Great. Good morning, everybody, welcome to Unum's 2017 Outlook Meeting. We're pleased that you were able to join us here on this nice frigid morning here in New York. We also appreciate all those who have joined us through our webcast. Our meeting this morning is going to follow a similar format to what we've done the past few years with updates on our business strategies from our executive management team. We'll also provide a preview on our financial outlook for 2017. As always, our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from the results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in the safe harbor statement that you see on the slide here and also in the books.
I remind you that statements in today's meeting speak only as of the date that they are made. We undertake no obligation to publicly update or revise any forward-looking statements. Participating in this morning's meeting are Unum's President and CEO, Rick McKenney, our CFO, Jack McGarry, as well as the CEOs of our core business segments who are all seated up on the stage with me here, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, Tim Arnold for Colonial Life, Steve Zabel for the Closed Block Operations. We also have several other business segment leaders in attendance today. I hope that you'll be able to meet with them before you leave.
Each of these executives will present. We'll go through all of the presentations, probably about an hour and 15, 20 minutes, something like that. Then we'll have an open question and answer session at the end. With that, I'd like to bring up Rick McKenney, who will begin with his introductory remarks. Rick?
Great. Thank you, Tom. Good morning, everyone. Certainly, I'd like to add Tom's welcome to have you here in New York at this meeting in person. Also welcome all those on the webcast and those that'll watch this at a later date. I think what we're going to take you through is actually a very good snapshot of where we've been performing, which is one of consistency. Also take you through what the environment looks like for us in 2017 and beyond. They are interesting times. I think we'll try and give you our best view in terms of what that means to us and how it will take the company forward.
As Tom said, some of the things that we want to hit on today, I am going to give you a little sense and a reminder of where we are today, where we are on our journey as being one of the leaders in the employee benefits space, talking about some things such as our brand reputation, distribution, how we continue to take the company forward. We certainly will talk a lot about our operating trends, which have been consistent and strong over the last several years, also as we look to the future, continuing on that same path. Some on our capital deployment and the investments that we are making in the business.
This year, we will talk a little bit more about the investments we are making in the business to fuel some of the growth that you have been seeing over the last several years and how we can sustain that into the future. One important thing to remind you is that we are successfully managing in today's environment. I define today as what we have seen over the course of 2016, where we are today, and where tomorrow might possibly be. We will talk a little bit about what we have done in the past, where we stand today, and a little bit about what is going on in the future. Let me start out today with 2016 just to give you a sense of how things have gone.
If you look across the board, those things that we would have talked to you about one year ago at this meeting, I think we have executed on all fronts and actually delivered above expectations in a number of areas. I would start with the earnings side, where we actually are at the very top end of our range as we went into last year. It was a pretty tough year when you think about how interest rates moved in the beginning of the year. A lot of things changed relative to expectations as people sat in December, we were able to successfully navigate through that and end up in a very good spot from an earnings perspective. Still some work to close out the year, we feel very good about where we are. From a top line perspective, both from a sales and premiums perspective, in line.
I would mentioned the premium line at 5% growth, right in the middle of the range that we have laid out longer term. 5% premium growth for us is a good, steady, stable area that we want to stick to because we think we can grow that way and grow in a profitable way on that front. The Closed Block has been stable over the course of the year. Steve Zabel will talk to you about the attributes of our Closed Block and where that is going, we think over the course of the year, saw little blips here and there, I will tell you, the underlying of the business seemed very stable. Of course, we executed on the dental transaction, very happy to bring in the team from Starmount.
We're in the process of integration in that, we signed, closed, and are integrating that in a pretty rapid succession because we see the really good fit that we have, and Mike will talk about that for a little bit. On the capital side, I think in line with expectations, bought back $400 million of our stock at what now seems very good prices over the course of the year. Raised our dividend 8%. Very steady on the capital front we've done over the last several years. We're going to end the year with a 400% RBC, so that's kind of at the top end of our range. Doing a lot of things on the execution front and also ending with a very strong capital position, which will help us as we go into 2017.
Let me give you a sense of what we see in 2017. One is consistent earnings growth. Jack will take you through some of the ranges that we see there today. It's been a consistent earnings growth story if you look back many years. I'll touch on that in a second. Sales continuing in the high single digits, pretty close to 10%-type sales out there. Very happy with it. We see top line growth coming into the year as we started out. Once again, right in that mid-single-digit premium level, which on a sustainable basis, we see a very good being able to grow. That's how we see the world today, and I'll touch on that in a second. The margins continuing despite the interest rate headwinds. Interest rates have been tough.
Although it's been reverting very quickly here over the last several weeks, if you look over the course of the year, have been tough. We're reflecting that, and as we look to the future, we'd like to see the trends that we've seen over the last several months continue. As we see it today, those strong margins continue to do. The team has done a good job across the board in terms of managing price, managing the things that keep those margins on very good footing. Our U.K. operations are very solid. Peter will talk to you. Foreign exchange impact for sure in terms of where we've seen the U.S./pound ratio go, but overall, the operations continue to do exactly as they've done.
Brexit will cause a little bit of headwinds, so we do expect that in terms of a slowing economy in the U.K. as they continue to absorb that. Overall, our U.K. business continues to perform very well. On the capital deployment front, once again, very consistent. We still want to invest very much in our business first and foremost, but the way we're generating capital, we'll still be buying back shares at a similar clip to what we've done in the past, continuing to raise our dividends. We think capital deployment is quite a shareholder-friendly thing, and it's a reality of the capital generation that we have that we'll be returning some of that capital to shareholders. I'd wrap up 2017 with a little bit of, there's a lot of uncertainty right now as we look out at 2017.
What's going to happen in the next month? What's going to happen over the course of the year? I would say when you look at all of those, we have pretty much a positive bias to all the things that could be coming at us over the course of the next year. Let me touch on that for a second, which is, what are the current topics out there today with a new administration coming in and what does it mean to us specifically at Unum? It will mean the same to a lot of people in the life sector, but I think we have some differences that I'd like to note on here. One, we'll start out with the rising interest rates and inflation. Those are two different aspects which are important.
On the inflation side, inflation is good for us, if it does so in a metered way, we'll start to see employees growing at the workplace, wage growth, which are things we've said for a long time, which are natural fuel in our business, if you will. We'll see that increase if we do see the type of inflation, the type of interest rates rising we have. Discount rates, which you've had out there. Now, we've been taking our discount rate down for some time. We'll talk a little bit about that today. The reality is, in a rising interest rate environment, that discount rate can start to go back up. What that means to us is that we'll actually see more earnings coming off of what we have as we raise discount rates, if we do see that environmental raising interest rate environment.
Surplus earnings, we do have a significant surplus portfolio, as we invest that, reinvest that, we've been reinvesting that down for a lot of years. If we're able to see a rising interest rate environment, we'll start to see that on a slow basis, but it will actually start to move up. LTC margins, interest rates is one thing we've talked about. We'll talk more about it today as well, is an area where we have to continue to restore margin in our LTC block, which I think is very important as we have it. The last thing is no disintermediation risk. The important thing to note there is that as rates move up, if they move up quickly, that's still a positive thing for us. You have other areas of the sector that may be impacted negatively if rates move up too quickly.
That's not the case for what we have today. We are very much on a fixed benefit type structure. As rates move up, even if they move up very quickly, all are positive for us. Tax reform, when you look at it today, we pay in the range we put out today is in the 31%-32% range, we are a relatively full taxpayer. The difference there coming from our U.K. operations, which has a tax rate, actually today it's 20% moving down to 17%, which has been enacted into law. Tax reform is something that we don't want to predict too early because there's a lot that will happen potentially on that front, but just to give you a sense of where we are today and what that looks like. The last is regulatory reform.
What we would have told you six months ago, a year ago, is things that are moving on the regulatory front aren't really impacting us from an overall perspective. There's little impact as some of those things get removed. Movements with the ACA that we would have seen a couple of years ago in terms of slowing our markets, causing disruption, if that starts to reverse, we'll have to continue to watch that. We don't think it will be the same movie that we saw necessarily a couple of years ago. 2017, it's the positive bias that we talk about. We're a company that certainly plans for what we see today, want to make sure that we recognize to you if things do get better, we will actually see those reflected in our results over the course of the year.
Let me turn a little bit, talk about our company, because it's important grounding to talk about where we are as a company today, what we do exceptionally well, and give you a sense of that, because that is the platform, what we do and how we serve our customers. The financial snapshot, you'll be aware of, close to $1 billion of operating earnings, $11 billion of revenues, and an operating return on equity of 11.4%. Book value per share, which is something as you looked over time, has steadily grown. I'll show you in a second, at $38.39 as of the last reporting period. Good, strong financial results that we have overall, and that gives us the heft and the ability to capture the share in the markets that we look to capture.
On the right-hand side, you'll see something as a changing pie graph, if you will. The areas you look at the top of the page now between Unum US and Colonial Life, the supplementary and voluntary in Colonial Life are now about 46% of our earnings. When you look at those two, we would've cut it a little bit differently. A very strong business in the U.K., impacted by exchange rate, as we talked about, the Closed Block. Our Unum US business, the remainder of our group products, very, very strong. Although group disability is now 21% of our earnings, it is a core franchise position. We are known for in the market.
We've been a leader in the market for our disability business for a long time, and it's something we certainly bring to market as a lead in terms of as we talk to customers and bring them through. You can see the shifting pie in terms of where we're generating our earnings from over time. Part of that is when you get back to the franchise, what makes us special in terms of our profitability and performance? We've kind of highlighted four different things here, and I'll dig into each of these a little bit deeper. First is market position. We are well known in the ancillary benefits that we are a market leader.
Not necessarily the brand to the mass markets, but certainly if you talk to HR professionals, they'll know Unum well, they'll know Colonial Life, because we're in there talking to them and they certainly respect our expertise. The breadth and reach within that space, within the area of ancillary benefits, we cover all of that. The dental acquisition that we did recently is a good addition to fill that out. When we go and talk to an employer, we're able to bring them all the solutions. The solutions that are not healthcare, that are not retirement savings, but everything else that they want to bring to their employee base, we certainly have that. Our reputation with our customers and our brokers is excellent. I'll show you that in another slide.
The financial strength, once again, is all about being able to invest where we want to bring that reach to our customers. They know we're going to be there at time when they actually need to have their claims paid. That's an important thing in the marketplace today. That's been something that's been unassailable for a couple of years, but it's certainly important as you go out and talk to customers. All that brought together brings a company that has a leading profitability and performance criteria. Let me dig into these a little bit, just to give you some more backup for each of them. First, market positions. On the disability side, you won't be surprised we've had a number 1 position. We've had that number 1 position for over 30 years. It's what we do very well.
I'll talk about some of those aspects in a second, which distinguishes us in that space. You also see the other leading products, voluntary benefits, a number 3 position in Group Life, rounding out that portfolio in a very big space. Our Unum US business is right there in the middle of the markets in which we participate. The U.K., very similar, a leading group disability business there, Group Income Protection, as we talk about it in the U.K. That's being backed up by a Group Life business and a growing group critical illness business, which is a voluntary business in the U.K., which is starting to grow out. Colonial Life, a number 6 position across voluntary benefits.
When you think about a direct to market or more agent-led distribution, we think about it as a number 2-ish type position across the voluntary benefits space, which is the mass universe number 6. Colonial Life has a very strong position today and a growing position. Tim Arnold will talk to you about that a little bit more. The last thing I note is we choose to participate at the marketplace. We don't have other distribution in other spots. We think that being at the workplace is the most powerful distribution aspect to get out there. A couple of the attributes, you think about 90% of all disability product is distributed at the workplace, 78% of all life product is distributed at the workplace. That's where we choose to participate.
It brings us a lot of advantages from a scale perspective, the ability to spread risk, the ability to serve customers of all demographics, meaning from the low wage earners all the way up to the high income producers. We're able to cover a very vast swath by being at the workplace today. Important as well is we think about our customers first. On left hand side of this slide, you'll actually see about how we help customers. This is rallying across the enterprise is how we think about serving customers, whether it's the benefits we paid out there, close to $7 billion in benefits paid out to people at time of need, the 34 million people that rely on our coverages that are out there today as a safety net. Then actually getting people back to work, 327,000 people return to work.
