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Unum Group
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Good day and welcome to the Unum Fourth Quarter 2017 Earnings Conference Call. At this time, I would like to turn the conference over to Tom White. Please go ahead.
Great. Thank you, Savannah. Good morning, everyone, and welcome to the Fourth Quarter 2017 earnings conference call for Unum.
Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. 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 also located in the sections titled Cautionary Statement Regarding Forward-looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2016, and 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. And a 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, in the Investors section.
Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum U.S.; Peter O'Donnell for Unum UK; Tim Arnold for Colonial Life; and Steve Zabel for the Closed Block.
And now I'll turn the call over to Rick for his opening comments.
Great. Thank you, Tom, and good morning, everyone. It was a busy fourth quarter for all, with the initial impacts from the enactments of tax reform reflected in our financial results. Through this, I am very pleased with our underlying results, which continued many of the positive trends we have seen throughout 2017.
Our net income for the quarter was $1.19 per share compared to $1.07 a share in the year ago fourth quarter. Adjusting for tax reform, a settlement on unclaimed death benefits and the net investment gains on our investment portfolio, our adjusted operating income per share was $1.13, up 14% compared to $0.99 in the year ago quarter.
I would note that this result includes a reserve release in our individual disability line of business, resulting from our annual review of reserves, which benefited our adjusted operating income by $0.06 per share. Overall, this was an excellent quarter for the company and a strong finish to the year.
The drivers of these strong results remain consistent throughout the year and again through the fourth quarter. We saw solid top-line growth in our core businesses and excellent operational performance. From a growth perspective in the fourth quarter, we experienced 4% growth in premium income for our core, with 3% premium growth in Unum US, 6% in Colonial Life and 2% for Unum UK in local currency.
A highlight was that that our fourth quarter sales were also very strong, particularly in our US business, where Unum US posted 28% year over year growth, and Colonial Life increased sales by 10.4%, giving us confidence that our premium growth trends can continue in 2018. With the sales growth, we have been firm in our underwriting discipline and we expect to continue to drive strong profit margins in our core business segments.
Our optimism for 2018 is further enhanced with the enactment of tax reform legislation, as Unum will be a significant beneficiary. From a GAAP earnings perspective, our tax rate will decline substantially from a 31% to 32% rate we have been reporting to a new expectation in 2018 of 19% to 21%.
This will also create additional cash flow in 2018, which will accelerate over time. While we expect much of the benefit will accrue to our shareholders, we also expect opportunities for enhanced investment in many aspects of our business. This includes infrastructure and technology spending to better serve the needs of our customers, further investment in our workforce, and finally, investment in and support for the communities that we call home.
And finally, we're looking to see how tax reform drives accelerated economic growth in the broader U.S. economy. For us, employment growth and wage inflation mean incremental growth for our customers and our business. Our optimism is also evident in our announcement last week of the acquisition of Pramerica Życie, a financial protection provider in Poland. This strategic acquisition expands our geographic footprint into Poland, a very attractive market for us.
This is a good profitable business with an excellent reputation, strong management team and a successful distribution model. We believe that over time as we expand the product portfolio and enhance the delivery capabilities with Unum's and Colonial Life's expertise, we can help build on its growth momentum.
We continue to feel very good about our direction as we move into 2018. Based on solid positions in our markets, we continue to look for opportunities for growth through product expansion and geographic expansion. This includes opportunities to further serve the needs of both employers and their employees.
The results we're generating and the flexibility that these strong results provide us, drive us as we look to further expand our business. We do this from a position of having great purpose in what we do. Our strategy is to provide more employees access to products and services, to protect their financial wellbeing in difficult times.
The need for this has never been greater and it's threefold: providing protection gaps when people need us most, helping individuals return to work and helping employers attract and retain employees. Now, let me turn the call over to Jack to cover some of the details from our fourth quarter results. Jack?
Thank you, Rick, and good morning, everyone. Following on Rick's comments, the fourth quarter was another strong quarter, concluding an excellent year for the company. In my remarks this morning, I'll provide more detail on our financial performance and discuss some of the financial implications of tax reform.
In addition, similar to others in the industry, we reached the settlement with a third party concerning unclaimed death benefits, which impacted after-tax net income by $25.4 million in the fourth quarter. This special item affected the Colonial Like segment, the group life and AD&D segment, and supplemental and voluntary business lines of Unum US.
In my remarks this morning, I'll exclude the impact of this settlement to make for a more consistent basis of comparison with the year ago quarter. Our strong financial performance continues to be driven in large part by the positive trends we're experiencing in Unum US, including strong sales growth, solid persistency and favorable benefit ratio trends. These trends are driving strong profit margin and adjusted operating ROE of 16.8% this quarter.
Within Unum US, group disability produced very good results for the fourth quarter with before tax adjusted operating income of $86.7 million. This is a decline from the year ago result of $89.5 million, primarily driven by lower net investment income and higher expenses. As a reminder, we had an exceptionally low expense ratio in the third quarter, which we expected to come back in the fourth quarter.
I'm encouraged that the premium income increased by 2.2% over the year ago fourth quarter, and that the benefit ratio improved to 76.3% from 77.7% in the year ago quarter. The improvement was driven by the ongoing favorable instance in claim recovery trends in LTD. So we continue to see very positive trends in this business.
The group life and AD&D line produced good results as well with adjusted operating income of $57 million in the fourth quarter compared to $56.1 million in the year ago quarter. Premium income increased 2.8% and the benefit ratio improved slightly to 71.3% compared to 71.5% in the year ago quarter as claims incidence was slightly improved.
