All right, we're gonna get started. Good afternoon, everyone. For those of you who don't know me, I'm Adam Auvil, Vice President of Investor Relations and Sustainability. I'd like to welcome you today to CNO's 2023 Investor Day. It's great to see so many of you in person. I'd also like to welcome those on the webcast. Before we get started, I'm gonna read a few forward-looking statements. This morning's presentation is available in the investors section of our website and was filed in a Form 8-K this morning. Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes to the most directly comparable GAAP measures.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in your appendix. One quick note before we get Gary on stage. There will be Q&A after each presentation, so store your questions for that. With that, I'll turn it over to Gary.
All right. Adam, thank you. As Adam mentioned, we'll be doing Q&A individually and collectively, when the entire presentation's done as well. Before I get started, just a little bit of context. First of all, it's great to see so many old friends in person. It has been way too long since we've gotten a chance to meet in person, it's very nice to see all of you here. Thank you for making the time to travel and come see us especially for those of you that had to fly. Second, there's an aspect to this that I think is really new for us. What I mean by that, the last time we did an Investor Day was in February of 2020.
It was late February, so literally two weeks later, the entire world shut down. Right before we did the last Investor Day in February of 2020, we had restructured the company in January of 2020. We were talking about it initially at our last Investor Day, but we've never had a chance to really come back and talk in more detail and be able to point to results and so on and so forth. We're very excited to do that. Of course, we've had quarterly earnings calls, but as all of you know, those typically focus more on the results of that quarter.
This is really our first chance to talk about the company from a broader perspective, and in particular, to be able to talk about some of the things that we implemented back in 2020, and frankly, had to stagger in because of COVID. There's a fair bit here that we hope you'll find interesting and new, and that really takes me to talking a little bit about what the goals of today are. Very simply, we have three goals. We want you to have a deeper appreciation for how the business is structured and what makes us different. We think there's a number of things that we do that make us really unique in this space in terms of how we approach the market and the products and so on and so forth.
We wanna make sure we convey that to you so you have a deep understanding of what makes us different than some of our competitors. We also wanna convince you that there's a growth story here. I think that's something, as I've reflected back on some of the write-ups I've seen over the last few years, I think that's something that has maybe gotten lost. We think there's a compelling growth story. It's building. It's taken longer than we would like because of things like COVID. We think there's a compelling growth story here, and we want you to understand that roadmap and why we believe that growth story is sustainable. The third and final goal is to give you an appreciation for the intrinsic value of this organization, so that you'll hopefully continue to believe it's a com pelling investment opportunity.
We think that when you hear about the products and target market and so on, it really makes that case. With these three goals, how do we wanna achieve that? Well, we wanna get across just a handful of messages. As you'll hear me and my colleagues speak, hopefully you'll see some common threads between our messages. Again, first, we wanna talk about the middle income market and give you a sense for how we're penetrating that market, why it's growing, why it's such a compelling growth opportunity. This is a segment of the market that very few other companies focus on, and it's also a segment of the market that really needs the kind of guidance and products that we provide. Second, we wanna talk about our distribution.
I've been in insurance my entire life, over 30 years. I've never seen another company that has the same mix of direct- to- consumer, independent, and career distribution. Most of the biggest insurance companies you can think of have one, at most two, of those distribution channels. We have all three. Having all three by itself isn't valuable. The manner in which we bring them together and extract value, that is unique. That integration does set us apart, particularly on our consumer side of the business, which you'll hear about shortly. I wanna make sure I don't gloss over worksite. Usually, when we give presentations about CNO, because consumer represents 80% of our business, that gets the focus. Even in the worksite business, the way we're bringing these things together is very unique. Third, we wanna talk a little bit about the product portfolio.
We've got a very unique mix of manufactured and distributed. Although we get thought of as an insurance company, there's quite a few products we're perfectly comfortable acting solely as a distributor of, meaning we're not manufacturing them. We do that because our goal is to provide a complete package or a complete set of services for our middle market consumers, be they work site or consumer. We want them to have the best products to cover their exposures, whether we manufacture them or not. There's one product in particular that we're going to go a little bit deeper on, and that's our annuities. We've had tremendous growth. We love these products. They do very well for us.
Again, based on some of the analyses I've seen, I think it's incumbent upon us to use this opportunity to help you understand why we like that business so much and why it does so well for us. Fourth, we want to talk about our business model. We really want you to understand the strength of the diversity. I think every CEO probably says some version of that, but I'd like you to consider just a couple of very simple things in terms of how we think about the diverse business model that results in this strength and stability. First, think about the mix of mortality versus morbidity business that we have within CNO. Second, think about the diversification between our work site and our consumer businesses.
In both of those examples, mortality and morbidity and consumer and worksite, if you think back what happened during the pandemic, that was the perfect test case for why this diversity is important and why it allows us to have a strong company. When one side, say, mortality, was suffering, our morbidity business was doing quite well. Our worksite business, when our agents couldn't go into the offices to see those prospective customers, our consumer business was doing very well with virtual or direct-to-consumer sales. There are a number of examples within CNO where we've got a very diverse approach to the market, and that gives us predictable, stable results. That takes me to the fifth key message, and that's this notion of earnings and cash flow.
I think what you'll hear, particularly when Paul speaks, and Eric speaks, you'll hear about the earnings, you'll hear about the cash flow, you'll hear about the valuation. Recall that we're rated investment grade. These are all things that have happened in the last several years, and if you look back, there's a really robust financial business here. When you hear Eric talk about the up in quality moves we've made with our investment portfolio, hopefully you'll come away with that same sense of comfort about our earnings and our cash flow. The last thing I want to mention that's not on this slide, I want to do a little bit of a teaser. I think there's three or four things you're going to hear that we haven't shared before. First, we're going to give a fair bit more detail on our outlook.
We've historically shied away from that, frankly. I think the level of detail that Paul will provide is certainly far more than it has been in the past. Second, we're using this as an opportunity to talk about our plans with our Bermuda captive. We think that there's a substantial opportunity there. Again, Paul will talk more about that. Third, this is our first time really talking in some depth about our worksite business and the different assets we've brought together there to create Optavise. Mike Byers will give you a good look at that. Finally, we're going to provide an update on LDTI. Those are all things that we haven't really talked about in a lot of detail, and we're very excited to do.
The last thing I want to cover before I hand it off to Scott, I don't want to go through each one of these. I just want to convey one simple message in terms of how we think about corporate social responsibility. We don't think about DE&I or ESG or CSR. We don't think about them as being separate from our business. The core of our business is helping people. That's what we do. We make a difference oftentimes when people are at some of the hardest points in their lives. Doing some of these things and making a difference, it's just a natural part of the business we do. It's not a separate thing. If you haven't already done so, I'd encourage you to take a look at the CSR report. You can get it from our website.
You can really understand in a fair bit of depth the types of things we're doing. What I'd like to do next, I'm going to have Scott Goldberg come up and talk to you about our consumer business. I'll be back towards the end of the day, again, you'll have an opportunity to ask each individual presenter questions. Again, I'll be back towards the end. Please join me in welcoming Scott Goldberg.
Thanks. Thanks, Scott. Good afternoon, everyone, and thank you for your interest. This is loud. Thank you for your interest in CNO. I'm Scott Goldberg. I've been with CNO for over 18 years. I've been leading Bankers Life for the last 10, and the consumer division for the last three. Let me get this here. My intent today is to provide greater insight into the structure and performance of the division. As Gary said, which accounts for the bulk of CNO's revenue. We operate a unique and compelling model, and it's proven to be a sound, resilient, and productive way to serve the middle market, and we believe it's well-positioned for further growth. Our model is differentiated 'cause it's vertically integrated. We think of our channels as belonging to the same platform. I'm gonna talk about that throughout my presentation.
On one hand, we have a best-in-class direct-to-consumer operation that draws in millions of prospects each year, covering our last mile is our large national field force of exclusive agents who build lasting relationships within their communities and operate at a scale that would be difficult to build today from scratch. As I said, we focus in on middle-income consumers who are in or approaching retirement. These are the millions of Americans of moderate means with most of their savings in tax-qualified retirement accounts. As they age, they need to navigate Medicare, they need to manage the drawdown of their assets, they need to be thoughtful about a host of medical and financial concerns. These are real needs, this is a large and underserved market.
I mean, many carriers don't have the right distribution or don't have the right products or aren't set up the right operationally to be able to serve this market. We provide solutions through a set of manufactured products, as you can see on the screen, that we have decades of experience underwriting and administering, and then we also have a set of third-party products for which we earn fees. Three years ago, as Gary was saying, we transformed our consumer-focused operating companies into a single division. We began sharing management and resources across our channels, and we began thinking differently about the customer journey. Today, we generate the majority of our new life and health annual premium using an integrated multi-channel approach.
We use media and digital to engage consumers, we convert some of those interactions into direct sales, and then wherever possible, we turn those touch points into local relationships with our field agents who are able to create a lot of value. Now, by connecting our channels as we have, we've achieved higher conversion rates on our campaigns, and we've become our own largest source of leads for our field agents. Think about that. About 20% of our field's life and health premium can now be traced back to a direct-to-consumer campaign. Just as a framework, we think there's a lot of opportunity here for us to build on by adding new campaigns, by adding new digital properties, by adding new product types, and so forth. A very powerful and unique integrated model for serving consumers.