Once again, that prowess on the disability side has helped us. Being able to work with 190,000 companies out there today to attract people, retain them, and ultimately take care of them at time of need. What's equally as important is the reputation that we've had, and these reputation scores have been strong for a number of years, but it certainly was an area to highlight this year. If you look at the broker distribution, which is our largest distribution that we continue to have today, mid to high 90s in terms of reputation scores that we have with brokers today. Brokers like doing business with us. We like doing business with brokers. I think it's a reputation that we've garnered very well over time.
Our customers also appreciate what we do today, and that customer can be defined both at the onset in terms of how we serve them, bring them into the market, but also we highlighted here from a claimant. At a time of need, we're there for them and our customers recognize the great service that we bring at usually some pretty difficult times. Across the board, customers and reputation are what fuels the company. If you look over time, if you do that very well, you're able to generate returns that are stable, steady, and high returning. I highlight here going back to the financial crisis, actually, the EPS that's been generated by the company over a long period of time. You've got earnings growth rate at 5.3%.
In the latest period, you actually were up almost 9% from an earnings perspective, you also see a steady growth in the book value per share. We're growing the company over time. We're taking the capital we generate. We're buying back shares. We're returning it as investments into the business. You've seen us also grow 8% over many years here in our total book value per share. A steady, consistent growth that we see in some pretty difficult markets. When you think about that, and if the markets get better and more favorable, what will that look like? We could talk more about that. Couple of things that we don't talk enough about is where we're different, where do we excel? We've highlighted three things on this page, and I'll touch on one on the next page.
First is distribution and relationship management. We have a very tenured distribution force that represent us very well in the marketplace today. They know we're experts in what we do across the company. They bring that to the market very well. Actually taking, if you don't have all the pieces working, it's not going to work. We take that expertise internally, match it up with a very strong sales force, both in Unum US, Colonial Life, and our U.K. business as well, take that to the market. We have a leading sales force, and congratulations to them. They work through tough times, when markets are tougher or when we need to take price, and they also do a very good job of keeping those relationships over many years.
Mike will talk a little bit more about that, but we have a tremendous sales force across all of our operations. The second is a little bit more internal, but although it touches the external world, is our pricing and risk selection. It's something we do very well. We talk a lot about consistency. We talk a lot about repeatability in terms of where we come to customers, and that's really in the guts of the company from a pricing and risk selection perspective. The team does it very well, a lot of consistency, and we have a mindset that thinks about the longer term in terms of how we price, how we run the company, and I think that we're different in terms of how we're able to do that over a longer period of time.
The last is something we have talked about a fair bit before, and that's our claims processes. At time of need, how are we taking care of customers, and is there a differentiated process you can go through? I believe there is in terms of our claims operations, what they do, how they treat customers. The scale and breadth that we have allows us to have a significant number of vocational representatives internally, skilled nurses that we have on the payroll helping out people today, and doctors that can help people through that process. Because when anybody becomes disabled or has any type of event they're claiming for, they're thinking more, how do I get back to work? We're there to help them in part of that process. The depth of our resources is unmatched in the industry.
The last piece I would mention is actually voluntary premiums. This is something that gets talked about a lot. Voluntary comes in different forms. It gets talked about very generally as you go through, but these are, think about people on an individual basis buying these products because they're covering a specific need that they have at the workplace. We've been doing this for a long time. If you go back and aggregate across the company in 2006, almost $1.7 billion of premium generated on that front. Since that period of time, it's grown almost 60% up to $2.8 billion of premium that we generate on the voluntary front. It gets talked about a lot today. We've been doing it for a long time. We've got good expertise. We've got good distribution on that front.
It's an area we will continue to grow because we think some of the gaps that are being created in the marketplace are the perfect place to continue to have growth in the voluntary space. Equally as important with that growth that we've seen, is we've seen also growth in the broker world. Broker world, which is very much a key partner of ours as we go to customers. We've seen a tremendous number of new brokers coming into the voluntary space because we have those good relationships, because we have the breadth, and because we have the history. Brokers like doing business with us on the voluntary front. It's something we'll continue to watch ourselves grow as those gaps continue to grow in the marketplace. Let me just wrap up as I turn it over to Jack.
When I think about the franchise overall, what we've talked about, the history of the company, what we've been able to operate through difficult times up to this point, we still think that we are very much a franchise that's positioned for the future. That operating performance, that consistency, the knowledge base within the company, the market positions that we have all come together and actually give us a franchise that we think can be very strong over the next couple of years. We're not standing still. You'll hear that very much in the comments from each of our business leaders today. The markets are changing, we're going to make sure that we're changing equally as fast, if not faster than the marketplace today. The last thing I'd say is we are well positioned for a post-election economy. All of us are wondering what that looks like.
When you look across the different dimensions and the different ways it could go, we feel very good about it because of the last bullet on the slide, which is we have a proven ability to manage through a challenging environment. As that environment gets better, we're going to manage through that environment or manage with that environment extremely well in the future as well. I thank you for the time. Let me turn it over to Jack to talk about the state of the business. Jack?
Great. Thank you, Rick. Good morning, everyone.
Good morning.
It's a great time to be talking about the state of our business. It is in very strong shape. I'll get to the details right away. 2016 thus far has been a really strong year. We've had great results. We're ahead of our guidance in plans. The biggest driver of that is just solid core fundamental underlying risk results. I would say we probably had some positive volatility in there that may not repeat, but we think the bulk of what you've seen in 2016 is just fundamental improvements in the business. We continue to expect to be above our guidance or slightly above guidance of the 3%-6% range off of the 3.64 in 2015. The fourth quarter we're facing, again, premium in sales remains strong. Continued disciplined approach to sales will continue to maintain our margins into 2017 and strong results again continuing for Colonial Life.
Miscellaneous net investment income is solid this year, a level that we expect to be able to sustain, but it was significantly down from 2015, which was a very big year. Our tax rate reflects the negative impact of rising interest rates in the U.K. I'm going to talk a little bit about taxes later. I'll explain that in a little more detail. We do expect our tax rate in the fourth quarter to rise somewhat. Finally, we do not expect to take any reserve charges in the fourth quarter. We've achieved a solid capital position throughout the year. Our risk-based capital in our holding companies we had expected to drift downward. It's remained pretty steady at very near that 400% risk-based capital level. That's driven by the strength of the statutory earnings that we've had in our operating companies.
We do expect to make a capital contribution to First Unum of $40 million in the fourth quarter. Again, we've had very strong statutory earnings in return to shareholders. We expect to be right on our $400 million share repurchase target. We closed the acquisition and have integrated Starmount into our financials. We've had an 8% increase in our dividend and have kept in line with roughly a 20% payout ratio. A really good first three months to 2016 and expectations for that to continue into the fourth quarter. If you look at how we performed and what drove things relative to the midpoint of our guidance of 3%-6%, the biggest driver by far was just the strength of our operating performance.
I would say underlying that strength, the foundation of that operating performance is just rock solid Risk results throughout the year, we expect that to continue. In fact, that'll be a consistent theme for everything that we say today, is just those strong risk results continuing forward. We had favorable results from taxes. In the U.K., there was a tax rate change from 18% to 17%. That helped us to the tune of a couple of pennies per share. We've also seen through the first three quarters, some favorable volatility in the U.K. tax rate. U.K. taxes are based on U.K. GAAP, which is kind of a mark-to-market regime. So your liability in the U.K. gets mark to market at a risk-free rate. We all know what happened to the risk-free rate in the U.K. during 2016. After Brexit, it fell to about 60 basis points.
That led to an increase in reserves in the U.K. for a tax basis, which led to a bigger deduction, it led to a reduction in U.K. taxes. Rates in the U.K. have rebounded significantly in the fourth quarter. They were in the 60 basis point range, in the third quarter. They're up into the mid hundreds now. We're going to see a reversal of some of that favorability. The result of the 18%-17% tax reduction in the U.K. is a permanent difference. That will remain. We had somewhat favorable taxes, but we expect that to come back a bit in the fourth quarter. Capital management. We had buying opportunities early in the year, we were able to buy shares at attractive prices. That helped us relative to our plan.
Relative to our plan, the discount rate pressures and net investment income came pretty much spot on. It was relatively neutral. The exchange rate again, hurt us. Particularly, it was going down before Brexit. After Brexit, it fell pretty harshly. That cost us as we translate U.K. income into U.S. dollars. Other trends in 2016. Premium trends continue solid. Unum US premium's growing at a 5% compound annual growth rate. Colonial is at 4.6%, but Colonial is accelerating. We had near 6% growth last quarter. We expect that acceleration to continue on the heels of very strong sales results at Colonial. Unum UK grew at 3.5%. I'd say that's a mixture of strong sales at Unum UK, coupled with some pressures and natural growth as a result of Brexit and the impact on the economy. Peter will talk more about that a little later.
From a benefit ratio perspective, again, that consistent theme of rock-solid risk results. You see decreases in Unum US. You see Colonial Life operating at kind of the low end of that 51%-52% range. A little bit of volatility in the U.K. A piece of that's related to the impact of index-linked benefits and index-linked inflation results, but very much in line around that 70% range. Operating expenses and efficiency has been a focus for Unum during the year. We've been very successful. We've been able to reduce our expense ratios in Unum US. They've been flat in Colonial Life, but that's on the heels of making additional investments in Colonial Life in terms of growing the sales force and our sales footprint, then significant reductions in Unum UK to support margins. Operating income ratios have been very steady. There is interest rate pressure here.
In 2016, it wasn't a discount rate, but the interest on surplus that we earn continues to fall relative to our portfolio. That puts a little bit of pressure on margins, but very strong results in what was somewhat of an adverse environment for most of the year. As we look to 2017 and kind of that bridge between 2016 and 2017, I want to talk about four key issues. I want to talk about interest rates, tax rates, foreign exchange rates, and share price, and kind of discuss how they impact our earnings per share outlook. Starting with interest rates, just as a reminder, we have been managing discount rate pressure and interest rate pressure for a long time now, since 2008, 2009. We've been doing it through prices.
Making sure that we put the rates into the market that we need to sustain our profitability. We've been moving our discount rate down to keep pace with drops in new money rates and portfolio. We've been managing investable cash, and we've been very good about looking across the spectrum of asset classes to optimize our results. Where are we today? If you recall, when I talked to you last year prior to the investor meeting, I talked about the discount rate change in year-end 2015 as being a game day call. We weren't sure where things were going to end up. We weren't sure where our position was going to be. We didn't have a really good handle on where rates were going. Turned out we really didn't have a good handle on where rates were going.
At 2015, we decided to hold pat. We had a reserve margin. We thought there was the possibility for rates to stay steady or increase. We jumped on the interest rate slide on January 2nd of last year. Rates fell from 250 to 175. That it felt to me, like instantaneously, I'm sure it took a little while to get there. We had another hit on the Brexit vote, and the 10-year Treasury fell to 130. Throughout 2016, we've had another year under our belt of investing at rates that were below our discount rates. On the positive side, though, we also have another year under our belt of putting rate increases into the marketplace, particularly on our in-force block.
I would say when we weigh those two, they come together with a point that we're anticipating a 50 basis point discount rate reduction in the fourth quarter of this year. We have a current margin is very healthy. It feels good to bring that discount rate more in line with what today's new money rates are. The other thing we're facing is we had very good investment years in 2008 and 2009. Although rates were down, spreads were much wider. A lot of those investments will be rolling off over the next two years, we want to build margin in order to handle some of those turnovers. Again, we're back kind of where we were at 2015. Unum UK will also take a discount rate on charge.
They're also in a position where they'll be able to maintain their margins and loss ratios in the wake of that rate. The important part for the disability experience is really the effectiveness of our rate increases. We've seen it in disability earnings this year and in their performance. We've seen it in the disability benefit loss ratio. Even after the 50 basis point charge in the discount rate, we expect the group disability benefit ratio to be in the 76%-79% range. Weighing that, we ended at about 79% this year. We just see really good strength in our core earnings in disability right now as a result of the actions we've taken over the last couple of years. We see upside earnings potential in disability. Turning to long-term care and the impact of interest rates. We feel good about our long-term care margins.