The supplemental and voluntary lines produced very strong results with adjusted operating income of $120.5 million in the fourth quarter compared to $94.5 million a year ago. Income in this line benefited by $19.5 million from an annual reserve review in the individual disability line, recognizing updated morbidity assumptions in the disabled life reserves.
Premium income continue to grow at a healthy pace. The voluntary benefits line increased 8.1% and the dental and vision line increased 8.5%. These increases were partially offset by a 3.6% decline in the individual disability line.
Risk experience was generally in line for the individual disability line and stable for the voluntary benefits lines, excluding the impact of the unclaimed death benefit reserve increase. Risk experience for the dental and vision line was favorable relative to the year ago quarter.
Sales for Unum US for the fourth quarter were excellent, increasing 28.7% for the quarter relative to last year. The increase was widespread across product lines and between core market and large case segments. Sales were strong for LTD, increasing 17.2%. And for group life increasing 25.1% over the year ago quarter.
In STD, sales increased 57.8%, but benefited by approximately $22.6 million from an update to the New York disability law for paid family leave.
Adjusting for this one-time benefit, sales still increased by 22.8% for Unum U.S., in total. We also saw strong trends in the supplemental and voluntary lines. Our voluntary benefit sales increased 11.9% and dental and vision jumped 148% from $10 million last year to $24.8 million in the fourth quarter of 2017.
We're very pleased with the rollout of the dental product to half of our Unum U.S. sales channel. And we look forward to the further gains in 2018, as we rollout our dental offering to the rest of the Unum U.S. sales force and to the Colonial Life distribution channel.
Persistency for our group product lines was lower in 2017 relative to 2016, but improved throughout the year and was in line with our expectations. We're also seeing encouraging trends for persistency early in 2018.
Unum UK continues to be impacted by the uncertain business environment related to Brexit. Fourth quarter adjusted operating earnings reflect this challenge declining by 7.1% from last year to $22.4 million. Premium income increased this quarter growing 2.3% in local currency due to growth in the in-force block resulting from prior period sales, which offset a decline in persistency.
The Unum UK benefit ratio was 75.8% for the fourth quarter 2017 compared to 67.6% last year. The increased loss ratio reflects higher claims incidence in the group disability line. The impact from the 80 basis point reduction to our discount rate for new claims, which we implemented in the first quarter and the impact from inflation linked increases in benefits, which were largely offset by higher income from our inflation index linked bonds.
Unum UK sales for the fourth quarter declined by 3.7% in local currency. This decline was driven by lower group life sales and supplemental product line sales, which offset higher sales in the group long-term disability line. Last year's fourth quarter sales results were very strong making for a tough comparison. All-in-all, our UK business is performing well and the difficult environment and produced an adjusted operating return on equity of 15.5% for the quarter.
Colonial Life was again a strong contributor to our overall income though adjusted operating income was 1% lower at $79.1 million relative to last year's fourth quarter. Premium income growth remains healthy increasing 6% driven by the positive sales trends we've seen over many quarters. Colonial Life's benefit ratio, excluding the unclaimed death benefits reserve increase was stable at 51.6% this quarter compared to 51.4% last year.
Less favorable experience in the life product line was largely offset by improved experience in the cancer and critical illness and the accident, sickness and disability lines. The expense ratio was slightly elevated in the fourth quarter driven in large part by strategic investments in our business and higher IT expenditures. The adjusted operating return on equity for Colonial Life remains very strong at 15.4%.
Sales momentum for Colonial Life continues to be very strong increasing 10.4% over the year ago quarter. Sales growth in the core commercial segment help to drive this along with increased sales in the large case corporate sector, we also continue to see good trends with new account sales increasing 13.2% and sales to existing accounts increasing 8.7%. We continue to invest in territory expansion and we'll begin to rollout the dental product to our Colonial Life agents this year. This should led to accelerated sales growth in 2018.
Finally for the Closed Block adjusted operating income declined to $33.1 million in the fourth quarter from $34.6 million in the year ago quarter. In the individual disability product line, the interest adjusted loss ratio was 81.2% for the fourth quarter compared to 84.7% last year, primarily resulting from lower submitted claim incidence and a lower average size of new claims.
The long term care interest adjusted benefit ratio increased to 93.1% in the fourth quarter compared to 89.1% in the year ago quarter. Risk results this quarter showed unfavorable policy terminations, primarily driven by unfavorable mortality experience. I remind you that at December outlook meeting, we indicated that long term care ratio will likely exceed our prior expectation of a range of 85% to 90% over the near term. This quarter's results are in line with our revised expectations.
Two important factors related to the long term care line continue to trend favorably this quarter. First, our new money yield this quarter was again above our assumption of 5%, just as it has been since resetting that assumption in the fourth quarter of 2014.
Again as we said in December, we're nearing the point where our reserve assumptions begin to reflect our rising new money yields. While long duration treasury yields have moved somewhat higher recently, credit spreads on bonds remain tight.
Second, while it's a quiet quarter for rating increase approvals on imports business, we still have a few large rate requests yet to be decided. Even without these, we're confident we will achieve the rate increase expectations assumed in our reserve assumptions. It bears repeating that we assume no future rate increases in our current reserve assumptions then we intend to actively pursue future rate increases were justified.
So in total, we saw strong financial and operating results this quarter. We continue to see very good risk results across the majority of our businesses along with favorable top line growth.