In terms of direct sales, our well-known Colonial Penn brand drives our results. Our ads are familiar, our pricing is simple, and our coverage is guaranteed. As with other carriers, you know, we saw demand for our direct consumer life insurance pick up during the pandemic. Where others have regressed, we've been able to sustain our growth through fresh media, through higher digital conversion, higher average premiums, and new distribution partnerships. This is a great franchise for us, and it's not easy for others to jump in and replicate our model as it might appear. Our metrics, and our advertising, and our fulfillment processes supported by decades of underlying experience. In this business, as I'll talk about in others, we see additional opportunities to expand our reach and to expand the appeal of our well-known brand.
Our other prize jewel is our national branch network of career agents. We have over 5,000 agents who exclusively represent our brands and our partner brands. We operate in every major and not-so-major metro across the country. We also manage a team of traveling agents who work with farmers and ranchers in rural areas. The value of our agents, it's not on our balance sheet. They're an incredible asset to us. We recruit and develop new agents from the ground up with award-winning training. When they get in front of prospects, we don't fight for shelf space. I've been fortunate in my role to get to know many of our producers. I'm very proud to say that we have an amazing team of field professionals led by a seasoned team of managers.
During the pandemic, our profession, our producing agent count compressed as recruiting became constrained. At the heart of our model is a team of experienced agents. You can see it on the chart on the left, and their count has remained relatively stable, and they keep our culture productive and fun. We attract thousands of young people each year who are looking to start a career in financial services. I mean, look at the chart. 57% of our agents are Gen Z and millennials. In fact, a testament to how our agents feel about our culture is our personal referral program. This is a big deal. When people enjoy what they do, they recruit their friends to join. Over the last few years, this program has brought us thousands of new agents.
It's elevated our culture, it's raised our average first-year retention rate, and it helped us buffer against the tight labor market. As we see recruiting conditions improve, we're gonna get a chance to see what this program can really do. So far this year, personal referrals are up sharply, as is recruiting in general. An important element of our strategy is that we equip our field agents with a diverse set of life and health products. This allows them to take a needs-based approach with their clients and to an extent, be a one-stop shop. This is just a view of our new field premium. Obviously, not our in-force premium, but just a view of kind of what they're selling today in terms of new business.
As you can see, this past year, about 60% of our new premium came from health insurance sales. There's a lot of opportunity in the health space that we're well- positioned for, and that doesn't include Medicare Advantage plans, which we distribute on a fee basis and have grown to be a much larger part of our total Medicare policy sales when including Medicare Supplement. We processed most of our Medicare Advantage enrollments through our own online health insurance marketplace, myHealthPolicy.com, which allows consumers to compare plans, enroll online, or be enrolled with the help of an agent. About 90% of our enrollments were driven by our field agents, and about 10% were attributable to direct marketing campaigns where we generated an inbound call.
That's a mix that we expect will evolve, but we're not looking to replicate the high- cost seasonal staffing approach that characterizes some of the publicly traded Medicare marketplaces. We've built a profitable and persistent third-party distribution business. Not everyone can say that. We think we can grow our marketplace in that context. This past season, we routed inbound calls to field agents. We're able to share local knowledge. We're able to meet in person. Guess what? We achieved our highest conversion rates. We see a path that we can build on. I've talked a lot about life and health sales because they're really important to our model. They provide us a way, among other things, to acquire consumers in a way where there's often natural demand.
As trust builds, we're able to expand that relationship many times to address financial concerns such as investment management and retirement income, in which products like our annuities can play a role. To a great extent, this sequencing of moving from life and health and into moving more deeply into financial products reflects the way our agents develop their career and the way that we structure our career path. In 2016, you might recall, we began a more intentional effort to grow our share of retirement assets by establishing our own broker-dealer and our own registered investment advisor. Today, we have nearly 700 registered professionals operating across every one of our branches, providing financial services to our clients.
As their rank has grown, so have our client assets and securities, the middle chart, and our annuity account values, which have now spiked to over $11 billion from just under $9 billion five years ago. A really great story. We did see, I'll point out in client assets and securities, a decline in this past year, it was completely due to a decline in equity values. We still saw hundreds of millions of net inflows. We see future growth, further growth on the horizon. You know, with a rising number of advisors, we've been expanding into the upper end of our target market, where we're able to position our annuities as a part of a holistic retirement plan. The result is we're selling more contracts and larger policies.
We think these are two trends that will continue. Finally, I should add, while the bulk of our production comes from our proprietary distribution model, we work with a small group of trusted independent partners who distribute our supplemental health plans. We've had good success partnering with health plan distributors because our plans pay lump- sum cash benefits that can offset expenses associated with high- deductible health plans. It's another area where we see a lot of opportunity. High- deductible health plans have become the norm, and similar to Medicare, we believe most consumers would be better protected if they also had a supplement. Just add it all up, and our results show steady growth over the last five years, before, during, and after the pandemic, and across all of our sales categories, life and health NAP, annuity collections, and fee revenue.
Each of these charts are going up and to the right. As Gary said, that's how we see our business. I'm gonna wrap up by telling you what we see going forward. First and foremost, we're focused on the near- term organic opportunities within our distribution model. We see opportunities to expand our reach, expand our campaigns, expand our digital properties and our digital engagement, expand our ground force, our retirement planners. Lots of opportunities right within our model. Meanwhile, we're continuing to see better results across all elements of the recruitment funnel. Our producing agent count is on pace to consistently rise throughout the year. We're well-positioned for higher life and health sales. With the recent rollout of our new Medicare Supplement products, which you saw, we had a very strong Q-Q four.
The continued success of our Colonial Penn life sales, which have been on a terrific run over the last several years, and we expect to continue to see growth and the continued expansion of our distribution partners. All in all, we think we have a very, very compelling story to tell, and we're really proud of the results we have. With that, I'm gonna spend a few minutes answering questions. As Gary said at the end, we'll be together as a team, and we could ask additional questions. Adam can moderate, and any questions that the group has, I'm glad to answer.
Thank you. Erik Bass with Autonomous Research. First, just curious, as you've changed some of the approaches, how have the demographics of your client base changed over time, either by income or age mix?
Broadly speaking, we talked for a number of years about what we called expanding to the right, which was this idea of being able to go after more well-heeled clients within our target market. By all evidence, that's exactly what's been happening. We see that just in the higher average annuity sales that we're making, higher average life insurance sales that we're making. I see that every day on the demands put on me and my team to be able to offer, you know, more sophisticated advice to clients. In my 18 years here, I think a big part of our story has been the pro-professionalization of our workforce. We're getting into better households, better neighborhoods, bigger asset sales. I think there's opportunity for that to continue.
We don't wanna leave behind the market that we focus on. You know, we're not gonna see that in every case. We wanna be able to have something for every home. There's no question in my mind that we've been able to expand to the right.
Thanks. I don't know if you have any numbers you can share on sort of the average number of products per client, and are you seeing that kind of expansion as you move up to people buying more products from you?
Yeah. You know, it's about, between 25% and 30% of our clients have a second or third policy that they'll buy after whatever initial products are sold in that first. In those early meetings. When we look at things six months later, we see, you know, between 25% and 30% are buying a second or third policy. I think a lot of that reflects that not all of our market is gonna have the assets to be able to afford a second policy. However, in a number of cases, we are the advisor for the household. In other words, they don't have a money manager, they don't have an estate planner, they don't have a tax person. They've had their money sitting in a 401(k).
They were told to roll it over when they left the workforce, and now they've become their own Chief Investment Officer. They gotta navigate Medicare. They gotta figure out their prescription drug plan every year. There's a lot to it, and we become that person. Depending on their situation, we're able to sell multiple products or offer investment management services.
Thank you. John Barnidge from Piper Sandler. You had a slide about the majority of your agents are 40 years or younger. 57% were born after 1981. How do you see that stacking up against your peers in the channels you operate? Have you done something specific to attract younger agents? Thank you.
Yeah. As most of you know, career building, agency building has, you know, for some companies, they gave that up years ago. I think many are regretting it as they fight for shelf space among, you know, distributors. We never gave that up, so we're able to continue to recruit people. We offer a real attractive environment. A very fun culture, very sales- oriented, and I think that we are one of the few places, not only that is very good at agency building, but that is attracting younger people. Now, of course, it's hard to tell.
The point of that slide is if you think of our distribution as some old-fashioned, you know, agency, where you're gonna walk in, and everyone looks like they're about to retire, you just got completely the wrong mental picture of what our offices look like. They are young, energetic places where people are anxious to start a successful career in financial services, and many, many people do. I think that this is a point of differentiation for us. You got to recruit new people in all the time if you want your agent force to stay, you know, with a lot of runway in their career, and we're dedicated to doing that. We're very good at doing that.
Questions?
Yeah. Scott Heleniak with RBC. Just wondering if you could talk about the third-party product revenue opportunity. You had a big increase in fees last year. Just wondering, there's been some dislocation there, what's your outlook is for those products, you know, for 2023 and beyond?
Yes, we do, you know, Let me make sure I have your question right. You're asking about third-party products, not our third-party distribution, right?
