Everyone, if I could ask you to go ahead and take your seat, we'll get the meeting started here. Good morning. My name is Tom White, Head of Investor Relations for Unum, and welcome to our 2019 outlook meeting. Appreciate all of you here in New York who are joining us live, and obviously those who are joining on the webcast as well. Our remarks today in today's meeting 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 SEC. I remind you that statements in today's meeting speak only as to the date they are being made, and we undertake no obligation to publicly update or revise any forward-looking statement.
A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures in today's presentation can be found in the presentation materials. Our discussion today will follow a similar pattern to recent years. You'll hear from our President and CEO, Rick McKenney, who will start the meeting with an overview of the company strategy. Jack McGarry, our Chief Financial Officer, will provide a financial review and outline our expectations for 2019, and that will be followed by strategic overviews from our four operating segment heads on their respective businesses. We'll have a Q&A session after all of our prepared comments this morning. I'd like to turn the meeting over to Rick McKenney. Rick?
Thanks, Tom. Good morning, everybody. Welcome to everybody here in the room, as well as those in the webcast. I did want to take just a quick second to introduce the team. It's a team that's been seeing good stability. We continue to bring together the knowledge of our industry very well, let me just go down through the list. Jack McGarry, who you'll hear from shortly here, our CFO, been with the company for some time, knows this business as well as anybody, we're glad to have him. Tom White, you just heard from. Mike Simonds runs our Unum US business, our largest piece of the franchise. Mike has been with Unum for consistently a good period of time and does a great job running our segments. Tim Arnold running Colonial Life. Colonial Life has seen good growth.
Tim has been a key component of that, which is an agency force which continues to grow and expand across the U.S. Peter O'Donnell, who runs our U.K. business historically. Peter's just expanded his role and now has oversight for our Poland business as well. He's actually leading the charge as we look for other places to do what we do very well. Steve Zabel, who's running the closed block. You'll hear from Steve. Steve's done a good job over the course of what's been a tumultuous year, I think, in particularly long-term care, but with a steady hand has done a good job leading us through that process. A couple of other people that you won't hear from necessarily today, but they'll certainly be around on break or to answer questions. Steve Mitchell. Steve, you can raise your hand.
Steve's our Chief Financial Officer for Unum US. Breege Farrell, our Chief Investment Officer, back here in the room. Puneet Bhasin, who joined the team earlier this year, our Chief Information and Digital Officer, will talk a little bit more about digital and the things that we're trying to drive to continue to enhance our proposition. With that, let me give you a quick sense of the overall franchise, where we are today. Make sure to remind you, there's really three things I want to accomplish today and our team wants to accomplish. One is to take you back to the strength of our core franchise. It sometimes has been overlooked over the course of the year, the strength of the core franchise is tremendous, continues to generate great results. We're well-positioned in our markets, we'll talk more about that.
The second is giving you more detailed execution plans by business. I think you'll hear more at a sub-business level about what we're doing, how we look forward, how we're thinking about 2019. As we've done in previous meetings, to give you a full sense of our financial picture, a lot of detail around how we see sales growth, premiums, revenues, as well as the earnings and capital generation we see over the course of the year. Certainly we'll answer all your questions. Hopefully we'll accomplish all of that this morning and get through this in a good time to get ultimately to your questions. Starting out, just as a reminder, talking about our Unum franchise today. You can see we really have good diversification across the different lines of business.
Our largest segment you'll see there today is Supplemental and Voluntary, which talks about the movement towards voluntary benefits. We see that both in Unum US and the Colonial Life side. You'll see those strong positions in the lower left on life, AD&D, and our group disability, which is really the cornerstone of the franchise. Continues to generate tremendous earnings and protects a lot of Americans and those in the U.K. as well. You'll also see the closed block in the U.K. at smaller %, the U.K. one being of really how the currency has moved. The franchise has been very stable through this period. Peter will talk more about that. As we've seen the currency come down, it's become a smaller piece. At least on a reported basis, we still very much like our position.
Colonial Life at 20%, good, strong growing, good margins, Tim will take you through some of the details of that. Very happy about where we are today, across all of these businesses, we consistently believe in that being a disciplined operator. You'll see that in how we grow our business, how we price our business, and ultimately how it generates returns for us and also enlists a good value proposition for our customers. One of the things to remember about Unum is we are very focused and uniquely focused on the employee benefits business. It's what we do. What does that really mean to us is that today, across all of our workplaces in the U.S. and the U.K., we want to be there to help provide benefits to individuals. You could think of that across the gamut.
It's not the health insurance, not the savings products, but everything else you'd get at the worksite, we want to be there to provide it, both from a product perspective as well from a services perspective. As a result, with our distribution that we have between Colonial Life and Unum US, we were able to cover the gamut from the very smallest of businesses to the very largest of businesses with a good value proposition that we have today. Where this generates value for us and ultimately for our shareholders is it really focuses our opportunities. That means when we invest money today, we invest it in the employee benefits market. We have been doing so consistently, so we're thinking longer term in how we can develop that space. It also gives us the ability to adapt quickly to a changing environment.
We have good insights. The entire company, the entire franchise is focused on the employee benefit space. We shift resources very quickly to both opportunities we see and other things that we see that need addressing. We'll talk a little bit more about that today. The last thing I'd say is those digital capabilities, we're thinking forward in terms of how we connect with our employers, our employees, and the brokers that serve us. The digital investment that we make is very focused towards that. It's one of focus. You'll hear about that today. Being focused on that allows us to really channel what we do to a very specific space. If I think about the attributes of the company that make us strong today and make us different is one is those market positions.
Because we have been focused on it for a long period of time, we hold market leading positions in all of our product sets that we have out there and all of our distribution that we have today. We'll talk about that, but you can think of a top 5 position across all these product sets that we have, even at different distribution levels, different product levels. As a result, we have great scale and breadth in the employee benefit space that allows us to invest more in what we do today and make sure we keep maintaining that leading position as we know in our reputation. The quality and reputation, you have to think about the people that really think about us are the human resource professionals, the leaders of businesses today that want to go with a trusted name.
Unum is that name for many of them, and Colonial Life for many of the smaller businesses. We maintain that strength. So if you talk to those that are in your human resource departments, they will know our name very well and the values that we represent today. We do that on the basis of financial strength. We've run the balance sheet in a way that we can deploy capital when we need to, also make sure that we have a good, strong balance sheet to support all of these growth opportunities that we have. As a result of that, combined with the discipline operator, we think that we've put ourselves in a good place from a profitability perspective, but more importantly, position ourselves well as we look to the future.
You have to go back, though, to starting with what we do and why we do it today, and that's about taking care of people at time of need. If you look at the workforce in America and the U.K. today, people are living more and more paycheck to paycheck. What that really means is if something unfortunate happens to them, who's going to be there to cover them, to pay for an accident, to pay for a longer-term illness, and making sure that we're there today. You combine that with the fact that 70% of people lack disability protection today. One in four will become disabled in their working lifetime. The need is real, we're still out there on a mission to make sure that people understand that. We do that on top of a base that's strong today.
36 million people protected by our products today and our services. Almost 200,000 companies today which utilize our benefits. Making sure we get people back to work, paying benefits at time of need is really what the cornerstone of what guides our company. What that's allowed us to do over the last several years is to grow. Growth comes in two forms. One is just that organic growth, good sales, strong persistency, stability on that front. We're also looking at how do we expand? On two different dimensions. One is the product line extension. You'll hear a little bit more today about dental and vision, a company we bought into a couple of years ago, how that's grown, how we see that growing over the next few years. Stop loss, Mike will touch on that briefly as well.
Just the expansion of product sets to leverage the distribution and the reach that we have today. We've also expanded in our geographic expansion. You've seen us do an acquisition, closed on it a couple of months ago in Poland. Very excited about the business opportunity we have there, as well as dental and voluntary in the U.K. Similar things we know. An acquisition in the U.K., expanding into the voluntary benefits in the U.K. We think we have a great position to grow that. Overall, combined with our core operations, we're seeing good growth, kind of in the 5% range over a couple of years. We think that's a good growth rate given the discipline that we have in our markets today, we'll look to continue that top line. We'll talk a lot more about that over the course of the day.
For 2018 on an operating basis was a tremendous year for the company. We'll see operating earnings grow at the higher end of our range of 17%-23% going into the year. We have an ROE of over 13%, and if you look to our core operations, over 18%. Great returns at our business and the growth that we've seen over time. Over the course of the year, we were multifaceted in our capital deployment. You saw us do acquisitions, repurchased a number of our shares, as well as a dividend increase of around 13%. We continue to redeploy capital, returning that to shareholders as well in a very shareholder-friendly way. It was a very active year managing the closed block in LTC. We've been very much out there with you, with our investor base to educate around that.
If you look at some of the review that we did in September, including us booking all of this through the third quarter, making sure you understand the dimensions, what we are working on, what the action plans are. It was an active year, probably more active than we expected because of some of the market dynamics, not necessarily because of our own book dynamics. It is a reality we had to go through over the course of the year. We will talk a little bit about going forward as well. We end 2018 in a very strong, stable, steady capital position in what is perceived today as a changing environment. We feel like we have good flexibility to act as we see it over the course of the year and continue to invest in our business operations.
As we look at 2019, this is very similar to a chart that we would have shown you last year. How do you continue to grow the existing business, as I said, kind of on a core basis? Investing in our operations, I would say this pillar is probably going to be where we do a little bit more this year, I will touch on that in the next page. Expanding our reach, I think we are going through a process of the expansion of our dental, vision, stop loss, Poland. I think we are going to be doing more of operating those businesses this year, as opposed to looking to a new venture, although we are always keeping our eyes open. I wanted to touch briefly on the digital side of the business, which is the invest in operations side.
This is something that is coming very much into the lexicon of the company. Our customer experience and how we digital align to that is really a cornerstone of what we are focused on in 2018, but also going into 2019, to make sure that we are giving a digital experience to our employers and their employees, like we have not before. I think because we are focused on it, we will get ahead of the market and be able to do a good job on that front. Then more on the internal to the company, how we continue to streamline the company and bring digital processes into our own operations to make us more efficient and reinvest that money back into the outgoing part of our business. We are also looking at how do you expand the footprint.
How do we get closer to the employer, to the customer in a digital way, so it makes it easier for them to do business? Mike will touch on that a little bit. We think it is a very exciting opportunity for us once again, because we are focused only on the employee benefit space. Lastly, enabling that growth platform. If you can think about, Tim is going to talk a little bit about how we digital enable our sales force at Colonial Life. We are doing that across the board. Even when we think about our product set, it is more with a digital first mindset. How do we actually develop product and services which are digitally enabled back to the end consumer? It is something we have been working on for several years. I think we are going to up the pace on this in 2019.
I think there's good opportunity for our customer focus, as well as good opportunity for the overall returns in the company. As I go to the outlook for 2019, it will look very similar to what we've had in previous years on an internal basis. Adjusted operating earnings of 4%-7%, which would've been similar to what we would've told you last year. Once again, that premiums are right around 5%, translating into earnings of a similar pace. We've seen that premium and return on equity is going to be quite consistent in terms of what we see overall. We'll talk about the details of that. That's all predicated on that growth being done with very strong margins that we see today.
As a result of that, in our business, which is not a heavily capital-consumptive business, seeing that cash flow generation coming off our core business lines, which gives us the flexibility to do things that we want to, which includes capital deployment, which we'll talk about that, continuing to be steady in terms of returning capital to our shareholders. Then making sure that we continue to effectively manage the closed block. We know that is on investors' minds today. It's on our minds as well, and to make sure that we continue to manage that business in a steady way, which we think we've done a good job over the last decade doing that when we first closed that business down. It's something we'll continue to do and be very disclosive.