Now I would like to provide some commentary around tax reform and the implications for Unum. In short, we feel the impacts are largely very beneficial for the company. In the fourth quarter, we reported two immediate impacts. First, the revaluation of our net deferred tax liability at the newly enacted rate of 21% resulted in a tax benefit of $97.7 million or $0.44 per diluted common share. Second, one-time tax on undistributed and previously untaxed foreign earnings generated a tax expense of $66.4 million or $0.30 per diluted common share. This tax expense will be amortized into cash taxes over the next eight years.
We'll see additional impact as we move into 2018. First, we'll have a substantially lower GAAP tax rate. Our current reported tax rate is generally in the 31% to 32% range with the new U.S. corporate tax rate being lowered to 21%. We expect our reported rate for 2018 to be in the 19% to 20% range.
Next, from a cash flow perspective, we estimated cash tax savings equal to approximately one half of the GAAP benefit. This cash tax savings will move closer to the GAAP savings over time. For 2018, we estimate that our free cash flow will benefit by approximately $90 million and this benefit will grade up to $200 million over the next 10 years. Clearly, this has very positive implications for the company.
Finally, as you know tax reform will have negative impacts on company's risk based capital ratios. For our traditional U.S. based life insurance companies, we are estimating our year end 2017 risk based capital ratio to be approximately 390%, which compares to 405%, a year-end 2016 and about 410% at the end of the third quarter.
In the absence of tax reform, we would have expected our year-end 2017 risk based capital ratio to be consistent with the fourth quarter - with the third quarter levels. The difference of about 20 points is primarily driven by the $236 million reduction in our statutory deferred tax asset allowed to be included in bidding assets for total adjusted capital.
The 390% RBC is within our targeted range of 375% to 400% and a very comfortable - and we're very comfortable at this level. The NAIC is still grappling with how and when they will modify the RBC formulas to reflect the new tax environment. In addition, the anticipated 2019 C1 factor changes made further impact RBC calculations. It's unclear how the rating agencies will treat these changes, particularly those agencies that utilize proprietary capital models with before tax rather than after tax adjustments.
Given our strong and growing free cash flow generation, we're very confident in our ability to rack as their views become clarified.
Moving on, we continue to deliver healthy levels of statutory earnings at our traditional U.S. insurance companies. For full year 2017 statutory after tax adjusted operating earnings totaled $812.4 million, down from $884.6 million in full year 2016. 2017 results were impacted by some one-time items. But after adjusting for these, our 2017 results were in line with the year ago total. Another good year of statutory earnings in 2017 will of course drive strong dividend capacity for us in 2018.
Holding company cash ended 2017 at $864 million. Our annual need for interest expense and shareholder dividends is approximately $366 million. So we have ample comfort. We will be paying for Pramerica Życie acquisition with cash at the holding company and do not expect this transition to impact our plans to repurchase $400 million in shares in 2018.
For the fourth quarter, our share repurchase was again totaled $100 million, putting full year 2017 repurchases at $400 million. It really shows the strength and flexibility of our capital position and capital deployment plans, when we can execute on the strategic expansion opportunities. Growth in our core businesses either through organic growth or acquisition is our number one priority for deployment of excess capital.
Wrapping up, I'm very pleased with our fourth quarter and full year 2017 performance. At our outlook meeting in December, we indicated our expectation for growth and adjusted operating earnings per share for 2018 to be within a range of 4% to 7%.
With the enactment of tax reform legislation, we are revising our outlook to a range of 17% to 23% from a base of adjusted operating earnings per share of $4.24 for 2017. This change in outlook reflects the lower tax rate, as well as our desire to use some of the tax savings to accelerate investments in our infrastructure and capabilities.
Now, I'll turn the call back to Rick, for his closing comments.
Great. Thank you, Jack. As you can tell, we're very pleased with our fourth quarter and full year 2017 results, which significantly exceeded our expectations coming into the year. I believe this is a result of the positive momentum we're seeing in our core business lines and the strong operational trends we are delivering.
Our strategic position in the employee benefits marketplace remain strong and we're successfully building on that through organic growth as well as the opportunities we are seeing through acquisitions, both product expansion with dental acquisitions in the UK and US, and geographic expansion with last week's acquisition in Poland.
We'll now move on to your questions, so I'll ask Savannah to begin the Q&A session, please.
Thank you. [Operator Instructions] And we will take our first question from Ryan Krueger from KBW. Please go ahead.
Thanks. Good morning. I guess, given the significant magnitude of the GE long-term care reserve charge, could you discuss some of the key difference you see with your block versus theirs that you see more comfort with the reserve adequacy.
Yeah. Sure.
Yeah, absolutely. Good morning, Ryan. So we feel like we're in a very different place than GE is. First, I'd point out that the blocks are very different. GE's block was a reinsured block, which removes them one step from the customer block. Our block was direct written, so we directly control the underwriting and benefit guidelines in that block.
The other big difference is 85% of our insured lives are group long-term care. They have a much younger profile. They - and most of those actual group long-term care insurance are employer funded as opposed to employee funded, much smaller benefit levels, much more conservative plan designs.
The other - by comparison the GE block was 100% long-term care. And it was a much older block than our block is. Second, we aggressively and actively managed block over time. Since - I know, we've had ten full-time actuaries dedicated to the block since 2012. And for a period, I was one of them.
Between reserve increases and reserve charges, we strengthened reserve margins over time by $4 billion in the block. And I will tell you, within long-term care timing matters. The earlier you move the better off you're going to be. And so, we have been an early adopter in that, in the block.