Correct.
Yeah. In terms of third-party products, you know, obviously, the largest product that we sell from third-party is Medicare Advantage, which has become like the rest of the market, the majority of our Medicare sales. Even though, you know, when we look at what happened in the fourth quarter for us, we saw a nice pickup in Med Supp. You know, we're positioned to be able to sell either. Whatever someone needs, right? They're turning 65, people have choices to make. They're gonna choose, are they gonna stick with the re-original Medicare and more than likely buy a supplement plan, or are they gonna go to Medicare Advantage? In either case, they've got to be thoughtful also about the prescription drugs that are either buying standalone or as part of that plan.
We haven't done what some marketplaces have done, which is become a very seasonal hiring, staffing enterprise. You know, refigure out your business, you know, every year between September and January, and then hope that the business persists because you're working with people virtually. We've done is we've incorporated these products right into our model. We'll come into the annual election period with thousands and thousands of scope of appointments filled out, ready to meet people. As I pointed out, our field agents are driving 90% of our activity through our enrollment platform, and we see continued growth in Medicare Advantage. Our numbers are strong, but there's a lot of runway there that we can continue to have. We spend most of our day getting in front of people who are Medicare eligible.
We see that business as having a lot of legs. We don't think it's gonna be the kind of cash- sucking business that it has been at competitors because we're not taking that approach. As I said in my comments, we have a very profitable third-party fee revenue business, and we're not looking to forsake that.
Thank you very much, Scott.
Thank you. I'll be back at the end if there's other questions. In the interim, I'd like to bring up Mike Byers, who is our President of our worksite division. Mike.
Thanks, Scott. My name is Mike Byers, as Scott just mentioned. Unlike Scott, I've been here about 24 months. Scott's been here 18 years. I should have said I've been here 24 months. It sounds more impressive. Here are some of the key takeaways I want to discuss relative to Worksite. First, as Gary mentioned at the beginning of his presentation, we rebranded Worksite as Optavise. We did that May of last year. What's important to recognize is that the tagline for Optavise is optimal benefits, well-advised. Through this presentation
I will leave you with the understanding of what that means exactly. I wanna reinforce that we are the only organization that has a bunch of capabilities that I'll talk about under one roof. Simply put, Optavise is meeting the healthcare benefit needs of both the employer as well as the individual employee and by extension, their family members. Finally, we have a very large opportunity in front of us, and our goal is to take full advantage of that opportunity. How did Optavise come to be? Optavise, first and foremost, provides an employer a one-stop shop that consolidates several best-of-breed solutions under one roof. That's important because as an employer, when you're trying to make a decision, you want an integrated solution, particularly when it comes to managing benefits for your employees. We've consolidated. The main components are PMA, our legacy worksite career agency.
Those are the people on the ground, walking into businesses, walking into municipalities, public sector, schools, et cetera, selling our products. Web Benefits Design, which some of you may recall, was a acquisition we did about four years ago. It's our benefit administration technology platform. DirectPath, our acquired personalized benefits, education, advocacy, and communication platform. These three businesses are distribution vehicles for our Washington National brand of voluntary benefit, life and health products. The American healthcare consumer is in trouble. Why is that? Healthcare is expensive, and with inflation, it's becoming more expensive. It's the number one cause of personal bankruptcy in this country. Very large topic of discussion at the time the Affordable Care Act was passed. It's complex. It's confusing.
If you've ever had go through enrollment and somebody hands you a summary plan description, it's a book about that thick. It's really complex. It's a very difficult subject. When you compound that with the fact that we've got multiple generations with varying degrees of needs in their healthcare, it makes it that much more complicated for a baby boomer and somebody in the millennial generation to figure out what they need at time of an open enrollment. The workforce, as we've all come to realize, is more remote. Communicating with those individuals is becoming harder and harder. That's some of what we deal with every single day. What is the Optavise solution? This circle is a really good indication of everything that I've just talked about and how it's come together.
What really differentiates what Optavise does is that we're dealing with the American healthcare consumer year-round. The primary intent of our solution is to provide a support system that is a combination of skilled professionals that advise, educate, and communicate an employer's benefits programs to each employee, coupled with a technology platform to administer an employer's benefits programs. Second, the year-round capability includes skilled advocates that are a phone call or a chat away from addressing a variety of healthcare issues, such as a surprise bill. The media has talked a lot about this, the individual who was expecting to pay a $50 copay, and then they get a bill for $50,000. I'm not exaggerating, I've actually seen examples of that. Cost transparency reports.
In an environment where you're self-insured, you really are focused on making sure that the individual employee gets the best care, not necessarily at the highest price. We provide that. Finally, we get phone calls from individuals who don't know where to go for a specialist in their particular region where they live. We provide that capability to make sure that they get the best treatment, they find the best care. Finally, a portfolio of individual or group voluntary insurance products that are designed to protect an employees and their loved ones in cases where the employer's benefit programs are insufficient to cover costs and care. That's the Optavise solution. That's what we're selling every single day. We've put all this stuff together, and we've put it under one umbrella, and now we're starting to see the benefits of this.
We're seeing an ability to go in where we have a successful relationship and Sell something else, excuse me. These are three different examples. I wanna talk about the one on the far left. This is a client that had a very common problem. It's a school system. I think they've got 1,800 employees out there. They had a decent but not a great healthcare plan. Our team had very little access to the employees, which resulted in poor enrollment support. We recommended, and the client took our recommendation, that introducing our benefit administration technology would give our folks an opportunity to talk to them, to help them enroll, and we took advantage of that opportunity to make sure that they understood that there were voluntary benefits that would further enhance the portfolio of services and insurance that they really require. It worked.
The employees ended up with much better in protection for themselves and their families. At the end of the engagement, the result was a very happy client, an opportunity for Optavise to sell new technology. The real benefit to us was because of our opportunity to sit with the individual and explain how the technology was gonna work and how to enroll and leverage it, we doubled our in-force premium in this example. Where do we spend our time and how do we focus, and how have we crafted the distribution? The left-hand side is our national accounts team. This team is primarily selling through the large national brokerage firms, the traditional alphabet houses.
On occasion, they'll get directly to the head of benefits, the CHRO, and they'll sell to them directly our solutions. The national markets team is entirely focused on trying to sell that entire circle I talked about a second ago. They're trying to get the employer to buy into the thesis that one vendor is better than having to deal with multiple vendors, and we've seen success in that. The 1 statistic I would point out on the far left under national is the 90% annual recurring revenue. It's a, it's a very sticky solution once we get in. People like us, we do a particularly good job there. The regional team is our career agents selling directly to small businesses, and this team is uniquely focused, and we've had a lot of success selling to unions in the public sector.
The regional team-- With the regional team, we recently launched a new initiative which pairs the small third-party independent broker who we recruit to work with our career agents to work collaboratively to find new prospects and ensure a really strong enrollment. Of note, on the bottom right, you'd see we've got about 80% re-enrollment sales. We've been very successful because of the high customer satisfaction we have and the unique nature of some of our products or a feature within our products, which is the return of premium, that we've been really successful going back in and selling to that client another product or products. Client profile. On this slide, you can see some of the interesting characteristics of each market segment. On the national side, we're serving just over 3 million employees.
We help save our advocate client members about $450 per case, and we experience high client satisfaction as represented by an NPS score of 65. Right-hand side on the regional part of the market, we have approximately 20,000 groups. Great employee persistency, again, very sticky. We've got really unique experience of getting into that small employer that may have five, 50, 75 employees, and working with that particular group. Recruiting. As you can imagine, as Scott just mentioned a second ago, recruiting took a bit of a hit in the middle of the pandemic, beginning of the pandemic, right through. In late 2021, we invigorated our recruiting by replicating a program that Scott's team had created, which is around personal referrals.
What we found in this distribution model, in this recruiting model, is that if you have an entrepreneurial spirit and you've been successful selling our insurance, you'll know somebody who's like-minded, and you bring those folks on. That was really successful for us. The first year we started this, we had a 125% increase in first-year agents. In the beginning of 2023, we see that success continuing. We're really happy with that, and we think 2023 is gonna be another great year for us for recruiting. You can see the charts are up and to the right. Post-COVID. It's behind us, we hope. Optavise is an exciting story. Our insurance sales, as you can see in the chart on the left, is starting to make that sort of up and to the right.
By the way, that chart also represents about a little over $200 million of in-force premium. Next, our stable veteran agents really maintained the relationships they had developed before the pandemic, really capitalized on those relationships for revenue generation during the pandemic, and that's going to continue post the pandemic. A little bit on fee revenue. What we've spent the greater part of the last 18 months or so, is taking the two acquisitions, creating one single entity, and seeing the cross-collaboration between those two teams. Now we're starting to see the benefit of that with the revenue growth you're seeing in fee revenue and the investments that CNO has put behind both of those acquisitions in terms of putting them together and putting greater capability behind it.
