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Unum Group  (NYSE:UNM)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Unum Third Quarter 2018 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Tom White. Please go ahead, sir.

Tom White -- Investor Relations

Great. Thanks, Shanade. Good morning, everyone, and welcome to the third quarter 2018 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC and are also located in sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2017 and our subsequently filed quarterly reports on Form 10-Q. Our SEC filings can be found in the Investors section of our website. I remind you that statements in today's call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements.

A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in the statistical supplement on our website also in the Investors section.

Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; CFO, Jack McGarry; as well as the CEOs of our business segments, Mike Simonds for Unum US; Peter O'Donnell for Unum UK; Tim Arnold for Colonial Life; and Steve Zabel for the Closed Block.

And now, I will turn the call over to Rick for his comments.

Richard McKenney -- President and Chief Executive Officer

Thank you, Tom, and good morning, everyone. The third quarter of 2018 was both a strong and pivotal quarter for the company. Earlier in the quarter, we released the results of our long-term care review, which have now been incorporated in our financial results. More importantly, our core businesses continued to deliver strong premium growth and strong margins. In our market of employee benefits, the operating environment remains very good for us, as the economy continues to perform well. A tighter labor market means full employment and wage inflation, both of which continue to provide more potential customers and increase the need for the financial protections that we provide. A stronger economy may also see higher interest rates, which is a real plus for our business. Overall, it was a good quarter and we are building momentum moving forward.

As I mentioned, the third quarter results we reported yesterday afternoon included the impact of the reserve addition to our long-term care business that we pre-announced back in mid-September. There were no material changes from that review. Adjusting for that as well as for net realized investment gain in the quarter, our adjusted after-tax operating earnings were just over $300 million, an increase of 22% over the year ago quarter. Adjusted operating earnings per share were a $1.37 in the third quarter, an increase of just under 26% compared to the third quarter of last year's $1.09.

While we will continue to address the long-term care block and update you on its trends as they evolve over time, we are very focused on the positive underlying trends we are seeing in our core business operations and the consistent financial results they're generating. Here are few points I'd like to highlight on the performance this quarter.

First premium growth for our core business segments remains favorable, increasing 6% this quarter on a year-over-year basis. This growth is being generated by a number of encouraging trends, including strong persistency in our Unum US business, excellent sales momentum at Colonial Life and disciplined management of rate increases on in-force business in Unum UK.

Next, we continue to see generally consistent benefits experience across the core business segments, particularly in our Unum US and Colonial Life business lines. Benefits experience at our UK business has been more volatile recently, but our disciplined approach to underwriting and pricing in our key US and UK business segments continued to generate consistent results. We also continue to see stable to improving expense ratios for the business segments through the active management of expenses and the benefits of the investments that we have made, and continue to make to improve the customer experience.

With these strong operating trends, we continue to see excellent profit margins and returns for our core segments, which in turn drive significant financial flexibility for the company. This financial flexibility allows us to invest in the growth of our business, both organically and through the expansion of our footprint, such as with the Pramerica Zycie acquisition that we closed in early October. This financial flexibility also enables us to effectively manage the legacy long-term care block with reserving capital updates as appropriate, as well as investing in the internal resources and talent to effectively manage this complex block.

Finally, our financial flexibility allows us to return capital to shareholders. Approximately $5.8 billion since 2007 through shareholder dividends and share repurchases. And while we were not in the market in third quarter repurchasing shares, as we completed the long-term care reserve analysis, we will resume that activity with the completion of our third quarter reporting.

It has been an active and eventful quarter for our company in many ways, and a quarter that I believe illustrates the strength of our franchise. Our management team is striving to ensure that LTC does not overshadow our core business segments and a franchise that it serves a growing need in our society and delivers real value to our shareholders.

Now, I'll ask Jack to cover the details of the third quarter results. Jack?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Thank you, Rick, and good morning, everyone. As you saw in our earnings release yesterday afternoon, we reported a loss for the third quarter of 2018 of $284.7 million or $1.30 per diluted common share. This loss included the reserve charge for long-term care, which totaled $593.1 million or $2.71 per diluted common share and was consistent with the estimate of $590 million we pre-announced back on September 18th. In addition, we reported a net after-tax realized investment gain on our investment portfolio of $7.8 million or $0.04 per diluted common share in the third quarter. Adjusting for these items, after tax adjusted operating income was $300.6 million or $1.37 per diluted common share. While third quarter results were consistent with our strong recent trends, there were some unusual items that affected net investment income, the tax rate and corporate expenses, which I'll explain further in my remarks.

Jumping into our operating results for the third quarter, I'll begin with Unum US, where it was another very good quarter with positive trends in premium income, very good persistency and stable benefit ratios across our major business lines. Within Unum US, adjusted operating income for group disability increased by 3.3% to $93 million in the third quarter. We saw good top-line growth and improved benefits experience and also higher miscellaneous investment income. Miscellaneous investment income can be volatile from quarter to quarter, and in the absence of this favorable volatility, group disability income would have been in the mid $80 million range this quarter. Benefits experience for group disability continues to perform well, with the benefit ratio improving slightly to 76.3% in the third quarter compared to 76.7% in the year ago quarter, due primarily to lower claims incidence and favorable claim recovery experience in the group long-term disability line, which was offset by higher claims incidence in the group short-term disability line.