Despite where interest rates were during 2016, we were able to place new money above our 5% bogey that we discussed in long-term care. Just as a reminder, when we made the assumption for long-term care in 2014, we assumed four to five years of 5% all-in rate, then that rate reverting to a norm over the next five years. We've exceeded that 5% target. That's actually helped to build margin over the last two years in long-term care. We feel good about where we are today. There's still pressure in terms of rates rising beyond the 2018 point. Given where interest rates are, I think we have a lot of latitude going forward as to the timing of any rate change that we may make as well as the size of any rate change that we may make. We feel good.
As I said, we assume all-in yields will rise in 2018. The chart on the right shows the Treasury rate plus the Barclays BBB long bond credit spread. Notably, that rate has averaged 525 over the last three years. Today, it's at 525 currently. I want to give you a little information to help size the exposure there. If we were to invest new money in long-term care at that 525 all-in rate forever, the impact on the discount rate and reserves resulting from that assumption would be basically equal to the $900 million difference between the GAAP and STAT reserve we currently hold. A 525 forever rate built into the reserves would result in a $900 million GAAP charge to earnings. It would not be a statutory event, and it would not affect our capital plans.
That's a lot of progress from where we were in 2014. I think it's a really important note. Looking at our investments, the quality of our portfolio continues to be strong. If you look at a Moody's view of our high-risk assets versus our shareholder equity, we are in the lower quartile on that. We do have a lower overall asset risk than many of our competitors. Our focus tends to be in the BBB investment category. One reason for that is because we're heavy C2 risk. We can add C1 risk, which is the asset category risk to our portfolio, very economically because of the way the risk-based capital formulas work. I would draw you back to second quarter of 2016 when Moody's did their energy portfolio review. They came out with a lot of downgrades. Those downgrades on our risk-based capital ratio was only 2%.
The reason it was so low is because of the weighting of C1 risk versus C2 risk. It's very economical for us to invest a little bit lower on the asset class thing. We also have a very well proven track record of being able to do that successfully. If you look at our high yield risk, it's heavily concentrated in the BB and the B. We have very little exposure below that. If you look at our success in investing in credit risk, we've been very successful. We came through the 2008-2009 crisis very effectively. We have had negligible losses in the ensuing years and even in 2015 and 2016 as we saw a little bit of uptick in losses in the marketplace. We navigated those very successfully as well.
Between the efficiency of the asset base of investing a little lower, the pickup in the credit spread, and the confidence we have in our investment department and its ability as a credit shop to do better than the market, we feel really good about where we invest and the economics that that drives for us. Next, I'd like to talk about tax rates. We anticipate the tax rate in 2017 to go up from its current levels. In 2016, we did benefit from that U.K. tax reduction. We also benefited in 2016 from a falling interest rate in the U.K., which led to bigger deductions on the reserves. We expect a lot of that to reverse in the fourth quarter of this year. We expect a lot of the reversion to a norm on the tax rate next year.
Which cost us a little bit because we did lose the 2018 to 2017 impact that was passed. We're monitoring potential changes to the U.S. corporate tax rate. If you just straight up cut taxes to a 15%-20% rate, it's easy to do the math of the impact that that would have on us. A 20% rate worth about $130 million in GAAP earnings to us. That would be wonderful. We doubt that will be the outcome. There's likely to be pay-fors somewhere in there in those changes. We've gone back. We've read through the Camp draft, the Trump plan, the House blueprint. We've kind of pulled together some of the things. We have a good handle on what might come as a result of those pay-fors. We still think it's a positive tax environment. We doubt that we're going to be hit.
We will probably have some hits. They're not going to be equal to the tax break that we'll get. We're very positive that if a tax cut should come our way, that we will benefit from it. The foreign exchange rate has hurt us. We basically translated over the average in 2016 at a 1.37 rate. We're anticipating a 1.25 rate in our guidance of 3%-6%. That costs us about a 1% earnings per share growth next year relative to a consistent rate. The final thing I want to note on is share performance. Share performance, we favored this year by a lower share price, particularly in the beginning of the year. We had about 5% growth from our capital management activities as a result of that. That's unlikely to repeat in 2017.
I gave you an example at a couple of different share prices, what the earnings per share growth rate impact would be. Capital management will be more in the 3.5%-4% range we expect in 2017 versus the 5% growth that it generated in 2016. I want to talk a little bit about our capital generation and our capital generation model. The key driver of capital generation is our statutory income and our subsidiaries. Very strong year in operating statutory income. That's going to lead to enhanced dividends in 2017, which will be a big part of strengthening our balance sheet. We've had some mixed dividend results in the U.K. as we worked our way through Solvency II. We're through Solvency II. We've kind of righted the balance sheet there.
We would expect going forward, although it's still going to have some volatility because of the Solvency II balance sheet to be somewhere in that $50 million range, GBP 50 million range a year with the U.K. The thing I want to talk about in our capital plan, which we haven't talked a lot about before, is that statutory earnings and dividends isn't the only thing that fuels the plan. We also have some intercompany fees that we charge. We charge about a $75 million investment management fee that's paid from the subsidiaries to the holding company for the investment department. We also have tax sharing and general service agreements. Our employees, for instance, are employees of Unum Group rather than the insurance subsidiaries. We get about another $100 million of fees from the insurance subsidiaries. As a result of that.
The next page, I'm going to show you what our actual sources and uses of capital were for 2016. We got dividends from the insurance holding companies of $605. We got the investment company dividends, the holding company receipts, we got a U.K. dividend. We issued debt in the net debt of $263. That was largely to fund Starmount as well as anticipation of issuing debt in 2017. Total sources of $1.1 million. We paid interest in dividends. We bought the $400 million of shares during the year. We acquired Starmount, made contributions to both First Unum and other captives. That's kind of a pretty good harbinger of the level of contributions we make to our captives over time.
We had uses of $1.05 billion, and we ended up with a little less than a $100 million increase in our capital position. If you look at 2017, you kind of build in that same chart. We're going to get over $100 million of additional dividends from the holding companies because of the strength of 2016 statutory earnings. We will continue to repurchase shares in 2016. We do not plan to issue any debt in 2016. We expect our holding company receipts to be very similar. We do not anticipate acquisition in our plans for 2017. Our lookout for 2017 from a capital perspective is we anticipate to largely be able to maintain our risk-based capital position close to that 400% benchmark.
We will improve leverage as a result of not issuing debt and growing our book value per share over the year, we will increase holding company cash. Closing comments for performance. We remain very focused on risk management and continuing to support those solid underlying risk results. We have best-in-class operating margins as an organization. Our capital generation model remains very strong and has gotten stronger over the last couple of years. We've proven our ability to manage through adverse environments. Although 2016 did benefit from some positive volatility, we do believe that the core of 2016 is sustainable going forward, and we're looking forward to another very successful 2017. 2016 was a strong year. Strong years make for tough comparisons, but we have confidence in our profitability. We think we will be consistent in our outlook between 2016 and 2017.
Now I've gone through some of the financial highlights. I'd like to turn it over to the market segments to really focus a little bit on the financials, but more of a focus on the growth opportunities that we face in the marketplace. With that, turn it over to Mike Simonds.
Good morning. Delighted to be here with you again. We start with a snapshot of the Unum US business, it's actually the same page that we've used over the last couple of years. I was thinking about what we might hit for highlights for all of you. I started with what this page looked like a year ago, what's changed and what's the same? First, what's the same, we remain, when I think about the Unum brand in the U.S., singularly focused on employee benefits, financial protection products offered through the worksite. We think that's a unique position to have, and it's served us really well. We continue to remain committed to the brokerage channel and continue to invest in those relationships. Those are critically important to us.
We're about $400 million bigger than we were a year ago, almost 6% bigger, and we continue to generate strong returns. We talk about a 12%-14% operating ROE, and we find ourselves towards the top end of that range. What's changed, we've added the Starmount company, strong dental and vision platform for us to grow from. We've increasingly augmented our distribution by adding technology-enabled platforms that can help us reach new and different parts of the market and help us grow in different ways. I'll spend a little bit of time talking about that going forward. If that's a quick snapshot on the business, maybe I'll just take a minute and talk about some of the key trends that are going on in the market.
I suspect that Tim Arnold, when he speaks to Colonial Life, will pick up on some of these trends as well. I think first and foremost, there's a lot of change that has gone on the regulatory front, certainly in financial markets. Through that, every indicator is that employers remain committed to offering benefits. That being said, they need help managing the costs, particularly around healthcare with administration, because as they push to more employee choice products, from the employer's point of view, that means more work. That means enrollment, that means administration, payroll deductions. Managing employees selecting their own benefits requires a different level of engagement. Carriers that are able to help have an opportunity to stand out. The biggest tool in the toolkit for an employer when they're thinking about managing their healthcare cost is plan design of that health plan.
We continue to see rising employee share of premium, larger deductibles, larger co-pays. The financial exposure to the employee in the event that they get hurt or they get sick continues to grow. The needs for the products that we provide, fundamentally, is on the increase. We know that employees, at the end of the day, think about yourselves when you go out and enroll in your benefit plan every year, is lacking. They don't understand our products as well. We'll spend a couple of minutes about steps we're taking there. As I mentioned, technology is enabling new distribution. As smartphones and mobile becomes pervasive, all kinds of employers that don't have employees sitting in front of PCs or at desks now have the opportunity to reach those employees through the devices in their pockets.
Cloud-based technology is enabling HRIS and admin solutions for people management to push into the small end of the market, that's exciting for us. As it turns out, not a surprise to anybody in this room, insurance is a complex and highly regulated business, we've seen some fits and starts as new technology players have come in and tried to take advantage of some of those opportunities. Interest rates remain a pressure point as though Jack went through. If you're disciplined about your repricing and you're always forward-looking, you can work to offset the pressures of those interest rates. Certainly, it's a pervasive pressure in our business, we feel pretty good about the spot we're in, that's reflected in how we are going into 2017. When we get to the sales outlook, I'll speak to that.
Certainly, because of those first two trends at the top of the page, the commitment to benefits and the need for our products, we are definitely seeing more and more carriers interested in the employee benefit space. We see all kinds of different players, both domestically and from abroad, beginning to think about our markets and filing product. What I would say is, because of the nature of the changes in the market, filing products is actually the easy part. It's really about having the scale, the distribution, the technology, and the expertise to deliver those products through the distribution, through the employer, all the way to that end employee that serves to differentiate you in today and tomorrow's benefit market. I think that's a really key point of differentiation.
It's where our strategy is based. I won't spend a lot of time on this slide, but across the top, there's three things that we try to do really well. We take our heritage as a disability player, which has helped us build a very large client base across the U.S. We work really hard to expand those relationships with new products, new services, better enrollment, to have more employees covered. That's really the second piece in the middle. Finally, we're very focused on building out best-in-class partnerships to be sure that we get there quicker and faster with new distribution and new capabilities. Those three things across the top of our strategy for Unum US, they sit on a foundation that doesn't change year in and year out. It is about our people, the values.
At the end of the day, the business we're in is making promises, so being sure that we always operate with the utmost integrity. Risk discipline is really fundamental to how we run the business. I just want to spend a minute on that idea of risk discipline. There's a lot going on on this chart, but if you'll let me, I'll walk you through it really quickly. I'll just start at the top, if it's a clock, at 12 o'clock. Right now, at five minutes to 9:00 East Coast time, we have about 150,000, give or take, open disability claims at Unum US. That's going to be by far the largest amongst any competitor in the market.
That kind of scale enables us to invest, as Rick alluded to, over 2,200 benefits and claims specialists, 80-plus physicians on staff, 15 different specialties, vocational rehab resources, both within our home office locations and out in the fields with our clients. That kind of scale enables us to invest in key industry areas. Places like the healthcare segment. That's about a billion-dollar business for Unum. When you've got that kind of scale, you actually can tailor teams that do nothing but work with hospitals. Being able to work with an employer that's got everything from janitorial to brain surgeons to the executives that run that hospital, the unique needs of having to run an operation 24 hours. When you can have the scale to tailor your approach to industries like that, it enables you to differentiate yourself on what that client actually needs.
