Find our seats. Folks in the side over here, if you could keep it down. Allison?
Yeah.
Just have them Okay. Next session is with Unum. Next speaker is Rick McKenney. Rick is President and CEO of Unum. He's been at the helm of Unum for almost four years. Four years, right?
Yep.
He's been with the company since 2009. He has navigated Unum through some very choppy waters, I'd say has taken very decisive action to deal with a number of issues, this conference is a great chance to get an update from Rick.
Great.
Also, many of you know Tom White from Investor Relations, a key part of the team as well. Rick, I've been asking the speakers when they come up here just to give some reflections on the last year. Maybe we'll start there, talk about how you view 2018, maybe give us a glimpse into 2019, then we'll get into some more detailed questions.
Sure, Jay. Happy to do that. It's good to have all of you here. 2018 was a year that a lot of things happened, pivotal. I think there's a lot of things that the company continued to do, which we've been doing over the last several years. I'd highlight first our core operations in the Group business is running at great performance. We continue to see good growth. On the premium side, we see very solid loss ratio and margins. We're very happy about the core franchise of the company continuing to do very well.
Unfortunately, 2018 was also painted with a lot of uncertainty around Long-Term Care, which is a business that we have in our closed block. We spent the year talking about that with investors, working on that as we accelerated our process to recognize, record, and do a fair amount of disclosure around our Long-Term Care business in the third quarter. We went through that process. I think that we actually put a level of disclosure out there which should give investors our insights into the business, where we've tracked for the last decade, and where we see that going forward. We feel good about third quarter, getting that behind us.
Two quarters of results since then, we've seen our loss ratio come down into the low 85 or the 85 range, which is at the bottom of our range. We continue to feel good about that, and we'll watch that business going forward. I think that really plays into 2019, how we can focus and make sure the markets are focused on the really good franchise that we have, particularly in the group benefit space. Throughout 2018, we continued to repurchase shares. We continued to increase our dividend 13%. We did all of the things from an action perspective that people have come to expect. We grew the business very well. I think it's a year that we're looking forward to 2019, that we can let those areas of the business, continued growth, good margins, capital return, really shine through.
That's great. Let's start with the Long-Term Care. Let's get that out of the way. Then we'll move on to some of the businesses that are ongoing, obviously, and growing. Talk about the process you went through in the third quarter, second and third quarter, I guess, to get your hands around this issue, things you've changed that you hadn't done in the past. Why, at the end of the day, you felt so comfortable putting the numbers out there.
I wouldn't say that we did things dramatically differently. I think our focus of what we delivered was different to bring out some of the knowledge that our team, and we have a very good team that's been focused on this business. We turned the focus on this back in 2011. This team has been really accelerating the amount of analysis they have behind it, taking in many different sources. I feel good that the process was there. What we did do, given all the uncertainty at the beginning of the year around us and the industry at large, is accelerate the process. Normally, we would've done that later, come out in the fourth quarter.
We moved it up a quarter and brought that out there and changed very much with a singular meeting focused on this business to highlight what we've seen over a number of years, our analytical tools, and what we're picking and what we're seeing going forward. It was a different process from how the Street would experience that, but I tell you, the teams are doing the same type of analysis that they did before. We're getting better at it, smarter at it, and using better tools along the way, so we feel very good about how we ended that process in the third quarter, and we've seen some of those results come out in the first quarter or the fourth quarter last year, third and fourth quarter of last year.
Rick, did you approach it with more conservatism? You knew this was a big issue. It was an overhang on the stock. Everyone expects you to take a charge. You could say to yourself, "We might as well just be really conservative, take as big a charge as we can to ensure that it's behind us." Did that factor into the way you approached it?
It doesn't factor into it because I think what we're trying to reflect is what is our best estimate of what's going to happen here. Conservatism isn't a word that we would necessarily use, but that does factor into your thinking about how making sure that the adjustments that we made work for a longer period of time. When you went through our attribute by attribute, I'll start with interest rates. We put out what our assumptions are over the next 10 years. Are they conservative or aggressive is actually in the beholder around what that is. We feel very good based on what we've been able to do and execute on, and we feel that that's in a very good spot. Others could think about that differently.
When you think about all of the attributes of the block of business, we put all those dimensions out there, people are going to have to form their own views. We formed our views based on data, analysis, what we've experienced, what we see going forward, we'll see how that plays out. I think the fourth quarter was a good example. We put out there an assumption around rate increases that we receive in the block of business over the next several years, in the fourth quarter, we actually had some very good results on rate increases. Was that a conservative estimate that we put into that? It's more when the facts play out, we'll see how that is. We feel very good about it, where our assumptions are and how those will take us out over the next several years.