To wrap up the Optavise story of today, we're in a unique marketplace. We've put together some unique features together, some unique people with some great skills, all combined. The story is essentially the following: we've blended benefits technology, skilled professionals addressing healthcare advocacy, benefits education, enrollment in a portfolio of insurance products that protect the healthcare consumer. We have demonstrable success in selling direct to employers and through brokers of all size, the local guy to the big alphabet houses. Now we're proving a model that leverages cross-collaboration between our national and regional teams, where they find opportunities, and they share them if they're appropriate for the other side of the house. Looking ahead. What do we see in the future? We plan on increasing our technology footprint.
We've put together some good technology assets with these acquisitions, we're gonna continue to enhance that with a focus on making the healthcare consumer more efficient, smarter around their healthcare and benefits decisions with a view towards leveraging data and decision support. Second, continuing down the path of the cross-collaboration I just talked about, where the national team works collaboratively with the regional team. Last, and this is a really important one, empowering our agents with enhanced training. We have found that when they come out of the gate and they have not really had sales experience, if you train them appropriately, they can be really productive right out of the gate. We're gonna continue to emphasize training and enhancing that with some technology, including productivity tools while they're in the field, while they're driving from business to business. With that, I'm happy to take questions.
Sorry, Adam. I have to introduce Adam.
No, you're good.
Ryan Krueger, KBW. Can you talk a little bit about, I guess, do you feel like you have all the capabilities you need now? You've done a couple of acquisitions over the last few years. Curious if there's more capabilities you're still looking to add, or you feel like you kinda have what you need?
Sure. That's a good question. As I stand here today, we're looking at adding additional capability, not necessarily to have to go acquire, but additional capability on the technology platform itself. I think this is gonna go one of two ways, and it's a direct result of the pandemic, and I'll give you an example. Scott had mentioned virtual. We created something called Optavise Now that gives an agent the ability to communicate with you one-on-one through video to make sure that you understand what your employer is offering. That doesn't mean we're gonna eliminate the in-person, 'cause we really think we're effective. That's one area that we've been emphasizing, sort of an enhanced capability to be able to talk to you and ultimately sell you insurance. Decision support, we think, is critical.
Today, a lot of that is a one-on-one communication when we meet with an employee. By the way, when we talk about communicating to an employee, we could be talking to an employer with 10 employees or 15,000 employees. We can do it with on a sort of a concierge basis where we meet with an individual. We do think we should augment that with better decision support so that if we can't get to everybody, there's a way to get through a decision tree around what should I enroll in? Should it be a PPO? Should it be the high-deductible plan?
If it's a high-deductible plan, let's say you get on that path, there are probably voluntary benefit products that you should augment that plan in the event you cannot afford the, you know, the high deductible that may come with that particular plan. Those are two areas we're looking at. To answer your question, is yes, we'll continue to get on that path.
A question on the national business. Are you competing primarily with other ben admin companies or insurance companies or both?
I would say primarily I call it benefit services companies, because if you look at the ecosystem we compete in, and that's why I would emphasize sort of the combining best-of-breed. The advocacy business, we could be competing with Health Advocate. On Ben Admin, it could be any number of players, as small as ADP, who's focused on the low end to Alight at the high- end. On the communication front, it could be the large consulting firms who do HR consulting. We have competition. The one thing I would say that really differentiates us from the players I just named is we have an insurance portfolio that does help us when we get into a conversation with an employer, particularly a benefits manager or CHRO. Good questions.
Thank you very much. John Barnidge at Piper Sandler. I have two questions. There was a slide that talked about one in five households having a medical debt. Is a health savings account a product that could help address that?
Potentially, if you can afford to fund an HSA, yes. That statistic is really driving at the fact that, particularly at the time they were funding, they were creating the ACA, there's a whole constituents of people who are employed who had insufficient coverage, care, and compensation. That's what creates the high level of bankruptcy. I'm a big believer in the HSA. I think it's a really interesting vehicle. It's something, you know, we would look to evaluate as something whether we could add to our portfolio. I don't know if it's necessarily gonna address that particular problem, but I do think it's a really important vehicle for the American consumer to start to really get their arms around and take advantage of.
Thank you. 43% of recruited agents are now referrals versus 22% in 2020. How does the recruitment time period and cost associated differ from previously when it was 22%?
The big difference is, and I think that's sort of like before pandemic recruiting, post-pandemic recruiting. We were heavily weighted before I arrived, more on the corporate approach of having folks trying to reach out through LinkedIn and a whole variety, Indeed, and a whole bunch of things, to recruit people to become career agents. I think the big difference is, and I really should emphasize this, is that we created an incentive program that said to the agents, particularly the veterans, you know, sort of build your own capability. You go out and recruit people who you think are gonna be successful. You help train them up, and I think the difference is has manifested itself in the following. We've got more people since 2020 who are out in the field, number one and number two, they're more productive.
Our first-year agents had a really great year in 2022, and I think it's because we found like-minded people who kinda had that entrepreneurial spirit, like, "You're gonna be your own boss. Look how successful I've been." As a result of that, you didn't end up with people who sort of, "I'll try it," and didn't particularly care for it, and they found the door. These are people who've proven they can sell, and we're kind of optimistic in the stickiness of what we're seeing with people kinda staying on board. Scott mentioned, and it's very similar to the consumer part of the business, they're having fun. They like it. There's a real nice camaraderie that gets built with these career agents, I think we're gonna continue to try to exploit that as best we possibly can. That's good questions.
Anybody else? As Scott mentioned, and I'm pretty sure, the gentleman to my left is gonna reiterate that, we'll be taking questions at the end of everything as well. Thank you.
All right. Thanks, Gary, Scott, and Mike. Before we go to a break, we'd like of to show you a couple of testimonials to show you the great work that our associates and agents are doing.
As part of our goal to meet customers where and how they want to buy and engage, over the past 30 months, we've collected more than 9,700 online reviews. Here are a couple of reviews from our customers about the service they received.
My experience with Christopher Palazzini was what I was looking for in an insurance company. The upfront at-home meeting with the agent was a major plus, not just a voice on the phone. His professional knowledge and personal approach, answering all of my questions and choosing the right health plan that suited my needs made this so very easy. Thank you.
My advocate was absolutely marvelous. She stayed on the phone for over three hours working to resolve four months of agonizing entangled issue. She was able to contact the correct people to learn where the pharmacy dropped the ball, and my prescription was filled in a normal manner with a normal cost. Thank you.
All right, it is time for a break. We're doing great on time. Right now it is 2:20 P.M. Why don't we look to reconvene at 2:30 P.M.?
All right, if you guys could take your seats again please. Welcome back. Before we move to hear more about our products, Gary spoke a bit about our commitment to corporate responsibility, and we would like to share a video in which we feel encapsulates that
Hello? Okay, guys, I'm good to go. Let's do this.
Five years ago, we began our journey to build a more inclusive and diverse culture here at CNO. Our initiative is called. I am CNO.
I am CNO.
We did this to shine a spotlight on the diverse backgrounds, experiences, and perspectives of all our associates. We recognized one very simple truth. We are better when we create a workplace that welcomes all associates, encourages them to bring their best selves to work, and values the rich diversity of associate voices that represent the customers we serve.
Here we go.
I continue to be inspired by all of our efforts and our commitment to diversity, equity, and inclusion, and I am proud of all that we have accomplished together over these past five years.
Yes.
There's more work that needs to be done, and we welcome being on the journey to make progress for all and everyone.
Loud and proud.
We are genuinely committed to having a culture in the company where we seek to hear the voices of all of our associates. We do our best to ensure our policies, benefits, and actions reflect our commitment to the needs of our diverse associates.
I am trans and proud.
I am a veteran.
I am Latina.
Our diversity awards and certifications are just a reflection of who we are today. Together, we are building a more diverse, equitable, and inclusive workforce that is proactive to the needs of all of our associates, and CNO Financial is prepared to meet today's workforce challenges.
I am CNO. Yo soy CNO.
I am CNO.
I'm CNO.
Main hoon CNO.
I'm CNO. We are CNO. I'm CNO. We are CNO. We're CNO, baby. Whoo! Yes. All right.
Now please welcome Karen DeToro, Chief Actuary.
Hi, everyone. Good afternoon. We have shared information about our products with you before, but today I want to go a little bit deeper on our product development and pricing strategy. I have 3 key takeaways for you. The first is we have a uniquely diversified product portfolio that enhances earning stability and risk mitigation. This has been borne out by our actual experience over the past 3 years and our stress testing. Second, we have broad internal product manufacturing capabilities that span across life, health, and annuities, and we supplement these with partnership products where appropriate. Third, we use various metrics to maintain strong discipline around our product management and pricing. We price all of our products to a target internal rate of return that is on par with the market.
We use two metrics, value of new business and customer lifetime value, to guide our product pricing strategy. At CNO Financial Group, we are very proud of our broad product portfolio, and this is really a key strategic differentiator for us relative to our competitors. Even as our sales patterns may shift slightly over time, we maintain good balance across all lines of business, as you can see evidenced by our collective premium and our insurance margin. This diversification provides solid risk mitigation and earning stability. As you can see in the chart on the left, no single product has a concentration of risk, and no single risk exists at a significant level across all of our products. This benefit has been evident over the past three years.