Those 150,000 open disability claims, if you sort of work your way around the clock to 3:00, that's about two times would be our estimate of what the average of the top 10 players in the industry have. We use that data to do a couple of things. First, to build the operational models that help us allocate our resources. We have dozens upon dozens of models that take that data and say, "Where do you want to put those resources to best effect when it comes to returning people to work?" You can't take everyone and work all 150,000 claims in the exact same way. You get better and better each month in, month out at applying those resources to best effect. You also use that same data to drive your pricing models.
If you take that down to 6:00, you pair that with really strong discipline around our underwriting profession and around our sales and client management team, you can take those prices into the market in a very smart way. The average underwriter at Unum, the average salesperson at Unum, came to us out of college. We've trained them. They're going to have between 10 and 15 years of experience. Their compensation plans are built around growth, but they're built around quality. We work very hard to be sure that incentives are well-aligned. That approach, year in and year out, helps us, going to 9:00, generate a strong and diverse client base. You can see 43,000 small employers that we cover. That's about 60% greater than the number two player in the industry.
The number 2, 3, and 4 players are focused on that small end of the market. Uniquely, not only do we have that share in the small end, but in the large end of the market, we serve about 41% of the Fortune 500 and about 51% of the Fortune 100. That diversity enables us to see every angle on the market and also help us balance our risk over time. If you can run that cycle all the way around the clock consistently, it helps generate the outcomes in the middle. 90%+ persistency, strong predictable loss ratios, and strong returns. That client base becomes really important to us, not only because it helps and informs how we manage the risk over time, but it's also one of our biggest growth levers.
I highlighted some of the similar numbers that Rick pulled out earlier, but what this shows is when we have a client, we work really hard to honor the commitments we made to that client and serve them as best we possibly can. You read through and we get fairly high marks. A really important one is when you get down to the bottom, 94% would consider Unum for additional benefits. That's central to our strategy. Because every time that we build out a relationship with a client, obviously there's growth. It comes in two to three points more favorably priced than if we have to go out and acquire a brand new employer client. Comes in at slightly lower acquisition cost. It's a client relationship that we already have. Probably most importantly, what it does as we broaden that relationship is it increases the stickiness.
That's probably our biggest lever to drive that persistency. When we're in the interest rate environment that we've been in for the last five or six years that Jack spoke to, these kinds of relationships enable us to place the necessary rate increase and have that business stick over time so that we can manage to, I think what Jack described, 76%-79% loss ratio as an outlook, even as we're having to make necessary adjustments to the discount rate. About 60%, it's actually a little bit north of that, of all our new sales come from existing client relationships here in 2016. We feel like we have a really long runway ahead of us.
The average client is about two and a half Unum benefits and post the Starmount acquisition where we add a strong dental and vision product, we think approximately 10 Unum benefits would be a fully penetrated client. Speaking of Starmount, at this point, we feel really good. There's folks working very hard in Chattanooga, Tennessee, Portland, and Baton Rouge, Louisiana, towards a customer day one for Unum-branded Starmount dental and vision to be in the markets in January. We'll be in about 50% of the market in our first wave in the first two quarters of next year and moving through the rest of the U.S. as we get product filed and approved. It's been a great partnership to date. We feel really good about the cultural fit between the Unum companies and Starmount and see this as a really strong growth opportunity for us.
You see, we feel like $130 million today's book, getting to $500 million over the next five years is reasonable and achievable. As we get through the full country on a Unum-branded basis, work will be going on to build Colonial Life-branded product through the Starmount company to get out through Colonial Life distribution in 2018. Really strong positive use of both brands and both distribution. Dental and vision are both network businesses, obviously. As we grow our customer base through both channels, both channels will benefit from stronger network builds over time. Second piece. Piece one, expand relationships with clients. The second component of the strategy is really about doing a better and better job with consumers.
I won't spend a lot of time on this other than to say, when we offer an employee pay plan, and this is really an industry metric, generally about one in five employees participate. We feel like that we can do significantly better than that. Every time we can move that 20% participation rate up a point, for the Unum brand, it generates about $25 million in additional sales. There's real leverage from a growth standpoint in investing in the people and in the technology and in the approaches to get better and better. It's a parallel to the risk example we went through on the disability side. As we get through the enrollment season here for 2016, many plans enroll in the fall for a January 1st effective date. We probably saw about 5 million workers here in the fall.
That's 5 million data points that we'll learn what kinds of approaches are effective, what's ineffective, so that the next time, as we get through the next enrollment season, we'll get better and better at this approach. The third element of the strategy is building out relationships. There's been certainly a lot of talk about private exchanges. Certainly, they're still out there and being marketed. What I would say in general, we'll have defined contribution, which generally is what sort of defines that private exchange is viable and we see it in pockets in the market. I'd say much more pervasive is just the use of strong technology for employers to help manage their employee benefits.
Like I was mentioning earlier, it's enabling parts of the market that might not have thought about employee elected benefits to really start considering it because there's strong and inexpensive technology that can help them accomplish that. Rick mentioned it earlier, employee choice and working with partners in that market, that's been the top of our investment list going back the better part of 10 years. We're fortunate to have a number of very strong relationships in place with 50 plus of these digital partners. We're seeing more and more of our sales come in on a digitally enabled basis. In summary, I'd say that we feel very good about the results that we have been generating and feel like the strategy is playing out well in terms of both the top and the bottom line results.
As we look forward to 2017, we anticipate good, strong earnings growth, continued disciplined top line growth, the risk management discipline to continue. We did have a strong, or we are having a strong year in 2016. Some of that, like Jack said, is probably favorable volatility, but the lion's share of it, we believe is about good risk selection and execution on renewals and in our benefits operation. The range for us, sales growth in the 8%-10% range. I'm an optimistic person by nature, but I have to say, I am more optimistic than I've been in several years going into a new sales year. That's if for no other reason, I think both the market conditions are more conducive, and number two, this is the first time in three or four years that we've gone in without needing to raise rates.
We feel like given the current interest rate environment, the current new business pricing that we're finishing this year is sufficient to take us into next year. As always, we'll continue to watch and monitor that, but we feel like we're in pretty good stead there. Strong sales growth paired with very strong 89%-90% persistency yields good earned premium growth. Operating earnings growth of 2%-4% and an operating ROE again in that range of 12%-14%. That's the state of the Unum US business, and I'm delighted to introduce Peter O'Donnell to talk about the U.K.
Good morning, everybody. I'd like to talk about Unum U.K. This is a very similar slide to the one that Mike showed. On the left-hand side, you see our primary product. Again, we're a workplace business in the U.K. We distribute all our products, primarily through brokers into the workplace. Group Income Protection, which you will know is long-term disability in the U.S., is our primary product. It's what we're known for in the U.K. as well as the U.S. It's where we built our business. We're expanding our offering, and you'll notice in market share, we've got dental in there now. A year or 18 months ago, we bought NDP, National Dental Plan. That's now Unum Dental. It's integrated into our business. We have a number two position in that, and it's growing very well and going very well.
Really happy to show that as part of our business now and when Mike talks next year, I'm sure it'll just be part of his product set rather than just Starmount. You can see on the right-hand side that the sales distribution is really benefiting from that. In terms of where we're getting our growth from, for a very strong year in terms of sales, you'll see that the supplemental products are growing pretty significantly because of that dental acquisition. Both, some of it's sort of natural growth in terms of it's not in the comparative, but some of it is actually the dental business growing as well. We've invested in our critical illness product. As you know, cancer is a sort of very big thing with consumers. That again, is a voluntary product primarily. That's going very well as we've invested in that proposition.
Our group life business is also growing well. We're targeting the small end of the market there using analytics to sort of identify underwriting areas and places that we like to price. We've also been very successful in growing our income protection market. The market's growing about 3%-5% and primarily Unum's at the heart of that growth. The market expansion is pretty much what we're driving. The business itself, on the bottom sort of core there shows earned premium around $400 million and very strong margins and profits. Profits under $100 million margins, almost touching 20%. As we've come through Solvency II, we've actually gone through that without any detrimental impact on our capital. I'm not quite as bullish as the U.S. election system has driven.
We had Brexit, that is giving us a more sort of pessimistic, bearish look outlook for the U.K. and Europe. I think if you go to the U.K. and Europe, you probably feel that a bit. However, we're doing very well in what I think is a challenging economy. Sales up 17%. I've taken the dental number out, 13% excluding dental. Really strong growth in sales, and that's coming through, as I said, some really nice areas. Seeing new to market income protection clients come in, seeing critical illness grow, and seeing that small life scheme grow and dental also growing. Very happy with the sales growth. Earned premium growth and earnings growth of 5% and 5%. If you took out dental, it'd be 1% or 2%. Actually, what's dragging that back a bit?
We're sort of below a little bit of what my expectations were, that's because natural growth. Wage inflation and employment growth in the U.K. is pretty much moribund. You've been seeing very low wage inflation in the U.K. relative to the expectations that were sitting here a year ago. In terms of natural employment growth, again, not a lot going on there. Why is that? Well, you look at Brexit. It's a high degree of political and economic uncertainty. What do we know about Brexit? We know that Brexit means Brexit. That's full stop. We know it's going to start in March 2017. We think it's going to take around two years, that's about it. That is creating quite a lot of uncertainty for businesses in terms of making decisions. The U.K. interest rates outlook has also deteriorated.
As Jack mentioned, it went to unprecedented levels during the summer, with the 10-year down around 60. It's come back a bit, but it's still pretty uncertain in terms of what the interest rate outlook is. There's a lot of quantitative easing going on in the U.K. and Europe. If you're in the bond market, you're actually competing against the government at times as they continue to support the economy through funding bond purchases. They don't want companies to have problems raising money. Employers, not all employers, but certainly we have a large set of financial services employers, are cost sensitive, and they're limiting business investments. They are saying, I don't think Brexit has turned into a catastrophe in any way, but actually people are just saying, "Well, we're not sure what we're going to do.
We're not going to take the chances of investing in new things or adding new employees. We're going to control costs pretty tightly." Therefore, for a business that responds to employment growth and wage inflation, that's caused us some headwinds in 2016, and we think in 2017 as well. GDP growth does remain positive but will dip in 2017. To try and illustrate that, I just thought I'd bring these charts up. When I was sitting here a year ago, I was probably feeling pretty bullish. I was sitting in one of the fastest growing G7 economies, well, the fastest growing G7 economy, and through 2016, things have not turned out in the way we would have expected. GDP is lower, and is predicted to go lower. Unclear and uncertain exactly where that's going to land.
I think these have a high degree of uncertainty in terms of being able to accurately predict GDP. I think wage inflation we can be more certain about. We're talking about 1%-2% next year. If you were sitting here a year ago, expecting that to go up to 3%-4%. The 10-year, as we mentioned, has come back a bit. It is driving a discount rate change for the U.K., as Jack mentioned. I'll come back to that in a minute. I think the quantitative easing are likely to still keep interest rates lower for longer in the U.K. I know the U.S. had a rate increase yesterday. No sign of that from the Bank of England. If anything, still slightly towards a drop in interest rates than an increase. I know the dollar exchange rate Jack referred to as an earnings pressure for us.
Actually, it's not going to see wage inflation come up, though. We don't think that businesses are going to put more wage increases through to offset what we think will be inflation of around 3%-4% in the U.K. next year. Actually, it'll be a squeeze for people in terms of real incomes next year. Just a more pessimistic, more cautious outlook from me on the U.K. economy than the U.S. What are we doing about that? We have adapted our plans. We're putting more price through our interest rate sensitive products, and that is income protection for the U.K. We had price increases going through sort of 2%-3%. We're up near 5%-6% now for that product next year.
