Happy to have with us from Unum, Rick McKenney, excuse me, is the President and CEO. Rick has been at the helm of Unum for almost three years. Probably went pretty fast, didn't it?
Still going fast.
To do with the companies in 2009. Rick has navigated Unum through some very choppy waters. We really look forward to his comments today. Rick?
Great. Thanks, Jay. Thanks for everybody for being here. I'm going to take a few minutes. It's a little bit different format. Just so you're aware. I'll take you through some prepared comments here. Want to make sure we get time for plenty of questions and answers. Appreciate having you all here today. Let me talk to you a little bit about Unum, where we are today, a little bit on 2017. Most importantly, where we're taking the company in 2018 and beyond. I'll start out just with a quick introduction of Unum overall. We are a leading provider of ancillary benefits. Think of all those things that you get in the workplace that are not health or savings. We do all of those other things for employers very well and have been doing it for a long period of time.
We've been the number one provider of disability insurance for greater than 30 years, something we're known for, but have enhanced that with other offerings at the workplace as well. What we've seen over the last couple of years is some very positive operating trends, and our market positions, which I'll touch on in a second, are leading, which helps us when we go to see each employer to bring Unum products in across the board to make sure that we're serving their clients, their employees, actually quite well. If you look over the last many years, our capital generation has been very, very strong. We've been deploying that through a series of ways of increasing dividends, buying back our shares, and then over the last several years, we've been also buying companies with M&A in a couple of spaces to enhance our overall product offering.
The businesses we're in today, the space that we're in today, is a high-returning business, one that we've been able to maintain those high returns while continuing to grow the company. We're looking forward to maintaining that in the world where tax reform has actually increased our margins overall at the company, maintaining that strong position over the next several years. One thing you know about Unum, if you've followed us, and if you haven't followed us, that you should expect from us, is we are a disciplined operator. That discipline comes through in the front line, how we price our products, how we talk to our customers, and how we actually look over the longer term.
You also see that in how we run the company, our investment portfolio, our operations, and the investments that we make in a very shareholder-friendly way continue to be very important to what we have. 2017 was a tremendous year for the company. Overall, we saw some of the best returns we've seen as a company. We saw earnings grow at greater than 10%, and this is prior to a world where tax reform has enhanced that. Very good top line. We saw a kind of mid-single-digit top-line returns and sales numbers that we saw, particularly in the fourth quarter of the year, that were the best that we've seen by a wide margin. Very happy with the overall top line that we've seen today.
When you look at the environment for disability benefits and overall experience and what we did on the expense front, also had a very good year. Top line margins as well as bottom line, very good. I think the one area of note that was challenging for us, which would not be a surprise to you, is our operations in the U.K. We have a leading disability provider in the U.K. With Brexit, it was a little bit more of a challenging time. I think we expected to see a slowdown in the top line, given some of the unknowns there. We also felt a little bit from a margin pressure. Overall, still a very strong returning company and one we like very much. Our closed block, which gets a lot of attention, is one that has been stable for us.
We've been managing that for the last almost decade on a proactive basis. I think that that's one thing that we've done a good job at, although it is a difficult business to manage. I'm sure we will talk a little bit more about that. Very consistent, as I mentioned, capital deployment, share purchases of $400 million, which we've done over the last several years, and dividend increases of 15%. Both of those things we'll look to do in the future. We ended the year, even after tax reform and writing off some deferred tax assets at the end of the year at an RBC level of just under 400%, still very strongly capitalized as we went through the end of the year. That's the company overall. If I take you back a little bit just to the construct of what we have.
Some financial dimensions to what we have are a company that generates just under $1 billion of earnings, about $11 billion of revenues that we have today, and a book value per share of just over $40 and $42. One of the things that we aren't as well known for is on the left-hand side of this page, if you can see it, is although we are very much known for a disability provider, our other benefits, supplements, or voluntary, are almost half the company. These are done both in Unum US, through the operations we have through brokers, as well as what we have in our Colonial Life business. Think of an agency force going direct to smaller customers we have out there today. That's about half the earnings of the company, high returning business, well-positioned in what we have there.