As the pandemic created losses for some lines of business, performance improved on others, which really proved out the value of this diversified model. We see the beneficial impact of diversification through our stress testing results. We test five to six stress scenarios annually, and during the pandemic, those stresses were on top of the already stressed environment that we were experiencing. Our stress testing results show that we're well-positioned with our existing capital management strategy, and our GAAP income remains relatively stable across those stress scenarios. As Gary and Scott both alluded to, one of the key differentiators is our ability to deliver the last mile of sales and service, and we are committed to giving our distribution the right products to support that strategy.
We have strong and broad product manufacturing capabilities internally, among the broadest of any of our competitors, and CNO supplement those capabilities with partner products where appropriate. We will manufacture product where we have the pricing expertise to do so, the operational capabilities to support those products, and where we see that we can generate attractive returns. If those conditions aren't met, we will look to outside partners to round out our portfolio and provide door openers that can lead to cross-sales into our manufactured products. Now, the specific areas where we choose to manufacture versus distribute may change over time, but our philosophy about bringing the right set of products to market will not change. Now, we regularly refresh our products across all lines of business. This is particularly critical for our career agents who only sell the products that we make available to them.
In 2022, we brought products to market across four different lines of business using a mix of manufactured products and product partnerships. Specifically, we launched a more competitive Medicare Supplement product with value-added features. We added Medicare Advantage plans from various nationally recognized partners. We increased the base amount on our simplified issue whole life product to give customers the option for even more protection to meet their needs. We offered new group supplemental health products to our Optavise distribution in partnership with another carrier. We expanded our dental and vision partnerships to provide new competitive options, particularly for the small group market. We're continuing our commitment to invest in all lines of business. Over the next 12 months, we'll be developing new manufactured products across life, health, and annuity, and we will continue to explore additional partnerships.
We use a variety of metrics to understand the value that each product contributes to our portfolio. We price all of our products to generate an attractive return that's based on a target internal rate of return, and we benchmark this target rate regularly so we know that our products are priced to generate returns in line with the industry. We go beyond just using internal rate of return. We use value of new business and customer lifetime value to further guide our strategic pricing decisions. Value of new business is the value of all future statutory profits on a given product discounted back to the point of sale, and that reflects the cost of capital so that value captures the capital intensity of our various lines of business.
Customer lifetime value is the value of statutory profits on all products that a customer will buy from us through their lifetime, also discounted back to the point of, the first sale. This also reflects the cost of capital for all of those products across the lifetime. This really helps us understand the value of acquiring a particular customer through a particular product. Neither of these metrics are unique to CNO, but they are also not consistently defined across the industry. The bottom line is that every product we sell is priced to generate attractive returns and drive value through cross-sales. Now I'd like to talk about our annuities. Based on value of new business, annuity sales are more accretive to profit per policy than life or health sales.
Even though our annuities are fairly capital intensive, we get a higher level of long-term value on annuities than on life or health. Customers who purchase an annuity from us, on average, have a higher customer lifetime value than those who don't. Customers with annuities have better retention than customers who don't have annuities with us, even in periods of rising interest rates. We believe we are less exposed to disintermediation risk because of our career agent distribution and because our middle-market customers are less likely to chase rate. We like our annuity products because the crediting rate mechanism allows us to maintain a healthy balance between competitiveness and profitability. Even as we experienced downward pressure on rates heading into pandemic, we were generally able to maintain our spreads.
In Paul's section, you're going to hear what we're doing to make the story on our annuities even clearer and more compelling. Now let's turn to Medicare. I mentioned we repriced our Med Supp product in 2022, and we used value of new business and customer lifetime value to inform that pricing strategy. Going into 2022, we knew that it was time to reprice our Med Supp to maintain its competitiveness. By looking at the VNB metrics and CLV metrics for both Med Supp and Med Advantage, that allowed us to pinpoint our Med Supp pricing to be competitive but also deliver sustainable value across our Medicare portfolio. On Medicare Supplement, we can manage risk through prudent rate increases to be able to maintain that value over the long term.
As we see a continued secular shift to Medicare Advantage, we expect to see increasing customer lifetime value on that product. We will continue to monitor and maintain the balance between Med Advantage and Medicare Supplement because we see attractive value to be had in both of those products. As we look ahead, CNO Financial Group is committed to maintaining our product diversification to mitigate our risk and stabilize our earnings. We will continue to lean in on opportunities to manufacture products where we have the right capabilities, the right pricing expertise, and we see the potential for attractive returns. We'll continue to look for opportunities to source products from partners where appropriate. Finally, we'll continue to use value of new business and customer lifetime value metrics to help guide our strategic pricing decisions to deliver long-term sustainable value.
With that, I'm happy to take any questions you have.
Thank you. Erik Bass with Autonomous. First, you mentioned using internal IRR as one of your pricing metrics. How do you also think about cash payback period as part of that?
Yeah. We look at those metrics as well. We look at the break-even period. For different products, different metrics are a little bit more relevant. For all of them, we price to that target rate of return, but we also want to look at how that profitability emerges over time. As you can imagine, it's very different for a line of business like health than it would be for something like annuities or life.
Got it. On your risks, that you talked about for products, I think the one that wasn't highlighted on there was credit, and obviously different products have different levels of asset leverage, with annuities being higher or some of the institutional products. How do you think about that and maybe the balance of asset leverage that you think about for the overall enterprise?
Yeah. That's a great question. Really, that slide was talking about what I would consider to be more of the actuarial risks in the product, so the traditional mortality, morbidity, persistency. We work really closely with Eric's team to think about how we're deploying our assets across the product portfolio. That's really where the interplay between actuarial and 40|86 comes into play. We do think about which assets are going to be used to back those, kind of the capital intensity that I talked about, and really do that in partnership with his team.
Karen, congratulations for slide 45. I agree with you. Most companies won't do that, and they won't talk about it. Would you ever consider giving my analyst friends in the room some of the numbers behind that? I mean, if you sum those two together, value of new business and the customer lifetime value, you would get an embedded value, which would be a great way to test your DAC asset, right?
Maybe that's a question for Paul. Give Paul more work to do.
I think as of right now, we're just introducing those metrics. Those are things we'll probably consider for the future. Right now, not planning on releasing those.
Okay.
Any other questions? No.
All right. With that, I'll turn it over to Eric Johnson, our Chief Investment Officer.
Were you clapping for Karen or were you clapping for me? Probably. Okay. I'm Eric Johnson. I know an awful lot of you, and it's really nice to see you all again. It's been a long time, too long in many cases. Gary mentioned earlier how CNO benefits from the diversity of its businesses, which creates stability, and he described how the consumer sector really took off during the pandemic and drove unexpectedly high level of growth and profits. Our worksite is now bouncing back strong, we're seeing both premium and fee, you know, going up into the right, as Mike Byers said.
One thing he didn't mention is that underneath all that, you know, in my view of the company, the real engine is this $26 billion of assets that wakes up every morning and throws off these little income streams. It's pretty predictable. Even if I don't wake up, it wakes up. You know, we have a little more money every day than we had the day before. Scott sells stuff, and Mike sells stuff, then we have even more. This is a really good accretion of money and value, that produces a very stable earnings platform for the company. We wake up every day thinking about how we can augment and contribute to that accretion process.
That's really kind of how I think about my job. You know, looking at 2023, you know, is the glass half full or half empty? 3 data points I think about. You know, investment-grade corporates are about an inch from yielding less than cash for the first time in 40 years. I don't like that very much. Long-end credit spreads are flat to inverted 10s to 30s. I really don't like that very much, especially at this level of volatility in the markets. We saw it this morning. I really don't like the fact that inflation has begun to, longer-term inflation measures have begun to tick up in the last months.
What's happened, the early part of the year is that, you know, the whole thesis is kinda flipped positioning, you know, from everybody thinking the first half of the year was gonna be a sell-off with a second half rally and the Fed pausing or to easing. We had a January rally and, you know, who knows what happens in the second half? You know. It's been the last several weeks have really required, you know, adaptation on the fly. You know, that I think we're very good at, and that's what makes us different. We're very good at producing a consistent income stream no matter what the circumstances are and on the fly.
We do it with good disciplines, carefully calibrated risk assets. Next page. I see 2023 as a great opportunity for us to drive forward, increase income, and really, you know, show what's special about us, which is, I put it in one word, it's resilience. What's the one word for today? It's resilience. What does that mean? It means we need to make our income happen. Whether you believe that you're worried about sticky inflation and higher rates, and you're worried about more persistent hiking and, you know, higher terminal rate, or maybe you're worried about the Fed hiking too high in a world of slowing growth and slowing inflation, declining excess savings, weakened consumer credit, lower mortgage values, everything going on in the commercial mortgage world.
Whether you believe in state A or state B, I think we're really well set up to deal effectively with either and extract the income the company needs to wake up every morning, meet its promises to its policyholders, and to all of you. Why do I think that? You know, well, we have a very experienced team, and we'll get into that later, and we've shown it. Really what makes us different is that we're a pretty small company. We're pretty nimble. You know, we change our asset allocation model every day if we have to capture relative value. We don't do the same thing every day. We don't do the same thing every quarter. I know that for you analysts out there, that probably makes us harder to follow than some other companies. I'm sorry.