The third thing I'd say is we did our comprehensive review of the long-term care block in 2014. We provided a lot of resources to build sophisticated models. We set our assumptions to be consistent with our emerging experience. And on an ongoing basis, monthly we track our actual to assumed assumptions and we provide you quarterly updates with that on an ongoing basis.
The fourth thing I'd point out is we just concluded our 2017 reserve accuracy studies. We had margin in our reserves, as a result of that analysis. The other thing is we have no future rate increases assumed, although we intend to pursue them. And then, finally we have $1 billion difference between our GAAP results and stat reserves.
We believe these buffers insulate our capital plans. We've been dealing with this problem for a long time. I think our dealing with it is characterized, but there's been no surprises. As a result, we've kept you apprised on an ongoing basis of where we are. And there's been no impact to our capital plans along the way. And we would expect that to continue into the future.
Right. Thank you for taking the questions.
Thanks, Ryan.
And we will take our next question from Erik Bass from Autonomous Research. Please go ahead.
Hi. Hi, thank you. Can you talk about how you expect pricing across your businesses to respond to the tax rate changes? And are there different dynamics for different lines of business?
Yeah, Erik. This is Rick. There are different dynamics that are happening. I think that when we look at the - the short answer is we don't see much impact certainly in the near-term. But let me - we can dimension that for you and then hit it by each for a line. So, Jack, do you want to talk a little bit about kind of the overview, why we say that?
Absolutely. Good morning, Rick. The first thing I'd say is that our success as a company has been predicated on providing exceptional value to our customers and we do not expect that to change with tax reform. Price isn't the all-in thing in terms of how we go to market. But within that we have pieces of our business that will react very differently.
First, 10% of our earnings come from the Closed Block. We're certainly not going to be reducing prices there. The second thing I'd say that may come as a surprise to people, 53% of our earnings as a company come from IDI voluntary benefits in Colonial Life & Accident. If you look at those products, they are much different than group products. First of all, they file the rates. And so, that file process - filing process is a long and arduous process.
And so the re-pricing horizon is a five-year pricing horizon rather than a one or three year. The second thing about those is we price those products on a free cash flow generation model as opposed to base on GAAP ROE and as you know with some of the timing differences that emerged in the tax reform. Free cash flow did not benefit as robustly as GAAP earnings did.
And then the final thing I'd say about those is those are issue age rates. And so, if you did change rate over that time horizon, it would only impact new business coming onto the books. The back book wouldn't change rates and would continue to generate strong earnings for a very long time to come.
Probably the most impactful place is kind of our group term product. So group life LTD and STD. 41% of our earnings as a company are generated by that. And let me talk about some of the underlying characteristics of that. The first one would be in terms of pricing within the industry we would only need to respond to the industry tax savings, rather than our tax savings, and because the industry has a significantly lower margin than we do.
We don't see that as being terribly material maybe in the 1% to 1.5% of premium range. Frankly, 1% to 1.5% of premium isn't within the precision window of the group benefits business. And if you want to be convinced of that, look at a chart of all the group competitors, group margins over the last four or five years. I will tell you, it looks like a spaghetti chart. It would suggest that pricing of 1% really isn't much of a factor.
The other thing I'd say is not everyone was at a 35% tax rate going into this. If you were heavily invested in tax exempt bonds, you got no tax savings on that income, as a result of tax reform. And if you're using those bonds to back liabilities at a tax equivalent discount rate, you may actually be feeling some pressure as a result of tax reform.
The other thing is the capital impacts of tax reform are still uncertain. If people need to rebuild capital to come back up to the same levels of risk-based capital after the formula changes as they were before they may not see ROEs improve and wouldn't be pricing any of that back into the market.
And then the third thing is even in the group business although it's a term business, it's still a three to four year pricing cycle, because of how renewals come up and rate guarantees are in place. So some of that may get priced back over time, but we think it's going to be very muted relative to the current expectations.
And so right now I'd like to turn it back to Rick for a second.
Yeah. So I think it's instructive, Erik. Jack's given you a lot of reasons, why we just don't see it right now. I think, it's probably good to pull it up a level two, and just talk to you about what the pricing environment looks like in general, which we think is seeing some positive trends. And maybe we'll start on Unum U.S., Mike can talk about what's going on in the general pricing environment.
Yeah. Thanks, Rick. I'd say we have a pretty typical pricing environment out there right now, but I'd say gradually it's been moving up. And Jack made the point, if industry margins sits somewhere in the mid-single-digits. They're still probably some room to go for the industry to be consistently earning at least their cost of capital there. And so as we did not need to move rates up as we talked about coming into 2017, we find ourselves positioned, I think, pretty comfortable in the window. We're never going to be the most inexpensive option out there, certainly though we need to be competitive.
So what you see reflected in our new sales numbers, what you see reflected in strong and improving persistency number, and Jack alluded to it at the outset, our early read on January 1 renewals here in 2018 also reflect that. We're positioned pretty comfortably competitively.
And Tim, you want to talk a little bit about Colonial Life and the pricing and competitive environment?
Yeah, absolutely. So as Jack mentioned in the voluntary benefit space. Rates are filed and guaranteed renewable it is a long process for changing rates and would only apply typically to new products or new issues moving forward. Product is going to be very affordable in this space. And then the VB market rates are less important than other elements of a value proposition like enrollment capabilities and the customer experience at both the employer at consumer level. And we feel we're really well positioned with our overall value prop, so we are concerned about this.
Hopefully, that's a good answer for you, Erik.
Yes. I appreciate all the details. Thank you.