The group life and AD&D line had a strong third quarter, with adjusted operating income of $64 million, an increase of 6.5% from the year ago quarter. Premium income increased 7.8%, driven primarily by prior period sales growth and improved persistency, which increased in the group product line to 91.2% for 2018 year-to-date compared to 87.7% last year. The benefit ratio was slightly higher at 71.8% in the third quarter compared to 71.4% in the year-ago quarter, due primarily to higher claims incidence.

The supplemental and voluntary lines generated excellent results, with adjusted operating income increasing by 5.2% to $113.9 million in the third quarter. Premium income increased 7.1% for the third quarter due primarily to higher sales, including growth generated by the expansion of our dental and vision product line. Benefits experience was very favorable in the third quarter for the voluntary benefits and dental and vision lines, while the individual disability line experienced higher claims incidence and higher average size of new claims. All-in-all, the supplemental and voluntary lines continue to produce strong levels of income for the company.

Sales for Unum US in the third quarter declined by 5.6%, primarily driven by lower sales in the group disability and life lines. We continue to see positive momentum in the voluntary benefits and dental and vision product lines, but market conditions seem competitive to us in the core market segments, where we intend to remain disciplined with our pricing. Persistency remains very favorable within Unum US, with persistency for the group lines combined increasing to 90.6% for the first three quarters of 2018 compared to 88.2% last year.

Moving to Unum UK, we continue to see a difficult business and economic environment, creating uncertainty in the marketplace. As a result, adjusted operating income remained relatively flat at GBP20 million for the third quarter of 2018 compared to GBP20.2 million in the year ago quarter. Premium income was stronger this quarter, increasing 5.6% on a local currency basis, generated largely by improved persistency, rate increases on the group long-term disability block and growth in the in-force business. The Unum UK benefit ratio was 74.2% for the third quarter of 2018 compared to 74.9% last year, driven primarily by favorable claims resolutions in the group long-term disability line, partially offset by unfavorable claims activity in the group and supplemental lines of business.

Unum UK sales for the third quarter increased by 2.4% year-over-year, driven by higher sales in the group long-term disability and supplemental lines, which offset lower sales in group life. The improvement in persistency from 86.4% in the first three quarters of 2017 to 87.7% in the first three quarters of 2018 is particularly encouraging, given the level of rate increases we've put through the block.

Colonial Life again produced strong results with adjusted operating income in the third quarter of $84.2 million, an increase of 3.1% from the year ago quarter. Premium growth remained steady, increasing by 5.6% in the quarter. Benefits experience improved slightly to 51.5% in the third quarter compared to 51.8% in the year ago quarter, primarily due to favorable experience in the life product line. Sales at Colonial Life continued to accelerate, increasing to 13% in the third quarter compared to the year ago quarter. The introduction of the dental product earlier this year is contributing to this growth, with sales of $7.5 million in the third quarter. In addition to the strong dental rollout, sales from other product lines also showed strong year-over-year growth.

Moving to the Closed Block, we reported a loss before income taxes and net realized investment gains and losses of $718.6 million for the third quarter, which includes the increase to long-term care reserves of $750.8 million on before tax basis. Excluding this reserve increase, adjusted operating income totaled $32.2 million in the third quarter of 2018 compared to $26.6 million in the year ago quarter. In the individual disability line, the interest adjusted loss ratio improved to 80.5% in the third quarter compared to 82.4% in the year ago quarter, due primarily to improved mortality experience.

The results of the long-term care business line for the third quarter reflect the new reserve assumptions we discussed in our presentation on September 18th. On this new reserve basis, the interest adjusted benefit ratio was 87.5% in the third quarter, which is in line with the range we outlined for you of 85% to 90%. The interest adjusted benefit ratio in the year ago quarter was 93.3%, but is not comparable, given the reserve basis change.

The statutory impact of the long-term care reserve increase that we recorded in the third quarter was also in line with the expectations we previously disclosed. Of the approximately $200 million impact we estimated, our total statutory results for the third quarter included $142 million of increased disabled life reserves for our long-term care blocks including Fairwind. The $200 million projection includes asset adequacy testing reserves related to the long-term care block, which will be finalized in the fourth quarter, but the total is anticipated to be in line with the $200 million we communicated to you in September.

Looking at the Corporate segment, the adjusted operating loss was higher in the third quarter at $47.1 million compared to a loss of $36.2 million in the year ago quarter. The higher loss ratio in the quarter was primarily driven by expenses related to Poland acquisition and restructuring costs that totaled approximately $8 million before tax.

As a final comment on our operating results in the quarter, the tax rate this quarter was 17.9% adjusted for the long-term care reserve charge and net realized investment gains. This is lower than the tax rates of the first and second quarters of this year, which were 19.9% and 19.5%, respectively. The lower tax rate this quarter was primarily the result of updates to our 2017 tax filing, which added a net benefit of $6.1 million to the GAAP after tax income for the third quarter. We anticipate the fourth quarter tax rate will be in our expected range of 19% to 20%.

Statutory earnings for our traditional US insurance companies remain at very good levels and adequately support our capital plans. For the third quarter, statutory after-tax operating earnings totaled $253 million compared to $187 million in the year ago quarter. For the first three quarters of 2018, statutory after tax operating earnings totaled $745 million.