When we go back to September, we laid all the dimensions of this block out to you, we'll give you a sense of its performance trends over time. It's not something you can update on a quarterly basis, certainly what the trends look like overall, we want to keep that out there in front of you. I'd wrap up my closing comments for the front section, is just talking about consistent results and talking about the future. That is a message that we brought to you over the last several years, is making sure we generate good, solid, steady growth results, earnings, returns, making sure we're making the right investments to be positioned ahead of our markets in the employee benefit space and serving our customers. We feel very good about that.
We think we have the flexibility to continue to move and invest in areas that are going to be important to the change in that market. I'd say we also, because of that strong cash flow generation we have on the core franchise and all those embedded positions, we feel our franchise continues to be resilient. I highlight that with our book value per share growing about 8%. That includes reserve increases that we've had over the number of years that you've seen in our long-term care block. We've still seen our franchise grow almost 8% over that period of time, that's what we're looking to do, is grow that book value for the company, continue to grow out the franchise. We'll give you some detail today how we expect to do that and look forward to wrapping up with questions at the end.
Let me turn the conversation over to Jack McGarry on the financial performance. Jack?
Great. Thank you, Rick. This actually is a little unique today. I usually have big things that I'm going to talk about, but having reviewed the long-term care results in September, I would say things have been pretty much in line since we've done that, not only with long-term care, but with the rest of the company. I'm going to try and go pretty quickly through my section and leave some time to talk about our actual core businesses and the strategies they're pursuing to continue to grow and to continue their great returns and profitability. From a financial performance, 2018 was a dynamic year. If you can set the share price aside, we actually had a very strong year in our core business segments. That was overshadowed in part by long-term care.
We had great earnings, solid growth at the top line, so good premium growth, and pretty remarkable returns on equities for the year. We addressed long-term care in September. We did a ton of work behind that. Felt very good about where we ended up. We feel we've made really good provisions for future experience in long-term care. We've also I think, set the standard for disclosure in long-term care. A lot of companies have come out and disclosed. A lot of the disclosures are around block demographics and kind of gross sensitivities to things like rate increases or benefits. We did the block demographics. We not only gave you sensitivities, and sensitivities at a assumption-specific level, things like claim terminations, active life terminations, incidents, and morbidity. We also showed you our actual assumptions and showed you how historical experience balances to those actual assumptions.
We gave you the insight not only to hear what we said we did, but also to judge for yourself how conservative or liberal you thought those assumptions were relative to what we assumed and the actual history behind them. From an earnings per share perspective, we expect to be at the high end of our 17%-23% range going forward. Tax reform was a big benefit for us. You can see it in our statutory earnings, our free cash flow generation, our returns on equities, but it did come with a cost. There was a lot of capital movements that flowed out of Tax reform that had an impact. We view most of them largely as non-economic, but we had a run on the denominator of our risk-based capital ratios, and you can see that in our results.
Finally, we've been active in share repurchase. From an outlook perspective for 2018, I would characterize it as steady as she goes. We feel good about where long-term care is and how it's emerged since September. We feel very good about the earnings generation powers and returns on our core businesses. Again, we'll be at the upper end of our 17%-23% range. We did close on a Polish acquisition at the beginning of the quarter. That acquisition will be reported in a new International segment, so it's going to be combined with the U.K. for reporting segment purposes. Not a big impact to earnings this year, but we do expect it to help revenue generation and sales growth in earnings going forward. Finally, capital return to shareholders. We've continued to be active in the market.
We expect to repurchase $350 million of shares in 2018, that's $150 in the fourth quarter. I'd remind you that in May, our board approved a 13% dividend increase. If you kind of walk through the generators of our 2018 performance, good solid growth and great underwriting results in our core businesses helped to fuel growth. We still see headwinds from interest rates. Prevailing interest rates are largely below our portfolio yields. As we've moved forward and we've adjusted discount rates, those headwinds are subsiding with time, and we expect will continue to subside. Neutral on the exchange rates. A little bit of a headwind in corporate. Two things that drove that, one is interest expense during the year, and the second would be some restructuring costs, but not really material impacts on the overall earnings of the company.
Favorable taxes in the year, even more favorable than we expected coming into the year. We had some adjustments when we finally filed our 2017 tax filings that helped last quarter taxes. We expect more of a normal tax rate going forward, but that was a benefit. We benefited from capital management during the year. We did not expect to have the deal on our share repurchases that we got. We would've rather had that number be a little bit lower than it is, but it certainly helped our earnings per share. Premium growth for the company has been a really solid and consistent story. We've had 5% plus premium growth over the years in Unum US and Colonial. We've even had good premium growth within Unum U.K., despite some of the headwinds from Brexit and the economic uncertainties we see there.
Really, that's the core that fuels our growth going forward, both our earnings growth as well as our free cash flow generation. If you look at benefit ratios, another good story, Unum US benefit ratios has largely been coming down. That's attributable to two things. One is good risk results resulting from really disciplined underwriting and risk management. The other thing is rate increases that we've put into the marketplace that both in time to improve those loss ratios. Some of that loss ratio improvement's clearly gone in to offset interest rate pressures that we've seen over that same time frame. Again, I think if you look at the earnings power of Unum US and the returns that we're achieving in those marketplaces, you can see that the benefits of that risk management has clearly come through to the bottom line. Colonial Life loss ratio, steady as she goes.
In that low 50% range. Clearly a very nice business for us, a business that's growing and a business that continues to generate very stable and solid results. A little bit more volatility in the U.K. Certainly the last couple of years have been influenced by Brexit, the economic uncertainty, the lack of hiring and growth. We've seen some of that come through our disability experience in the U.K., although 2017 to 2018, it did seem to stabilize, and we hopefully, knock on wood, without knowing what's going to happen with Brexit going forward, expect to continue to see that stabilization. As I said, return on equities have been incredibly strong, fueled by strong risk results in our core markets, but also tax reform and the benefits of a lower tax rate. You can see the big bump in Unum US and Colonial.
You don't see it in the U.K. because their tax rate stayed pretty much the same. Again, you can see the benefits that we have gotten from tax reform and pretty remarkable returns in excess of 18% in an insurance business. Statutory earnings continue to be very strong. A little volatile in 2016, 2017, and 2018. There's a couple of one-off things that happened there. In 2016, we had the landing spot elections, which helped statutory earnings on the Long-Term Care business. 2017, we had an unclaimed death benefit charge and a Penn Treaty charge that hurt statutory earnings. Then 2017, we've had strong risk results, and we've benefited from tax reform. Some volatility there.
I would say kind of our go-forward rate is in that 950 ± range as kind of the core run rate for statutory earnings, which, as you know, statutory earnings drive free cash flow generation, and we feel really good about our cash flow generation going forward. I'm going to hit a couple of topics real quickly. Long-Term Care, capital management, talk a little bit about our investment portfolio, and then touch on the FASB Long-Duration Targeted Improvements. Long-Term Care, I'm not going to say a lot about it because we talked a lot about Long-Term Care in September when we rolled out the reserves. A ton of work went into those reserves and updating the assumptions. We've continued to contribute capital to Long-Term Care. We've refreshed our rate increase strategy and are in the process of readying those filings. We feel good about where we are.
We feel good about our block. We feel good about the actions we've taken to stabilize and shore up that block. We recognize that we told you what we did in September. We shared the basis of our actions in a lot of level of detail, so you could judge for yourself kind of where we are in the spectrum and how actuals have performed relative to our assumptions. We do recognize that we need to prove it. That proof will be steady loss ratios in the 85%-90% range as we move forward. We had an 87.5% loss ratio in the third quarter. We've not seen across the company anything really surprising within the fourth quarter results to date. We're confident that we will be able to produce those loss ratios that support that block.
We believe that as we do that will be a real catalyst for our company as we prove and people gain comfort with the long-term care position of the company, they're going to turn their focus on recognizing the value of the rest of our franchises. 2018 was a very dynamic year from a capital perspective. Our capital remains very strong. Year-end estimates is risk-based capital in this 370%-375% range, holding company cash in the $550 million-$600 million range, well above our target of one times fixed charges. Going forward, we will maintain risk-based capital above 350%. We'll maintain holding company cash above one-time fixed charges. We've had good discussions with rating agencies about these metrics. The rating agencies are comfortable given the changes that have happened in the risk-based capital formulas with where our targets are.
We've had good feedback in terms of our ratings with most of the rating agencies and feel comfortable going forward that we're in a good spot. We will continue to return capital to shareholders. We continue to generate strong free cash flow at our insurance subsidiaries. That fuels holding company cash, and we will continue to return that cash to our shareholders. That 370% risk-based capital that we're expecting at the end of the year is equivalent to a 390% pre-tax reform. Again, even though our risk-based capital ratios are decreasing, the overall amount of capital that we're holding out as a company is continuing to increase. The denominator changes have an impact. We don't believe the risk of our company has changed at all as a result of tax reform. I've talked about that in the past, but it's based on two underlying factors.
First of all, if a product has a loss that's less than the overall earnings of the company, the company has more capital after that loss at a lower tax rate than it does at a higher tax rate. The company's stronger at a lower tax rate. If that loss gets big enough so that it eats up the entire earnings, for us, $1.3 billion-$1.4 billion in earnings, and goes negative for the company, we haven't seen a time where the IRS cuts you a check for taxes. You'd get net operating loss carryforwards, but you'd need to produce future statutory earnings, taxable earnings to offset those. We view tax reform as largely noneconomic. Changes the timing of things a little bit, but it does not change the strength of the overall company.
In fact, we're a stronger company at a lower tax rate than we are at a higher tax rate. We've had consistent sources of capital. I talked about our statutory earnings, talked about that run rate being in that $950 million plus or minus range. In addition to that, we continue to get dividends from the U.K. on a pretty consistent basis. We have management fees that we get from the insurance subsidiaries, and we have a non-insurance sub that also pays dividends to the holding company. You get up around that $1.1 billion of free cash flow generation annually. Rick talked about the growth in our book value. That growth in our book value provides another $200 million plus or minus of leverage capacity on a leverage neutral basis. If you think about on an ongoing basis, $1.3 billion of capital generation, well in excess of fixed charges.
We've had some calls on that capital in 2018. We're going to continue to see those in a little bit, although lessening in 2019. If you think about a run rate going forward once we're through tax reform and the capital impacts, that's in the neighborhood of where we would be. I want to talk a little bit about the impacts from tax reform and capital things that happened in 2019, and actually 2017 through 2019, much of it being driven by tax reform. The first thing we saw was a write-off of our deferred tax asset of $350 million. That was year-end 2017 on tax reform. That ate up capital. Also, it strengthened our capital base because when we replaced that with real assets as opposed to a booked asset, it makes the quality of your capital as a company better than it was previously.
Tax reform also had impacted asset adequacy factors because cash flow testing in New York is on an after-tax basis. It increased the asset adequacy reserves that we needed to establish in New York. You can see that was in the $160 million to $170 million range. Most of that happened in 2018. You'll see higher contributions to subsidiaries in 2018 than you'd seen previously. A little bit more in 2019. Then the NAIC changed the risk-based capital factors to adjust them for tax reform. They did that against our advice, by the way, because we did make the argument about why it was non-economic to the NAIC too. That was worth almost $300 million in 2018, a little bit more in 2019. There were also risk-based capital things that were non-tax related happening. There's the C1 risk factor changes that will take place in 2019.
That's $265 million for us. That's bigger than it was previously because of tax reform. Those factor changes have a bigger impact than they had previously. They did an operational risk change in 2018. A big call on capital. If you look down that list, the only charge that has anything to do with the experience of the company is that long-term care charge of $186 million. The rest of those charges are non-economic. They're just capital that the world is now requiring us to put behind the business. You will see as a result of that, higher contributions to the subsidiaries in 2018 and 2019. It's not because they're performing any worse than others.