I apologize, but it's good for us, so we're gonna keep doing it. You'll just have to keep an eye on us and, you know, you'll see the story emerging. It's not the same wheel every quarter. Some companies buy triple B bonds all the time, and that's what they do. You know, some companies, you know, have an investment matrix that's set at the beginning of the year, and then they fill those buckets throughout the year. We don't do any of that. You know, we do what adds value when it adds value. It makes us more difficult to predict, and to put in your models, but the long-term results have really been good, and we're gonna keep doing it that way. One advantage we have relates to Karen's presentation. Which was a tough act to follow.
We have a very great diversity of product types, which go all the way from the shortest products to the longest products. For each of those products in each company, we have a customized segmented portfolio that has its own assets and capital intensity and earnings, pattern and earnings emergence and cash flows, and we model all that stuff out. Every, you know, that allows us to invest in every kind, any and every kind of thing at every point across the yield curve. We, so we get to make, you know, conscious choices. I think that's an advantage we have over many other companies. You know, another advantage we have is we take a very market-driven view of risk. It's about ratings, but not just.
It's about RBC and capital, but not just. It's about, you know, correlation and but not just. mostly it's about getting paid the right way for the amount of risk and the capital that we have to put up. you know, we're very conscientious about that. we, you know, we understand that the shareholder has to get the benefit of the bargain. you know, there are things that we would like to do sometimes that, you know, we don't do because it doesn't leave enough on the bottom, you know, return. we're very, very disciplined about that. You know, at the core of that discipline is a pretty rigorous stress testing regime.
Really at the end of that, at the bottom of that is how we understand the implications to risk and capital from different strategies. We apply numerous historical scenarios. There's 15, all of which I actually lived through. One thing I will tell you about an observation I had last week when, as I was putting some materials together, is that, as I look back over those 15 historical scenarios, you know, long-term capital, the Peso crisis, for those of you who remember that, the dot-com bust would be examples. The worse the results were, the more My memories are much greater of those events, right? Like the great financial crisis, I remember like it was yesterday. Every Sunday, another bank got shoved off the table by the Fed.
I really hated that. Others I barely remember. Like the Peso crisis didn't really leave much of a mark, and I don't remember it very much. This is a way that we learn to manage and observe how we feel, our asset allocation choices will affect capital of the company. I'll give you an example. We spent a lot of time recently studying the whole our commercial mortgage exposures. You know, you read the newspaper every day. You obviously read a lot about how challenged the office environment is. You walk around larger cities, and you can see it for yourself. You know, this is an area we keep a very close eye on.
You know, we feel very good about our allocation to commercial mortgage. We have a very low LCV portfolio. We have literally zero delinquencies or defaults. 89% of our CMBS portfolio are no loss designated bonds. You know, this is something we have spent a lot of time on hotspots. Later in the materials in the appendix, you'll see there's some individual pages on some hotspots and how we look at them and how we feel about them, and we're very satisfied that we have a very low risk approach to high risk asset areas. This serves us very well.
Of course, our biggest impact that you observe in the income statement is the net investment income that's allocated to the product lines. As I described earlier, pretty much every product has its own investment strategy in dollars and targets for yield and risk. The great thing that I've observed, we've observed recently and this is a stable and accretively growing activity. As Scott sells more and more and Mike sells more and more, more and more money comes in. If we can get that positive synergy going, which we've seen the last few quarters of more money coming in and book yields going up as interest rates go up, I mean, that can become a very significant source of incremental EPS, and something we're paying very close attention to.
You know, one of my major emphasis this year is I wanna see book yield go up every quarter this year. Actually, every month and every quarter this year. A second area that you probably pay a lot of attention to is net investment income, net allocated to products. Colloquially, you call that variable income. Your earnings estimates live and die to some degree by variable income. I know that's why you care about it so much. Well, we do too. The good news is that what you call variable income for us actually has a mix of parts which are typically non-correlated, and it tends to be less variable than variable. I'll give you a little bit of an answer key.
For example, of what you call in-variable, about 60% of that, 50%-60% is off of our alts portfolio. About 20% is off of just surplus, which tends to be invested in high quality fixed income. About 20% is coming off of our funding agreement and Federal Home Loan Bank funding programs. If you divide that up, roughly 40% of our variable income is actually very predictable. That's your answer key for those doing earnings estimates. We're very happy with what we've done in the last couple of years with the funding agreements and Federal Home Loan Bank. It's, as I said, a growing source of stable variable income.
We've had very good market receptivity and support, in both of these areas in raising the money, and people want to do it with us, and we do it well. We hope we're. We hope and believe we're a good counterparty. I think this has got some more legs in it. But it does require capital allocation, which means the arb has to be right, the return has to be right, and that's when we'll do it. We, for example, as you all know, didn't do anything in January in the funding agreement space because we couldn't make the returns work out right for us. There'll be another window, I guess, in March, and we'll have to wait and see, and then in June, and we'll wait and see.
We're not just piling up the money, irregardless of getting the shareholder his fair deal or her fair deal. We'd like to. We think we can continue to grow this footprint. We like it. It's good income, stay tuned. Back to the word for the day, resilience. Resilience of book yield, new money rate, net investment income, cash flows in the companies and up out to the holding company. Very good quality portfolio. Roughly 97% investment grade. Very modest limits on high-risk assets. As you'll know, we've, you know, done awful lot of surgery on our BBB and corporate high yield allocations over the last couple of years. We're very well-positioned for whatever the later part of 2023 or 2024 brings us.
It's not just up in quality, it's up in resiliency, it's up in granularity, it's up in assets that have multiple sources of protection and repayment, and an asset performance that, you know, just wakes up in the morning and takes over day after day, quarter after quarter. You know, Look back to January and, you know, it was all a big yield trade. People liked yields and bottom. I think that kind of bottomed out in February and, you know, everything's trading against volatility now, and I think it's gonna be this way from here on out for the year. I think for us, that'll be some great earnings opportunities. As I said, new money rate up, book yield up, net investment income up.
Hopefully we'll get a chance to continue to grow our funding agreement in Federal Home Loan Bank footprint and expand the spread of our existing footprint. We'll get two bites of that apple. Market conditions have also reopened for us, asset areas like agencies, some triple A securitized spaces that were not that exciting for us a year ago. Look back to where yields were two years ago, that have been good value over the last three to six months. I mean, you know, we're buying agencies in the very high-five s in December. You know? You can't do that trade today, I bet you we'll get another bite at that apple this year.
We like that as a AAA asset, you know, that matches up well against annuities, produces returns that are, you know, north of 20% on allocated capital for AAA. That's tremendous. Gary mentioned earlier how, you know, we're a profit-making company and profits come first, but at the end of the day, our business is about helping people. Let me tell you that ESG is a long-term commitment at CNO as part of helping people. You know, my team is doing its part, not 'cause we have to, but because we believe in it and we want to.
'Cause we think it's a good hygiene practice for only improving the quality of the investments that we make and giving us different ways to look at things that measure and monitor incremental risks that maybe 10 years ago you couldn't see. Now you can see them. You're making more informed choices. Hopefully, those more informed choices help lead to better performance. We think it's good for managing risk, improving returns, and at the end of the day, being part of what our company does to help people. On that note, you know, looking ahead, you've heard me, you've heard these points, I'll stop there and ask if you have any questions. Adam, would you like to...
Ryan.
Thanks. Ryan Krueger, KBW. I'm gonna ask a question that may be challenging to answer, but it does revolve around your variable income, but more particularly, the spread piece of from FHLB and FABN. You've seen a pretty substantial increase in the spread income there over the last year. Can you just give us any sense of how to think about how they may trend as we go forward? Yeah, I do. We've paid very careful attention to carefully managing the risks associated with these programs. We have a very tight asset liability matching and cash flow matching requirements. We have very high, actually very high asset quality requirements for that program as well.
You know, our target spreads, we're exceeding today our target spreads by a decent margin in that we think we can continue to stretch them out a little bit. I'm trying to be careful not to measure, quantify it, 'cause Paul doesn't really like us to give too much guidance. I, you know, I do think that there's a favorable in-increment yet there that we can achieve without doing any violence to our risk guidelines. Just to give you a frame of reference, I have two hands and 10 digits and, you know, something like 10 basis points will probably be achievable this year.
I think it's just one related follow-up is how sensitive is that income gonna be to the shape of the short end of the yield curve over time?
As I described earlier, we've done a very careful job from an asset liability management perspective. We're not looking at any volatile or significant cash flow mismatches in those programs. They've run by probably the tightest end of our ALM guidelines that we have in the company. You know, I do think rising floating rates has been a reasonably decent good guy for that. At the same time, you know, we also look at it from a DM perspective, i.e., you know, taking out the floating increment and, you know, my comments stand true from that perspective as well.
Thanks.
You're welcome.
Thanks. Erik Bass from Autonomous. One of the themes the last couple of years has been up in quality in the portfolio. I guess my question is: Do you view that as a tactical trade, given where spreads have been and your view on outlook, or is that more of a sort of a structural strategic move to kind of bring down the credit risk in the portfolio and something that you would expect to maintain longer term?
Eric, that's a good question, and the answer is both. I think at the time that we initiated that strategy, I thought it was good market tactics in terms of relative value. I also thought it would serve us well from an institutional capital strategy perspective. Those two things aligned, which made it easy for me to make a decision like that. I think those two things will at some point in the future, align in a different way.