We are encouraged by the rise in interest rates and the corresponding higher new money yields we realized in the third quarter. In the third quarter, we easily exceeded the 5.5% new money yield assumption for our long-term care business. As a reminder, our new reserve assumption set includes a 5.5% new money yield assumption through 2021. For our other US businesses, new money yields are higher, but remain below our portfolio yields, so we can expect to continue to see pressure on the portfolio yield and overall net investment income. Importantly, the relationship between our new money yields and new claim discount rates continue to provide a healthy margin. Higher interest rates are very beneficial to our business, especially as we have very little disintermediation risk in our liabilities.

The capital position of the company remains strong. At the end of the third quarter, the risk-based capital ratio for our US traditional life insurance companies remained at approximately 385%. With the implementation of RBC formula changes from tax reform at year-end 2018, we anticipate ending the year with RBC in the range of 360% to 370% under the new formula.

Cash at our holding companies totaled $973 million at the end of the third quarter. As we move toward the year-end, that cash balance will decline with the funding of Pramerica Zycie acquisition, expected cash contributions for Fairwind and First Unum and the resumption of share repurchases. We will resume our $100 million of quarterly rate of -- in the fourth quarter and I anticipate making progress on the $100 million we did not buy back in the third quarter. We'll have an update on these metrics at our Outlook Meeting in December and feel very comfortable with where they're trending.

I'll conclude my comments this morning by reiterating our expectation of growth and adjusted operating income per share in the 17% to 23% range for the year. So given our performance for the first three quarters of 2018, we expect to be toward the upper end of this range. As a reminder, the base of adjusted operating earnings from 2017 is $4.24 per share and the projection for 2018 excludes the reserve increase for long-term care.

Now, I'll turn the call back to Rick for his closing comments.

Richard McKenney -- President and Chief Executive Officer

Thanks, Jack. All-in-all, it was an eventful quarter for the company. We are encouraged by the operating trends we are producing in our core businesses, and we are also pleased to have completed the LTC reserve analysis. We look forward to the growth of our core operations for the remainder of the year and as we move into 2019.

We'll now move to your questions. I'll ask the operator to begin the Q&A session.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question today comes from Ryan Krueger from KBW. Please go ahead, sir. Your line is open.

Ryan Krueger -- KBW -- Analyst

Hi, thanks, good morning. I was hoping you could talk a little bit more about the US group dynamics in terms of competition, persistency and then also kind of any early look you can provide us on January 1 renewal trends.

Richard McKenney -- President and Chief Executive Officer

Thanks, Ryan. I'll turn over to Mike for his comments.

Michael Simonds -- President and Chief Executive officer of Unum US

Thanks, Rick. Good morning, Ryan. Yeah. I'd say -- excuse me, I'd say, we've got a competitive or rational market. We've gone through stretches of time, where you'd have one or two carriers that would be aggressively trying to take share. I would say, that's not necessarily the case right now, but I'd say in general the industry feels pretty good about where margins are and so there's less business moving and you'd see that in our group sales numbers. 3Q is not typically a big sales quarter for us anyway, but we did see some declines in group disability and group life and insurance. That was offset to a degree by continued strong growth in the sub-vol segment, VB or voluntary benefit sales were up about 6% and encouraging to see continued strong adoption of our dental and vision product, up about 27%. So we'll continue to keep an eye on it. Most importantly for us is despite it being a difficult new client acquisition market, it's proving to be a market where we're holding on to customers. I think persistency was up a couple of points over the prior year, that's really helping fuel good strong earned premium growth that both Rick and Jack highlighted.

Ryan Krueger -- KBW -- Analyst

Thanks. And any insight you can provide on January 1 renewals?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. I mean, I think if you look up market larger cases, decisions have largely been made and we feel real good and that the persistency trends that we've seen shown up in the numbers are likely to continue as we head into next year. Some decisions are still to be made in the core market, so that's part of the final fourth quarter, but in general, I wouldn't see anything other than pretty solid and sustained levels of persistency.

Richard McKenney -- President and Chief Executive Officer

Hey, Ryan, it also might be worth noting, I mean, it is a tough -- when we look at the new sales, it's a tough comp to the prior year. So in 3Q, I think our group sales were up about 29% and a similar almost 30% increase in 4Q of last year. So the environment we had last year was one that was conducive for us winning some new client business and doing it at our targeted pricing levels, I'd say, we're looking at a more difficult comparison this year.

Ryan Krueger -- KBW -- Analyst

Thanks. And then I just had one on Unum US expenses. The expense ratio was 19.9% and it had been running more in the 20.5% to 21% range. Can you give us some more color there? And if there were any material timing considerations that impacted the quarter?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. It was a -- it's sort of a kind of equal weighting between a little bit of timing of expenses that we would expect to kind of normalize as we go into the 4Q. And then what I'd say it's kind of been a longer-term trend over the last, really, three years or so, where we've seen pretty gradual improvement in that expense ratio as we've modernized some of our processes and put some new technology. We're starting to see some of the benefits of that come through this. That's a slower burn.

Richard McKenney -- President and Chief Executive Officer

Ryan, I'd remind you that the -- that 6% premium growth helps as well.

Ryan Krueger -- KBW -- Analyst

Sure. Thanks.