It's largely driven by the fact that we had excess risk-based capital in our traditional insurance company, they were running in that 390%-400% range. They could absorb the risk-based capital charges through a reduction in their risk-based capital ratios. We did not hold excess capital like that in our subsidiaries, the impacts in the subsidiaries need to be funded. They're funded in part by dividends from the holding companies as we brought that capital out. In terms of the contributions to subsidiaries, however, first, they're temporary. You'll see a bigger contribution in 2018 and 2019 as the risk-based capital formulas change. That should return to a more normal level in 2020 and 2021. It's a temporary change. Non-economic, we don't feel any differently about the risk in the subsidiaries. It's not driven by underlying performance of the subsidiaries.
It's just driven by the capital formulas. It's not experience driven. We think this is something we need to work through as a company. In the short term, it makes capital a little tighter than it had been prior to all these changes. We still feel extremely comfortable with where we are as a company from an overall capital level. We still have the free cash flow generation, even making these contributions to the subsidiaries to continue to be active in the market with share repurchase. A lot of this, as shown, will show up in a slightly higher leverage ratio for the company over the short term, but we expect in the 2020s for that to return pretty quickly to a more normal level as well. Again, I'm not going to belabor this much more.
We came through a lot of capital changes in 2018. We have some more to go in 2019. When we talk about our capital deployment plans, all of those changes are anticipated in our current plans. We still feel good about free cash flow generation and our ability to return cash to shareholders. Really quickly about our investment portfolio. We are a credit shop, so we invest in fixed income, by and large. We tend to invest a little lower on the quality scale than some of our competitors do. A piece of that is because we get some diversification benefits because we have a big insurance risk base element to our capital portrait as a company. It's more efficient for us to go to the lower end of that scale. We feel very good about it, though. We're largely in triple Bs and higher.
We are dedicated to buying things where we have looked at and understand the credit worthiness of what we're buying. We are not in a lot of structured type of products. The one structured product that we do invest a reasonable amount in are agency-backed mortgage securities, which are triple A rated. We don't have a lot of collateral loan obligations or other structured things. We feel great about our performance as a fixed income investor. This chart shows you our credit performance relative to the Moody's index. Actually, interestingly enough, in the 2009, Lehman's is removed from the Moody's index. That would have been up near five in that year. To put our credit risk in perspective, through 2008 and 2009, our capital losses were worth one year of share repurchase. We actually built capital through that period because everyone stopped repurchasing shares.
Our recovery from a company perspective in terms of continuing to generate earnings, didn't take much of a dip during the last downturn. Has recovered very strongly since then. We understand that the credit cycle may end at some time. We feel very comfortable with the portfolio we have as a result. It's a pretty defensive portfolio. We are overweight consumer non-cyclicals. I have a lot of utilities in our portfolio. We are underweight financial exposures, tech. We used to be very heavy-weighted energy. We came nicely, again, as another reminder, through the 2016 energy crisis from a capital and loss perspective. We have been trimming that portfolio. It's now much closer to the index weighting than it had been back in 2016. Again, a credit crunch is going to impact everybody.
We are confident it will be less impactful to us than most because of our historical performance and the way we invest as a company. Looking at FASB, the standard is going to go through. Remind you of a couple of things. One, it's non-economic. It doesn't affect statutory earnings. It doesn't affect statutory capital. It shouldn't affect cash flows. The second thing, unfortunately, disabled life reserves were not included in targeted improvements. It's focused on active life reserves. 60% of our reserves as a company are disabled life reserves. Those are exempted. The biggest impact as a result will come through the change in the discount rate, marking active life reserve discount rates to a single A level. That mark comes through AOCI. It doesn't affect earnings.
If you look at our reported GAAP earnings, you'll actually lock in the discount rate at the time of transition for the in-force block. Earnings should continue to emerge in line with where they have historically. Our book value, excluding AOCI, should remain intact in ROE as a result, since earnings don't change and book value ex AOCI don't change, should remain intact as well. The measurements that you've judged us on historically will continue to apply going forward. The other thing I'd say is we have minimal to no exposure on market risk benefits, we don't expect any of that volatility that may arise there. The one thing it will impact, because there will be a negative adjustment to AOCI, is our leverage ratios. Some of our rating agencies exclude AOCI in calculating leverage, it shouldn't be impactful there.
There is one major rating agency who currently includes AOCI. They know it's on the table to think about. That'll affect us, it'll affect a lot of other insurance carriers. We'll keep a close eye over the next couple of years about where that plays out. Turning to 2019. Again, we expect continued solid performance in our core U.S. businesses. We talked about Unum International and the addition of Poland. Ongoing interest rate impacts, again, they continue to subside both as our portfolio versus new money rates draw closer and closer over time. Also, the adjustments we've made to discount rates brings that closer and closer. There is headwinds, there's kind of the interest on surplus component gets affected by reinvesting at lower rates, but nowhere near as strong a headwinds as we faced earlier. Again, they'll continue to subside over time.
We anticipate a tax rate in the 20%-21% range. It was lower than that in 2018 because of some unusual factors related to the transition of tax reform. We anticipate adjusted earnings per share growth of 4%-7%, we expect to continue to drive strong cash flow generation. We expect to continue our share repurchase on similar trends that you've seen over the last few years. We will continue to make cash contributions to the subsidiaries going forward. Those will be outside. They're higher in 2018 because of the reasons I talked about. They'll be higher again in 2019, we would expect them to revert to more normal levels that you've seen over time in 2020. If you look at the bridge, again, good core operating performance. Some headwinds from interest rates and discount rates.
A piece of that is the very favorable miscellaneous net investment income that we saw in 2018, which we don't expect to necessarily repeat. That showed up in Unum US. We talked about that last quarter. Planning on no impact from the exchange rate. That's a day-by-day thing to look at, particularly with Brexit still on the radar. The good news there is the U.K. is only 10% of our earnings, so not a high amount of leverage there. Closed block and corporate segment, we expect a little bit of lift out of that. Taxes, a little bit worse because we had the favorable 2018. Capital management, we expect to be worth 3%-5%. That's the bridge between where we start 2019 and the 4%-7% earnings per share growth. We'll continue to maintain risk-based capital ratios going forward above 350. Strong capital levels.
We'll hold cash above one times fixed charges. We expect to continue our current pace of share buybacks. We feel we still have flexibility as a company to deal with the unexpected down the road. I'm sure people have seen this sheet. I'm not going to go through it in detail, but strong sales growth anticipated in 2019. Good, solid premium growth along that trend that you'd seen earlier. Our earnings per share growth in the 4%-7% range. Again, we really are in a position of steady as you go, good core earnings, good capital generation. We are leveraged to a stronger economy and higher inflation, and rising interest rates as a company. I'd say we're leveraged to that. Shouldn't mistake that for saying we're counting on that.
As we look to the forward, as we build our plans, we're building our plans for what we face right now in terms of an earning. We don't need any boost from the economy to hit our free cash flow generation and our earnings per share growth. We expect to continue recent trends with share repurchase. With that, I'm going to turn it over to Mike to talk about Unum US.
Thanks, Jack. Glad to be with all of you here again, provide an update on the Unum US business segment. Over the past five years, it's become really a pretty special part of my holiday tradition to be with all of you here in New York. As many of you know, Unum US is singularly focused on the employee benefits market. We enjoy leading positions and returns in the group disability, group life, and voluntary benefits space. We've got emerging growth platforms in the dental, vision, and medical stop loss lines of business, and I'll talk about those in just a minute. Overall, we've grown our business to about $5.7 billion in earned premium and about $1 billion in pre-tax operating income. To give you a sense, over the past five years, both revenue and before tax operating income's grown at a CAGR of about 5% per year.
It's worth noting that growth has occurred through a period of pretty low interest rates and low single-digit growth in the employee benefits market overall. Our strategy, as Rick laid out, very consistent. It's about delivering a very strong experience to our client base, employers from the very small to the very large. We believe that that experience not only enables us to maintain very strong levels of persistency, which is a huge lever in our business, but also provides an avenue for growth as we add to the number of products and services that we bring to market. If you take a few things, maybe four away from this quick update on Unum US, I hope you would take away the following.
At our core, we remain a disciplined underwriter and risk manager, and when we have to trade off growth to maintain consistent margins, we will certainly do that. In addition to risk, we've increased our discipline over the last several years, and you saw that in Jack's chart on operating expenses. We've seen the operating expense ratio come down pretty consistently, and we would expect that to continue. Importantly, underneath that operating expense ratio improvement, we've also had good success shifting more of our expense from running the existing business to investments in capabilities, many of them digital in nature, as Rick alluded to. We'll spend a couple minutes on that.
If you think about the near term, the year to come, our earnings growth will be constrained by lower investment income, both from lower portfolio yields as well as some of the capital efficiency actions that we've taken, which has lowered the assets behind the lines of business. Of course, the good trade-off there is the very strong returns on equity that we're enjoying. Then I'd leave you with looking beyond the immediate term, the next 12 months. We do expect earnings growth to migrate closer to the good, strong earned premium growth that we've been seeing as our growth platforms mature and get to scale, and those portfolio yields represent less and less of a drag.
On this point of disciplined underwriting, stable to improving loss ratio, that's a trend highlighted over three years, but in the slide that Jack went through, that goes back longer than the last three years. Importantly, our focus is dual. It's both about being that good risk manager, but also taking very good care of our clients. You see good, strong, consistent persistency, which is huge for us. That lends a lot of stability to the business. Where we will see volatility, you can see it in the chart here, is new client sales. What this is showing is a year-over-year comparison of sales premium to just new employer groups to Unum. It does not include the sales that go into our existing clients, and existing clients represent over 65%. This is the other third of new business sales.
What you see is in 2017, we encountered a market where we had the opportunity within our risk tolerances to add a lot of new clients to our base, which is fantastic. Year to date in 2018, we've seen a market without really any material changes to our pricing or underwriting stance, where we've come back just a bit. That's not an optimal outcome for us. We would love year in, year out to be adding new Unum clients. I think it's a pretty good illustration of the fact that we're going to stick to our knitting, and if the market's not going to give us new clients at the rate we want, we're going to live with it. Over time, we think that's a formula that generates good, stable, and strong returns.
You see the adjusted operating ROE profile has continued to improve, and with tax reform up around 19% this year. The second point was around the investments we're making in the business. You could start to see the decline in the operating expense ratio, which has been a contributor to earnings growth, helped offset some of that decrease in investment income. We would expect that to continue in the future. Also what you see illustrated is the increasing percentage of our expense base that's going into new products and new capabilities. If you see the lower right-hand bullets on the chart, those are the primary areas that we've been investing in. First and foremost, it's been about the client experience.
If there's a secret sauce to the employee benefits business, it's about winning new clients on a sustainable underwriting and pricing basis and then holding onto them and growing with them over time. We've been investing, as Rick said, in the customer journey. That's taking an employer and their employees' point of view. Redesigning our process and bringing digital technology to make that a superior experience in terms of the simplicity, the empathy, and the expertise that we can bring to bear. What you see here is the percentage of sales that comes from existing clients. That's going to fluctuate a bit. You see there in 2017 it was down because we had so much success in the new client market. What we're experiencing year to date is about two-thirds of all of our new sales premium is coming in from that existing client base.
As we've talked about in years before, that's good news because as we write more and add more Unum benefits up to 2.8 per in-force client, that's revenue that comes in generally more favorably priced, and it comes in at a better expense ratio because it's a client relationship that we've already got established. Finally, that usually means an expansion of the relationship and greater stickiness, and we'll talk about a good example of that in just a second. If you happen to notice on that last slide, it talked about 2.8 products out of a possible 13. In years past, we've talked about 10 and 11 products. We've added a few new to the portfolio, the most important of which is our dental and vision business. We feel really good about the outlook in this business looking forward.