What that will mean, I think, is we've seen this before, that competitors probably will say they're going to put price increases through, but not unlike Unum US, Unum UK tends to be the market leader in this. We tend to be more effective at getting price increases through. Today, my renewal program and new business quotes going out for the first quarter already have those rate increases through. Competitors will look at that as an opportunity to write some more business in the first half of 2017. We think persistency will take a little hit next year. At the moment, our GIP persistency is around 88%-89%. It'll come down a few points from that, probably in the first half of the year. The rate increases, the competitors catch up and the market starts to move.
That rating program, though, very important for us in terms of our risk discipline and getting the right prices in to match that interest rate environment. The good opportunity, Unum UK is now a much broader employee benefit provider. We want to build on the momentum in 2016 that we've seen around our critical illness, our life product, and our dental. You'll see sales growth continue to come through at pretty good levels there, primarily driven by those products. There are industries in the U.K. that are going to benefit off the back of a lower exchange rate. Manufacturers being obvious. There's still opportunities out there for us to segment our portfolio and work with those employers to put income protection and expand offerings in there. We want to make sure we're continuing to invest where we'll get bang for our buck.
Selective investment in marketing and distribution. Big push on simplification, I'll talk a little bit about our new administration platform in a minute. That will basically allow us to drive significant efficiencies from the business. Continue to become a more customer centric organization. When you're talking about rate increases to your clients, and they're going to experience some of the same pressures we are, having a great customer experience, having the standout proposition, having great relationships with your partners is going to be critical for us to maintain that strong consistency through what I think will be a reasonably challenging year. In terms of the new admin platform, 18 months ago to 2 years ago, we started to invest in a new admin platform.
We went live in quarter three this year for new business, and we started migrating our business from our old platform in November. Basically that migration will take most of 2017 and into early 2018. What does it do for us? Well, first of all, it's speed to market. I'll be able to get new products out much more quicker than I can today and much more cheaply than I can today. It also allows us to be digitally enabled. It's modern architecture. A lot of the insurance platforms in the U.K. are still in the 19th, 20th century technology, maybe 19th, slip of the tongue. 20th century technology, therefore they find it very difficult to cope with consumer demands in terms of mobile technology, access to data, portals. This allows us to really move that forward.
We think combined with what we do today with our people and relationships, that will create a market-leading service proposition. Significant operational efficiencies and a great customer experience. Actually, it'll be faster, it'll be speedier, it'll need less people, a lot more automation around this system. An opportunity to both deliver a better customer experience more efficiently. It reduces technology risk. I don't have that legacy product anymore and makes upgrades much more easier. Finally, but not to be underestimated, regulation in the U.K. has been an area that's been significant change with Solvency II, and a lot of EU legislation. Coming out of Brexit may mean that we have a complete rewrite of legislation. Very difficult to know exactly. This platform allows us to do that very efficiently and cost effectively as well.
Feeling very good about that investment and the payback from it. Overall, although my premium growth probably won't grow much next year, my expense ratio, I expect to take about a point off my expense ratio in year, and then that will grow from there as we go into 2018 and realize the full year savings. In terms of the strategy, it remains unchanged. I do see these as headwinds. I think actually this is a great opportunity to test some different areas of the strategy. Growing the income protection block, unfortunately, I think that will be challenging in 2017 because of that persistency, but we still have the opportunity to work with those industries that are going to do well out of Brexit and get them to place more employee benefits.
Great opportunity to grow my other group risk products, as I said, critical illness and the life product. Continuing to build on the voluntary business and making sure that we get dental really moving and motoring. Really good opportunity to continue to get growth in the areas that are going to be very important as the economy recovers. As I want to reinforce, making sure that customer experience and we continue to invest in the future and make sure that we continue to invest in the things that are going to make us get more accelerated growth as the economy recovers. In summary, the U.K.'s decision to leave the EU does create uncertainty, and in particular, the wage inflation and employment growth that we've seen be very muted in 2016, I expect to continue in 2017. However, we're adjusting our plans.
We're putting price into those interest rate sensitive products. We're growing the products that are not interest rate sensitive, and we're taking action on our cost base to mitigate the impacts. We will see a discount rate change next year, and obviously that will mute our profit growth as well. Our investment portfolio is very defensively positioned. Jack talked you through that from an enterprise wide. The U.K. is similar and feel very good about where we are in terms of investments. However, actually finding investment yield remains very challenging in the U.K., so therefore that is an area that we continue to look for. Our operational performance is strong. We will continue to invest. In the longer term, the workplace remains an attractive place to distribute insurance products in the U.K., and getting the non-interest rate sensitive growth products to grow is a great strategic opportunity for us.
We'll be well positioned to capitalize on the future growth opportunities as the Brexit fog clears through 2017 and 2018, and we understand more certainty returns and growth returns to our economy. Looking at the numbers, you see the strong sales growth there. Premium growth showing that lower wage inflation in employment areas as well as lower persistency on GIP. The operating earnings sort of in the naught to two range, reflecting the discount rate change. So good underlying core earnings, but the discount rate actually offsets that. And then very strong and continuing ROE. That's in pounds? That's all in pounds, yeah. Right. Now I'm going to hand over to Tim. Thank you.
Thank you, Peter. Good morning, everyone. Thanks for coming out this morning. The headline I would want you to take away from this meeting with regard to Colonial Life is we're extremely excited about the market opportunities ahead. We're very confident in our plans and in the ability of our team to execute those plans to take advantage of those market opportunities. A quick overview of Colonial Life. The takeaways here are a very broad portfolio of both individual and group employee paid products. A distribution footprint that is a competitive advantage. We'll talk about that a bit more. And strong and balanced growth across our key market segments, and especially strong growth in the public sector and in our core markets, which are our target markets. We think about the market potential. There's a lot of potential with new customers.
There are 6 million businesses in the U.S. that have fewer than 100 employees, and that's a significantly underserved marketplace. The majority of those employers do not offer voluntary benefits. There's also the opportunity to sell new products into our existing customer base, and there's the opportunity to re-enroll as employers hire new employees each year. We have 7,000 benefits counselors in our field distribution system that are uniquely qualified and capable of going out and conducting those enrollments. The market opportunity exists in every segment, every size segment, and every target market segment. You can see on this slide, there's significant under-penetration for employee paid benefits. LIMRA data suggests that 30%-40% of U.S. households have no life insurance and have no private disability insurance.
In addition, as Mike said, employers are increasingly enhancing or are actually adding to their deductibles that they're asking people to pick up the cost for. That creates a lot of opportunity for our product portfolio as well. A lot of discussion about millennials lately, and then the conventional wisdom is millennials don't believe that there's a need for insurance, and to the extent they did, they have dramatically different buying patterns. As you can see from this LIMRA survey, actually, millennials do believe in the need for both life insurance and financial protection health insurance. And although they enjoy using technology, and even some of us baby boomers enjoy using technology to make purchases, they actually want access to a person who can give them advice when they're making financial protection purchase decisions. We're encouraged by this slide.
The 2009 to 2011 period was a challenging period for small business growth and for jobs creation. We're seeing very good momentum in both of those and in the opportunities that we have with our business at Colonial Life. As Peter said, his strategy remains unchanged. That's true for us as well. We continue to be focused on serving America's workers and their families with simple, modern, and personal benefit solutions. We continue to be focused on four areas in our business plans: growth, enhancing customer experience, improving productivity, and ensuring that we have the right talent to execute on our plans. Market landscape, we think, is actually pretty supportive of our business currently. Brokers, especially those who serve the small end of the market, need expertise. They don't have a lot of time to actually think about voluntary benefits, to be honest.
As Mike said, they're spending a lot of their time on the health side. We offer a turnkey solution for those brokers to go in and actually do everything they need to do relative to employee benefits. We'll take care of that for them. All they have to do is introduce us to the client and then go to the mailbox and get the commission check. We feel good about our broker value proposition there. We work primarily with the small, local, and regional brokers rather than the big national houses. We mentioned earlier, employers have a lot of cost pressure. They're shifting some of the cost pressure onto employees. That plays right into our market and our potential to fill the product needs for employees.
As Mike said, consumers are taking on more responsibility. We are very uniquely positioned to help serve them with the products and services that we offer. There's a lot of new competition coming into the employee paid space. We think the market's actually growing faster than the amount of competition coming into the marketplace. We're also very confident in our competitive advantages, and we'll talk about those more in a minute. Technology's becoming increasingly important. Mike mentioned this as well. We're investing heavily in technology on the enrollment side and on the claims side. We introduced a new eClaims capability last year, which allows our policyholders to submit their claim using their iPhone or their mobile technology. In the majority of the instances when they do that, we can pay their claim within one day. Our competitive advantages.
I mentioned earlier our distribution system and market reach. We have the second largest distribution system in this space. We're very confident in our ability to continue to grow that distribution system. We've had good success over the last few years, improving the success rate of the people that we're bringing on and adding to our new sales offices. In the year 2016 so far, we've added over 200 new sales managers. Enrollment capability is another area of strength for us. We have a proprietary system that we use for the small case market, so we can do the enrollments for those employers, including what we call core enrollments. For every dollar of Colonial Life premium that we enroll, on average, we enroll $10 of non-Colonial Life premiums, so health benefits.
That gives us a significant advantage in having those face-to-face meetings, or as we term it, attendance at the enrollment. A lot of plug-and-play capabilities at Colonial Life as well. Mike mentioned over 50 relationships at Unum US. We do not have quite that many, but it is a rapidly growing segment for employers who have their own benefits administration system. We have a very easy way to plug and play with those capabilities. Face-to-face enrollment capabilities across the entire country. We can enroll an employer's employees no matter how many states or localities that they are based in, either through face to face or telephonic or electronic self-serve. We would like to accelerate growth. We are having a good year in 2016. We are well above the projections that we shared with all of you last year at this meeting.
We would like to be consistently above last year's projections, so we are making investments in territory expansion. We are adding new territory offices. Think of those as a state-level office. We are accelerating our growth in those offices. We are also investing in the existing territories with new sales managers, investing in the success of our sales districts, and in new reps. We are also making a significant number of investments in persistency. Among our competitors who report consistency, we have the industry-leading persistency, but we are still not satisfied with where we are, and we think there are opportunities to enhance that. We would much rather keep an existing customer. So a few initiatives there, on account management strategy, customer retention initiative, which just means that if someone calls us and asks about canceling the policy, we transfer those people to a licensed sales professional.
Then alternative payment solutions for high turnover industries. We have created the capability to have people pay us their check draft or credit card to allow them to continue their relationship with Colonial Life even after their relationship with their employer ends. Business outlook is very strong. You see some of the metrics here for the year 2016. I mentioned earlier the success of some of our new offices. Under the second bullet point, the last sub-bullet, we have increased the number of sales managers by 18% this year, but the sales from those managers have increased by 82%. Key drivers for next year, we need to execute on the plan. We feel like over the last three years, we have seen significant improvement in our team's ability to execute plans. We have got great stable risk management.
We will continue to be focused on making sure we are making the right decisions around expense and investment. Our financial outlook has improved a bit since we were here last year from a sales growth and premium growth perspective. I would just share with you that we feel confident in the ability to deliver on those plans. With that, I will turn it over to the President of the Closed Block Operations, Steve Zabel.
Great. Thanks, Tim. I'm Steve Zabel, and I'm going to speak today about Closed Block Operations. Okay, got it. There we go. This picture hasn't changed much since last year, I too am going to focus on just some of the changes that you may have seen. As you know, we have two main blocks within Closed Block Operations. We have our closed individual disability block. We also have our long-term care block, both group and individual policies there. IDI was closed in the mid-1990s, then that followed by our two long-term care blocks. One thing that we always highlight is just the maturity of our blocks and just the age of them. The long-term care block is pretty early in its maturation.
One way that you can measure that is just how much of the reserve is an active life reserve versus actually in claim reserve. For long-term care, we have about 14% of that in claim. That reserve continues to grow. It grew about 5% over what you would've seen last year. That will continue over the near-term horizon. CDB, pretty static in its size. We do see it gradually decreasing over time. As you can see, the majority of that block is in claim reserve. Much of that block is in claim. A lot of that is going to be lifetime claim, over time, that will just become more and more stable as those really age into a claim reserve. From a premium distribution perspective, this is definitely shifting over time.