Richard McKenney -- President and Chief Executive Officer

Thanks, Ryan.

Operator

Thank you. Our next question comes from Jimmy Bhullar from JPMorgan. Please go ahead, sir. Your line is open.

Jimmy Bhullar -- JPMorgan -- Analyst

Hi. So I had a question first on just free cash flow. I think you're adding about $200 million to stat reserves this year, but seems like, from your comments, that it shouldn't really affect your ability or your free cash flow that's available for buybacks and dividends. So is that the case? And why is it that it's not affect -- it's not being reduced next year because of the stat reserve addition?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Ryan --

Richard McKenney -- President and Chief Executive Officer

It's Jimmy.

Jack McGarry -- Executive Vice President and Chief Financial Officer

Oh, Jimmy, I'm sorry. So it's not that it doesn't affect -- it doesn't affect free cash flow, it's that we've built it into our plans and we expect to, given strength of our balance sheet going into this that we'll be able to cover those uses and continue to repurchase shares.

Jimmy Bhullar -- JPMorgan -- Analyst

And then if you're thinking about the --

Richard McKenney -- President and Chief Executive Officer

Yeah. Jimmy just to add to that. I mean, the free cash flow, I mean, the -- was generated from the company, it's still very, very strong from a statutory perspective. When we look at the reserve charge we went through, we see that more as a funding need one-time in nature similar to other things that we're doing, but free cash flow, the underlying free cash flow of the enterprise still remains very strong.

Jimmy Bhullar -- JPMorgan -- Analyst

And as you go beyond 2019, like into 2020, would you assume that you would have more flexibility than you've had in the past, assuming that there's no such charge or no stat reserve addition or is -- some of -- like sort of the 2019 free cash flow is something that is being compensated by 2018 and 2020 to some extent?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we're going to have a strong free cash flow in 2019. You've seen the statutory earnings in 2018, which is the driver of '19 dividends from our subsidiaries. I'd remind you that there's a lot changing in the capital world as well. We have the implementation of the RBC factors that due to tax reform that will happen in 2018. We have the C1 factors getting updated in 2019. And so there continue to be things still to work through, but we feel very comfortable with where we are. We feel very comfortable in our ability to meet those obligations. I would say, I'd be looking probably more to 2020 and 2021 for when we really see the benefit when we get through kind of those changes in the capital formulas and when we really see the benefits of tax reform kicking in.

Jimmy Bhullar -- JPMorgan -- Analyst

And then just lastly on the benefits ratio in the US disability business, it's improved really through the last several years. How do you think -- and it seems like it will be better this year than it was last year, how do you think about that improvement continuing, given sort of the competitive environment and the economic backdrop?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. Thanks. Thanks Jimmy. I can take that one. It's Mike. Excuse me. Yeah. So I'd say, we were right about in line with where our expectations are and so that's going to move around a little bit quarter-to-quarter. I would say, probably the one thing as we sort of look forward, we saw a bit of benefits ratio pressure in a pretty defined segment on the short-term disability side and that's something that we're addressing through the renewal program. It's not hugely consequential, but that is something that will provide a little bit of improvement to the segment overall.

Operator

Thank you. We will now take our next question --

Richard McKenney -- President and Chief Executive Officer

Thanks, Jimmy.

Operator

-- from Mark Hughes from the SunTrust. Please go ahead sir.

Mark Hughes -- SunTrust -- Analyst

Yeah. Good morning. Thank you. You talked about the wage inflation full employment helping your core business, so you talked about natural growth in the past. Are seeing that actually flow through your underlying growth?

Richard McKenney -- President and Chief Executive Officer

Yeah. We actually -- when we think about the natural growth we talked about in the past comes from two different things, they're coming through, one, is just as employment improves over time, which we've seen, we look to pretty full employment economy. We haven't always felt the benefits of the swings around that, just given who we insure at the employee base, whether it's part-time workers, other areas of the economy, we don't insure, but we certainly have felt that over a period of time. The thing that we're looking at now is wage inflation. You're starting to see that in our lines that we cover as well, and so we'll look to have that be a lift. But the way you can think about it, Mark, is we've seen prior benefit, if you look over the last four, five years, probably 1% addition to our premium growth that we've seen. So of that 6%, 1% is probably coming from an economic lift. If wage inflation really starts to kick in in our sectors and -- then we could see more, but that's something we'll look forward to.

Mark Hughes -- SunTrust -- Analyst

And then on the persistency side, you touched on this, but it seems strange that your sales are a little slower, granted you have a tough comp. But at the same time, your persistency is quite good. Do you think that's a -- based on your internal initiatives or is it just more broadly businesses and moving quite as much?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. It's Mike, I can take that. I think it is a bit more of the latter. I mean, I think there is less movement in the markets. The number of proposals that we're seeing coming through on the brokerage side is down year-over-year. So that's a piece of it. But for us taking care of existing clients is job one. So most all of the investments we make in capabilities, we do it with an eye toward improving the experience that we're delivering there. A lot of our growth has come by expanding the number of Unum benefits that are offered by each of our clients and with each line that we extend, we see an incremental improvement and stickiness in that relationship. So those are some of the long-term sort of helpful dynamics, but the market itself, I think, is also a bit of a tailwind for us.

