‘19, it starts to have a very meaningful impact to earn premium growth towards the latter part of ‘19 and ‘20. And then as we get to scale the earnings growth, will start coming in 2021. So, Tim, I don’t know if you’d have any doubt about success on the worksite front.
Yes. Thanks, Mike. Our field organization is very enthusiastic about the dental product. It’s the first time we’ve had a viable dental product in the marketplace and great results from it last year and last year we only had the product in the marketplace for 9 months and we started with about 30 states and currently have about 45 state approval. So, lot of excitement about dental again in 2019 and the opportunity that we have to both reach new customers with the dental product, but also introduce dental to a lot of our existing clients as well.
And then just curious whether with the government shutdown that has impacted recoveries in the disability area whether there was any sort of slowdown in approvals for government disability benefits, I don’t think it impacted you in the last shutdown, but did you see anything there around Q4, Q1.
Yes, thanks for the questions, Mark. No, we didn’t – consistent in terms of what we’d seen headed into it really and expect the same to continue after.
Thank you.
Sure. Thanks Mark.
We’ll take a follow-up question from John Nadel with UBS.
So, I just have a – thanks for taking the follow-up. I just have a quick one on Unum International. I think the outlook from Investor Day was for 1% to 3% earnings growth in 2019. Should we be thinking – is that relative to the 2018 reported earnings or should we be adjusting the baseline to include any contribution to earnings from the operations in Poland, maybe you could sort of parse that out a little bit?
Yes, that would actually, John, that would be off the reported earnings. So that’s the growth for the overall segment, which only had a quarter roughly of Poland as part of 2018. So, I mean, the dynamic you see there, Poland – yes, John, very happy with Poland. How it’s really hit the ground running as part of our team. So that’s going to be a good enterprise and a lot of growth ahead of it. And as Peter mentioned, the UK is a little bit slow right now and so that’s the reality of what we see in a Brexit world. And so 1% to 3% growth I think is good for that segment given the nature of those two dynamics.
Okay. So, if I sort of broke that down, is it fair to say a modest decline year-over-year in the UK constant currency I suppose, and in some contribution from Poland?
Yes, it’ll just be flat, I mean, I’d say, if you look at the total on a comparable basis, it’s going to be flat year-over-year. And understand in Poland too, they’re doing a job, we are also investing there and integrating and going through that process. So, it’s smaller relative to the overall.
Still very modest. Alright, that’s helpful. Thank you very much.
Yes. Thanks, John. Okay. I think that was our last question. Appreciate all of you taking the time this morning to join us. We look forward to seeing many of you in the coming weeks, different conferences and investor meetings. And so that now completes our fourth quarter 2018 earnings call.
This concludes today’s call. Thank you for your participation. You may now disconnect.