I think two years ago was really the inflection point where the volume of premiums from long-term care and IDI, they were pretty consistent with one another, it's about 50/50. Last year, it started to shift more to the LTC side. Those percentages have moved about 3% since what you would see last year, where now it's become more and more weighted to the LTC side. Really what's driving that is on the IDI side, our persistency roughly 92%, you see about 8% of those premiums roll off year to year. On the LTC side, although you do have lapses within that at about a 5% clip, we are putting pretty significant rate increases into that block, all in, you actually are seeing those premiums grow a little bit year over year.
We'll continue to see that over the near-term horizon as we continue to put more rate into that block. Just from a premium income perspective, pretty consistent with last year, rolling off a little bit year over year. The way to think about taxes or earnings before taxes is really just the income that we earn on our surplus behind the Closed Block Operations. Fairly consistent story. I'll move on and just talk about a little of the block demographics. Again, fairly consistent to what you would've seen last year. The in-force lives have dropped below $1 million. Those continue to decrease. We do give the demographics between our individual block and our group because they are very different blocks. If you think about how these were sold, the individual block was your more traditional across the kitchen table.
You have an individual agent selling the product to the consumer. From a group perspective, these are more employer group sales. Really just the sales process with the individual is more of a full-bodied product. The benefits are higher. You're going to have more lifetime benefits, more inflation benefits built into those. Where on the group side, much of that's employer paid, and because of that, smaller benefits, a little bit more of a stripped-down version of the product. You can see that come through in many things like the percentage that are lifetime, as well as just the overall premium levels. The group product actually feels more like a group disability product as far as the level of premiums.
That's another distinction, that's a distinction that we also talk to the regulators a lot about when we're out there talking to them about our rate increase requests, just the impact to consumers versus employers and the relative risk and premium levels on those. We do have some information here just about our interest-adjusted loss ratio for long-term care. We do look to have that be in that 85%-90% range. It's been very volatile over time, sometimes below, sometimes above. This year, we've had some unfavorable volatility. There's really a couple things, we've talked about this in earnings calls, couple things going on there. One is we've started to implement some pretty large rate increases on the long-term care block. We started implementation last October. Those have really started to work through the book as we go through the summer.
What that does is sometimes gets people to wake up around having their policy. We've seen really not overall incidents increase on the block, but we have seen the severity increase because it's pretty highly weighted to more incidents on some of those blocks that we're currently rating. We've seen that in years past when we have large rate increases. We expect that could continue for a period of time. All very manageable, when you look at the underlying results, we feel pretty good about being within that range. The other thing that has happened over the last couple quarters, in the third quarter is we had a very large group case terminate. Really how our GAAP accounting works for that in our reserving, it moves to a different reserving construct when the group goes from a group policy to kind of a ported individual policy.
It's really just the reserving construct and our view on the risk when it moves from group to more of a ported policy. We reflected that in third quarter earnings. That probably cost us in the mid-single digits from a loss ratio perspective. If you take that out, you go back, you look at the last several quarters, we feel pretty good that we're operating within that range that we had set forth. Go on to the next slide and talk just a little bit about performance since if you go back to the end of 2014 when we reset our reserve assumptions, went to a new valuation system, we went through new experience studies, really reset our expectations for the block. Wanted to give just a little bit of an update of how we're doing since we reset those expectations.
As Jack mentioned, we've gone through our reserve adequacy study this year. We really feel good about where we're at, both from the liability assumptions, whether it's incidents, mortality, duration of claim. We feel pretty good all in about how that's going. Jack talked about the interest rates, and we do know we have pressure going forward there, but feel that that's manageable. I want to talk a little bit about the in-force rate increase and how that's progressing. One of the new things that we did when we filed in the 2014, 2015 timeframe on our individual product is we incorporated a landing spot concept, where we gave the consumer the decision between foregoing paying their increased premium, which is pretty significant on the rate increases that we filed, or they can choose to reduce their inflation on their benefit from 5% to 3% prospectively.
They kind of lock in their current benefit but reduce that going forward. We think that's a great value proposition for the consumer, I'm going to talk a little bit about what inflation for those types of services have really been. We feel like that's a good opportunity for the consumer to keep their premiums the same and still have adequate coverage. That's gone very well with the regulators, that discussion. They really like that option. We began implementing those rate increases back in last October. We've seen how that's played out over the year, and we feel good about the rate at which our consumers are electing to take the lower benefit inflation versus paying the higher premium. We feel good about that just from kind of a forward-looking interest rate risk perspective, having the lower benefit build over time.
If you bring that back and just think all in how we're doing, we're really right on top of how we thought about the impact of our premium rate increases in our original reserve assumption. We feel really good about the progress we've made there. Mortality and morbidity, I mentioned you can kind of get a sense of that by looking at our loss ratio. Then I'll talk a little bit about utilization rates, but that's kind of a non-issue for us. I know if you have a reimbursement type product, that can be kind of a real assumption risk within your reserve construct of how much of the kind of contractual benefit a consumer will actually use as they're really only paid for their actual expenses. Our product is, majority of it is indemnity, where it really doesn't matter, frankly, what the actual expenses are.
We pay a daily benefit regardless if the person is eligible for claim. That kind of takes that variable out of how we think about our reserve construct and feel that that generates kind of a more stable reserve structure for us. Other considerations, more than half of our premium is in Group. It does have more favorable characteristics, as you're not going to build such a large benefit over time, and therefore you don't have as much new money to invest, and there's a lot of other just characteristics that make it kind of a less volatile type of product. The benefit of increasing interest rates, we will feel kind of unilaterally on the asset side as opposed to a reimbursement policy where you're also going to see maybe more inflation on the reimbursable expenses that will then flow back into your benefit payments.
Jack talked about the difference between our statutory and GAAP margin. We continue to feel good about where that is and continue to manage that. We put on here the re-domestication of Fairwind just because I think it's still relevant. Back in 2013, we re-domesticated a captive that we had in Bermuda back in the U.S. into Vermont. We continue to feel good about that construct, but I think the important piece of that is we continue to hold our reserves as well as our capital levels consistent with how we think about our other U.S. statutory U.S.-domiciled companies. More of a U.S. statutory reserve construct, as well as managing that more to a traditional 350% RBC ratio. I'll move on to strategy. This doesn't change. We feel very good about the strategy.
We have four things that we continually focus on with the team back at the home office. Financial analysis, we continue to increase our skills there. Back in 2014, we moved our long-term care reserve to a new actuarial cash flow projection model. We're currently looking at our IDI block to do the same thing with our claim reserve. Don't anticipate that will give us a different view of the current reserve, but we think it'll give us more insights into how that book will progress over the coming years. From a rate increase strategy, I actually feel very optimistic. I spend a lot of time on the road meeting with regulators. I've actually been doing that for the last five or six years for different blocks of businesses. I've kind of seen the progression of how the conversations with the regulators have gone and how that's evolved.
I think there's a couple things happening. I think there's a lot more education with the regulators. I think they understand the issue so much better than they did five or six years ago. They also talk to each other quite a bit about the issue. There's a little bit of just kind of that peer education, but also that peer pressure to actually take action for these requests. I've seen that evolve, but I've also seen the consumer education evolve a lot, too. I've attended and testified at numerous hearings this year.
I think that's a great thing that the states are doing, where they're having forums where regulators, carriers, consumers can come together and talk about the issue, talk about the need for rate increases, and have more of an open dialogue where it doesn't feel like decisions are kind of being made behind closed doors. The consumers have a more active role in the discussion. I think that's really helped, and it's really helped regulators be able to move forward. We've actually seen the benefits of those types of discussions and hearings in our success to be able to get our rate increases approved. I think the other thing that's driving a little bit of this is Penn Treaty. That's all kind of coming to a head. The first of the year, the legal liquidation is going to go into effect.
The states are starting to figure out what that really means, what that really means from a guarantee association perspective, and what that could mean to their premium tax base going forward. That's a real driver for them to say, this can happen throughout the industry and the regulators need to kind of do their part to help carriers manage their businesses properly. Talk about capital management. We continue to pulse the market for capital management opportunities. Those range everywhere from larger co-insurance opportunities to maybe trying to swap out some of the risks that we might have embedded in there for a more fixed projection of what those may be, whether it's longevity or morbidity. I'll say we're still exploring. Nothing imminent.
Rising interest rates will help that discussion with counterparties, but it's something that we'll continue to work towards, and we'll continue to just manage the capital as best we can. Then from an operational effectiveness, in this block, we don't have sales. We don't have a big commercial strategy, but we do really work on making sure that our underlying foundation is going to be sustainable, because specifically with long-term care, that book's going to be with us for some time.
We are investing money in our technology, especially from a benefits perspective, to be more efficient and be able to scale up those operations, but also looking at just talent acquisition and making sure that we have the people to serve our customers, because although we don't have a commercial strategy, we still do have 1 million policyholders on the LTC side that we need to serve, and we take that very seriously. I want to talk a little bit about reimbursement versus indemnity, and we have a chart in here. When you think about the expenses that we pay with our long-term care coverage, it's not what you'd think about normal medical costs, where you have a lot of acute care in hospitals and those types of inflation rates that you hear about double-digit inflation rates in some of those areas.
Really what we pay for more is in-home services, types of indemnity care in nursing homes. Those are more brick and mortar and a little bit more just tied to what the normal inflation wage is. When you think about what those types of services, how they've inflated, it's been in that 3%-4% range. There's a lot of cost studies out there that also confirm this that you'll see from different carriers. Two things really for us. One is we do think that the landing spot is a very viable option where people have inflated it at a 5%. You weighted average that into a prospective 3% inflation, but it gets into the zone of what actual inflation has been for these types of services.
Also, as I mentioned before, it does give us, I think, an advantage as far as how we manage our block, not having to worry about the level of utilization that we have within our policies and how inflation could influence that. In a normal reimbursement type of book, you may be paying out in the 60%-70% range of what the actual maximum daily benefit is. With us, that's stable. That's known. We know we're going to be paying out the contractual benefit. 2017 key priorities, they don't change. What we're going to continue to work with regulators to work through our rate increase strategy and continue to implement those. Many of our rate increases are actually implemented in over several years. Even though we feel good about the approvals operationally, those will actually be implemented over several years.
We need to continue to work on the implementation there. We'll continue to think about enhanced options that we can give the consumers. That goes a long way with the regulators as well. It gives good options to our consumers. Talked about operational effectiveness. We'll continue to move forward there. Financial analysis, I think the thing that we'll be looking at there is just to continue to grow our understanding of the block, and so we can predict beyond just next year, but predict 10 years, 20 years down the road. Capital management, we'll be opportunistic. We will continue to work with the regulators, continue to pulse the market to best utilize the capital that is behind this block of business. From a financial perspective and looking at next year, obviously no sales, so no sales growth.
Premium growth will continue on as what we've seen. The way to think about that, long-term care premiums will continue to grow a little bit as we implement rate increases. The IDI premiums will continue to roll off at about an 8% clip. Operating earnings are going to be down a little bit. The biggest thing there is we've had a pretty high level of miscellaneous net investment income due to bond calls and that sort of thing during 2016. We don't look for that to recur going into next year. You think about just the underlying risk results, they should be fairly consistent on both blocks of business. We'll continue to be in that operating return of 2-3, which is basically just the return that we have on the investments backing the capital of the segment.
With that, I'm going to turn it back over to Jack to go through the broader outlook.
In the interest of getting to your questions, I'm not going to dwell on the outlook. I'd look at two things. Our outlook is the 3%-6% range, same earnings per share growth rate that we had last year. It's driven by really strong continuing operational results. We have the 50 basis point discount rate change in the interest rate environment create some headwinds. Tax things that happened in 2016 that don't repeat in 2017, puts a little pressure. Capital management in the 3%-5% range. Right now, we would look to the lower end of that as a result of our current share price, it comes back to 3%-6%. Earnings growth, not going to go through this in any great detail other than to point out there is no normalized growth rate left on it, as I promised last year.
Good solid sales growth, good core premium growth.