All right, Erik.
And we will take our next question from Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my question. On the expenses in group visibility, supplemental and voluntary, and Colonial Life in the quarter, as you mentioned they were somewhat elevated. But I was just wondering, what portions of those expenses were higher, because of higher variable compensation due to strong sales in the quarter as opposed to business reinvestment.
Yeah, so the very specific question, Humphrey, and Mike will answer that. But let me just hit at the highest level. So we did see some more expense in the fourth quarter, we are actually pretty happy about that overall, we are investing in the business. But I would tell you that as a company we still are focused on our efficiency. Our expense ratios have been stable to down over several years, we'll continue to focus there. But getting to your specific question, Mike, you want to hit on that.
Yeah, thanks, Humphrey, and good morning. I think, you hit it right. We talked about a little bit of favorability due to timing in the third quarter ratio and that came back as we expected a bit in the fourth quarter. And so I think there's a good chunk of it that you can attribute to timing. And then the balance of it, if you think the other half in those particular segments is a combination of the expenses incurred in a very strong sales year, so that's a good expense to take as well as the investments that we're making in the business. And I'd highlight a couple of things around the client experience.
We have recently rolled out new capabilities around leave. Corporate leaves are picking up, you'd see a lot of that in the headlines as corporations are extending maternity and paternity leaves and other protective leaves that layer on top of statutory leaves at the municipal state and federal level. That's a lot of good news for employees, but complexity for an employer and that's where we come in, and those kind of capabilities certainly give us a little tailwind in 2017. But I think really the benefit is to come in 2018.
So we're actually pleased with the earnings coming out of those segments, particularly because underneath and inside those are investments that, I think, are going to propel us here in 2018.
Got it. And then on the long-term care. At the Investor Day, you talked about you expect them to be a little bit elevated in 2018. Can you remind us, why you feel comfortable that there would be a near term observation for 2018 as opposed to something that is more structurally challenge.
So - part of the reason is we did our reserve review, our margin during 2017 and reserves. Actually grew a little bit, because we've been outperforming on the investment side. But if you look at the big picture around long term care, and where we are with the reserves. There are a couple of factors: one, 2017 was a very good year for the living, you saw that in favorable individual life results across the industry. Our risk in long term care is a longevity risk, not a mortality risk, so we were the other side of that coin that put pressure on long term care results.
I would tell you old age mortality is very volatile. We had low mortality in the fourth quarter, which contributed to that benefit ratio. Today, we find ourselves facing one of the most virulent flu seasons in a decade. And we're already seeing some signs of that in our currently emerging results. So the business is volatile, we're not going to react to a single quarters. We're going to look at that long term care trends, we've been looking at that over time, we will continue to do so.
And the one thing I will tell you is, we'll keep you apprised of that as it emerges, and we'll see how 2018 plays out, keep you posted along the way. And if we do have to adjust reserves as a result of emerging experience, we're confident that it will be - that will not affect our capital plans, because of the margins we have, because of the rate increase latitude, and because of the gaps that difference we currently have built into our reserves.
Got it. And then, I guess, just in terms of the elevated experience, how much of that was - can be attributed to you kind of pushing through the rate increases, and then the policyholders receiving the notices and have kind of the waking of the sleeping dog that you [finally saw] [ph] coming through?
There may be some minor pieces to that, but most of it was a mortality story. And you got to remember in long term care, weaker mortality results affects both the disabled claim reserve and the active life reserve, because policies don't terminate. And so that's what we saw in the quarter.
Got it. Thank you.
Thanks, Humphrey.
And we'll take our next question from Suneet Kamath from Citi.
Great, thanks. Just to follow up on Humphrey's questioning on the long term care, obviously, the loss ratio is something we all look at every quarter. So could you provide some more specificity around what you expect for 2018. Should we thinking 90% to 95% or 90% to 93% above 90% leaves it somewhat vague and I was just hoping you could be a little bit more specific?
Yeah, I thought, we kind of directed to the low-90%, so that would put you in between the 90% and 95% range. And again I'd remind you that we expect it to be volatile as it has been over time.
Got it. And then just in terms of the price increases, I'm assuming that what you've asked for so far was assuming in the 85% to 90%, so if we are elevated 90% to 95%. How much of an incremental price increase would you need, if we're at those loss ratios?
I'd say it's more complex than that Suneet, the - you make assumptions in reserves that it's not purely a one-to-one like price hits the loss ratio. There are a lot of factors around, how the incidences of things emerge and how they hit you reserve factors.
So I want to say it's a direct tie. I think we're comfortable that with the dry powder we have on rate increases given emerging experience and the buffer we have between gap and stat that we wouldn't see the remedy to this causing any impact on our capital plans. But if - in long term care it's a long term thing, it's not what happens this quarter you're predicting things out over the next 40 and 50 years. Really that has to do with how a lot of different assumptions interplay.
Yeah. That makes sense. I mean the reason I asked the question, if I thought that some of the larger state approved some price increases in the recent past, but one of the deal they struck with that that carriers wouldn't come back for five years or so. So that the case, I mean, are you going to be able to build in incremental pricing, if the loss ratio space at 90% to 95%?
Well, some of those large states, we still have outstanding, so we haven't heard back from them. I'll give you an example of New York gave us a long term care rate increase. Several years ago they did put do not return sign on it for a while. That's expired at this point. And we will go back to New York going forward. So the fact of the matter of five years is a drop in the bucket in the long term care business. And really that trade off we would hope that any reserve assumptions we built into requests for a rate increase would survive a five year period.