As we've been known for for a long period of time, our group business for both disability and life, also very strong. You can see our U.K. business at 7%, smaller as a part of the enterprise. It has not grown as quickly as the rest of the enterprise, but it's still a market that we see lots of potential in as they continue to work through Brexit. If you look at our market positions today, we have leading positions in all of our space, and as we go to an employer, it's very important that they see these leading positions when they're trying to take their employee base, really one stop.
They want to have one carrier that brings the products to their employees, that will serve them very well, do it at a price point that is reasonable, also be consistent around how we price our business. We'll continue to do that for a period of time. I mentioned the U.K. leading market positions there as well, one we see of good growth in the future. Tougher right now, but one we continue to grow. Our Colonial Life business is a great franchise. Direct agency force we have out there today has a number 6 position technically in the voluntary space, but in its market, which is an agency-driven distribution, really a number 2 position there. These leading market positions give us a lot of opportunity to go to market.
Coupled with that, what we have from our core things we're known for, one, is great distribution. We have long-term relationships that we've built through a long period of time. Two is risk selection. We know the customers out there, we know the employers, and we choose who do we want to do business with, at what price point, and how do we want to serve their customers. The last piece I mentioned is that consistency. We're stable prices in the market today. We look over the longer term, make sure we're consistent, and it's paid off very well for us in our marketplace today. When you think about the environment today that we have, that we're seeing around us, it couldn't be a better time for where our company is positioned.
If you're looking at an improving economy, something we have not seen in a long period of time, employment actually improving. These are people who, not the unemployment rate, but those employed, the creation of jobs in the country, very helpful. All of these are insured, as well as wage inflation that you're starting to see in the country as well. Once again, those are all elevated premium levels for us as we continue to help people. The labor force will continue to develop and grow, and we think that's a great thing for us. The last of which we have not seen in a long period of time, we've been looking forward to the day when it happens, is starting to see interest rates move up a little bit.
This is something for our company, particularly rising interest rates, as fast as they can rise, are all the better for us in terms of we don't have cash surrender values in our product. Everything that happens with a rising interest rate environment are all good for our company. We look forward to that day. It's not there yet, but certainly something that I think we're optimistic about as we look out over the next several years. If you think about what we're trying to do inside the company to make ourselves better, you've seen over the last several years. One is grow the existing business, get to more customers, do so across the U.S. in a growing economy.
We're known very well today, making sure that we have more offerings to take to them, actually increasing the penetration for each of the employees that are out there to take more of our products is something we'll continue to grow. I'd say we've seen mid-single-digit premium growth in the company over the last several years. We think that's a good spot for us. We can do that in a very responsible way. Second is we'll invest in our operations, think of technology, think of what we're doing overall in the company to improve the customer experience. Although the insurance business and our business isn't maybe on the forefront of what's happening for a customer, we want to make sure we're right there to serve our customers in the way they want to be served, whether that's through mobile applications, whether that's through direct interconnects with their employers.
We want to make sure that we're leading edge on that front. We'll continue to invest on that front. The last thing is expand our reach, and we've done that through M&A over the last several years. We bought dental businesses both in the U.K. and the U.S. to expand the reach that we have at the customer. We just expanded our geographic reach by buying a small company in Poland as well. The geography, things that we have in the U.K., we'd like to do that in more countries around the world where we see the right construct of those markets. If you look at 2018, the headline is on the right-hand side, we see operating earnings per share growing 17%-23%. It's actually with tax reform. We've seen very beneficial results coming through the overall EPS.
I'd also say the fundamentals of the business continue to perform very well. We're looking at continuing mid-single digit sales and premium growth. Watching that top line grow at a good rate, but in a very responsible way. Our margins still maintaining, industry-leading margins across the board. We see that continuing. The U.K. will still be a little bit choppy. We do expect that, and we do have that embedded in our results, what's going on in the workforce there. Ultimately, on the capital side, tax reform is going to be a positive. We are navigating industry changes going on there, but I think day one, tax reform will bring more capital to the company, give us more choices on what we want to do over the next several years. We'll continue to navigate those markets from a position of strength.
If I wrap up with my prepared remarks, just to give you a sense of when you think about our company, think of us on these four tenets. One, strength that we have today and the consistency of operational performance you've seen over a number of years. Those leading market positions enable us to continue to grow from a position of strength with our customer base over time. The relationships we don't take for granted with our distribution partners and ultimately with the customers that continue to depend on us. Finally, that financial foundation, which we've had strong for several years, going through and making sure that we're generating a high amount of capital, which our businesses do, and taking that back to our shareholders to make sure they're getting the returns that they expect from us. That's my quick prepared remarks.