Operating margins continue to grow. The Closed Block is shrinking, that impacts things at the corporate level. Again, capital management will continue to contribute to growth. On top of the outlook for our earnings per share, we expect to strengthen our capital position with continued strong statutory earnings, continued strong risk-based capital, increasing company holding cash during the year, and reducing our leverage. I'm going to turn it over to Rick for final comments.
Great. Thank you, Jack. Just a couple things to wrap up today. You heard some good depth from across the business segments about strategies, about how things are rolling up over the course of the year. I think that we look very good in terms of how the company looks from an overall franchise perspective. Our operations remain strong, consistent, stable. We're generating capital, putting that to good use, returning some to shareholders over time. We've got substantial leverage, as we mentioned earlier, to a rising interest rate environment if we get there. Last year, we felt a little bit similarly, if you recall, as rates were starting to go up towards the end of last year. We're feeling that same way this year. We'd like to see it, certainly our plans are predicated on the fact that interest rates stay where they are today.
As the environments could fluctuate, be challenging, we're ready for anything that comes at us. Hopefully you felt that same confidence out of the team as we went through it today. One of the questions you might have is how well the management team gets together, considering we put seven people within 10 linear feet here on the stage. Those of you in the room that would be able to see that, we are a team that works well together. Certainly leverages our strengths and capabilities across the enterprise, across both the U.S. and the U.K. I think the team is ready for the year. With that, we're ready to take any questions that you might have in the room. Yes, Ryan. Well, actually, we probably should get a mic for the
Yeah, they're coming in with the microphone.
for the webcast.
Thanks. Ryan Krueger, KBW. Can you hear me?
Yes.
Yeah.
Okay. First, I guess I had a couple of U.S. questions. First, on the benefit ratio for group disability, I think on the last quarter call, you talked about 80%-82%, and you've lowered it to 76%-79%. I assume part of that is less discount rate pressure, it seems like there's underlying better expectations as well. I guess, can you talk about what led to the much better outlook?
You want that one?
Yeah.
Yeah. I'd say just in general, it's sorting through and what new incidents look like, what are recovery patterns, offsets, settlements. When you take the sum total of it and sort of cast it forward in the next year, while we do feel like we did have some positive upside in terms of volatility on the risk side this year, we think some meaningful portion of it will go through into next year. It's really the underlying sort of quality of the business that leads us to the conclusion that high 70s loss ratio is reasonable.
Okay. On the sales as well, I guess it seemed like in recent quarters you talked about somewhat higher competition, you have a pretty favorable sales outlook for next year. I guess, could you talk about what's changed?
I think a few different things. One, I alluded to it earlier. As we sort of look into next year, this will be the first year in several that we're not going in with an additional new business price increase. I think we sort of feel like the market, while competitive, is coming up just a bit here as we go through the close of 2016. The combination of that continuing to progress with us feeling pretty good about where we are on new business pricing is quite helpful. I think in general, we just sort of see a more favorable business climate out there where the slack's coming out of the labor market a bit more. Demand for benefits is going up a bit. We sort of see those as conducive to the higher end of the range.
Thank you.
Thanks, Ryan. Let's come over here. Suneet?
Thanks, Rick. Suneet Kamath from Citi. For Jack to start, I think you'd mentioned in your sources and uses of cash at the holding company that you expect cash to build this year given the strong risk results, et cetera. Just curious what's behind that, as opposed to more aggressive use of that cash.
I think it's going to build naturally from the dividends and the strong statutory results. A piece behind that is there's still long-term care. We'd like to be in a position, if anything did come up in the marketplace, that we could take advantage of it. We continue to be focused on kind of boxing in the long-term care thing. That could take capital. As we get more certain about what those opportunities may be, we would want to have the capital to be able to execute on them.
Yeah, I think, Suneet, I'd just add to that, we'll have flexibility. When you think about that, we've kind of built in right around the same level of share repurchase. We'll have flexibility to deal with different things that we see or ultimately return capital. It's a good position to be in.
Okay. I guess last year, I think it was, we talked about IDI and maybe some strategies around that block. Just wondering if there's any update there in terms of what you're seeing in the market.
Yeah. We'll continue to work on that. We are looking at something that has proven to be more difficult, I think, than we initially expected, in part because of the marketplace, and in part because of both some of the reinsurance that's behind that, as well as some of the captive structures makes it somewhat more difficult to unwind than we'd initially expected.
By marketplace, is that interest rates, meaning the move that we've seen, does that make it incrementally easier or is that not a big deal?
No, it's not so much interest rates because most of the long-term care block, it's in runoff. There's no new cash flow, so interest rates don't affect it. It's more around how robust the market is relative to impaired life mortality. There's a big longevity swap market around normal annuity business that's not as big when you're talking about disabled lives.
Go ahead.
Humphrey Lee from Dowling Partners. Just a follow-up question with Mike with respect to Unum US. Kind of just going back to Ryan's question about the rate increases that you feel like you don't need to raise prices in 2017. In your comments from the third quarter, you had mentioned you feel like your competitors are a little bit underpricing because of interest rate. Do you feel like with the interest rate improving so far we've seen, do you feel like your competitors will still have to raise rates to catch up with you, or do you feel like you may actually have to lower rates just to be more competitive or to be in line with peers?
Thanks, Humphrey. A couple of quick things. The first would be I would differentiate, when I speak to going in with a consistent set of rates, it's on new business. We feel like that's different than we've gone into the last several years. Number 2 is on renewals. The in-force book, that's a pretty consistent process that we run. Certainly we'll continue to execute. About a third of the book comes up every year for renewal, and we'll continue to be sure that those prices reflect the current interest rate and risk assumptions that we've got. We've got a good, robust, manageable renewal program ahead of us. On the comparisons, it's really two things. One is we're not moving much.
We probably see a little bit more rationality in the competitive market here as we close out the fourth quarter, still with a little work to do. The other is when you look at an 8%-10% growth, it's a comparison over some difficult sales quarters, particularly in new business, that we experienced in 2016.
In terms of the kind of existing customer penetration, it seems kind of we've been at that kind of two and a half products per customer for quite some time. How do you kind of anticipate that would change over time, especially with this Starmount acquisition, and do you anticipate any acceleration in the near term?
I'd say we would anticipate that moving up 10-20 basis points each year over the next several years, and that's around investment in the client management team and the alignment of their compensation, and then improvement in the underlying technologies that the products fit more and more strongly together.
Good. Thanks, Humphrey. Let's continue over here.
Hi, Jimmy Bhullar, J.P. Morgan. I had a couple of questions. First, on LTC, you mentioned that if rates are at 5.25%, you'd have, I think, a $900 GAAP impact. In that scenario, what do you expect to have to add to STAT reserves on an annual basis? Would it be similar to what you've been doing or more or less?
Yeah, that difference is actually, it's just a GAAP difference.
Yeah.
Going forward, we would expect GAAP reserves and STAT reserves to grow pretty consistently over time. I think it would be the winds are favorable relative to statutory reserve growth. I don't think it'll be as big as we've seen over the past couple of years. It's going to be comparable to kind of the capital contributions we have in our 2016 capital model.
On solutions for the long-term care or the individual disability closed block, have you had serious discussions with the counterparties, or is it more of a hope at this point that something emerges down the road?
I would say we've had discussions. How deep they are is questionable. They're getting better. The trend is positive, but the likelihood that someone's going to pop up this summer and say, "I'll take your whole long-term care block," isn't all that likely. It's getting better, and one of the things we're doing is we're pursuing multiple paths. It's not just someone buying the business. There are other things we can do to help with the transparency of the block and where it's positioned in the corporation.
Lastly, on ACA, there's obviously talk about changes or repeal. How do you expect that to affect your business in the short term, either in terms of sales or persistency? Could it have a longer-term impact in terms of what employers are offering employees in the form of benefits?
Yeah, Mike, why don't you start? We'll go to Tim, too.
A few things. One would be anytime that there's massive regulatory change, there's always a short-term disruption risk. I think the unwind and replace, if that comes to be, seems like it would be less onerous in terms of disruption, but that's something that we'll watch. Same brokers and consultants that are distributing our products are also advising on healthcare, and if their capacity is filled with dealing with regulatory change, they've got less time for our products, usually means higher persistency for us, but some lower new sales. We'll certainly watch how that plays out. I'd say in general, it seems as though the changes are probably going to, if anything, accelerate the shift towards higher deductible health plans. There's been talk about sort of supercharging the tax-favored saving vehicles that sit underneath those higher deductible plans.
As that happens, that's just greater demand for the products that both Colonial Life and Unum brings to the market.
I don't know if you add anything, Tim.
The only thing I would add is just agree with Mike on the potential for short-term disruption, long term, we believe the need for the products that we manufacture will continue to grow.
Thank you. Great. Thanks, Jimmy. Up here.
All right. Thank you. Erik Bass from Autonomous. Mike, I was hoping you might be able to give a view on sort of the longer-term benefits ratio outlook for disability, and is kind of the mid to high 70% a reasonable long-term ratio, or are you benefiting from sort of favorable pricing and experience trends short term?
Yeah, I would say, first and foremost, it's an insurance business, so it's going to move over time in sometimes unpredictable ways. In general, what I'd say is, as we put price in the book to account for interest rates, that's a big driver of that coming down. Should interest rates sort of in portfolio yields be at current point, that's probably a reasonable long-term norm, barring any sort of external shocks. Should interest rates begin to go up, as Jack and Rick highlighted, that's upside for us on the discount rate, and we might actually see some of those benefit ratios drift up a bit as we sort of reflect that in new business pricing.
Got it. As part of comparing to historical, that we should expect a naturally lower benefits ratio because of the mix shift towards more small and mid than what you'd had historically?
Yeah, I think that's a piece of it. We've also seen within the industry segments that generate slightly lower benefit ratios, we've grown a bit faster. Both on a size and an industry mix basis, that is a piece of it. The underwriting process, it's more than just rate. It's also about selecting and increasing exposure in places we think are going to be more favorable, and then sort of tapering our position in parts of the economy that we think are going to run a bit hotter.
Thank you.
Great. Move up front here to Jay Gelb. Nope. Sorry, Bob. We'll get you.
Jay Gelb from Barclays. I'm just trying to level set a little for 4Q, because it seems like there's going to be some tax issues there, and how should we be thinking about that from an EPS headwind standpoint for 4Q, and what it ends up being for the full year 2016?
Yeah. There is tax headwinds there, but we continue to believe that for the year, we'll end up at or slightly above our earnings per share guidance. We still think we'll end up in that +6% overall earnings per share growth. It's not going to be as robust as second and third quarter is, but we don't anticipate that tax impact is going to have a major consequence on where we are relative to consensus right now.
Is there anything else we should keep in mind for 4Q in terms of puts and takes, investment income, anything else like that?
Not right now, other than we continue to see favorable underlying risk experience. That's what's driving everything we're talking about.
Okay. For the long-term care, there was that sensitivity if the reinvestment rate is at 5.25%. What's your perspective on how conservative or optimistic that assumption might be going forward?
Yeah. I've stopped trying to predict interest rates. The only message I'm sending, I'm not going to predict which way interest rates are going. I think there's a feeling that rising rates are probably more likely than falling rates. That sensitivity is if that is the assumption and that's what we earned, that's what the cost is. I will leave it to you to draw the path of interest rates in the future.
I don't know it either. Is there sensitivities, say, for example, that if it was 50 basis points higher or lower, what the impact might be?
Yeah. I'll give you one sensitivity. If the all-in yield was 50 basis points higher than that, I think we'd be done.
What does that mean?
Like, there'd be no charge.
Okay. Thank you.
Great. Thank you, Jay. This time we will give it to you, Bob. Here it is.
Bob Glasspiegel from Janney. Staying on Jay's 50 basis point sensitivity, if you didn't do the 50 basis point discount rate in your U.S. block, what's the impact of earnings of that increase? You're going to offset some of that with pricing, I assume. How much of that do you offset by pricing? Gross in that would be great.
Well, we're taking a 50 basis point discount rate change in our LTD business.
Right.
Given the prices we've already put into the market and the underlying risk results we're seeing.