You can see the growth in group dental sales year-over-year. We expect that growth to actually continue and if anything, accelerate. Importantly, that's a driver not just in terms of the group dental that it brings, but that typically comes bundled with a couple of other products, a life or a disability, sometimes voluntary benefits. It tends to be a driver of our overall core market growth in total. We now have the 12th largest dental provider network in the country. We are the single fastest growing dental provider network in the country, and we expect in the coming year 2019 that we'll crack into the top 10 in terms of that provider network. We also made a small acquisition in California of a DHMO company that brought a difficult-to-earn Knox-Keene license for the state of California, and that gets us a jumpstart into the DHMO business.
That ends up being a pretty important capability in a number of states, California probably most importantly, where many clients want to offer both a PPO and a DHMO option. Another example of an investment in this platform as we look forward. As you might expect with a new growth platform, the first impact that you see to the overall Unum US segment is going to be on new sales. To give you a sense, in 2019, we expect 2-3 points of our overall Unum US sales growth to come from dental. As that sales number builds a nice strong book of in-force clients and earned premium, the impact begins to show up in earned premium. A full point of our earned premium growth in 2020 will come from growth in the dental business.
Starting in 2021, we'll start to see a meaningful BTOE impact. It gives you a sense of the trajectory. We are really excited about what we think is a unique dental asset, where we get a single manufacturing center in Baton Rouge, but it's distributed out both through the Unum brand and distribution force, as well as Tim will talk about in a second, the Colonial Life agency and distribution force. Things like building a network when you can go in and talk about clients through both brands makes it that much easier to build out the provider base. We're on track to deliver on our bold goal of building a $500 million profitable dental business five years after the acquisition, and for those who are counting, we're two years in.
Dental's not the only new product that we're bringing out to that client base. In addition to dental and vision, we're excited about new product additions on the sup vol segment. Jack highlighted the percentage of our earnings that's coming through this segment. We have new group chassis versions of group accident and group critical illness that will come online in 2019. Those have been designed primarily around a seamless package with the group insurance product. Again, putting things together to deliver a superior experience. We're also rolling out two new individual disability products for middle and high-end earners of our clients, and that's built on top of an entirely digital acquisition process. Finally, we're continuing to learn and invest in our medical stop-loss business.
Our strategy here is centered on the remarkable amount of data that is available through the quoting process, both direct and third party. We're feeling good about the momentum that's being built in this business with new capabilities under development, but we also recognize that this is a long-term play. I would think about the medical stop-loss business at Unum as being 2 years behind where we are in the maturation of the dental business. Stop-loss will contribute modestly to next year's sales growth for Unum US overall, but much more meaningfully in 2020. Earned premium and BTOE will follow in the years to come. If dental and stop-loss are 2 longer-term bets for us over the next 2 to 3 years, we're certainly investing and have invested in things that have more immediate returns from a growth point of view.
One I would note on the left is our leave management services. As I'm sure many of you are aware, there's a lot that's happening when it comes to mandated leaves at the federal level, at the state level, and even at the municipal level. You add that in with what a company might be planning to do from a corporate leave point of view, and there's a pretty remarkable problem to solve in terms of the complexity of what an employer and their employees have to navigate. What you see here is the growth of our prospects in the large end of the market that come with a request for proposal on outsourcing leave to Unum, and that's been a steady growth.
Once we get past January 1st implementations We'll see almost $1 billion of our earned premium will be with clients that also outsource leave management to us. That is a big lever in that the persistency of that group, because of what it takes to outsource leave to Unum, that tends to run 2 to 3 points more favorable to the rest of the book. It adds a really important degree of stickiness to it. We're planning to build on the momentum in the leave business. We've made an acquisition of a digital platform, LeaveLogic, at the beginning of last year. In 2019, that tool that's built for the employee, the consumer, that helps them plan for, manage, and return from leaves, that'll be integrated seamlessly into the Unum disability process.
On the right, Rick mentioned this, really excited about what we call our HR Connect. We've seen our clients migrate rapidly towards off of on-prem human capital management and HR systems towards cloud-based technology. That presents a really interesting opportunity for us, because without the customization that comes on-prem with access to cloud and associated APIs, we can redesign our products and our processes and our technology to take advantage of single instance HR technology. We launched with our first platform, Workday, in early 2019. We saw remarkable interest in that platform. In fact, amongst finalist presentations, we saw 8 out of 10 finalists choose Unum when they saw the Workday HR Connect functionality. A lot of the administrative tasks that would normally fall to the employer are eliminated entirely through the automation of this connect.
We're excited to continue to build and benefit from Workday's growth, but also we'll announce a second major cloud-based platform in January and a third around mid-year 2019. The third point I wanted you to walk away with is more the short term. We will continue to see some pressure on short-term earnings growth. Even as we've continued to see good, strong loss ratio trends and expense trends, the earnings impact of what you see on the chart here, yields continuing to come down. And actually, on the chart, you'd want to reverse the yields and asset levels in your book. I think they got mislabeled. And what you actually see is the pressure primarily from slower than we would otherwise expect in asset growth, and then the pressure of lower portfolio yields contributing to pressure in that $20 million-$30 million range.
I think importantly, as we look forward, and Jack alluded to this, we would expect this earnings pressure to continue to mitigate as the portfolio yield and the relationship to new money continues to flatten out. This is going to continue to diminish, and we would expect over the next couple of years that our earnings growth for Unum US is going to migrate much closer to where our revenue growth is. Sum total sales growth in 2019, we expect at 6%-8%. Again, the dental business and capability there will be a significant contributor, as will the associated products that come with it. We also suspect that our HR Connect and leave advantages in the market will help us grow in the mid and large case market. Good, strong persistency as we look at 1/1 renewals.
It's an important time of year for us, everything that we see in the pipeline suggests that we're going to be able to maintain the strong persistency that we've demonstrated over the last several years. That translates to premium growth of 4%-6%. As Jack said, we're not banking on significant wage increases coming through. That could represent a bit of a tailwind. Operating earnings growth 1%-3%. Again, that's constrained by the investment income. We do expect that'll migrate closer to revenue growth in the coming years at a really strong operating ROE in the 16%-18%. Thanks for your time. Look forward to addressing questions in the Q&A. At this point, let me turn it over to Tim Arnold to talk about Colonial Life.
Thank you, Mike. Good morning, everyone. Thank you for joining us this morning. Let me start by saying that we are encouraged by the continued performance of the Colonial Life business, and we remain optimistic about the opportunities ahead. Share a quick overview of our business. As you can see here, we have a top 5 market share across most of our portfolio. According to Eastbridge Consulting, the primary consultant for the voluntary benefits business, Colonial Life is ranked fourth in market share based on 2017 sales overall. Our strategic emphasis is on the core and the public sector markets. We play opportunistically in large case. We do have a number of large case customers who are very capable of serving that market, but there are dynamics there that have to be considered in terms of whether they are a right fit for Colonial Life.
As you can see here, we've had strong sales growth through the first three quarters of 2018, but we are seeing some pressure in the fourth quarter because we're up against a very tough comparison from 2017. A little headwind here in the fourth quarter, but overall, a very strong sales year through three quarters. We have delivered strong and consistent growth in both the top line and the bottom line at Colonial Life over the last few years. We're really focused on serving America's workers and their families with affordable financial protection products. Over the last few years, we've focused on growing our distribution footprint and capabilities, growing and updating our product portfolio, enhancing our industry-leading enrollment capabilities, and investing in tools and technology that enable our employees to better and more effectively serve our customers.
We are well-positioned to achieve our aggressive goal of serving over 5 million of America's workers and their families by 2020. As a result of the investments we've made in the business and the solid execution of our strategy and business plans, we've consistently outpaced market growth rates while producing very strong profit margins. We plan to continue to outpace market growth rates with continued investments in our distribution system, in our digital capabilities, as you heard from Rick and from Mike, through the build-out of additional customer-centric experiences, through operational excellence, and with talent. In addition to growing our agency distribution system, we continue to remain focused on existing and broker relationships, and as a reminder, two-thirds of both our in-force business as well as our new sales come from brokers.
I think sometimes people think of Colonial Life as a company that only goes to market through direct relationships with employers, but that's not true. The majority of our business comes through brokers. We're also working to digitize and further improve the experience of our employer clients, our consumers, and also our field sales producers through the development of customer journeys for each segment. We're modernizing and digitizing processes across our business to also ensure more self-serve capabilities, which not only enhance the customer experience, but help us with productivity as well. I mentioned we've been growing our footprint. We've been growing that footprint pretty aggressively over the last few years, and if you think about a territory office, which are represented by these flags, they're essentially the size of a state or a very, very large metropolitan area.
We've been adding two to four of those large territory offices to our footprint each year over the last few years, and we continue to plan to add additional territory offices over the planning horizon. Mike mentioned the dental offering. It's been a terrific product for Colonial Life. We launched that product, the individual PPO product, in very, very late March, essentially early April. At the time we launched, we had about 35 states approved. We're up to 46 now. All 50 states will be launched soon. It is somewhat unique in the industry, especially as we think about the people who compete against Colonial Life with a dental offering. It's not typically an individual PPO product. It is supported by Starmount, but as a fully integrated Colonial Life branded product. That's helpful because there's a single bill.
Our agents really identify with the product as a Colonial Life product. It's easy to sell in a packaged environment. Our sales, as you see here so far to date, represent about 5% of our overall sales. Probably more importantly, for every dollar of dental premium that we write into an employer group, we're writing $1.80 of other Colonial Life products into those same groups. The dental product has some tailwind helping as well with our other product portfolio. Talk a little bit about digital. Cover at a high level some of the things we're doing from a digital perspective. We will introduce a new agent app, a mobile app in January, that we're very excited about. It was built in concert with our team in Ireland who do a fantastic job.
The pilots that we have conducted so far have been met with tremendous enthusiasm and really a significant desire to have this tool in the hands of the marketplace sooner rather than later. The tool will include a very robust CRM capability. It will include automated lead generation. It'll include existing account management capabilities, and it will enable our agents who spend most of their time on the road to pretty much perform every element of their job using their mobile phone. There's a tremendous amount of excitement about that. On the claim front, we're seeing tremendous adoption of the electronic claims capabilities we introduced a few years ago. In fact, more than half of our claims are now submitted online, most of those with mobile technology. We've been processing and paying claims in one day since 2008.
Our online claims process, along with our direct deposit feature now, enable us to pay more than 60% of all of our claims in one day so far this year. We're also working in 2019 to enhance our online invoice management system to make it even easier for our employer clients to manage and pay their bills online. These changes in digital capabilities that enable better customer service also enable us to operate more efficiently. As you see on this slide, we have been working to keep our benefit ratio relatively flat over the last few years while making investments in the dental offering and the expansion of our footprint with the field. We made some changes in our workplace strategy that were a part of the investments you see here.
In 2019, as we continue to implement our digital footprint across the business, we will see the actual operating expense ratio begin to decline a bit, despite increasing the investments we're making in some of the more interesting parts of our business. I mentioned a couple of times that our premium and sales growth have been outpacing our competitors, I just wanted to share this slide that depicts the rate of that growth over the last five years. Colonial Life's the blue line, the marketplace is the green line. You can see that our sales growth over the last five years has pretty significantly outpaced the market. The market's not stagnant. On average, the market's been growing between 3% and 6%, depending on the calendar year. Our message is we feel good about the future.
We continue to deliver consistent results, good top and bottom-line growth. We're going to continue to make investments in the things that have worked well for us over the last few years. While the competitive market continues to intensify in the voluntary benefits space, we believe that the capabilities we bring to the market, the focus we have, the strategy and our plans will allow us to continue to achieve our longer-term goals. For 2019, you can see here, it's pretty much what we showed you last year. Very consistent. Sales growth still in the upper single digits to potentially 10%. Premium growth in the 6%-8% range. Operating earnings, 3%-5%. Really strong ROEs continuing into 2019. With that, I will turn it over to Peter O'Donnell to talk about Unum International.