I'd like to go to all of you for your questions on any topics that might be on your mind.
Let me start.
It's here. Okay. Your wire.
This is working, right?
Yep.
Let me start with a couple. Your business obviously is quite good. Others experiencing recently good results in the business as well. Pricing for 2018, are you expecting to feel any downward pressure on prices?
We don't. You can never predict what's going to happen out there. I think when we look at it, what we saw in 2017, which I think is the best indicator, you saw pretty stable pricing in the marketplace. Many of our competitors out there were disciplined, and that's all we ask for, is that we all remain disciplined and you don't have any outliers that are out there grabbing market share that will ultimately change the markets. Pricing has been stable. One of the things that we did over the last several years is we've been increasing prices. Mostly given low interest rates, we saw the need to increase prices as rates were coming down.
As we go into 2018, we don't have the need to do that, so the prices we're bringing back to our customers are going to be very stable from what they've seen before. You can never predict in our space, but I think our competitors out there today, many of them have seen difficult pricing cycles. In our business, if you go through that, what happens two to three years after is not pleasant. I think we'll see some reasonable discipline in our market, not to predict that'll be the case, but that's what we're seeing right now.
You mentioned inflation being good to some extent, certainly from a revenue standpoint. What about from a claims standpoint? Is there a risk if inflation spikes up too quickly, it could put pressure on margins?
No, when you think about it's still going to be the relative margin. As inflation comes into the book of business, as people have a higher wage, they're going to pay more premium and have a potential claim. Remember, we're paying a loss ratio somewhere around 67%-70%. That's still going to be incremental margin. We'd expect those margins to hold. Even in an inflationary environment, you're not going to see more people per thousand actually going out on claim as a result of that.
Got it. Colonial Life, the distribution obviously is a bit different. It seems as if the growth there has been better than your other channels. Can you talk about what exactly you're doing there to drive that growth, why it's better?
Sure. Yeah. Colonial Life has seen good growth. Last year, we were about 7.5% growth, 10% the year before that. We've seen that for a number of years, and really, the key there is feet on the street. It's actually getting people out to those smaller customers. If you think about our agency force, you can think about 5,000 to 7,000 people out there that are dealing with small businesses. You've got to have the right infrastructure, the right set of products, and the right capabilities, but ultimately, it's getting in front of more customers that like these benefits. The market has also been good for ancillary benefits and these type of benefits.
You think of the gaps that are forming for individuals out there, actually the voluntary benefits, think about smaller premium levels, smaller face amounts are good gap fillers in a plan where you may be in a company that moved to a high-deductible plan. You're concerned about your child breaking their leg in a Little League game. These products fill that in very nicely, we've actually seen good growth of people wanting to protect themselves with simpler products that they can get at the workplace, these fill in that gap.
I wanted to ask about the long-term care closed block. I'm assuming you have at least explored ways of disposing of that business. You haven't done it yet. What's the calculus? What's the numbers that you are looking at to determine if this would be a positive action for shareholders?
Well, there's the calculus, there's the numbers, then there's the dynamics of what happens in long-term care. You're absolutely right. This is something that over the last 10 years, we've been looking about how we can not be in this business. It's very different than everything else we do. Everything else is at the workplace, dealing with it. These are people that are beyond the workplace at a different point in time. We're looking at what we can do to go to outside capital to help with this business. The reality is we haven't gotten there, and I don't think we predicted that we would be there by this point in time. We're taking price increases to continue to supplement the profitability in that block and keep it profitable. When it comes to buyers and sellers meeting, we just don't see that world today.
There's a lot of activity. There's a lot of discussion about what that would look like. You see things happening in other spaces, buyers and sellers coming together, but long-term care particularly, and I wouldn't say our whole closed block because our closed block is half long-term care, half old IDI business. On the long-term care side, you just don't have buyers meeting sellers there at scale. The calculus to do that is that we would like to be out of this business, and if we brought some capital to actually be fundamentally out of it, we'd do the math around that. For our shareholders, I think it would be very much positive to be out of that business so they can really unleash the power of the core franchise, which I talked to you about.