When, you know, when I can look down and say, "Hey, there's a bright light that's telling me a, more of a risk on strategy will produce, with a due margin of safety, the returns that would justify it for our shareholders," I would have no qualms about doing that. I just, I look down, I don't see that today. If in other words, what you're asking me is it always up? Is it up in quality forever? It's up in quality as long as it's in the interest of our company. There'll come a day when, the smart trade is the reverse, and I think we'll be...
When that day comes, you know, we won't be shy about extracting the value that, you know, we should get.
Thanks.
You're welcome.
Yeah, just a quick follow-up on the VII. You mentioned 40% is non-variable of the VII. I was wondering, is that a number that you think is sustainable and you're targeting that kind of 40% number over time, or is that just kinda where it is now and it's difficult to predict?
You know, a couple. There are a lot of elements. That's actually a complicated question. The honest answer is that it's, you know, we do want the variable contribution or the unallocated contribution to have various and non-correlated components, because I think that's what's good for the company, and have some measure of predictability. I like nothing more than when alts are rocking off the charts and throwing off 30% and 40% returns like they were in 2019, 2021. That pushes up that relative contribution. I like years like that. When, you know, when alts are struggling and, you know, producing basically flat returns like the last quarter, I don't like that so much.
You know, that there is exposure to that cycle that informs your question. Yes, I do think it's important for the non-allocated contribution to have parts and pieces. You know, that sometimes bails me out of, you know, allocations that aren't working as well as others.
All right. Thank you very much.
Thank you very much.
We welcome Paul.
Hello, everyone.
That's our secret weapon, Eric Johnson. Tough, tough act to follow. I'm gonna focus my areas in three areas, my comments rather, in three areas. Our strong and stable earnings profile, our disciplined expense management, and our strong free cash flow coupled with disciplined capital management. I'll also provide an outlook, including specific guidance on our expense ratio, our excess cash flow to the holding company, and operating earnings per share, sadly not variable net investment income. As this slide illustrates, our diversified product suite produces strong and stable underlying insurance product margin and actually produced elevated reported margins throughout the pandemic as the favorable claims experience in our health products more than offset the adverse mortality in our life products, demonstrating the resilience of our business model.
Notably, the mix of earnings on a normalized basis from life, health, and annuities was remarkably stable and balanced over this time period, which I think is an important point of differentiation for our company and is really the basis for the strong and stable earnings. Our total pre-tax earnings on a normalized basis have also been quite stable, and our reported earnings have also been elevated, benefiting not only from the net favorable COVID impacts on our insurance product margins, but also from very strong results from the variable net investment income, particularly in 2020 and 2021, as noted by Eric in his comments. Our 2022 earnings, both reported and normalized, were a bit pressured versus 2021 by the lower variable NII and also by higher expenses.
Regarding expenses, we seek to be as efficient as possible in our run rate operating activities, while investing judiciously to grow the business. This has translated to an upward trend in our expenses and in our expense ratio in the last few years, driven by some fairly sizable investments in what I'd call compliance areas. These are sort of mandatory spend areas, things like cybersecurity, privacy policy, and the new Long-Duration Targeted Improvements accounting standard, coupled with discretionary targeted investments to grow the business that's been mostly focused on technology designed to enhance the back-office efficiency, or agent productivity or customer experience. In 2023, we will manage to an expense ratio of around 19%, not to exceed the 19.4% that we recorded in 2022.
The headcount reduction that we announced on our fourth quarter earnings call, through a voluntary retirement program will help in that regard, along with other actions we've taken, trade-offs that we've made. In addition to producing solid earnings, our business generates very strong free cash flow, both in absolute terms, measured on the margin by strong excess cash flow to the holding company, and also, in relative terms as a of operating income. Free cash flow was elevated in 2019, as capital was freed up in the wake of the long-term care reinsurance transaction we completed in 2018. It was elevated again in 2020 and 2021 due to the net favorable COVID impacts and elevated returns from alternative investments.
2022 was a bit closer to more of a normalized run rate, with a free cash flow conversion of 60%, which puts us right around the median for the peer group. In 2023, we expect excess cash flow to the holding company in the range of $170 million-$200 million. Net of ordinary quarterly dividends, that suggests share repurchase capacity in the range of $100 million-$130 million, which we expect to be more weighted to the back half of the year. We define excess capital as capital above the targeted 375% consolidated RBC ratio and the 150 minimum hold co liquidity.
We'll continue to manage those targets to those targets while erring to the plus side in the near term, just given the potential for a recession and the impacts that that may have. We had maintained higher RBC and hold co liquidity levels in 2020 in the context of all the uncertainty related to the pandemic. As that uncertainty waned and as the resilience of our business model proved itself, we began to manage closer to our target levels in late 2021 and into 2022. We also, in early 2022, reduced our target RBC from a range of 375 to 400 down to a target of 375, which we think is appropriate in the context of our earnings and our risk profile.
I think worth noting that in early 2022, AM Best upgraded our financial strength rating from A- to A, and more recently, coming out of committee, affirmed that rating with a stable outlook. In late 2022, Fitch raised the outlook from stable to positive, continuing the favorable trend in our ratings profile. We have consistently returned excess capital to shareholders through a combination of ordinary quarterly dividends and share repurchases. We've increased the dividend annually since 2013. Share repurchase levels were a bit elevated from 2019 to 2022, driven by the elevated levels of free cash flow that I just referenced.
We also have occasionally used excess capital to fund targeted acquisitions or bolt-on size acquisitions where there has been a compelling strategic and financial rationale. Our intention with excess capital has been to put it to the highest and best use. That's sort of been our mantra. I think you've heard that from us over the years. I think our actions have been consistent with that intent. We are currently seeking approval for the formation of a captive Bermuda reinsurance company to which we would cede a portion of the in-force and the majority of our new fixed indexed annuity business. We do not anticipate assuming any third-party business or seeking any third-party capital.
The rationale, as you'd expect, is to improve, to increase, to optimize the capital efficiency of the business while retaining the economic benefits and in the process, putting ourselves on a level playing field with the increasing number of companies who have either already adopted this structure or are in the process of doing so. Subject to the required regulatory approval, we're in dialogue with regulators as we speak, that's a work in process. We expect to be in a position to put this structure in place in the third quarter of this year. The expected $170 million-$200 million of excess cash flow to the holding company that I referenced earlier is before consideration of the impact that this structure may have.
While we're not ready to quantify that impact, mostly because we're still working out how much of the in-force we would cede, and also because we don't wanna get ahead of the regulators, but I think it's, you know, fair for you to assume that we wouldn't go down this path and go through all the work to put this structure in place if we didn't think that it would have a meaningful, you know, favorable impact on the capital efficiency of the business. As summarized on this slide, we are providing some incremental LDTI disclosures, including point estimates of the balance sheet impact of transition, which are inside the ranges that we had provided previously.
We're also providing ranges of earnings impacts in 2021 and 2022, and on sort of estimates for 2023, which are consistent with the directional impacts that we had provided previously. In addition, concurrent with adopting LDTI, we are refining the method that we use to define non-operating income for the FIA business to better capture the non-operating impacts on that business. This will move what we had previously disclosed as the market volatility impacts on the FIA business. We had those in each quarter of 2022, totaling about $62 million. That would be moved under this refined methodology out of operating income and into non-operating income. As a result, the reported operating income for FIAs will be much more stable, both historically, particularly in 2022, and also going forward.
We do believe that this refined method is consistent with the method that other companies have used historically. In terms of outlook, in addition to the expense ratio and the excess cash flow to the holding company that I referenced, we're also providing guidance on earnings per share in the range of $2.80-$3.00 per share. That's under LDTI and excluding any significant items that we may call out as we move through the year. Lastly, looking forward more generally, we think that we're well positioned to grow the business profitably, continuing to generate strong free cash flow, and exercising discipline with respect to expense and capital management. With that, happy to take any questions.
Erik Bass with Autonomous. I guess first, just on the Bermuda captive and maybe just tying it together, I think when you talked about the 2022 free cash flow conversion of 60% being a more normal level, just to be clear, that's before any benefits from the reinsurance strategy. You would expect that to be higher, the amount TBD going forward. Is that the right?
Yes. I mean, You can imagine that some capital would be freed up, and so that might create, you know, a spike in excess cash flow. Then going forward with ceding the new business, you know, all else equal, you'd have a bit of a lift as well.
Got it. Then for LDTI, on the margin benefit, can you help us think about all sort of where that shows up by product? Then going forward, should there be more stability in the margins on a quarterly basis for most of the products?
Yes, there will be more stability. The biggest impact is from DAC, just being, you know, more spread out. The other thing I'd call out is, as you saw on the slide, the lift from LDTI is greater in 2022 than we're expecting it to be in 2023.
Got it. Maybe can you just explain that last point on the amounts, made in 2022? Was it because of just where markets were relative to expectations? Or is that a grade down that will continue going forward?
There's a bit of grading down, but it's also sort of e-enhanced, if you will, in 2021 and 2022. The reason for that is the retained earnings impact at on the balance sheet transition gets sort of earned out over those first two years because of favorable claims experience during that period. That hits mostly in 2021 and 2022, and you don't see it as much in 2023. That's the big driver.