We think even after that cost $25 million to do that, to lower the discount rate by 50 basis points. We think the underlying business will improve its loss ratio by a couple of % relative to this year, even after covering that $25 million. With the discount rate change, we expect to see a loss ratio in the group disability business in the 76%-79% range. It was right around, say, we anticipate somewhere around 79%.
There are other factors in loss ratio changes in your forecast than just rate and pricing and claims incidents.
I'm sure.
They're already in there.
You're neutralizing those when you're making that comment?
Yeah, all in.
It's all in.
It's all in.
Okay. One quick follow-up. When you say that group long-term care is better persistency, does that mean more lapses or-
Yes.
More lapses.
What's that?
More lapses.
Yes. More lapses.
More lapses. Correct.
Thanks, Bob. Let's go back to John.
Thanks, Rick. John Nadel from Credit Suisse. All right. The 50 basis points on the LTD discount rate, that's $25 million. That's a pre-tax number.
Yes.
There's no four Q16 impact. I think a couple of years ago when you lowered the discount rate, you started in the fourth quarter. This is starting in 2017.
No, we will, and we anticipate lowering it in fourth quarter, and that still accommodates that expectation that we'll be at the high end of our full-year range.
Understood. Okay. The comparable impact on the U.K. business, I think you're lowering there as well 50 basis points. I'd assume the impact is certainly less in dollar terms.
Yeah. It's less in GBP. It's a smaller block. I think the way I would look at that is we anticipate maintaining loss ratios and earnings and margins at about where they are after the discount rate change.
Okay. Turning to the 5.25%, that average yield over the last three years, is that the actual average yield you guys achieved?
No. Actually, we've achieved better than the 5.25%. That's purely a public data.
Yeah.
U.S. 30-year treasury plus the BBB long duration Barclays spread.
That's why I asked. How much better than the five and a quarter did you guys achieve?
We really don't disclose our new money rates on a quarterly basis, but we had a good margin over that.
Okay. We still think about that relative to the 5% for the first four to five years.
Yes.
I think it then reverts over the next five to 6%. Is that correct?
No, it's a little higher than that.
A little bit higher than six. Okay. The last question I have is, that $900 million charge, we assumed five and a quarter. Over what time period do you anticipate that? I mean, is that over the next 10 years? Is that over the next 20 years? It feels like the net present value of that $900 million would be significantly lower.
No. The $900 million is the present value.
That is. Okay.
If you change that assumption and built in 5.25 forever into your new money rate on your long-term care gross premium valuation reserve, you would have to increase that reserve by $900 million.
I think the important point though is that's a sensitivity. That's not an expectation.
Understood.
As we look at it, we're going to make our best estimate judgment on how rates will go. You heard it, what we did a couple of years ago, and we'll continue to do that. We wanted to kind of give you a sense of if you took present value of spot rates, which is not our best estimate, by the way.
Right
of what it would look like.
As an example, I assume, or I'll leave it to you to assume, but does that assumption include any further forward expectations for rate increases of premium?
No. 5.25 level all-in rate.
Yep. Last question is a hypothetical one. Corporate tax rate reform. If we saw the statutory tax rate in the U.S. drop from 35 to, let's just pick a number, 20%. For how long do you expect Unum would be able to maintain that benefit to the actual bottom line and a higher return on equity overall before you feel the true pressure to pass along some of that savings to your customer base in the form of lower premiums or higher benefits or something?
I'll just start on that, which is you're putting a speculation on top of a speculation there in terms of how that would go. I think though Jack did a nice job of laying out that you're right around the calculus around where rates are. There's a lot unknown in terms of how we're going to get there. We're waiting and seeing a little bit in terms of what's going to be the go back in the other direction. Your second piece around how long does that last in terms of the overall pricing in the market, that's too far out there for really to have an opinion on in terms of what that looks like.
Do you expect to sustain that kind of benefit, though? If we got a 15-point reduction.
I haven't gotten to the benefit yet of my expectation of what the benefit looks like to go out beyond that.
Fair point.
I mean, you look at relative markets. You look at returns on equity. You look at competition and things like that, and you can make a lot of judgments as to where it might go. We'll talk about that hopefully.
After we get the rate cut.
Six months from now.
Great. Thank you.
Whatever it might be. Thanks, John.
Alex Scott, Evercore ISI. I had a question on the capital contributions to the LTC and just the $135 million run rate. Can you help me understand just what drives that? Is that funding the natural growth in the active life reserve?
Well, in First Unum, a piece of it is the cash flow testing results that actually will benefit significantly from the current interest rate outlook. We're a little bit above where we were in 2015, but compared to what we were thinking in the middle of the year. Cash flow results, the other contribution is the capital required behind the assets and risk in long-term care, so required capital. A piece of it is the difference between kind of the GAAP earnings of the business and the statutory earnings. To the extent you're building some provision for adverse deviation in your statutory reserves going forward, that requires a capital contribution because it's above kind of what's in there for GAAP. Those are the two elements.
Could you just give me a feel for what kind of duration we should expect for those capital contributions, and then any kind of sensitivities you would expect around interest rates moving?
What do you mean what kind of duration?
Just how long. Well, you said it was a run rate of about $135. Should we think about the duration of that as in line with the duration of the long-term care book?
You know, is it what you do in perpetuity?
Yeah. It's hard to speculate in perpetuity. It depends on the performance of the business. It depends on interest rates. You would always maintain a provision between your STAT and GAAP reserves. Once you get to a point where STAT versus GAAP is the margin you want to keep, the change in the two should be very close. It would not be in perpetuity that that would always happen.
Thank you.
Yeah. Let's go up here with Sean.
Thank you. Sean Dargan from Wells Fargo. Jack, I just wanted to reconcile in my head what you were saying about the cash build and long-term care. Is the inference being that if some kind of capital market solution or other reinsurance solution presented itself for long-term care and you needed to contribute capital, you could? Or is it that, I guess, that incremental capital build, cash build will go towards funding reserve strengthening?
No, I think it's more the former, that we're comfortable with where the reserves are now. We're comfortable they're adequate. They have adequate margin. If a capital solution came to the table that allowed you to be done with it, I think realistically we'd be willing to pay something to make that happen. You want to have that money in hand.
Thanks, Sean. Yes.
Thank you. Al Copersino, Columbia Management. I had two expense ratio questions just from slide 24. Colonial's been growing nicely, but the expense ratio is flat to maybe up slightly. I just wonder if there's been investments in growth and if there's some possibility that the Colonial expense ratio may come down in the next couple of years or so.
Yeah. Initially we expect the slightly elevated expense ratio to continue, over time it will start trending back down as the growth investments begin to take hold and accelerate our top line.
Okay. Thank you. In the U.K., you guys have managed down the expense ratio well to protect margins. Is there a risk that there's any under-investment going on, or how long will the lower expense ratio continue, do you think?
We've been investing to bring that expense ratio down. We've done a lot of work on process re-engineering, and the new admin platform has allowed us to get more efficient. If you look at the customer service results we're getting, they're actually up even though we've been taking sort of headcount out of the organization, actually. We think it'll come down below 20% and maintain service.
Okay, great. Thank you. One other question, if I could, which is the flip side of, I don't know if it was Bob or Jay's question, but if it were interest rates, if we were to assume a 50 basis point decline from the current 5.25% you can achieve now, would the implication from your prior answer be that the charge would be $1.8 billion over time, or is it not linear?
No, again, that was a sensitivity analysis. It's not saying that we need to do that. There's a lot of latitude. We're not going to react to 50 basis point increases or decreases in the new money rates immediately as though they're going to last forever. We will be more stable in our approach to that. If we saw them go down by 50 basis points, that would put us back in thinking about what the long-term outlook is, what's a reasonable interest rate assumption over that long-term outlook, and react to that. There's nothing in there that causes us to react one way or another to short-term changes in interest rates.
Thanks, Al. Any other questions? Yes, Yaron.
Thank you. Yaron Kinar with Deutsche Bank. Rick, I think in the past you talked about the absence of good industry or company data as being one of the problems with looking at third-party solutions for the long-term care block, more so than the rate environment.
Yeah.
I seem to hear you a little more optimistic about such opportunities today. Has anything changed on the data front?
Nothing dramatic has changed on the data front. Time has changed. As we look at it and when we did it three years ago, you're starting to build out bigger databases as an industry. It's not just us. As you start to look at older age type mortality, things like that, you're actually starting to get more data filling that in. I think we've been very consistent, that that's something that marches along. I think that what has changed, and you're right about the interest rates, I think it helps facilitate getting something done, but it doesn't get somebody to attract somebody to this market per se.
I think the last piece I would add to that is that will continue, but what you have are people, as databases build out, people will now start to have an interest in what might be there that actually is misunderstood by the market that can be priced for, and somebody else with a different capital structure or a different view and lens towards it could take that on. As Jack said, we don't see anything imminent, but there's more conversations, and I think that that's a positive trend line that we'd like to see, but we'll continue to work very hard on that front.
Would it be more likely for us to see something on the group side or the individual side of the long-term care?
I think as Jack said, we have many different lines in the water that we're looking at in terms of thinking what's out there. I wouldn't want to preclude or give you in any direction how one thing might happen, but we're looking across the entire spectrum.
Okay. One final question, probably for Mike. Historically, I think the benefit ratio has been much more in the 80s range, mid 80s. You're talking about 76%-79% these days. How long does the market support that? Or at some point, do you have to look at maybe moving back to the 80s and just to remain competitive?
Yeah. I'd say in general, I feel reasonably confident. More so because 76%-79% is the group disability loss ratio. We feel pretty good about the delivery on short-term disability within that's a very high transaction thing that a client's going to experience. We feel like the return to work outcomes we deliver to a client are benchmarked as superior. You've got a really good value proposition, even as you've got to manage the benefit ratio down two or three points from maybe where they've been historically. It is something that we actively manage. Again, as inputs like what we can earn on investments change over time, we'll move that benefit ratio around a bit. We think that's about where it needs to be to generate the return on capital, and we can still find that sweet spot in the market.
Good. Thanks, Mike. Other questions? See one in the back here.
Well, wait for Mike, please. Thank you.
Can you speak to what you see as the trends on the ASO marketplace and what that'll mean to the impact of the business?
Yeah, I can take that. ASO for us is largely short-term disability. I'd say, in general, pretty consistent. The big trends for us are actually how do you take your short-term disability management and integrate it with what you're trying to do with your employee population overall. More and more what we're doing is taking both case management and the data that's produced in the mid and large employer market where you see administrative services versus fully insured product, and combining that with medical and pharma data through partnerships and trying to generate outcomes not just on the productivity front, which is our normal place where we play, but also looking for ways to contain that healthcare cost, which is top of mind to employers for sure.
Any other questions? Yes.
Hi. Dan Kirby from Guggenheim. Thanks for taking my question. I was wondering if you could speak to the divergence in the outlook for discount rates in the LTD and LTC books. Is that due to a difference in the mix of the assets backing those books or what kind of drives that?
Yeah. There is a very different mix of assets driving those two portfolios. The LTD portfolio is kind of geared off the 10-year treasury. The long-term care portfolio is geared off the 30-year treasury. They are both not only higher rates on the yield curve, but there's a spread curve that increases with duration as well. The other thing is the difference in the cash flows. When we talk about the discount rate in LTD, we talk about the discount rate on new claims, so that's claims coming in the door this year and where we're investing money this year with those premiums in setting up the reserves. Long-term care is more of a portfolio view. We have a big asset portfolio behind long-term care that will continue to fund benefits in the future. It's not on a new money rate basis.
We basically build a model that looks at new cash flows, invest them at a given level, the portfolio rate and the discount rate that comes out of that is significantly higher than the new money rate because we have invested assets that we already own, earning a much higher rate that plays into it.
Thanks.
Great. Any other questions we have in the room? I don't see any, and we certainly have taken up a fair bit of your time. We really appreciate the time you spent with us to go through that. Hopefully, you will see our optimism as we go through 2017. We think we have a lot of good things ahead of us, and we look forward to taking you through that journey here over the course of the year. Thanks for your time. Those on the webcast, we appreciate your time listening in as well. Thank you very much.