Richard McKenney -- President and Chief Executive Officer

Thanks, Mark.

Operator

Thank you. Our next question comes from Tom Gallagher from Evercore. Please go ahead, sir. Your line is open.

Tom Gallagher -- Evercore -- Analyst

Good morning. First question is on Colonial. Yet good sales there, but weaker persistency, seems to be kind of the opposite trend you're seeing in your group business. And you also had a decline in public sector sales. Can you talk a bit about what's driving that result? Is competition escalating there or any comments on that dynamic?

Richard McKenney -- President and Chief Executive Officer

We'll turn it to Tim Arnold. Tim?

Timothy Arnold -- President and Chief Executive Officer of Colonial Life

Yeah. Thanks Rick. Thank you Tom for the question. On the persistency side, we had a little bit of volatility in the first quarter of this year and the persistency metric gets reported on a 12-month rolling basis, so that will stay with us through the fourth quarter of this year, but just a little bit of volatility there. We're still inside our expected range for persistency. On the public sector side, we're seeing a little bit of pressure on our educator market this year. We don't believe it's enhanced competition at this point, we had a really strong public sector sales growth here last year, so the comps are a little bit challenging, but we believe that is just this one segment of educator business that is creating the pressure.

Tom Gallagher -- Evercore -- Analyst

Okay, thanks. And --

Richard McKenney -- President and Chief Executive Officer

And I think Tom, we would have to make sure we add into that, you referenced it, but Tim -- the sales have been great, so we'll start with that too, with 13% growth. And Tim's business, Colonial Life, has been seeing very good sales growth, so (Multiple Speakers)

Tom Gallagher -- Evercore -- Analyst

Right. And Jack, just a question, expected contributions to Fairwind and First Unum this year, are they going to be consistent with levels of prior years or can you quantify what you would expect there?

Jack McGarry -- Executive Vice President and Chief Financial Officer

They are going to be higher this year for a couple of reasons. One is the statutory reserve charge. It's going to impact capital levels in Fairwind. The new reserve basis has an impact on cash flow testing within First Unum. So that kind of $200 million number is probably a decent number to think about the addition on top of kind of normal funding. And there is a little bit related to the new RBC factors as a result of tax reform. But that's one of the reasons why we're holding a pretty sizable cash balance going into the fourth quarter. We expect that cash balance to come down with that funding, but we would expect to land comfortably above our one-time fixed charges.

Tom Gallagher -- Evercore -- Analyst

Got it. And just so I understand, so there is the $200 million statutory reserve charge split between reserves plus AAT. And then on top of it, about another $200 million or -- so --

Jack McGarry -- Executive Vice President and Chief Financial Officer

No, the $200 million is the funding of that reserve charge. And so if you look at kind of our normal funding that we've had year-after-year, where we haven't had reserve charges, there is going to be an increase on top of that as a result of the reserve charge. That's what's driving the higher level of funding this year versus some previous years.

Operator

Thank you. We'll now take our next question from Randy Binner from B. Riley. Please go ahead, sir. Your line is open.

Randy Binner -- B. Riley -- Analyst

Good -- excuse me, good Morning. I had a question just on investing in the long-term care book. And with interest rates higher and the first question is, can you kind of characterize how much higher you're getting above the yield or the hurdle there rather? And then, what are you seeing in the market? Are spreads wider? Is paper more attractive or private investments more attractive in the last couple of weeks? Just trying to get an idea of what the -- this environment, this investing environment is affording you in matching those liabilities in the LTC book.

Richard McKenney -- President and Chief Executive Officer

Yeah. So this is Rick. Just talking about overall market environment across all of our books and I'll touch on long-term care particular, but the higher interest rates has been good across our portfolio from what we've seen and that actually helps a lot of our product lines. Credit spreads are still pretty tight. So those haven't moved out at all, so that's something we still deal with. But the all-in investor rate that we're seeing across our lines are very good. Particularly to long-term care, we saw rates higher than our 5.5% that Jack talked about comfortably above that in the quarter, given the mix of what we've invested in. So the higher rates overall from the 10-year and 30-year have been a real plus to us, but it's one we fight every day and getting good investments, but it's a much better environment that we've seen this half of the year than we've seen in previous times.

Jack McGarry -- Executive Vice President and Chief Financial Officer

I'd add to that too, Rick, that even with the pullback in rates we've seen recently, the 30-year has held in significantly better than shorter rates.

Randy Binner -- B. Riley -- Analyst

And are you seeing -- is the better opportunity in bonds or is it in private structures? I guess, I'm just trying to understand with an update on kind of how I can think about tracking what you might be investing in, in that book going forward?

Jack McGarry -- Executive Vice President and Chief Financial Officer

The good part about treasury rates is they float all boats. So it's kind of across the board that we've seen more very favorable investment opportunities. And so one of the advantages that we have is we can choose our asset classes. We are not committed to certain percentages. And so our investment approach is to really look at relative values across the board and to pick the best one.

Operator

Thank you. Our next question comes from John Nadel from UBS. Please go ahead, sir. Your line is open.