Thanks.
Ryan Krueger, KBW. I guess on you've had favorable health claims for ever since the pandemic started. Seems like it is anticipating. In your guidance, is your expectation that we'd continue to have this level of favorable claims experience?
Yeah. You know, as we've been saying for the last three years, who knows? A lot of it has come back, though. You know, our Med Supp claims experience has returned largely to pre-COVID. You saw the benefit from COVID that we disclose each quarter really diminished in the back half of last year. I think, you know, slowly across the products you end up back to something like that. The other thing I'd say is under LDTI it gets, you know, that volatility gets smoothed out more.
Got it. One more on free cash flow. The $170 million-$200 million, I think you said that would be somewhat more back and weighted.
Yeah, it's not so much the free cash flow.
Oh, okay.
back and weighted, you know, that translates to about $100-$130 of what I'll call share repurchase capacity. It's, you know, it's excess cash and we can deploy it to the highest and best use. Presuming it was all share repurchase, it would be more back and loaded mostly because we're erring to the plus side of those targets in the first half of the year, just given the risk of recession.
Got it. Is it fair to say that the $170 million-$200 million is a pretty good run rate, you know, beyond 2023 as well, but then you'll get uplift from the new Bermuda captive?
Yes, I think that's fair.
Okay. Thank you.
Other questions? No.
Hi. Thanks. How will the captive impact your RBC guidance of 375?
Yeah, it's a good question. In the U.S., we'll continue to target a 375. In Bermuda, we'll target a 175 BSCR. You know, going forward, once we adopt that structure, you know, we would speak to those two metrics. The Bermuda, you know, for what it's worth, the Bermuda company will be a sub of the company that owns the U.S. company. You know, dividends from Bermuda would come up to CDOC, the acronym, and then up the chain. Anything else? All right. With that, I'll welcome Gary back to the stage for some closing remarks, and then we'll have some sort of a team Q&A if there are any questions remaining. Thank you.
Good job.
Thank you.
I am the final impediment between all of you and cocktail hour. I'd just like to cover a few things as we wrap up here. The first thing, there wasn't really a good place for us to cover this, and I just wanted to acknowledge something. Like so many other companies in this industry and in others, we recognize that the way business is conducted in America is changing. The way consumers expect to interact with you, both at a point of sales as well as service is changing. I just wanna assure you that there are a number of initiatives we have in flight within CNO, whether it has to do with AI or robotic processes or cloud computing.
There's a number of things we're doing in recognition of the fact that the way we interact with our consumers and support our agents and so on, has to change. Again, this wasn't the time or the place to necessarily go into those details, but it felt missing not to at least acknowledge that. If you have specific questions, I'm happy to punt all of them to our CIO who happens to be here today. We're happy to answer them at the end of this. I also want to share with you perspective on at least how I've thought about our growth momentum. For those of you that have been following the company for a while, you'll recall that prior to 2017, we spent a lot of energy and money de-risking the company. Most notably our long-term care transaction.
That was really a big point of focus. All of that work done by my predecessors and many, many people, some who are still with the company and some who have since left. All of that hard work was done in order to position us to be able to start to grow again. One of the things I wanna make sure that all of you remember, if you look at what we were starting to do right before COVID. Right before COVID hit, we had posted six consecutive quarters of growth. Now obviously, the pandemic threw everything out the window and you've seen a little bit of that in our financial results, and we had to focus on other things like everybody else in America. But we're in a position now to really accelerate that growth again.
If you look at what we're doing with our agents, with our products, with our people, with our distribution muscle, there's a tremendous opportunity, and it's building, and we're doing it in a marketplace that's growing, meaning our consumers, the needs they have are growing. We think there's a tremendous opportunity here to really pick that trend back up. We acknowledge that we had to put some of those efforts on pause, like everybody else in America. Things changed when the pandemic hit. We think there's a substantial opportunity here. As I start to wrap us up, there's a handful of things I wanna make sure I remind you of in terms of thinking about an investment in CNO. First, we focus exclusively on the middle market.
It's an underserved population more than most populations, they need these products and they need this service. Number two, you've heard my colleagues talk about different types of growth initiatives, whether those growth initiatives have to do with how we're gonna optimize our investment income, think Eric Johnson. How we're gonna grow our worksite business, think what Mike's doing. How we're gonna continue to grow the consumer business, think what Scott's doing. We have a number of different growth initiatives in place that are showing some traction, and again, if you think about what we were doing before COVID and what we've seen in recent quarters, I think there's some credibility there. Third, if you think about what's happening with the middle market, there's still 10,000 of these folks retiring every day. There's still fewer companies that offer pensions.
There's still growing healthcare cost inflation. There are still needs for these folks to have the products and services that we provide, and those needs are growing. It's not a problem the government can solve. The government is not in a position to make benefits richer. This will have to be done by the private sector. Fourth, we have a very solid balance sheet, strong cash flows, and we're taking steps to continue to improve those. Think our Bermuda captive, think what we're doing with our investments. Fifth, the distribution strategy we have and the ability to integrate the direct-to-consumer touchpoints with actual agents that can go into the households, that is unparalleled.
You will not find another company out there that's got the same blend of assets and the ability to generate leads and potential opportunities and hand them off real time in an effective way to an agent that can go in and then talk about manufactured or distributed products. You won't find that elsewhere. I'm embarrassed to admit there's one more icon that should have been on here. I had a gentleman approach me during the break, and I wanna share with you. He said a couple of very nice things, but there's one thing in particular he said that I wish I would've thought of myself and captured here.
Again, he said a bunch of very nice things, and he said, "You have a mid-cap company, but the caliber of the people running it are like large-cap folks." I couldn't agree more with this gentleman. I think my colleagues do a fantastic job. You heard from about half of my senior team, and as good as they are, I promise you that the folks that are doing the work every day that are back in Carmel or Chicago or wherever right now and doing the actual really hard work, they're even better. They're the people that are so dedicated to this is a very personal thing for all of the leaders and the employees here, and that really should have been on here. That's probably the most important reason to invest in CNO.
Now, as we open it up for questions, there's one last slide I'd like to have up in the background, and I wanna just position this, I think, in a very direct way. I think if you look at the performance of the stock over the last few years, what I would leave you with is a very simple observation. I'm extremely pleased with the progress, but no one on my team is satisfied with these results. We can do better. We appreciate your attendance today. We appreciate your support, and with that, I'll open it up for any last questions.
Hi, Erik Bass. Gary, wanted to build on your last comment or your comments about growth being the focus, and you give us the scorecard each quarter to sort of track how you're building with sales and agents' growth. How should we think that, about that building over time and ultimately translating into bottom line growth as you look out over the next couple of years? I realize there's been a lot of volatility in things the past couple of years that have masked things, as you think going forward, if we're here in three years, what would you view as kind of being a success?
Operating leverage. The bottom line has to grow faster than the top line. That's the only measure of success that will really count three or four years from now. I feel like we were on a reasonable trajectory to do just that right before the pandemic hit, and then I think we retrenched for all the right reasons. All those decisions we made, whether it was the LTC deal or the other things we focused on during the pandemic, I wouldn't change any of them. Now it's time to deliver operating leverage. The bottom line has to grow faster than the top line.
Got it. I guess, realizing you don't want to give any specific guidance, but how do you see the top line building too? 'Cause clearly we're seeing the sales, which would be a leading indicator of premiums and account values, but is there a way to think about how that should build over the next couple of years?
Are you looking for a numerical estimate when you say is there a way to think about...? I'm trying to make sure I understand the question before I decide whether or not to reply.
Well, if you're willing to give a numerical-
I'm not.
Direction.
Look, I think you're gonna see a couple of things happen and most of them are tailwinds. There's a couple of headwinds. Lemme start with what's gonna happen with the headwinds. If you take a look at what's happened with our Medicare Supplement block, you've seen that continue to shrink, and that's primarily because there's a secular shift happening with what the American consumer wants. They want more Medicare Advantage. That represents a pretty substantial headwind for us, and it's gonna take time for us to continue to build the volume in the Medicare Advantage, and we're doing some other things with Med Supp. You saw us do that in 2022, and I'm really pleased with the sales results we had. It's the first time we've really grown that block in quite some time.
I think that's a very substantial headwind. Where I think you're gonna see growth, I think you're gonna continue to see annuity growth. I think you're gonna continue to see Med Advantage growth, which is gonna translate to fee revenue. I think you're gonna see substantial growth in our worksite business. We just got these assets together. I mean, we frankly we timed our acquisitions pretty unfortunately, 'cause they hit right about the time of COVID, and that really slowed us down. I think we're in a position now to really bring these assets together and show tremendous growth. I think those are gonna be the pockets of growth. How quickly each one of those comes on, I think time will tell. We have some beliefs about what's gonna happen.
The only other comment I would make, for those of you... I've been in the chair for five years now. This is the first time we've given, you know, I know many of you want more guidance, but if you look at the level of guidance we've provided, this is way more than we have. I hope what you take away from that is, okay, this team's getting comfortable with what their visibility is on some of these things. And we think there's a lot of really good things coming.
Thanks.
All right. We appreciate the support. Thank you.
Yes. Thank you.