Okay.
Thanks, Suneet.
And we'll take our next question Alex Scott from Goldman Sachs. Please go ahead.
Thank you. First one just on capital generation, uses of capital I mean it sounds like even though the cash taxes are a bit higher than GAAP taxes, there's still incremental free cash. So could you talk about just the potential uses particularly with the cash balance of the holdco? Would you favor MNA verse potential upside the capital management you played out?
Yeah. So fortunately, we've entered this period in a really strong capital position we do have $864 million of holding company cash. At holding company, even after our DTA write-off, our RBC ratios are still comfortably in our 375 to 400 range. And actually we've entered this period with lower leverage than we've had in quite a long time. So we do see the impact of free cash flow we purchased a Polish company. Just recently, I think we will continue to look for merger and acquisition opportunities either to expand our reach, or frankly also capabilities that help to sort of support and complement our offerings in the marketplace.
But the other thing is, we're being understandably cautious at the moment, because it isn't clear yet how the NAIC is going to react, what they're going to do with their capital formulas whether it's going to be a phase-in or an immediate impact and what the follow-on on the C1 factor changes would be.
It's also unclear how rating agencies are going to react S&P, and A.M. Best have come out and said, we use our own capital formulas that are not tax adjusted and don't expect to react to RBC formulas, Moody's still kind of a wild card out there. That will have to wait and see. And the one that's really unclear, is how you and other investors are going to react. Are you going to feel comfortable with RBCs, dropping as a result of the formula changes or not, so we're going to. stand around, we're going to maintain a strong balance sheet, irrespective of what happened we're really confident that we can respond to it quickly without necessarily impacting our - the strength of our balance sheet as a company.
And so I think we're in a wait-and-see moment, but it's great to be coming into this with such a strong capital position to start.
And the follow-up on long term care. I think in the past, you've had a larger amount of interest rate hedges going back a few years. Now with interest rates starting to move up, would it potentially become attractive for you guys to reimplement a more about hedging strategy run rates there?
Yeah, we've had hedges, we haven't put on new hedges in a very, very long time. And there's two factors that happens there. As interest rates move up and become closer to our portfolio rate, we would certainly consider putting hedges on. The other thing is - at the same time, our discount rate has been coming down, because of some of the charges we've taken. So the gap between current interest rates and where I discount rates are - is closing, and if we get the opportunity to lock that in a favorable environment, I think we'd certainly take it.
Thank you.
Thanks, Alex.
And we'll take our next question from Tom Gallagher from Evercore. Please go ahead.
Good morning. Just a follow up-on long term care, Jack, your comment on old age mortality, I just want to get a better sense for what's happening there from what I gather at least, but what I'm just guessing is that that would be something like Alzheimer's patients living longer. And is that, what's happening do you think behind the scenes here and is that something that you think might need to be permanently changed in assumptions or is it not that clear, what the trend is there?
No. I didn't talk about old age mortality extending, I don't think there's a ton of evidence of that happening. What I said is it's volatile. And so you can't judge old age mortality, but what - by what happens in one or two quarters, you need to go through full cycle, judge it on annual and quinquennial kind of looks at it. And what we saw particularly in the - we had - the way of it would pretty good mortality in the first quarter of 2017. We had very poor mortality in the following three quarters one of the top comparisons between fourth quarter 2017 and fourth quarter 2016, is the flu season hit earlier in 2016.
We saw an uptick on mortality and that resulted in more favorable results. But you're going to go through the cycle. You have to see how the years unfold it's not something you'd react to on a quarterly basis. And again kind of the improvements in mortality that doesn't happen one or two years, that's something that happens over decades.
Okay. And then, is - do you still - it sounds - Jack, from your comments it sounds like you guys are still comfortable this won't be a cash situation regardless of what the outcome is on a GAAP basis. You still feel pretty good about that, and I'm guessing with the GE charge, the regulators are going to take more notice. Do you think there's going to be any impact and reaction here more broadly, whether that's to your captive structure or anything else that you would say might be some kind of reaction to that.
Yeah, we're not anticipating a reaction to that. As I said, we're in a different - very different place than GE Capital. We talk regularly with our regulator that, as we have no surprises with you, we have no surprises with them either. So we're not anticipating an impact.
Okay. And then final question, just on the social security death master file charge, you took one in 2013. Why did that recurred. I would have thought, if you took care of it in 2013 I would expected you to be checking it every year or maybe I'm not thinking about that in the right way.
Yeah, now, it's a little bit different than that now. I mean, it's not a checking every year. I think it's a process change. And you're right, that back in 2013 we went through a process internally of assessing of how we want to go back and find claimants that have not actually filed a claim. So we did that, went back, several, several years to do that. That was the increase in reserves that we did back in 2013.
Since that point in time, our process has been good. We've been finding these claimants and continuing to go back further than we're required to. I think what you've seen since that period of time, you've had dozens of companies out there that have gone back even further in the process. And so, as we've looked at it, we're going to reflect that as well. And that's what you saw on the fourth quarter. So it's not a process differential. Our process is very good. This is going back several decades to find claimants that actually never filed a claim.
And so, we feel good about doing that. And this should be the last time you hear about this.
Got it, Rick. So really this was just because they - they request and you go way, way back. This wasn't - this had nothing to do with like the go-forward process.
No, think early '90s. So this is something that we had gone back a decade. Last time we looked at it and now we're going back to the early '90s. That's why I say I don't expect to go back further than that.
Got it. Thank you.