John Nadel -- UBS -- Analyst

Thanks. Good morning, everybody. Jack, a question on LTC reserves in the underlying assumptions and I'm wondering, is there any data that you can disclose to investors that demonstrates what you're looking at that indicates the morbidity improvement is a reasonable assumption? And I ask this because very clearly what we are hearing from some of the other larger LTC players is that they are really seeing no evidence of morbidity improvement. So I'm sure you can understand why investors are somewhat skeptical over that underlying assumption, given what we're seeing and hearing from the rest of the industry.

Jack McGarry -- Executive Vice President and Chief Financial Officer

So I'd start John bringing it back to our September 18th presentation. We laid out a graph there that showed our actual to expected incidence rates over the past decade, they had improved on average 3% a year relative to our underlying reserve assumptions. We think with that as the historical result, assuming 1% going forward, is actually a pretty conservative assumption. The other thing I'd point out, and I've said this a lot, is that morbidity improvement can only really be understood relative to your underlying reserve assumptions. And so when we showed that graph of 3% improvement, that was how morbidity improved using our underlying reserve assumptions as the expected base. If your underlying reserve assumptions are more aggressive than ours, you'll have a different slope going forward than ours based on the same claims trends you may not see morbidity improvement relative to those assumptions. So again, it's only meaningful on a company-by-company basis, taking into account what the underlying assumptions and reserves are, we feel very comfortable with where it is. We disagree that nobody else has seen it. I mean, we've talked to other companies, maybe it's kind of like saving on GEICO, the companies who aren't using it tend to be the most vocal about they're not using it, but there are plenty of companies out there that continue to use it and continue to see it within their blocks.

John Nadel -- UBS -- Analyst

Okay, all right. That's helpful. I appreciate that. And then a follow-up question is just, maybe it's following up on a couple of earlier questions and thinking about RBC and targeted risk-based capital levels. It sounds like the roughly a $1 billion of cash balance at the parent that you had at the end of September, some of that's going to be used as a funding of capital injections down into the subsidiaries. So your 385% RBC ratio that was flat quarter-over-quarter. How should we think about where you're targeting for that ratio to be, considering some of the capital injections -- it sounds like you're going to make in 4Q as well as taking into account some of the formula changes that are coming through, including the effective tax reform?

Jack McGarry -- Executive Vice President and Chief Financial Officer

So as we mentioned in our remarks, John, we expect to end the year in the 360% to 370% range. That's largely reflecting change in the RBC factors from tax reform, which will be implemented at year-end 2018. I think that's a little higher than we need to be, but we also anticipate another change in RBC factors with the C1 changes, which will be a smaller impact, but will impact 2019. So that level of capital is a level we feel comfortable with going forward. I think we'd see RBC ratios decrease because the denominator increases in 2018 and then a little bit again in 2019 with the C1 factor changes.

Operator

Thank you. Our next question comes from Erik Bass, Autonomous Research. Please go ahead, sir. Your line is open.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. I was just hoping you could comment on the earnings outlook for the Closed Block segment following the LTC charge. And does the resetting of the benefits ratio back to the 85% to 90% range or any changes in allocated capital have any impact on the go forward earnings expectations?

Jack McGarry -- Executive Vice President and Chief Financial Officer

We think it's going to have minimal impact. We would expect earnings to continue for the Closed Block kind of in the range that they'd been in. You do get, I mean, certainly, a lift from the improvement in the loss ratio, but there's also additional required interest that comes into play with the increase in the reserves and those two things kind of offset each other.

Erik Bass -- Autonomous Research -- Analyst

Okay, thank you. And then on Colonial, can you just update us on where we sit in terms of the business investments that you've talked about? And should we expect the expense ratio to start coming down as we move into 2019?

Richard McKenney -- President and Chief Executive Officer

Tim, do you want to take that?

Timothy Arnold -- President and Chief Executive Officer of Colonial Life

Sure, yeah. So we do continue to make investments in the business, both in distribution and customer experience and talent and technology. We do also believe that the OE ratio will begin to come down as the premium income continues to accelerate and the rate of investment slows just a bit, but we'll continue to make investments. We do see the expense ratio coming down.

Operator

Thank you. Our next question comes from Humphrey Lee, Dowling and Partners. Please go ahead, sir. Your line is open.

Humphrey Lee -- Dowling and Partners -- Analyst

Good morning and thank you for taking my questions. So in Unum US, we've definitely seen the dental and vision business continue to grow at a very good pace. I think you've talked about growing that book of business to $500 million of annual premiums in four years at your Investor Day. Do you think you're kind of on track toward that target? And maybe can you talk about how should we think about the trajectory of that growth?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. It's Mike, Humphrey. Thanks for the question. We are excited about the potential that's come -- that came with the Starmount acquisition and we're seeing really nice growth in the group dental line in particular. I'd say, we are right in the range of where we would want to be toward that $500 million target, but it's -- we're really in that five-year, so we've got not just to deliver over the next 12 months, but we've got to continue to invest in the provider network, in the technology that underpins that business. So the trajectory goes beyond just the reported period sales results, it's also kind of investing in the scalability of that business, and that's also on track for us.

Richard McKenney -- President and Chief Executive Officer

Yeah. And I'd add to that Humphrey too. We've also launched through the Colonial Life business and we've seen a great start. Tim, maybe you want to comment about that?