Good morning. As Rick and Jack mentioned, I've picked up responsibility for Poland as well as Unum U.K. We're going to combine those in one segment called Unum International. We'll report that in USD as well. In the future, you'll start seeing USD coming through for that rather than the GBP and the PLN. If you look at the business snapshot, this chart will be very familiar to you. I think importantly here, just to point out, all the numbers on the right-hand side are just Unum U.K. numbers. We show this to the 30th September. We'll start reporting the Unum International segment in the fourth quarter. Then we'll consolidate Poland into that, and obviously that will change that snapshot. A couple of things to point out here. You'll see, this really reflects part of our strategy, but also part of Brexit.
Our strategy has been to diversify our earnings. You can see that coming through the Supplemental line, where we've purchased the dental business a couple of years ago. We're now a top 3 player in the dental business in the U.K. Also critical illness. We've revised and revitalized that product, and that's helping growth there. Brexit has been particularly difficult for large employers, I think, in the U.K. They've been heavily distracted. It created a lot of uncertainty. Therefore, their focus on adding benefits and employee benefits has been somewhat muted. Whereas smaller employers pretty much have ignored it in 2018 so far and have continued to run their businesses as is. You can see that somewhat coming through in our core sales, which are nicely up, versus our large case sales, where people haven't been switching and have been increasing participation rates.
The other thing Jack mentioned we've seen in the U.K. for the disability product is we have seen elevated incidents across the industry. We saw that towards the second half of 2017. We got on that quite quickly, and we've been re-rating, particularly for large clients, we've been seeing some significant premium increases through 2018 and into 2019. That's depressed margins as we bring the rate in to sort of match the claims incidents. We're getting really well through that. We're starting to see some of the benefits of that rate coming through in 2019, and then it continues to come through in 2020. Just again, to mention, all the numbers are in GBP and reflect just Unum U.K.
In terms of our strategy for Unum International, I think one of the things that reflects how easily Poland fits into this was that I didn't have to change that slide a lot, actually. It fits nicely into what we were doing as a business anyway. If you think about being recognized as a broad employer benefits provider outside the U.S., there's a sort of embryonic employee benefits market in Poland. The way these markets tend to develop is bank assurance and direct sales forces tend to be the first area that sort of sees emerging markets grow in insurance. What happens is the brokers get there, and they are there now. People like Mercer, Willis Towers Watson, and the employee benefits market starts to grow. We're seeing that. There's full employment. There's significant competition for employees in Poland.
Really, it's a really nice play for us. To be the number 1 choice for distribution. That's in the U.K. It's been brokers, and we're trying to expand our reach and get with other distribution. I'll come back to that in a minute. In Poland, they have an agency sales force similar to Tim's, although it's selling to individuals rather than the workplace. We know how to run agency sales forces. It's a very high-quality sales force and one we really like. We'll be leveraging Tim's capabilities to help run that business. Then be the place that people aspire to work is something across Unum and fits very well with Poland as well. Grow the U.K. protection block. I talked a bit about that. I think Brexit is impacting on that.
We have seen large employers have to take large rate increases, that's really sort of depressed that a bit. We've really been trying to repair our margin there in 2018 and 2019. Grow our other products. We're doing nicely, and we'll look to deploy some of Unum's benefits and distribution expertise in Poland. In terms of my key messages, I'd have to start with Brexit, obviously. A lot going on. Today you'll have probably noted that there was a leadership called vote of no confidence for Theresa May that will take place sometime this afternoon, U.S. time. If she wins that means that she'll be guaranteed a year in place, which probably will actually see market confidence return. You might actually see the dollar sterling bounce a bit.
If she loses, that will create more uncertainty, then we'll see probably a change in leadership. Our underlying assumption is that there will be a deal. That's what's in these numbers. That deal will go through. I think if you talk to most business leaders in the U.K., that is the message that we are sending into the politicians. Bring certainty back. The market doesn't like certainty, and certainly businesses don't like uncertainty. We really want that to continue. However, we do need to be agile. There is a possibility that there won't be a deal. I think what you would see then is probably the dollar and sterling would further depreciate. Hard to tell what will happen to interest rates. Depends on exactly how that sort of mix comes through.
You could see economic growth also fall in the U.K., and certainly businesses would be very distracted, I think, during the market during 2019. It would impact on our growth. We may see some of that claims experience continue as well. I think we've been very agile to respond to that during 2018. We've dealt with that sort of uncertainty very well. We will remain resilient and robust, but perhaps some of the ranges I talk about later might be a bit depressed as we get through, if the no deal scenario comes through. As I said, we've been pulling rate through sort of double-digit rate increases coming particularly for large customers who have a significant part of the disability book, and that's been across the industry. The competitors are getting there as well.
We're not losing very much of that business, which sort of tells you it's an industry-wide trend. Jack talked about the investment portfolio. Clearly, Breege and the team also managed that in the U.K. We feel very good about our investment positions in the U.K., depending on different scenarios. We've been very resilient, and just as Jack talked about U.S. defaults, the U.K. has also reformed very robustly through the last 10 years of the credit cycle. Mike and Tim talked about investments in operating model. In the U.K., we've gone from three sites to two sites. We've gone from 1,000 people to just over 700, and we've re-platformed our group risk business and our dental business. All of that would have reduced the expense ratio by over 2%. We are reinvesting some of that in our digital side, particularly to support new distribution.
We will continue to expand and Poland is obviously the key area that we've done in 2018. Let me talk a little bit about Unum Życie. The hardest thing about this integration has been the pronunciation of the Polish language for my colleagues and I. We will call it Unum Poland, but if you were in Poland, it would be Unum Życie, and we have rebranded the business on Monday to Unum Życie. We're off and running. The thing that we've still got left to do is a bit of integration on IT. We're still on the Prudential's IT infrastructure for things like data centers. We have some money to spend to get off that in 2019. That will take us a few months and cost a few million USD one-off cost.
We also want to spend a bit of money on rebranding to sort of get our name awareness up and make sure our customers are happy with that change. It has gone tremendously well, though. Why Poland? It's an attractive economy with significant growth prospects in the employee benefits market. It's not quite emerging markets, but it's certainly not mature markets. It's somewhere in between. We see the opportunity for significant growth in insurance. There's a growing middle class, a growing need for protection, and it plays very well to our strengths. The business provides individual and group financial protection products. There is a little bit of diversification in our strategy there. We have a direct sales force, the more long-term products and long-tail products. There's actually quite a lot of profit built up in that business as we look through the years.
It is a very well run and solid profitable business with a strong management team. Although I have taken responsibility for Unum Poland, we are not integrating in any way with Unum U.K. It is going to be a separately run business. What we will try and do is drive our expertise through distribution, group employee benefits, and digital technology into that business. We will take the best of Unum and apply that to Poland and let that management team run the business. It has been growing premiums at sort of just under 10%. The IRRs on new business are over 15%. Really, if they continue doing that, we will be very happy. Just turning to the operating environment. You will see our assumptions there. GDP really is an indication, although we are not directly related, about business confidence. It has been muted, as I said. I think it is actually going to end about 1.3%.
That is what we are expecting to continue in 2019. Poland GDP always much higher and is much more buoyant marketplace there. You will see the dollar exchange rate. On average, it has been about USD 1.34 during 2018. We are assuming it will be about USD 1.30 in 2019 when we look at our numbers. Clearly, that could be volatile. It is at USD 1.25 today, but it is bouncing around quite a lot. Obviously pre-Brexit, it was up near USD 1.60. The 10-year gilts. We still continue with that about 150 basis points below U.S. We are still having to deal as we put that rate through, both with some of that claims experience of interest rate sensitive products, but also the low yields. In terms of our priorities, a couple of things I would highlight on the U.K. side. We are now taking those platforms and really looking now to digitalize our customer experience.
There is quite a bit of investment going in on that. The key area, though, what we are trying to drive is expand distribution. If you think about that core market, employers under 500. It is very under-penetrated. There is new people using technology to open that up. Pension providers in the U.K., but also new employee benefits digital players. They do not want to be dealing with your old traditional insurance company. They want to deal with something straight through, no paper, sort of 24-hour systems and processing. We are looking to work with them to do that. Rick mentioned that we also launched a voluntary proposition called Beni, which is very similar to Colonial Life, adapted for U.K. regulation. We are up and running on that, and you will start seeing some of the results come through in 2019.
Really, that is probably a longer-term play as we grow that market. Poland, as I said, really is focused on integration, land the business safely, and start applying our expertise to running that business and what we are good at. In terms of the ranges, they are significantly impacted by the Poland business coming in. Here you have three months in 2018 and 12 months in 2019. Interestingly, it affects them in slightly different ways, actually. Sales growth, 16%-21%. You see there really the benefit of the nine months coming through. U.K. be more in the 6-9 range. That is the kind of U.K. range. Premium growth sort of 9%-12%. Again, that being really helped by Poland sort of 12 months coming in. Poland is about a USD 65 million business.
It's small from a group perspective, but reasonably impactful on the U.K. The U.K., probably more in the 1%-2%. Adjusted operating earnings, well, as I mentioned earlier, we've got reasonably significant integration costs, we're basically applying those against Poland. Really, Poland isn't really going to make an impact in 2019 to our earnings, but it will start coming through in 2020, you'll start seeing the earnings boost then. The same with the ROE, where we're seeing Poland slightly dilute that. The U.K. ROE would be around 15% for 2018, but actually, you'll start seeing Poland starting out, dilute it in 2019, and then it'll start coming through in 2020 and 2021. With that, I'll turn it over to Steve to talk about the closed block.
Great. Thanks, Peter, good morning, everyone. I'm going to hit three things this morning. One is I'm going to review some of the demographics behind the block, both products, the individual disability income product that we have in closed block, as well as long-term care. Second, I want to hit on a few details around the reserve assumption changes that we made in September. I think coming out of those discussions, there were a couple things that we thought we might want to drill a little bit deeper into in this meeting and give both an update and a little bit of clarity. Third, just talk a little bit about the outlook for 2019 for closed block.
The demographics of the closed block, as many of you know, there's actually two products, although we normally talk about just one of those, but there's two products within closed block. Both legacy blocks. We have our closed block of individual disability income. That was discontinued in the mid-1990s. That's a very mature block. When you think about it has premium that run off about 8%-10% a year. That block really terminates by contract right around retirement. Think 65 years old to 70 years old, those policyholders, their contracts will just terminate. What we're seeing right now is the average attained age on the active life reserve is now around 60. If you just play that out, we're talking 5-10 years, a lot of that active life business will be run off.
What we do have is a pretty significant disabled life reserve, you can see that on the bottom left. About 94% of our total premium is actually in claim at this point. That number, as you can imagine, ticks up every year. That's the individual disability income block. You have the long-term care block. It looks pretty consistent with what you would see last year. It's about 60% of the premium of the closed block. It's held steady the last couple of years, that has continued to do that. It's a combination of just the termination of the active life there through mortality and lapse. We have input and rate through the block. The combination of those two have given us kind of a steady premium level over the last several years.
As you can see, the majority of the LTC block is an active life reserve. Right now, about 16% is in claim and the rest is active life. Pretty consistent with the statistics you would have seen in prior periods. The other couple of things that I'll note. One, we do have a statutory to GAAP difference that's right around $650 million as of the measurement date here. That does continue to grow year-over-year. That allows us to manage that GAAP reserve without impacting our capital plan significantly. The other thing that I'd note is just a pretty consistent after-tax operating that has been consistent over the last few years. Our strategy remains the same, and I'll just briefly touch on each one of these.