Let's talk about the rate increases. Obviously, you come up with a need. Here's the kind of rate increases we need for various products, maybe it varies by state even. Then, of course, the states, maybe trying to protect consumers, they think about it differently than you do. I have maybe a couple of questions. One, how is the dialogue you have with the states? Two, this is a harder question maybe, what's the delta between what you really would want and what you actually get? It might vary by state, but I don't know if there's any sort of college math.
This also, you have to throw an added dimension to that, which is time. Because it's not just about that one discussion that you have with a regulator about where you are today and looking for a rate increase which is well justified. They may have a different point of view, you come to an agreement as part of that. Oftentimes those will be revisited as you look out three years or five years, whatever the time may be, to come back to that. We've been taking rate increases in this book of business going back over a decade. So we have those relationships with the regulators. We have shared interests in how we want to move through that process, so I wouldn't say there's a big disconnect.
It's just one of communication, one of timing, making sure we end up in a reasonable spot for the company, for the shareholders, for the policy holders as well. A good example on that is our last round of rate increases we did before, as opposed to just we gave people the choice between a premium increase or we'll adjust the benefits that you get out there as well. So that choice is consumer friendly. Regulators like that because we are presenting choice. Oftentimes, people were over-insured in this risk, so buying down their benefit, in a sense, was a better option. Those are the kind of things that we do working together with a regulator to move through this process over time.
Does it matter to you if it's a price increase or a reduction in benefits?
It really doesn't. I think, at the end of the day, we'd like to see a level of benefits that is reasonable so that they're covered. In some cases, you can see clearly that they have too much benefit that is available to them. We'd like to see them buy that down in that case. From a financial perspective, it really doesn't make a difference. Sometimes it depends on the consumer. Sometimes it's better for them to actually pay the higher rate. Sometimes it's better for them to decrease their benefits.
The fourth quarter loss ratio for long-term care was 83%. Your goal, your target here is 85%-90%. I know not every quarter you'll be in there. Should we read into the 83 that it was below that target, or is that just general randomness?
Well, it's not general randomness. We were happy that it was below the target. We set out those targets with a set of assumptions on how this business performs. We were happy to see that, there's no question, we are trying to take it more towards a rolling four quarters. Let's look at this over a little bit longer trajectory. Maintaining that 85%-90% range is good. Even if you look at the second, we haven't had a full year yet on our new reserving basis. When we do, we'll talk more about that. For the second half of the year, we were just over 85%, so we're in the range for that six months. That's a much more reasonable way to look at how the business is performing, is to spread it out over a little bit longer period of time.
Yeah, no, that's probably fair. I want to move on just to the ongoing business. If there are questions on the runoff business, we'll take one now. Josh?
Hi. Just quickly on that buyout question, how big could that be? I've heard a lot of talk about this in the industry over the last year or so, buying down the benefits as an option.
Yes.
Specific to the industry, how big a % of the book could be taken down with this buyout, and more specifically on Unum, what do you think you can do with your own book?
Yeah.
I think it's pretty appealing.
It's a very appealing option. Our last round of rate increase, I have to think what it is as a percentage, that offer was given to all people as part of that process. The industry can continue to do that as well. We'll look to use that as a tool to take down those benefits. One of the areas the trade-off was people had an inflation assumption in their policies, there was no need for them to have an inflation level at 5% when the overall costs haven't increased that much. Bringing that down was good. Many people, I shouldn't say many, a number of companies have actually availed themselves of that. We'll continue to use that as a tool when we talk to regulators about how we want to work with the policyholders for the best options for them.
Any other questions on the runoff business? We have one right here.
Just a quick follow-up on that. Have you revealed the terms generally or the percentage that you would generally pay of the premiums or however you define it, for buying out those policies? Secondly, just from a theoretical perspective, I imagine there's a lot of, call it game theory, that goes into these negotiations with the states and with the regulators. If you really need a, I'm making up numbers here, a 50% increase in premiums, will you go in and ask for 100 on the hope that you go down to 50? Or how exactly does that negotiating kind of strategy work as you play over time?
Maybe I'll start with that piece first, which is this is a very regimented process. You don't go in and ask for something and hoping for something. You go and demonstrate what your block has performed like so that you actually justify those rates. They are actuarially justified rates that you go in and request. We would like to get 100% because we think they are justified. We bring them in. We may not get that. There's two levels. One is what we ask for, and the other is what we expect. We don't always expect 100%, that's just because of nature going through that. We do believe everything we ask for is justified in an actuarial way. Otherwise, we wouldn't be requesting that. The first part of your question was on For the buyouts and the-
Yeah, I mean, just kind of the terms associated with that and what kind of premium above you would need to pay.