And we will take our next question from Mark Hughes of SunTrust. Please go ahead.
Yeah, thank you. Good morning. The corporate segment was little better this quarter. How should we think about that going forward?
Yeah, so two things drove that about half-and-half. Half of it was just better net investment income performance in the corporate segment. And the other half was pure expenses. We actually had higher expenses. Last year in the corporate segment, we were dealing with some - a little bit of disruption and that - in staffing that we accounted for in the corporate segment last year.
We didn't expect that to repeat it. It didn't repeat. And so, I think the expense level in the corporate segment is at a good level, net investment income, because it's kind of a leftover bucket, may fluctuate from time to time. But I would say last year was elevated as opposed to this year being low.
Right, yeah, tax rate outlook, is at 19 to 20 or 19 to 21?
We think it is kind of…
Near term 19 to 20.
2018 will be 19 to 20. As some things happen it's going to float up slightly over time. So that 19 to 21 is more of a longer term outlook.
Thank you.
Thanks, Mark.
And we will take our next question from Sean Dargan from Wells Fargo.
Hi, thanks. I just have a question about any differences between the guidance given in December and then the - the post-tax-reform guidance given last night. So it sounds like there's some additional investment. Just wondering where that's going to come through. And also wondering if you changed your UK or how you're thinking about UK earnings in dollars, given the movement of the pound.
Yeah, so in our guidance if you just took pure tax reform and grossed it up, we'd be at the top end of that 23% range. We are planning on making investments in our business to accelerate some things that we were - had in the works anyway, and will take this opportunity to do - and so that brings it down a little bit in the range. It's not outsized in terms of amounts.
It's a fraction of what the savings were. The other part of that question…
It's in the UK, that's about the UK outlook, because…
Yeah, and so we did not change the UK. We have not changed the foreign exchange rate in our outlook. That may provide a little bit of upside within that range.
Okay. Thank you.
Thanks, Sean.
And we will take our next question from Randy Binner from B. Riley.
Hey, thanks. I just want to go back to your comment, just on UK segment and headwinds from Brexit. I don't think that got followed up on in these questions. But I guess the benefit ratio is a little bit higher there. But nothing there seem dramatic.
So with Jack's comments, so is that - is it more like a premium production challenge from Brexit kind of in the southern part of England or is it - are you seeing shades of what we saw when there is financial pressure there last time around, where you see a little bit higher claim incidents? What is the Brexit pressure that you're seeing in the UK business exactly.
Yeah, Randy, let's go to Peter O'Donnell in the UK to get our Brexit update. Peter?
Great. Thanks very much, Randy. So the way I describe it is, the UK is doing well in a tough environment. So actually our results as you say, there's nothing dramatic happening where we're sort of performing recently well. If the market was better, I think we'd be forming a lot better. And, of course, the relativity to the US world is one of the things I guess that influences that commentary.
In terms of what we're seeing, really going back to what were the implications of Brexit, so there's three things I'd point out to you. One is those lower interest rates, interest rates are lower for longer, which means for us our interest rate sensitive products we've been putting right through in 2017.
I think there is some chink of light there in that. We are seeing the market begin to move as well. So, some of the competitors are starting to put rate through, which gives me some confidence going into 2018 that that will be a slightly easier environment to be more competitive in. But in saying that, our sales numbers and our premium numbers were pretty good last year.
The second thing is this political uncertainty and economic uncertainty. So what we are not seeing is that natural tailwinds you get from wages and you get from sort of employment growth, particularly at the large employer end. That's been muted in 2017. And I think that will continue in 2018. The uncertainty is continuing and until we have a clear plan that companies can plan for in terms of the exit, that's just a headwind for us.
And the third thing as you pointed out, we have seen slightly higher incidents across the industry on our income protection side. That's something that we are factoring into our pricing. So we're putting more rate into sort of rectify that. But that's been something that's been a little abnormal in 2017. We probably think that will continue good in 2018, but nothing dramatic in terms of what we're seeing.
And I think if you remember our guidance, flat to slightly up earnings is where we're positioning our numbers.
Yeah, that's great. And on the higher incidents is there a particular type of claim you're seeing?
No, it's across the piece. Just - we just think it's one of those abnormal years. And just a little bit of I think uncertainty in the environment causing people to perhaps be a little bit more tendency to have a bit more sickness in their operations. Eventually, we think that will revert to a norm. But again, it goes down to that uncertainty.
Very good. Thanks a lot.
Good. Thanks, Randy.
And we will take our next question from Joshua Shanker from Deutsche Bank. Please go ahead.
Thank you very much. And good - I want to ask a question about the group dental expansion. I'm trying to understand the customers that you are targeting. Is this a pie that's getting bigger and you're going to take a greater share of it? Or is this - customers you're dealing with on the life and disability side, potentially who you might be able to get to also by the dental product?
Where does the growth come from most general insurance, not one thing, but as you expand how should we think about that?
Mike, you want to take that?
Sure. Thanks, Rick. I appreciate the question, Josh. So I think it is absolutely both. If you take a step back, the premium production in terms of new business approached about $50 million this year and built momentum all the way through the year. That was the introduction of the group dental product into roughly half the country.
As of January 1, we've introduced that through pretty much the rest of the country under the Unum brand. It targets our core market and really in particular the small to mid-sized business that's under 250 employees. And in that segment, you'd certainly find a great deal of in-force dental that might be with a standalone provider.
And to your point, we very often write it in concert with life disability and voluntary benefits. And in fact, we saw about ten points better growth in those products in the regions where we had group dental in 2017. So it's a real lift for us outside of just the dental premium and the profit that will follow.