Let's say interest rates go up another 100 basis points from here. Does that change the math at all, do you think, from a buyer standpoint?
It absolutely changes the math. There's interest rates that are going to be a piece of that, then you're also going to have what the longer-term view of interest rates are. It's not just the first 100 points. It's what's going on in the market. Then it's just looking at the risk profile of it and looking at that. A higher interest rate level helps you clear those hurdles where buyers and sellers can meet. Although I don't think it's necessarily the key limiter today. We've got to make sure people understand the risk on both sides and can come to agreements.
The gap must be narrowing to some extent, given that rates have been rising.
There's two gaps that I think are narrowing. One is the interest rate side. We've been helped certainly in the last year from the lows of what we've seen. We still would like to see more, we think, relative to our expectations. We've been beating our own expectations over the last several years, we do have expectations that they still could rise from here. The second piece of that is with time, there's more and more data coming into the LTC block. Once again, with that data, you'll have buyers and sellers that can come to agreement on what a transaction might look like.
In that block, it feels as if loss ratios were higher in 2017. What was driving that?
What you have going on inside the block of business, they were slightly higher as we got to the end of the year. You would've seen some of those kind of in the high 80s of loss ratio move into the low 90s. The biggest determinant that we saw, particularly in the fourth quarter, was older age mortality. People are living longer in the older ages. That can be volatile, so we're not predicting that as a trend. Even with what you're seeing in the flu season today, that can reverse very quickly in terms of what we're seeing. Without any predictions there, we'll have to see how that plays out. You will see volatility, and that's a big part of what you saw going on in the fourth quarter of the year.
Any questions? Yeah, right over here. Is there any particular strategy in your international growth, particularly in Europe? I mean, you picked Poland. Is there, again, to use the word calculus?
Yes. Lots of calculus. It's an area we've been looking at for a long period of time. Our U.K. business, tremendous business, it has a construct similar to the U.S. People will buy their benefits and their cover at work. That's first and foremost. That's what we know the best, that's what we know how to do. You need to look for a country that has the construct where people are actually looking to the workplace to buy benefits that will help them both from a life insurance perspective, maybe to protect their income, maybe dental insurance, which are right in the U.K. Poland is one that fits that mark. People in Poland get their benefits at work, similar to what you'd see in other countries.
There are other geographies in Europe which have that, but we thought Poland was high on the list, and so we're very happy. Small transaction, it'll take some time for it to get up to scale, but we're very happy with the team we have there and optimistic for its future.
Other questions? I've got a couple more. Tax reform obviously is a benefit to earnings, but there's also a benefit to cash flow, probably a growing benefit over the years. What are the plans to use the additional cash flow that the lower taxes will help generate?
Sure. There's two things going on. One is we do have additional cash flows coming out. If you think about the GAAP returns, I mentioned the 17% and 23% growth. That's all coming through going to the 20% rate. There's some different dynamics happening in the insurance space, which will play out over the next eight years. Think of the benefits there are about half that. If we're getting $200 million on the GAAP side, you'll get about half that on the statutory side. We'll see that flow through in a couple of different ways. One, as I mentioned, M&A. We're looking at that and doing some things. We're still looking at different opportunities to grow there. We'll continue to buy back our stock like we've done over a period of time and raise our dividends.
One thing you should take into account that's true across the industry is what are capital requirements going to look like over the next several years? That's an unknown, so we're keeping an eye on that. It doesn't change our course, but it's something we'll have to take into account as we plan out over the next several years.
On the capital, could you see a situation where the capital requirements change so much you have to make a change in your balance sheet? I mean, that's pretty remote, I assume.
We don't see that. A couple of things that happen. One, at year-end, we reflected writing down for tax assets. That's done. That's in our numbers. Like we said, it's around 390%. The second piece is how requirements change and how that's a very much an unknown of what that looks like and over what timeframe. We'll have to navigate through that. Once you've done that, it's how do the rating agencies view this? I think most of them have said this is overall credit positive. Looking at that, this is one of magnitude and time, and I think in any of those scenarios, we feel like we can manage through that pretty well.
In the U-
There's actually, we have a-
Oh, yeah, go ahead.
Yeah, just to follow up on Jay's question there, could you remind us what your RBC ratio is? Have you talked about, I can't remember if you talked about what effect the tax reform would have on statutory capital?
Yep.