From a financial analysis perspective, we think we have one of the best machines really in the industry as far as being able to analyze our blocks. That was really confirmed over the last year as we've had outside consultants in working with us on Long-Term Care. We feel good about our analytical tools. We've taken those tools over the last year and applied them also to our IDI block. We've looked at our claim reserve on a new system, really validated our view of that claim reserve, and we feel good about that as well. Long-Term Care rate increases we announced back in September. We're continuing with the program that we launched in 2014 to see that through, we're also going to be launching a new program or a new strategy that came out as part of our reserve assumption modifications.
Those filings are in process right now. We will actually begin dropping those filings here in the fourth quarter into the first quarter and really begin our next outreach process with the state regulators. We forecasted a lot of this with the regulators. They know they're coming. They knew that that would be part of our reserve assumption modifications that we announced back in September. From a capital management perspective, we continue to have discussions out there in the market. There are a lot of interesting parties, I would say as far as actual transactions being done, we think that's still going to be kind of tough. We will continue to explore all the alternatives, and we know that that's a large lever that maybe longer term we can use to manage the capital and the risk within our closed block. Operating effectiveness.
We have a very large claim block that we have to manage on both of our products. We continue to deploy technology enhancements to that to try to operate the block as efficiently as we can. Our priorities, they stay the same. Near term, the team's really ramped up on the rate increase strategy. Again, we'll begin our outreach at the beginning of next year. We have gone through our comprehensive reserve analysis. We spend a lot of time right now just looking at the current experience and looking at how that compares to those reset assumptions. As you would've seen in the third quarter, our loss ratio is right in the range that we would've expected when we reset those assumptions. So far, we feel very good about that.
A lot of this we disclosed back in September. We wanted to just hit on a couple highlights of this. We feel like our block is somewhat different than other LTC blocks that are out there in the market. We have a significant portion of our block in group business. Those are individual insureds that are within a group contract. Many of those groups are employer paid. That's important in that what that means is that the entire employer group would be covered, which really spreads the risk that we have. The other thing that you'll see within these blocks is just because of how they were sold, there's a lot of dynamics that produce lower risk in the group product designs.
Little lifetime benefit coverage, high percentage of no inflation coverage, lower daily benefits. It just makes sense with how those were sold in that the employer wanted to provide something to their employee base, but they weren't willing to pay the higher premiums that you might see in an individual product. You can see that come through in the average premium, where the average premium on the individual business would be closer to that $2,000 a year range, that would be normal. What we're seeing in the group block would be more like an annual disability income type of premium. We believe, and I think you can use it as a proxy, that average premium is a pretty good indication of the relative risk of the products sold within the groupings. I want to hit on a couple things, going back to our reserve increase modifications.
One is morbidity improvement. Clearly, that's gotten a lot of discussion in the market. We want to reiterate really the message that we sent back in September, but then give a little bit of an update of some of the discussions that have been going on in the regulatory environment. As many of you saw this back in September, how we think about morbidity improvement relates to morbidity incidence, just incidence rates and the improvement of those incidence rates over time. What we presented and what's up on the chart is when we compare our actual incidence rates over time to what our base morbidity incidence assumptions would indicate, we have seen an improvement in that actual to expected rate over time. That improvement that we've seen is over 3%. We set our morbidity improvement assumption at 1% annually.
We feel like it's well supported by our experience and well supported by our data. What I would say is there's been a lot of discussion out there in the market. The regulators have started to talk about this assumption. Our view on that would be really there's two places that it's being discussed that are related. One is at the Long-Term Care Actuarial Working Group, and the other is, there's an SOA working group that have been looking at the topic of morbidity improvement. We've also talked to a lot of regulators individually. What I'll tell you, coming out of the November NAIC meetings and what we've heard from the SOA working group, it's going to be a very kind of rational discussion going forward. There's no absolute conclusions around whether companies should include morbidity improvement or not.
I would say the themes that are coming out of it would be two or three. One would be you need to look at the company's actual experience. That's important. When carriers are dealing with their regulators and they're having that discussion, you need to look at each individual carrier's experience. You can't read across all carriers. The second thing is there are ways that you should look and measure morbidity improvement. There's two ways that they've been talking about. One would be just an absolute incidence rate over time. That's an okay way to look at it. They also say that really the way you need to look at it is in relationship to your base morbidity incidence assumptions. That's how we look at it.
That's how we demonstrated it and represented it in these charts, and that resonates with the regulators. Generally the conversation has been very rational. I don't think there's going to be any kind of conclusions drawn imminently. The key is that there's a language that's being created between regulators and carriers to look at this assumption. We continue to feel good about the assumption that we have in our reserve. The second topic is around our rate increase strategy. There's a little bit of confusion maybe coming out of the September discussion about just what really makes up our new assumptions. Just going to take you through a real quick chart here. If you go all the way to the left side, this was the strategy that we launched back in 2014.
We filed rate increases that totaled about $2.2 billion, think about it as present value of those increased premiums or reduced benefits on a lifetime basis. Through the end of this year, we're running at approvals of about $1.3 billion on those. We feel really good about the program that we launched. That's about a 60% success rate. The remainder of what's still on file, we will continue to pursue, and that's that the top part of the bar chart just carries over into the next chart, and is really the underpinning of our 2018. We're going to continue to pursue what's left of those filings back in 2014. We did bump that up to $1.1 billion because we've had a couple other smaller filings along the way between then and now.
We're going to continue to pursue that, and the majority of those are going to be made up of really two things. One is California. We have a very large filing outstanding in California on both individual and group. The second would be states that have been approving our increases but doing it very incrementally over time, 10% a year, 15% a year, 20% a year. We feel very good that we're going to be able to see that through. It might take a little longer than we would like, but that we will be able to get meaningful approvals on those over time. That's the prior program, the $1.1 billion. In addition, the $1.2 billion at the bottom of that middle stack, those are new requests that we're getting ready to file. The aggregate value of those is $1.2 billion.
If you go to the next chart, in our assumption, we have assumed a $1.4 billion value of approved increases. Again, that's about a 60% approval rate on what we have on file today. We feel like that's very supportable by what we've seen. We go through a state-by-state evaluation of that and really look at our success rate in each state. It's also heavily weighted, the $1.4 billion on the group side. The majority of the value that we're assuming is coming from the group business. We feel like that conversation is a lot easier to have at the regulatory level. A lot of it's employer paid. The absolute increase of premiums is much smaller than the individual side, just because the average premiums are smaller on that block of business. We feel good about the target.
It's highly leveraged to the group product line. It's highly leveraged to California. We feel good about California. Nothing that I can announce at this point, we continue to make progress there, and I can assure you will know about it very quickly, if and when we get an approval from California. I'll talk a little bit about our individual disability block. That has been a very stable block. I think demonstrated by the fact that we don't talk about it much. It doesn't come up in earnings calls, and it's been a very stable performer over time. We've given the interest-adjusted loss ratio, which has actually been improving over time, and very stable. Going back, this was a block that was capitalized through a securitization within our Northwind captive back in 2007. We issued debt of about $400 million to capitalize it.
That non-recourse debt has been paid down on time and is expected to be completely paid off in 2021. I think the import of this is we're basically servicing that debt out of statutory free cash flows of that business. Once that debt is paid off, those cash flows will be available for Unum Group. The debt service on the debt repayment alone is about $60 million a year. We feel good about how this is paying down. We also feel good that this will be another source of capital down the road for us. Just in summary, from an outlook perspective, we expect closed block earnings to be pretty much in line 2019 versus 2018. They might be slightly higher but fairly consistent. Net investment income could continue to be pretty volatile.
About 40% of the earnings of this closed block segment is through miscellaneous net investment income. Bond calls, alternative asset income. It tends to be pretty volatile, so that's something we keep our eye on. We do feel good about the range we put out there. After our reserve assumption, we're still expecting the 85%-90%. Again, we'll make the point, that can be highly volatile from period to period, and that's more of a long-term expectation that we do have for the long-term care block. I'll just give you the numbers. Premium growth, that's really a combination of the IDI, individual disability income block, should run off at about an 8%-10% clip. We think the LTC premium levels will be pretty consistent year-over-year for the things I mentioned earlier. Earnings, pretty consistent.
When you think about the returns, we're in loss recognition on this block. We're basically earning after-tax corporate bond returns on the capital that backs the block. You'd expect it to be in that 2%-3% range. With that, I'll turn it over to Rick for some closing remarks.
Great, thank you, Steve. As we wrap up, I would just take you back to those points I wanted to highlight earlier. As you've gone through and seen the entirety of the business and the great opportunities that we have in front of us, the good returning businesses, we're very focused on growing those core businesses in a disciplined way and continuing to generate significant returns. I think Steve laid out and Jack mentioned, in 2018, worked through the closed block. We were very disclosive back in September, we'll continue to be about where we stand in the different positions, we'll continue to educate about our particular block and where we stand. As we wrap up the year, we feel good about navigating the capital changes that have come at the company.
As we look forward, the cash generation that we have coming off of the business will allow us to redeploy that capital primarily back into our businesses to continue to grow and invest. We will also use some of that capital to continue to manage our closed block. Ultimately with shareholder friendliness, we'll continue to give it back to shareholders through share repurchase, dividend increases over time. We feel good about the entirety of the enterprise, what we're doing. Want to make sure that you see that we continue to be the same operators on a disciplined basis that has a very good franchise serving the employee benefits space. With that, let me wrap up there and turn it over to the audience here in New York for any questions you might have. I think we have a couple microphones coming around.
Start right in the back there.
Hi, thank you. Erik Bass with Autonomous Research. It's something we're hearing from a lot of companies. Wondering sort of how you see it really driving growth, or is it something where it's sort of table stakes to be competitive in the industry going forward?
It's a good question. I'll start, I'll let the team kick in. It's something we've been working on for a long time, it's not a new initiative starting
In 2019, connectivity to our customers has always been important, I'd put those in digital categories. I think we're upping our pace in 2019, both internally, in terms of how we run the company internally, more importantly, how we connect to those customers, which Mike talked about. Not something new, certainly something that we're spending more time on. You're hearing about it more in the industry. The only thing I would say about us is because of our knowledge of our customer set, the scale that we have, we have the opportunity to deploy that effectively, I think we've led in a couple of areas from a digital perspective. Mike, do you want to add thoughts to that?
No, I think you hit it well, I'd say, Erik. A lot of times, two things. One, we take a sort of an outside-in perspective, that's a little bit unique. We don't start with what's the capability? We start with what's the client trying to accomplish? You heard the term journey mentioned a number of times. What's the client trying to accomplish? I'd put them in two buckets. Very often, what it is, it does fall more on what you would describe as table stakes. We might be a bit ahead, we wouldn't expect that the market wouldn't follow pretty quickly. I think importantly, it's a better experience for the client a lot of the operating expense efficiency actually comes hand in hand. You simplify what that process is. You put some new technology in.
That drives your OE ratio, but it also, first and foremost, the experience. I'd say where we start to see differentiation, where I would not describe as table stakes, those are things where you're creating new avenues. I talked a little bit about the LeaveLogic platform. That is a 100% digital experience. It's about equipping an employee to plan for their leave. It's about equipping the frontline manager of a client to deal with someone who's going out on leave. A good second example is the HR Connect service, where we're integrated with Workday. That is just a wholly different process and something that we think is unique. Nothing, I would say, in the space can't be copied eventually. I think we've got a little bit of a head start there.
Thank you. I guess, do you think you ultimately can drive greater enrollment levels from some of these initiatives by just making it easier for employers and employees to sign up? Is that where you see the revenue growth opportunity?