In the smallest end of the market, you actually find employers that aren't yet offering a group data plan. So you are actually growing the pie to use your analogy in that case. And so, we feel really excited about what the prospects are as we continue to add capability network and product into that dental suite.
Also in January, excited to bring the star-month [ph] capability for dental and vision into the Colonial Life distribution. Tim, you'd like talk about early returns there.
Yeah, absolutely. So we actually began selling the product in April, so said it'll be - start showing up in second quarter. We're very excited. Dental is the number two most requested product in the voluntary benefits industry. So we're excited to have a solution there. Our solution will be an individual PPO product. There's tremendous energy and excitement in our field about it, because in addition to being able to offer that product into our 85,000 plus employer customers, we're very excited about penetrating the 6 million small businesses that have fewer than one hundred employees, who desperately need not only this product, but we think this will be a door opener to some of our other products as well, so lot of excitement about it.
And along those lines…
We appreciate it. Josh - Josh, as I said, we appreciate the question, because that's an acquisition that we did with leverage of what we already do well on the distribution side. And it's a good example of how we can take some of the things that we're very good at and bring them out in a different way to our customers. So I appreciate the question.
Are there of life and disability sales that you can make now that you have done till that you couldn't have made before, that people wanted all three and since you only had two and made you limited in your audience?
The answer to that is, yes. It's a little bit difficult. We actually spent some time with field folks and brokers to try to glean exactly what that percentage is, but we're estimating. When we write the disability and life insurance with the group dental product, fully a third of the time we would not have been invited to quote on that opportunity.
Thank you very much for all…
We're not for the dental, yeah.
Good. Thanks, Josh.
And we have a follow-up with Mark Hughes from SunTrust.
A quick question, on the long-term care, Is there are an opportunity to do any sort of risk transfer or reinsure - the insurance of that block?
From what I've seen, there's been a lot of activity on the variable annuity blocks. I think long-term care is still a ways away. They're still a bit out spread on the interest margins and long term care. And quite frankly, it's just - it's still an immature product. Underlying experience is emerging.
It's not well understood. It's volatile. And I think until either interest rates rise and you get some margin protection as a result of interest rates or the liabilities are better understood. I think we're still a ways away on a transaction.
Thanks.
Savannah, any other questioners in the queue?
And we have one follow up with Jimmy Bhullar from JPMorgan.
Okay.
I had just a couple of questions. First, on long-term care, if you could talk about what the environment is for price hikes. And whether you see any risk that with lower taxes it's going to be harder to get regulators to approve the price size either in long-term care and similarly in some of the other products where you have to file with regulators for prices?
Great, Jimmy. Let me turn it to Steve Zabel, who'll take you through that environment.
Yeah, thanks for the question. This is Steve. I would say from the standpoint of the regulatory environment. It's good. We've seen it really improve over the last, say, half a decade. I think regulators are becoming more educated on what the issue is. We've seen in even some of the more problematic states that there's more dialogue and more openness.
So we continue to have good relationship with our regulators and we feel pretty confident about how that will play forward. From the standpoint of tax reform and I'll handle it from the LTC side. The actuarial maths to support those are pretax loss ratios. So just from a kind of a regulatory construct the tax rate really doesn't factor into the conversations that we do have with the states.
The other thing is just based upon how profitable the block may be. Not all these blocks are making money. And so the tax reform may actually drive you to higher rates. And so, we haven't really had that conversation with any of the regulators yet. But we feel pretty good that that's not going to really impact how we think about LTC premium levels.
And then, just on any of the other products where you're filing with regulators that you - do you have any thoughts on how taxes if - I realize cash taxes are going down less than GAAP. But do you have any thoughts on how that will affect?
Mike, go ahead.
Yeah, it's Mike. It's very little. And for the reasons that Jack and I talked about earlier on the call. For most of the products we're talking about, pretty de-minimis impact on the actual percentage of premium that might be impacted. So anytime, we're going to take a new product or a rate filing on active business to department of insurance. Much more important is going to be what the trends on the underlying risks are, how expenses have emerged, then the tax rate.
I'd say, Jimmy, too I don't think there's any place in our company other than the Closed Block, where we're filing for increased rates.
And then just lastly on the - if you could just talk about competitor behavior and pricing in the disability market? And how much of an opportunity do you see from this consolidation that we've seen in the market with a couple of competitors being eliminated by - through the Hartford and Lincoln acquisitions?
Right. It's Mike. I think you hit on a very good point. And so, our philosophy is always, we're going to be a disciplined underwriter when it comes to the group insurance market. And we find ourselves positioned in a spot, where we're in a window. We're competitive as I said.
We're never going to be the least expensive, but we feel very, very good about the value prop that we're bringing to market. And the stability with which we are bringing that value into our brokerage and employer clients. And so, yeah, to your point, there is a bit of consolidation and certainly the associated disruption that's happening, particularly in the mid to large end of the market.
And our folks are long tenured. They've got great relationships. The brand is very strong. And so, I think among other companies I think we're well positioned to take advantage of that.
Okay. Thank you.
Great. Thanks, Jimmy.
And we're up on time here. I think we've exhausted all the questions. I would like to thank everybody for taking the time to join us this morning. We do look forward to seeing many of you at various insurance conferences and investor meetings over the next several weeks. And, Savannah, that now completes our fourth quarter 2017 earnings call.
And this concludes today's conference. Thank you for your participation and you may now disconnect.