Timothy Arnold -- President and Chief Executive Officer of Colonial Life

Yeah. So we launched in very late March, and at the time, we had about 35 states approved for up to over 44 now. So getting much better national coverage and the attraction of this product in our distribution system has been better than expected. The product is on its own performing very well, but we are also noticing that when we sell the dental product, we have good traction with many of our other products and those same employers as well. So very pleased, it is very early, but pleased with the progress we're making and excited about 2019.

Humphrey Lee -- Dowling and Partners -- Analyst

Okay, got it. And then I think in your prepared remarks, you talked about kind of right now the dental adoption rate is kind of 27% in Unum US, but to get to that 500%, like what kind of adoption rates you need to get to in order to achieve that target?

Michael Simonds -- President and Chief Executive officer of Unum US

Yeah. Humphrey, it's Mike. So the sales growth rate, I think, is -- this is what you're referencing of about 27% and we need to be in that range on a sustained basis over the next several years. So you should be looking for high-teens low-20s type growth. And as with any kind of start-up growth story, it's not going to be linear, right. So there'll be some quarters, where we're exceeding that and there'll be some where we're below it, but that needs to be when you take a longer-term view where we are.

Richard McKenney -- President and Chief Executive Officer

Thanks, Humphrey.

Operator

Thank you. Our next question comes from Alex Scott from Goldman Sachs. Please go ahead, sir. Your line is open.

Alex Scott -- Goldman Sachs -- Analyst

Good morning. First question I had was just on some of the accounting changes from FASB. Can you comment at all just on, I guess, for the long-term care specifically what kind of discount rate you're using? And if there's any way to help us think about quantification of how much reserve levels could change from the new accounting regime? And if there is any offsets that I should be thinking about across the businesses, aside from just sort of the interest rate impact?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Okay. So thanks Alex. So the first thing I'd note about the accounting changes is that they're GAAP only impacts, they won't affect statutory reserves or capital. They're scheduled for implementation in 2021. We think that would be the earliest that that implementation will happen. There have been some favorable developments in the accounting changes versus they exclude disabled life reserves with 60% of our reserves as a company are disabled life reserves, so they won't be impacted by the accounting changes. The big impact will be on active life reserves when you change the discount rate from -- a discount rate based on your portfolio results to a single A discount rate, that transition change will happen through AOCI.

We actually already have a mark on our liabilities under FAS 115 and AOCI, so that mark isn't as big as going to a single A rate, but it's already in there. The good news about that going to AOCI is it won't impact book value excluding AOCI, which is the way most people look at returns on equities and book value of the company. It won't impact reported GAAP earnings in a dramatic way because that's going to AOCI and we will continue to report earnings based on kind of our current portfolio rate and long-term care going forward in terms of what comes through retained earnings. So I think there'll be an impact from an AOCI perspective, it's a little -- It's a bigger mark than we currently have. There is a lot of work to do to figure out what that is and to get our reserving systems to align with the way things need to be calculated under the new rules.

The other good part about the rules is at least on our initial pass, we don't see any of our products having market risk benefits associated with them, so we're not going to face some of the volatility that will arise out of that. And so we're looking at it, overall, it's going to be a ton of work. We think the result will be manageable and we are encouraged by the fact that the impacts will be through AOCI, not through retained earnings and kind of our historical measures will continue to apply post implementation.

Alex Scott -- Goldman Sachs -- Analyst

Maybe just a follow-up on the AOCI point, specifically. I mean, one of the things I've been thinking about is just part of the reason we exclude AOCI today is associated with assets being marked through AFS and liability is sort of not being marked to the same degree. So I guess, through your conversations with the rating agencies and so forth, are you finding that they will continue to look at it excluding AOCI or will they actually look at just regular book value as well going forward or is it sort of too early to tell?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Yeah. I think it's early to tell. And in fact, if you look across the rating agencies, there's not a single way they look at it. Different rating agencies exclude different things in their leverage calculations. And, again it's -- from a rating agency perspective, it's largely about leverage as opposed to kind of the earnings and return pieces. And so time will tell, there's a good amount of time to get accustomed to where it is. But again, there's no single view across rating agencies today and I'm sure they will work to develop their views over time.

Operator

Thank you. Our next question comes from Josh Shanker from Deutsche Bank. Please go ahead, sir. Your line is open.

Josh Shanker -- Deutsche Bank -- Analyst

Yeah. Thank you for taking my question. Much has been answered. I want to understand the expense that you guys incurred during the quarter in Corporate for processing all your work on the LTC charge, like the operational expenses. And related looking at the very good results in Unum US, to what extent do you think that the expense management and whatnot that delivered that results is sustainable in the going forward quarters?

Richard McKenney -- President and Chief Executive Officer

Sure, Josh. Yeah. This is Rick. Let me just talk about our expense management overall, and specifically in the Corporate what you're highlighting there, it's not a result of the investment in actual process. What we saw there was we had some restructuring costs as we realigned some of our resources, particularly to the technology side. And so you're seeing that come through. But expense management as a broader theme is something we're always investing in, better ways to do things, more efficiency. I think Mike covered pretty well the expense management on the US side, so I won't hit on that, but that's a general theme across company, as we want to be very efficient in terms of what we're delivering for our customers and seeing that come through the expense ratio. To do that, sometimes you have to invest, sometimes you have to realign and so you'll see some one-time things that happen through the Corporate line. But overall, our expense management remains very much on track.