Yeah. You'd have to look at the type of policy, but you could see somebody that was looking at a 50% premium rate increase or buying their policy down from 5% inflation rider down to 3%. I should say that most of these, I don't want to say 100%, but most of these are actually future increases. If you've been getting 5% to date, it's actually something that will, in the future, you'll only accrue it up at 3%. You already may have a benefit level that's more than you'll ultimately need. Those are not mathematical examples I give you, just a rough benchmark what it might look like.
Question in the back?
Hey. I know it's not necessarily economics, but if we talk about the accounting proposals and the impact that could have on a Long-Term Care block, especially when you have to aggregate and reset the mark-to-market, how are you thinking about that?
Yeah. Well, the first thing I'd say is it's not economic, right? The things that were being discussed out there don't actually impact our capital or our statutory books, which is really where the capital of the insurance company is dictated. The other thing I'd say is this is still a long way off in terms of us implementing, the industry implementing, there's a lot more that needs to play out there. I really can't take it more than that. We are up on what's going on in the industry, and we'll do the work to make sure we land in the right spot.
Any other questions on kind of the runoff business? If you have questions later on, you have enough to follow up.
Why don't we come back to that?
Yeah. Well, let's go come back to it. I wanted to talk about because there's more important things to talk about anyway. Let's talk about Unum US and I guess Colonial Life. Your sales growth target's reasonably healthy. Talk about the key drivers of that growth, where it comes from.
Sure. Let's go to each of those. First is Unum US, when you think about Unum US, you have a core business, which is group disability, group life insurance. It's something that we've been a leader in that industry for a long time. We'll continue to grow that in the market like the market grows and exceed that given some of the opportunities we have to bring new services, new ways to win business. We could see ourselves in that kind of core business growing a little bit faster than that. We're also adding new products to that business line, which is important. Last year in, it's actually the second year, but last year in a concerted way added dental insurance to that book of business, we saw that business from a low level but growing at 30% last year.
As we start to get the relative market share, this is a business we weren't in if you go back four years ago, getting our market share of that business as well, which will be a good one. You'll see growth coming from that avenue as well. In the voluntary benefit space, which is a faster-growing part of the market, we continue to grow that in Unum US and think about these as simpler products, lower benefit amounts. We've been a leader in that business for a long time, and it's been a good business for us. That's been a growing market. Think about an Accident Policy, a sickness policy, very basic type of cover that we have out there. That's growing a little bit faster than the traditional business.
I'd also mention we also do write some individual disability in the marketplace, it looks kind of like voluntary business. We only do that in the workplace, and that's been very good business for us over the last several years. It's a good round portfolio that we continue to grow at a little bit faster than the market pace. Colonial Life, I'd add on the voluntary space, has seen tremendous growth over the last several years. It's a different business model. This is about getting more feet on the street. We have an agency force of over 10,000 people that are out there selling to smaller businesses, working with brokers to find businesses that want to be enrolled into these type of benefits around the table.
We've seen some very healthy growth rates out of Colonial Life, we look forward to that continuing as we expand new territories and grow the business. I'd say that's probably the biggest thing is making sure we have more distribution out there to take care of more people at the workplace.
Is there something unique about the distribution there? It's obviously growing and that's helpful, but what makes it different than other companies?
Well, I think that one is the tenure of these teams out there with Colonial Life. They're very much tied into, although they are independent agents for sure, they actually like working with Colonial Life and have for a long period of time. They think about a broader financial plan for the individual so that they aren't just moving towards one product. They think about a broader protection. For an example, dental last year we introduced in April of last year into the Colonial Life network. We saw tremendous sales of over $25 million in just that space over the nine months of the year. This is one where we really see that having that long-term relationship with the employer, doing great things for them from a service perspective, our agents are able to continue to grow that business.
It's growing the number of agents, but it's also growing the size of the book at each of the carriers that they have those relationships.
Got it. Again, domestically, what role does wage inflation play as far as sales and earned premium growth?
Yeah. When you think about the natural growth that happens in our book of business, it comes in two fronts. One is as the employment picture gets better, you have more people at work. They're able to avail themselves of a group business that may be provided by their employer or their ability to buy up. The second is wage inflation. Just think about these covers are percentage of salary-type protections when you think of group or life insurance, as those wages go up, the amount of premium, the amount of cover they have goes up, and we haven't actually had to talk to a new consumer. We're just actually growing as they grow in their wages. The employment side we've seen, we've kind of gone through that cycle. Wage inflation is still earlier for us.