Have you spoken to that yet? I can't remember if I missed that.
Absolutely. Let me repeat it for you. Actually at the end of the year, we wrote down deferred tax assets on a statutory basis and ended the year at roughly 390% RBC. Our range that we've been out there with for a long time is kind of 375%-400%, and we've been usually at the top of that range, mostly because of having excess capital sitting there. As we look out over a period of time, that 390, the question is what happens to requirements and over what period? If you go to the extreme end of that, we've said it would be about 60 points of RBC if you snap back all the way. We don't think that's how it's going to play out.
We think it'll take time, and we think things will move around, that would be the math in terms of what it would be at its extremes. That's not how we see the next couple of years playing out.
Rick, of your main products, what do you see as having the best growth opportunity over the next two years?
There's kind of growth off a small base, there's things that are meaningful to the company. The number one growth area that we'll see, particularly in the U.S., is our dental business growing. This is growing from a very, very small level. With an acquisition we did over a year ago, we saw tremendous growth last year. We'll see another year of tremendous growth, and this is all on a trajectory to getting to what we would consider our requisite market share that we would expect coming out of that. A lot of energy, a lot of time spent on the growth there. We think it's great to build that business. The second piece would probably be in the voluntary benefits space on both the Unum U.S. and the Colonial Life side.
Voluntary benefits are still a very popular benefit and is still an under-penetrated benefit that are out there in the marketplace today. We'll still continue to see voluntary benefits growing very well. The last piece, even our group business, we've seen very good growth. Premiums growing on a very large base of 5% is meaningful growth and adding more customers every year. We see good opportunity to continue to grow that business as well. Sometimes that growth can be enhanced by added services to customers, different things that we can do, different investments that we can make to make sure we're getting a growing base overall.
With the U.K. business, other than just the economic impact, the effect of Brexit on the company, if it's just the U.K., is there much of an issue?
Yeah. The Brexit, not much on the company. Once again, if you saw my earnings, it's 8% of earnings. It's a very small piece of the company. One, we want to grow, very profitable, love the market. When you think about Brexit there, one, we would've went into last year saying, "Hey, we'll see a little bit of top-line headwind, given employers aren't hiring, given that there's a lot of unknowns going on there." What we experienced over the course of the year was actually a little bit higher incidence. I would tell you in the U.S., when we've gone through slowdowns, at least the last slowdown we went through, we didn't see that. We didn't see incidence levels kick up, and then when we did see it, they didn't actually become paid incidents.
Just been somebody submits, doesn't In the U.K., it's been a little different over the last year. We actually have seen higher incidence levels there. Nothing that eroded our profitability. It's still generating mid-teens type ROEs. It wasn't generating the returns at the levels we've become accustomed to over the last several years. Whether that's Brexit explicitly or something else going on, hard to tell. These things will trend over time. Something we're definitely watching in 2018 as well.
Any other questions? I just have one more question. Priorities for capital management in 2018, how would you rank order them?
Yeah. First, sorry about our capital and the generation we have, and we talked about being very strong generation. First is putting it back in the core operations. We're looking at mid-teens returns, and if you start to look at even tax reform, maybe even higher than that. We're going to grow the company in a responsible way, but as quickly as we can, and we want to consume the capital there. Second would be on the M&A front and where we want to actually acquire to enhance the capabilities we have today or potentially new geographies. You would see with the acquisition of dental in the U.S., dental in the U.K., enhancing the offering we bring to market. You'll also see M&A in Poland to expand those geographies.
That would be the second, which is grow the company, do so in a responsible way. Third would be continue to make sure we increase our dividend at a pretty good rate. Last year, up 15%. We're going to continue to invest money in increasing our dividends, recognizing the very steady cash flows that we experience. The last piece would be share repurchase. If you look back over the last seven or eight years, we've repurchased a significant, about retired almost half of our float. We'll continue to buy back stock at these levels, and I think because of all those other things, we're going to be a disciplined player. Share repurchase becomes a logical way to redeploy capital to our shareholders. 2018 should look similar to what you've seen over the last several years.
Did you mention acquisitions?
Number 2.
Number 2.
Right behind core operations.
Dividends, then buybacks.
Yeah.
Okay. Any other questions? Fantastic.
Good. Thank you all for being here. Thank you, Jay, for hosting. Appreciate it.