Josh Shanker -- Deutsche Bank -- Analyst

And let me just get back to the US for same. I mean, looking and going forward, are we at levels -- should we think about there's a seasonality or is the 3Q '18, I guess, a sort of a leaping off point where you guys have made material improvements that are going to be going forward into the future, I guess?

Michael Simonds -- President and Chief Executive officer of Unum US

Hey, Josh, it's Mike. So there is some degree of seasonality. So if you look back, it's not a bad idea. As you are forming estimates to look back over the last couple of years quarter-to-quarter, volumes come through kind of a lumpy way in the employee benefits business. But I'd say, probably more constructive is to look at what the annual numbers have done. And I'd say, we've seen pretty good gradual improvement over the last several years and I would expect, as to Rick's point, that that would continue going forward. Specific to the fourth quarter and your question, I'd say, to reiterate that, it's probably equal parts, some timing of expense that will come through in the fourth quarter and as well as that underlying improvement and the net of those two is what we've been seeing.

Operator

Thank you. (Operator Instructions) We will now take our next question from Suneet Kamath from Citi. Please go ahead. Your line is open.

Suneet Kamath -- Citi -- Analyst

Thanks. Just one cleanup question on the LTC assumptions. Just wanted to confirm going back to the morbidity improvement and the 1% that you talked about Jack, is that your assumption for GAAP and stat or are you just making that assumption on a stat basis -- I mean, on a GAAP basis, excuse me?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Yeah. That's a good question. If you look at long-term care, there's really three kind of sets of assumptions that company uses. There is statutory assumptions underlying the statutory reserves. We do not have morbidity improvement in our statutory reserve assumptions. Second basis is your GAAP assumptions, we do include morbidity improvement in that GAAP assumptions. And then the third basis, which is a very important one as well as the basis you're using for cash flow testing. So it is quite possible for a company to not have morbidity improvement in their statutory reserves, not have morbidity improvement in their GAAP reserves, but use morbidity improvement in their cash flow testing assumptions to test the adequacy of both their statutory and their GAAP reserves. So we do not have morbidity improvement in our statutory reserves, we do include in our updated reserve basis on a GAAP basis the morbidity improvement and we do use that same morbidity improvement assumption in our reserve adequacy testing. The exception to that would be in the State of New York, where morbidity improvement is not allowed.

Suneet Kamath -- Citi -- Analyst

Okay. I mean, I was sort of always under the impression that we should focus on the difference between stat and GAAP and that should give us a sense to the extent that is higher, call it a cushion or a buffer, but now it seems like if you're using different assumptions for the two approaches, maybe comparing them is less relevant?

Jack McGarry -- Executive Vice President and Chief Financial Officer

Well, no, it's very relevant. It's less important what the different assumptions are than the fact that our GAAP reserves are based on the best estimate on the loss recognition. And that's why we use the same basis for GAAP reserves that we do for cash flow testing, to the extent you are holding more money on a statutory basis, you have more provision for future benefits and expenses in protection of policyholders. So I would focus less in the difference in our underlying assumptions for stat and GAAP and focus more on just the gross difference and the fact that you have a higher provision, but for future experience under stat than you do GAAP.

Operator

Thank you. Our next question comes from Rob Hauff from Wells Fargo Securities. Your line is open. Please go ahead, sir.

Rob Hauff -- Wells Fargo Securities -- Analyst

Hi, good morning. Thanks for taking my question. A lot of moving pieces around the capital side, especially as we look toward year-end and through 2019. I was wondering, if we could just dial it in and think about it in the context of your existing ratings. Is your intent through all of your capital management actions over the next year or two to maintain your existing ratings or would you be willing to let your ratings slip from one of the agencies? Just trying to wrap my arms around how you're thinking about that looking ahead.

Jack McGarry -- Executive Vice President and Chief Financial Officer

Yeah. Basically -- and you can never guarantee these things, but based on everything we know and we've had good discussions with the rating agencies, we would expect to maintain our ratings

Operator

Thank you. This concludes today's question-and-answer session. I'd like to turn the conference back to Mr. Rick McKenney for any additional remarks.

Richard McKenney -- President and Chief Executive Officer

Yeah. Thank you, Shanade. Thanks for all of you for taking the time to join us this morning. We look forward to seeing many of you over the next few weeks at insurance conferences and I would remind you we've put out that our Annual Outlook Meeting will be held on December 12th in New York. And so, we look forward to seeing many of you there. So Shanade, that now completes our third quarter 2018 earnings call. Thanks.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Tom White -- Investor Relations

Richard McKenney -- President and Chief Executive Officer

Jack McGarry -- Executive Vice President and Chief Financial Officer

Ryan Krueger -- KBW -- Analyst

Michael Simonds -- President and Chief Executive officer of Unum US

Jimmy Bhullar -- JPMorgan -- Analyst

Mark Hughes -- SunTrust -- Analyst

Tom Gallagher -- Evercore -- Analyst

Timothy Arnold -- President and Chief Executive Officer of Colonial Life

Randy Binner -- B. Riley -- Analyst

John Nadel -- UBS -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Humphrey Lee -- Dowling and Partners -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Josh Shanker -- Deutsche Bank -- Analyst

Suneet Kamath -- Citi -- Analyst

Rob Hauff -- Wells Fargo Securities -- Analyst

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