We didn't see it going into a year or so ago. We're starting to see a little bit more of that wage inflation coming through our book of business today.
Is it sort of one for one? As wages go up, your revenues go up? Is there any sort of offset?
No, it is. It's a one for one. If somebody's salary goes from $60,000 to $70,000, and their cover is based on that, their premiums will go up pro rata to that. It's also a good profitable sale as well because we aren't necessarily having to re-enroll that person. It just rides up as their payroll rides up.
What's the biggest challenge for the U.S. business in 2019 and 2020? What do you look at and say, "Gee, this could be a real risk?
I don't think there's a risk. I think something we've articulated, which has been going on for a long time, is interest rates. The low interest rate environment does impact our business. As we take in premiums, we're investing those for the future. That has continued to roll down for us, so it didn't reset all the way. That portfolio has rolled down, and it causes a little bit of pressure in our overall investment income. It's not a risk. It's a well-known thing. It's just the timing of how that comes through. Otherwise, we feel very good about where our U.S. business is placed, very enthusiastic about this year. We wrote over $1 billion of new premium last year, for the last two years, this year we look to be a very good year of growth as well.
I guess the business has been pretty good for other companies as well. You've had some consolidation. Do you get a sense competition is heating up at all?
Competition in our business is there. It's always been there. I think that you have to think about the different dimensions of competition that happen. One is you have competition where people push a little bit too hard. I'd put that in the category of irrational competition. We've seen that in our marketplace before. I think that's a well-trodden path. We don't see that right now. Actually things seem pretty rational across the board. There's more competition in the smaller ends of the market, in the voluntary space, a place we've been for a very long period of time. It's good business. We should expect more competition there. That's not a bad thing. I think it actually makes the whole industry better. You mentioned consolidation. I think consolidation ultimately is a good thing.
As you look at that, there's less players calling on employers. I think that as we get our requisite market share, I think it's a good thing for us. A stable industry with our competition and everything is good. It's good for everybody. I think I want to call that out, that just because some players are doing good doesn't mean that everybody can't do well by our customers and continue to grow in this market.
I guess with those consolidated entities, there's fewer players. Arguably they may be better. Net for you think it's a positive.
I don't think that's a bad thing. I think serving employers well, we feel like we will always be competitive. It's all we do. This is our business. We are always thinking about over the horizon, what's the next thing we bring in? Where's the next acquisition we can bolt on to make us a better customer service-oriented company? We'll always do that. Competition is a reality. You have to take it as it will make you better. We push our teams to make sure that's the case.
I guess your size and scale gives you some competitive advantage, obviously, as well.
Yeah, in this space for disability, we've been the number one provider for 30 years. group life insurance, kind of a number three position, number four position. Voluntary Benefits, a leading space. We have plenty of scale to make the right investments, and I think more importantly, we've got the focus to laser in on what our customers are looking for.
I want to shift to international. Can you discuss the acquisition in Poland and why the market was attractive for you?
Yeah. You have to go back to our U.K. business. U.K. was a business acquired going back a couple of decades. The idea on that is what they do in the U.K. around Group Income Protection there, which is similar to group disability insurance here in the U.S., is bring some of those capabilities around claims management, around pricing and risk selection, and brought that to the U.K., and we have a very successful business in the U.K. We've looked for a number of years, where is the right opportunity in other geographies to continue to grow and bring those same capabilities? Poland has been on our list for some time to look at what are the opportunities there. The reason is not because of anything more than we distribute at the workplace.
It has to be conducive to distributing our products, our protections for consumers at the workplace. Poland is that kind of country. As we acquired the company, we're very happy with the acquisition. About 40% of it was group business, there's an individual piece as well, which is doing very well. We're learning and growing with that as well. Poland was a very good choice for us, and we're very happy with the early days of that acquisition.
There have to be many countries where people sell at the workplace, it might be a natural fit for you. Should we expect you to do a deal every other year to get into a new country?
Yeah, we have to be a little bit careful. We have acquisitions. The dental business that I mentioned we acquired, we got to make sure we're growing that at the right pace. The Poland acquisition, we've got continued work to do there, although they're doing a fantastic job. We're not going to move too rapidly to this international expansion. We've got to make sure things bed in correctly and that we're running them well. There are other places that we're looking. Like I say, the demographics of it will have to be more skewed towards people getting their protections at the workplace. There are other places we're looking at, this is not an expectation that we do this on an annual basis. If the right opportunity is out there, we certainly will go after it.