I think it's a definite opportunity. We are pleased with the enrollment platform we have, but also the capabilities that we have to connect to other platforms and make that enrollment experience seamless for employees. The other important point around digitizing the overall experience is two-thirds of our sales, and I think this is largely true for the industry, come from existing customers. I know you guys have a lot of sales growth from your existing customers, the more you can improve that experience for consumers, the more they're not only willing to re-enroll, but the more they go back into their workplace and tell others, "Hey, you should think about a Colonial Life product." The next enrollment, people have it more top of mind.
In the voluntary benefits industry, one of the main reasons that an employer client would choose to leave is because of billing concerns. Through digitization, we can significantly enhance the billing process or potentially even eliminate the billing process. There's another opportunity. Finally, for us, from a digital perspective, the agent app I talked about, we believe will significantly enhance the productivity of our agents. A lot of opportunities to grow sales, keep more of our existing customers, and then write additional customers inside existing clients through digital.
Thanks, Erik.
Thanks. Randy Binner with B. Riley FBR. I have a question, I think this touches both Unum US and the Supplemental and Voluntary area, then also Colonial Life. It has to do with what's going on with ACA and a shortened open enrollment period and lower take-up rates in that environment. That's major medical. I understand that's different than what you all sell, but you kind of start where that stops in a lot of regards. Whether it's stop loss, whether it's someone buying a supplemental dental policy, if they're buying a limited term health plan, the people, the Colonial Life agents are visiting, if they're getting questions about what should I buy, and what's going on with open enrollment?
I would just be curious how that environment, which is obviously changing, is affecting your business now as that open enrollment period winds down and just how you see that affecting the demand for your products going forward.
Yeah. It's a good question. We really have not seen tremendous impact there. We have the opportunity, the availability to conduct enrollments almost immediately after the sale. We can be up and running with a client on their timeframe. In terms of the ACA, generally we continue to see people choosing plans that create a lot of gaps in their medical coverage, which plays right into our playbook, and we have 7,000 benefits counselors in the field who can sit with someone and talk to them about all of their benefits, not just Colonial Life. They can talk about their medical and where the gaps exist in the medical, and how certain products can help support that gap. Did that answer your question?
Yeah. Have you thought about manufacturing some of those short-term medical products, and could you offer them as a distributor?
Yeah. We've given it some thought as something we continue to actively consider. There's a lot of regulatory ambiguity around where that space is headed, especially if you start thinking about traditional skinny medical plans and where that goes. At this point, it's on the table for us, but it's not something that we're actively pursuing for 2019.
With ACA, I think originally the biggest impact for us was just distraction. I'd say we're not seeing that in the brokerage community with some of the changes that are happening right now. I think the most critical trend is the one Tim highlighted, which is, in general, employers are managing costs by shifting more accountability to the consumer, to the individual. Higher deductibles, higher co-pays, much more rigorous management of pharma spend. That creates pretty significant gaps for the average working American. That Voluntary products, whether it's Unum branded or Colonial Life branded, that's a primary growth opportunity for us.
Thanks, Randy. Ryan?
Thanks. Ryan Krueger, KBW. Jack, you made some comments about free cash flow. Can you roll it all up on an aggregate level and when you consider how much capital contributions you'd normally expect in statutory earnings and holding company costs, what the overall free cash flow of the company is at this point?
Yeah. I think I mentioned it's about in that $1.1 billion range, coming from both the traditional insurance subsidiaries as well as the U.K., and some of the non-insurance subs. That dividend capacity is $1.1 on an ongoing basis since we've been generating high single-digit book value growth on a leverage neutral basis, that would create another $200-plus million of free cash flow opportunity.
What would be the normal hold co-costs and capital contributions to subsidiaries? That would be an offset to that.
Yeah. They're higher right now over the next couple of years because of the RBC tax factor changes. We expect them to go back to that normal level of a couple of hundred million.
Okay. Then on Unum US, Mike, can you talk a little bit about the competitive environment? It seems like we've had a couple of big mergers in the space. I guess just what you're seeing right now.
Yeah. Thanks, Ryan. Our best data point is those one-one renewals. So I mentioned, always a battle right to the finish, even two weeks to go. The numbers are lining up consistent to maybe even slightly favorable to what our original expectations. If things get really irrational from a pricing perspective, you do actually see a bit of an impact on your in-force block and your ability to place the increases that you want. We're not really seeing that. I'd say it continues to be what we would describe as the upper end of the small case markets. I think 100 employees up to about 2,000. That sort of middle market where carriers that focus on the large end are coming down to get diversification and transaction count. Small employer-focused carriers are kind of looking and big fish hunting.
So it gets pretty choppy in that middle, and we continue to see that. Activity is pretty flat, quote activity, but close ratios have suffered a bit. I'd say a little choppier than normal in that mid-market, but not outside.
Thank you.
Yep. Thanks, Ryan. Alex?
Hi. Yeah. Alex Scott, Goldman Sachs. The first question I had was on the FASB comments that you made. I guess, I get a lot of it's the discount rate, it's an AOCI. I guess the piece I wanted to ask you about is just, I think there were two elements. One, disaggregation of reserve calculations by policy year, as well as, I guess, building a profit before a loss reserve for premium rate increases. I guess premiums that are coming through today, I don't think you build into the profits before losses reserve as you get those premiums specifically. When I think about those two items, would that cause you to have a higher reserve at transition that's sort of separate from the discount rate?
Yeah. We're not anticipating that. I think the disaggregation is something we're working on. If you just followed your nose, there'd be a little bit of a discontinuity there. Not a real big one. We also believe there are things we can do to help mitigate that, in terms of the underlying assumption set and how they're applied to issue years. I think, too, you can disaggregate your rate increase assumptions, particularly in long-term care, and kind of apply those to issue years. We're not anticipating huge impacts. The disaggregation to issue years, it does have an impact. It makes it harder to manage. The interesting part about that, it has nothing to do with being a closed block or not.
Any business is going to have issue years from 20, 30 years ago that are going to have uncredible remaining blocks of business that are going to have to be reserved independently. I think we're in a position, particularly around long-term care, to be able to deal with that. We haven't gone through all the work, all the final judgments haven't been made, but we do believe it's a manageable position, and even in kind of where we're just looking at the worst case, it's not
It's manageable relative to our overall capital strength.
The second question I had is just on the group benefits businesses. I think one or two of your competitors has talked about just where loss ratios are relative to what they price for over a longer time horizon. I'd just be interested if you could share anything around where you think your loss ratios are compared to what's in your pricing assumptions.
Mike Allen?
Yeah.
Yeah. I'd say for the most part, there's some puts and takes, but for the most part, pretty much in line. The question was specific to group insurance, I think. I'd say the only place where we actually would like to see the loss ratio come up just a bit is the voluntary benefits line of business. It's been unusually favorable over the last couple of years. I mentioned we're putting some new products into the market. Those are priced closer to more our targeted loss ratio, which is a few points higher than what our experience has been.
Thank you.
Thanks, Alex. Yes, Suneet. Suneet, right?
Thanks, Rick. Suneet Kamath from Citi. For Jack on the IDI block, I think you've talked about that economically as having a risk profile similar to a deferred annuity or fixed annuity. Obviously, lots of demand, in terms of third-party solutions for that type of business. Is that something that's still possible for you guys on the table? Do you have to wait for that debt to fully pay off? Where do we stand with that?
Yeah. It's probably simpler if the debt's fully paid up, but there's just not that much left, and you could sweep it up as part of the transaction. I think as we've played it out, because of the certainty of the cash flows, that they're not volatile, they're emerging, it's kind of like an economic wash. You pay someone else's cost of capital and the capital they're going to have to set up, and you get the remainder, and it's just a question of, in our current circumstance, does that look more attractive than just waiting out and getting those same cash flows down the road? It's something we continue to look at. We continue to test the markets. It's not a compelling thing, like, wow, this is a huge opportunity.
To the extent that we had a use for the capital, it's certainly an option we have.
Okay. Separately on the Long-Term Care and the FASB changes, so we're obviously looking at the stat to GAAP reserve differential, and every quarter we talk about that.
Yeah.
To the extent that these accounting changes cause the GAAP reserves to go up, does that have a natural knock-on impact on the stat reserves, just because I think you're managing to a differential between the two?
No. You're really managing your statutory reserves to what your best estimate liability is and making sure you have a margin over that. When this gets implemented, our best estimate liability doesn't go to the single A rate. It will stay consistent with where we are today. I wouldn't see it having an impact on stat reserves.
Okay. Then just a quick numbers one for Steve. On the long-term care blocks, can you give us the split of reserves? I know you've given us different cuts across a number of metrics, do you have the reserve split across employee, employer paid, et cetera?
Yeah. That's not something we've disclosed, I don't think we would in this forum.
Okay. Yeah.
Yeah.
Okay.
That's right behind you, Steve.
Jay Cohen, BofA Merrill. I guess a question for Mike. Mike, you had mentioned, about 2.8 benefits products per client. My question is, what's the trend? Has that been going up, and where do you think you can bring that to?
Yeah, good question. Last year, I think what we would've put up there was 2.6, so we're seeing a nice increase. When you think about 60,000 or 70,000 clients, that's a nice increase. I'd say it's a little more complex than that. If you go just maybe one click down, what you'd see is in the mid and large employer segments where we have more direct and day-to-day contact, that product benefit per client number is significantly higher. I think that's probably the segment where we've got still the most opportunity. We're averaging somewhere in the four to five benefits per product. I think very reasonable to think that could be a six or a seven.
If you build it, back to the digital question, which was a really good one, it's good for the industry when folks are investing in new digital capabilities because it starts to shift the basis of competition a little bit more towards the experience and a little bit away from just purely pricing and underwriting terms. If you start to put it together, even as other carriers are investing in those experiences, what you're doing is creating some value for the client, and the broader that relationship goes, the stickier it is. I think for the industry and for Unum, it's broadly positive.
Good. Bob?
Jack, the Wall Street Journal indicated that Half of the CFOs in this country think we're going into a recession in 2020. I'm not sure how you voted, and I'd probably vote no. First of all, Unum's done apologies that you went public. You've had lots of recessions, and the company's going through, and you went through the last one with pretty well positioned relative to credit and experience. Could you talk through enterprise risk management? Let's say you did vote yes, we're going into recession. To what extent does that influence pricing on renewals, what Breege is doing in investment credit? You guys have been thoughtful in how you've approached enterprise risk management, how would a recession impact your planning going into the next year?
I would say, first of all, I did not vote because I'm deathly afraid to click anything in an email these days.
Affect karma. Karma impact.
We understand this credit cycle is going to come to an end at some point. It's been long-lived. We are prepared for that. It's not going to be fun. It's not going to be fun for anyone. When it comes to an end, there are likely to be capital losses that we will take. In the portfolio, we are very confident that we will fare at least as well, if not better than much of our competition. Even if you compare it to 2008, 2009, which was one of the deepest recessions and quickest developing recessions we've seen. Even then, we had very reasonable losses as a company. We think we're well prepared.
We have the capital, we have the capacity, we have a very highly skilled and professional credit shop that have worked through and have the experience of working through credit down cycles in the past. We will manage through it. The growth of our business may be sensitive to economic cycles to an extent. The performance of the business in terms of underlying risk elements are less sensitive to economic cycles, although they could be impacted. Because we've been in such a long period of lower interest rates, we are way better off going into this next cycle than we were going into the past. We're not coming off of a 6% all-in interest rate environment, and then all of a sudden find ourselves in a 2% or 3% environment.
I'd say it will impact us, but I think it would impact us in manageable ways, and we would work through it.
Have you tweaked pricing at all, just based on the last two weeks of market expectations? It's a ridiculous question at one point, but to what extent are you factoring a recession in pricing at all?
It's less of factoring in a recession in pricing. What you're looking at is interest rates, and although prevailing rates have fallen, spreads have widened, all-in rates have not changed as dramatically as the treasury has changed, and we're out on a point in the curve toward the 10 and 30 year-end, where we're still finding reasonable things to invest in that support our current discount rates.