Opportunistic. Okay. In the U.K., obviously, the news on Brexit suggests a great deal of uncertainty. Talk about the different scenarios of how Brexit plays out and how it impacts you.
Okay. As people have seen and know, it's a dynamic time. The next month will be very dynamic over there. I think when you think about Brexit and what it means to us, we prepare for all scenarios and what will play out, this is about us being at the workplace. The first and foremost is to understand that a lot of companies that are impacted by Brexit, it's because they're operating in the U.K., they have product that they're distributing around Europe. We are just U.K. We're based in the U.K., protecting people in the U.K., that piece for us is actually a little bit simpler. For us, it's more about the economy.
Yeah.
All these impacts of Brexit, what does it mean to the workplace? What does it mean to the workforce for the U.K.? It's very hard to predict what that looks like. For us, I think over the last several years, what it has meant is employers were more reluctant to increase their payrolls, a little bit more reluctant to increase their benefit plan. For us, we've been fairly stagnant in terms of the growth when we expected to be growing at a pretty reasonable rate. That's more what we'll have to see play out. That's very hard to tell. Even with any Brexit scenario, it really is, how do you see that playing out in the workforce in the U.K.? We want to be there. We're very committed to the U.K. We think it's a great business. We provide great benefits.
It's more about what our growth trajectory looks like there.
Any questions from the audience on anything? Let's talk about capital management and just list your priorities in 2019 for how you use your capital.
Sure.
If you can put some numbers around it, the capital generation, and then what you plan on doing with it.
Yeah. We actually have pretty significant capital generation. We'll generate statutory earnings just shy of $1 billion this year, as we did last year. Our priorities haven't changed in that area. First and foremost, we're going to be out there making sure we're investing in the growth of our business. Think about that as the core growth. The reality is, over the last several years, that has not consumed a lot of capital. We can grow because our products are fairly not as capital-intensive. We can grow very well without putting a lot of capital behind that, but we will grow our core business first. The second one would be acquisitions. You've seen a couple of acquisitions over the last several years. Two dental businesses we bought, one in the U.S., one in the U.K.
Our Poland acquisition we talked about, and a couple of services-type businesses that will enhance our overall offering. We'll continue to do that. We love to grow in the right spots. We like smaller acquisitions that fit into the overall portfolio. You look at the dividend rate and share repurchase. We've increased our dividend at a pretty steady rate over the last several years. We'll continue to do so. Share repurchase has been one we've been acquiring at a pretty consistent rate over the last several years. That's always a place we'll go. Last year, even with everything going on, we bought back $350 million of stock. Generally, we bought back around $400 million a year, and we expect to be buying back shares again this year.
Got it. Looking at your stock price, obviously, it was a rough year last year. It's come back quite a bit this year. When you look at your evaluation, do you have any sense of what the market is baking into the closed block? What kind of value or negative value they're putting on it?
Yeah. I've really seen that over the last year or so. It has been a difficult market. I think that particular to long-term care and even particular more broadly in the insurance industry, we've seen valuations come down. I think where we're going to have to be different and change is really just reflecting the strong core franchise. All those things I've talked about, great returning business, growing a long-term care business that is now stable, steady. Everyone understands where our assumptions are. We feel good about where that is. I think we'll accrete more to the value of the overall enterprise. To call it a discount is very hard to do, but I do think there is value there.
I think we are discounted below where we should be, and we'll accrete more to the core franchise as things stabilize on that front and the markets become a little bit more stable as well.
I guess how you make money, underwriting results, underwriting earnings should arguably be more valuable than a spread business or something.
It's a good business. I think anybody that would look at the employee benefits business would look at it and say it's a good business. Some of our competitors have said that, and they've actually gone deeper into that business. We think that's a good thing because it's a real protection. It has great purpose in the needs that it serves here in the U.S. You can underwrite it. You can price it well. You can work closely with an employer, work closely with a consumer, and then ultimately, you're fulfilling what insurance is meant to do, take care of people at a time of need.
Yeah. Any last-minute questions? Great.
There's one.
Oh, there is one.
Any comment on the RBC ratio?
Question was on the RBC ratio, if you have any comments.
On our RBC ratio? As a result of tax reform, we saw our RBC ratio come down, not because our capital came down, actually because the requirements came up. You got less benefit from the lower tax rate. We saw that come down, but we still feel very good about where our capital is. I think we ended the quarter in our traditional companies, close to 370. We still feel very good about where the RBC ratio is, and we'll manage that very well in concert with the rest of the capital management that I talked about earlier.
Any other questions? All right. Why don't we wrap it up here?
Great. Thank you, Jay.
Thank you very much.
Thanks for all of your time.