Go ahead, Tom.
Thanks. Thomas Gallagher, Evercore ISI. Just first question for either Jack or Mike. What's the group disability benefit ratio that's embedded in 2019 guidance? Is it consistent, like the 76 or so that you've been running at? Is that the expectation?
Yeah, I'd say largely consistent. Actually, we'll see a little bit of an improvement if things play out as we would forecast. Actually, based on the short-term disability component of that group disability ratio, we've got a segment of that short term that needs some pretty aggressive renewal action. That'll get implemented in 2019. We would expect a bit of an improvement there, but largely consistent overall.
Jack, I wanted to come back to your comment about subsidiary contributions, just so I'm clear on how much should we expect this year and then next year. I think you had mentioned it's going to be running on the high side both 2018 and 2019.
Yes.
Is that in addition to the reserve charge for 2018? Can you just elaborate a little bit more on.
No, that includes the reserve charge for 2018.
How about for 2019?
There'd be no reserve charge for 2019. 2019 is largely driven, a little bit of follow-up on cash flow testing in New York when they went from 35% tax rate to a 20% tax rate increase, asset adequacy reserve requirements. The biggest component of that is the C1 factors. Again, those get absorbed in kind of the traditional.
Insurance subs, because we're running at higher than a 350 risk-based capital there. They can't be absorbed in the subsidiaries. You need to put money into Beckham.
No unusual or larger capital contributions beyond the reserves?
Yeah. I think, as I said in my opening remarks, very little of this is being driven by any experience consideration. Other than what we talked about in the Long-Term Care reserve charge, there's nothing else that's driving it other than the aftermath of tax reform in other than the C1 factors.
Got you. Steve, just a few questions for you. Can you talk about when you step back and look at the trend that caused you to strengthen reserves last quarter, what was really the driver? Is it extending claim durations? When you look at really what the core cause of that is, what was going on behind the scenes?
Tom, I just go back to the waterfall that we showed. It was made up of a few components. One was, although we felt good about the historical interest rates we've gotten on new money, we did bring down the longer-term new money expectations. That was a bit of it. It was the combination of just all of our other liability cash flow assumptions. A big driver of that was claim terminations, though. We did talk about that. That was a significant part of it. The majority of the charge was just the core cash flow projections in the liability.
When you think about the claim terminations, that's extending or improving mortality, I assume.
That's right. Yeah. The majority of claim terminations is going to be driven by mortality.
You're essentially seeing longer duration of claim that's mortality related. Is that the right way to think about it?
Generally.
When you think about your reserves, I believe you all use mortality improvement that's embedded in your reserves, do you use that for both frequency and severity?
No, it's purely frequency.
Got it.
Both morbidity improvement and mortality improvement is more of the frequency or incidence of morbidity and mortality, not in any way the severity.
I guess my main question on that, and I think you're not alone, I think most other companies use that same assumption. Is that a risk for you in the industry if everyone is seeing, because I think everyone is saying the same thing right now. They're seeing extending claim durations, and if no one's adjusted that assumption in the ALR in terms of the improvement in on-claim mortality, is that a risk? Is that something you guys have to adjust?
I wouldn't think so because I wouldn't think of severity as an assumption. Severity is the outcome of other assumptions. It's the outcome of our mortality rate, it's the outcome of our recovery rate, and it's the outcome of just contractually the benefits being exhausted. I view severity as just an output, and we feel like we match up with our experience on both recoveries and mortality. That's just going to drive the duration of the claim.
The other thing, Tom, is I wouldn't wrap up that impact on mortality on disabled life reserves as largely driven by improvement. I think it's driven by the fact that as the blocks have matured, we understand better what that underlying mortality actually is.
Right.
I don't think improvement is a big factor in that. It's more just through experience, coming to understand where the assumption should be versus where we initially put it.
Got you. It's more the assumption as opposed to seeing a big change in trend.
Yes, that's right.
Is that fair?
Yes.
Okay.
Tom, can we move to somebody else here? We can come back to you. I didn't do my good Tom White job of two questions. Sorry, Tom. We'll come back to you, Tom. We'll be here all morning. Good. Yes. Come down front.
Humphrey Lee from Dallan Partners. Pardon my voice. I'm a little under the weather, so hence the cleaning on the mic just to not to get anybody else sick. On the wage growth expectation, you've talked about your not significant amount of wage growth building into your top-line expectation. Can you talk about what is your baseline assumption, and then how sensitive or how quick would a wage inflation affect your premium growth, that sensitivity?
Yeah. Thanks. Hope you feel better soon. What we've seen is over the last 4 years, it's gone from being a drag to being a push, to being slightly positive. Kind of a point to a point and a half range on the group businesses in particular. I think our assumptions hold with what we experienced this year, so nothing built into the numbers beyond what the run rates are. How quickly it burns in a month for a particular client. In general, billing's going with a 30-day lag, so it really just a month behind what employers are doing is what flows through. I think the only other piece of color I would offer is we've talked for a long time about increasingly what's happened is an employer-funded plan to have moved to mixed contrib plans where employers are funding maybe a base or a portion.
Employees are buying up additional all the way to, like in Tim's business, 100% voluntary. A lot of the voluntary segment for Unum, 100% voluntary. You don't see the same
Automatic leverage. As you see things like employment gains and you see wage increases, that flows through really pretty rapidly on a pure employer-funded plan because there's no decision to be made at the consumer level. Also, a lot of those benefits are hinged. If you think about your own life insurance benefit, you might have a two times salary benefit. Disability insurance tends to be a percentage of salary. Again, it flows right through. A voluntary life plan tends to be a flat dollar amount. You're buying $40,000 of coverage or $25,000 or $50,000. Again, you don't see that same automatic leverage on wage growth. Should it pick up, I think it would bleed through, but it'll bleed through on a little bit more of a muted basis.
In terms of your client mix, can you talk about in terms of the sectors of your clients, how much exposure do you have to potentially tariff-affected industries?
Yeah. I would say, when we look at it both geographically and by industry or SIC, we're pretty evenly distributed to the U.S. economy. We're probably a bit overweight services and healthcare, in particular. That's grown pretty rapidly because it's taken on a bigger share of GDP and employment. We're probably even a little bit heavier there. Yeah. No, it's something that we watch. It comes through in the experience. To the earlier question about, Bob's question about the economy in a downturn, when we think about things like disability incidents, it starts to show up in a sector through experience. That goes right into your renewal rates. One of the things we're pretty disciplined about is making sure that our rate guarantees are limited in nature so that we can take action as things emerge.
We watch it in a lot of different cells, in general, I don't think we're overexposed.
Great. Thanks, Humphrey. Please get better. Come back to Ryan over here. I think we'll retire that microphone, actually.
Very thoughtful to your colleagues. Well done.
Go ahead, Ryan.
Ryan Krueger, KBW. I just have one quick follow-up. Jack, are the C1 factors finalized? I thought they were still up in the air at this point, if that was going to happen in 2019.
It's our anticipation that they'll happen. They have not been implemented yet.
Okay, thanks.
Let's go over to Mark.
Mark Hughes, SunTrust. Are you seeing any extra competitive pressure in the broker channel in Colonial?
Yeah, it's a good question. I think, the way I would characterize it is we see competitive pressure among brokers, which impacts our industry. In our industry, where commissions are typically paid on a high-low basis, there's intense pressure or competitive pressure in the brokerage community. When one broker replaces another broker with an existing client, they're highly motivated to move that client to get first-year commission. We do see competition among brokers impacting us. We don't see other competitors taking our brokers away from us, if that's getting at your question.
On the leave management services, you emphasized it's beneficial for your relationships. Could you talk about the financial profile of how much revenue, what's the margin profile?
Yeah. It's a service business, no capital behind it. The way that we price it is generally to be breakeven to slightly profitable, kind of low single digits on an incremental basis. The leave business is somewhere in the $50 million-$65 million of fee income, and it's in that group disability segment.
Tom. Come back, Tom.
I promise I'm going to make this quick. Jack, just a quick one on that FASB change. The discount rate, are you going to be able to use forward curve or is it going to be spot rate when you make the change to ALR discount rate?
Yeah, I'm not sure.
Not sure yet. Okay. Steve, just to come back, last topic on long-term care rate increase assumptions. You had mentioned California's important. I think they're getting a new commissioner, if they haven't gotten one already. How does that play into the process there? Does that change anything? Why are you confident that you're going to be successful on group when groups actually had very good, I think, performance up until now? Is that because it's the aging of the block and the way that works?
Yeah. On the commissioner, that's something we obviously track. That could have an impact, we feel really good about the actuaries that we're working with there and the administration that we're working with there, which is kind of further down in their administration. It's something that we monitor, we still feel pretty confident that we'll be able to move forward there. On the group, I think it's a couple things. One is, a piece of that block we've never rated before, we think there's an opportunity there because that block hasn't been impacted, that regulators will be more accommodating there. I would say also on the older block that we have rated, it was a 75% rate increase kind of across the board, we still think there's opportunity there where we did not ask for approvals up to kind of the actuarial justification.
I do think to your point, time helps on that block a little bit as well because more credible data, they ask for actual group data at times, and they like to see some credibility there as well. I think time probably helps us a little bit on that block as well.
Come back over to Alex.
I just had one quick follow-up on the digital initiatives. I guess one thing I didn't see was anything in the waterfall year-over-year for an acceleration of expenses. Are you absorbing that through growth and earnings? Is that just kind of included in the operational performance in the waterfall? What's the way to think about it?
Yeah, I think consistently across the company, a lot of these initiatives have been self-funded. We talked about some streamlining, some savings that will come out, but we're plowing that right back into the investments that we're making today. That's been our run rate over the last few years. I think given the scale, we have seen improving loss ratios in some of our businesses, so some of that's flowed through to the bottom line. When we think about those initiatives, we still want to make sure we're investing in a significant amount into the growth.
Well, I mean, totally agree. I think just the first thing you want to do before you invest in the technology is you want to make sure you have an optimal process so you're not automating a broken process. Pretty aggressive push around process redesign and implementing lean management. That has actually generated kind of fuel for the tank in terms of investment, and it's allowed us to, I think, across the businesses, bootstrap the digital investments.
Thank you.
Yeah. Randy?
Just one more. Randy Binner with B. Riley FBR. On the one more FASB question, and this might pick up from what Tom was asking, but if we don't know what the reference will be for an A spread, do you know approximately what the delta would be in your discount rate now versus where an A return is like now on a spot basis, just to kind of size it for us?
Yeah, I mean, we've looked at it. It's significant. It's in the $ billions. It helps that it's confined to active life reserves. It's really largely a long-term care issue because some of our other products have active life reserves. The discount rates associated with them and the rates we price at tend to be significantly lower than where long-term care is. It's a chunk. It's a meaningful piece. I'm not going to speculate on where credit spreads are going to be or rates are going to be three years down the road. Certainly, a rising interest rate environment helps that and would make that a smaller amount.
All right. Thank you.
Yeah, I mean, as Jack said, it's still three years off. There's a ton of work to do. I think we're trying to give you our best look, but this standard just came out. It hasn't been worked through, so I don't want people to read too much into it. We're still talking about, at a minimum, 2021, and we'll have to see if that becomes the implementation date. I know it's a hot topic. We want to give you as much as we know, but don't want you to take too much precision in what we're talking about here.
Yeah.
There's a lot to play out still.
It's going to have an industry impact. It's not just us. Variable annuity carriers are going to have their own separate impacts. It's something our entire industry is going to deal with.
Good. More questions? Well, good. We appreciate you coming out today. Hopefully you got a good sense that we're still doing the things that we've been doing, running a good core franchise, working through the changes that we've seen. We feel very good about 2019. Appreciate your time today, and hope you all have a very good holiday season. Thanks.