Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group First Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Adam Auvil, you may begin your conference.
Good morning. Thank you for joining us on CNO Financial Group's First Quarter 2017 Earnings Conference Call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer, Gary Bhojwani, President, and Erik Helding, Chief Financial Officer. Following the presentation, we will also have several other business leaders available for the question and answer period. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the media section of our website at www.cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website on May 3rd.
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 for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we'll be making performance comparisons, unless otherwise specified, any comparisons made will be referring to changes between first quarter 2016 and first quarter 2017. With that, I'll turn the call over to Ed.
Thanks, Adam. Good morning, everyone. We continued our strong performance in the first quarter of 2017. CNO's diversified business model, coupled with disciplined execution of our strategy, resulted in solid financial performance and growth across most key metrics. Growth highlights for the quarter include a 5% increase in collected premiums on continued strong annuity sales and solid customer retention. Operating earnings per share increased 26%, driven by favorable underwriting margins and investment income. We again generated considerable net free cash flow in the quarter and returned $57 million to shareholders after resuming our share repurchase program. We continue to be an industry leader in terms of returning capital to shareholders. Turning to slide six. We have a diversified business model that broadly reaches and serves the middle-income market in the U.S. That diversification and being a market-focused company means our success cannot be measured by one or two metrics.
A basket of metrics best depicts our business growth, customer reach, and retention. Our growth scorecard includes the most pertinent metrics to help assess the growth of our business from our diversified product lines and services delivered through our various channels. A more granular view of the growth scorecard can be found in the appendix. With that, I'll now turn it over to Gary to discuss our segment results. Gary?
Thanks, Ed. Before turning to the segment results, I would like to make a few comments on the recently announced changes to our executive leadership team and provide an update regarding our implementation of the U.S. Department of Labor's Fiduciary Rule. On the leadership changes, Mike Heard was appointed president of Washington National, Joel Schwartz was appointed president of Colonial Penn, and Gerardo Monroy was appointed chief marketing officer. These moves were all internal promotions and demonstrate the commitment CNO has to developing and retaining strong talent. Additionally, these changes are designed to accelerate the company's strategic growth, further strengthen the enterprise, and position the organization for continued success. Regarding CNO's implementation status as it pertains to the Fiduciary Rule, our timeline shifted commensurate with the delayed implementation date. However, our core strategy remains, with no material deviations expected until changes, if any, are definitive.
Moving to slide seven and our Bankers Life results. Total collected premium grew 4%, driven primarily by annuities up 10%, and continued the growth in this product line that we've experienced in recent quarters. Annuity account values increased 4% on recent sales momentum. Health new annualized premium increased 10%, driven by growth in our Medicare Supplement and Short-Term Care product lines. New annualized premium from life products decreased 18%. Trailing four quarter third-party fee income, primarily derived from the sale of Medicare Advantage plans, increased 6%. Average producing agents decreased 6%, primarily due to fewer first-year agents. As mentioned last quarter, we continue to evaluate all aspects of our agent recruiting model as we shift to more targeted recruiting of new agents and the retention and development of higher-producing, longer-tenured agents.
Additionally, while not yet material to our overall results, we continue to see customer assets and registered advisors growth in our BD and RIA businesses. Turning to Washington National. Total collected premiums were up 5%, with a 6% increase in supplemental health, partially offset by the continued runoff of the closed Medicare Supplement block. First-year collected premiums were up 2%, reflecting increased sales over the past two quarters.
Total new annualized premium was up 5%, driven by a record first quarter at PMA. Worksite new annualized premium was up 2% and benefited from growth in our PMA producing agent count and higher life sales, resulting from the introduction of a new living benefits rider on our UL product. Individual NAP was up 7%, driven by momentum resulting from changes to the PMA field leadership structure implemented in the fourth quarter of 2016. New agent recruiting at PMA contributed to an increase of 6% in the average producing agent count in the quarter. Moving on to slide nine into Colonial Penn. Total collected premiums were up 6% due to growth in the block and stable persistency. First-year collected premiums were down 2% due to lower recent sales. New annualized premium was down 10% as increased competition for television advertising has not abated in the post-election period.
This has resulted in limited inventory of cost-effective TV spots, leading to reduced marketing spend and lower sales in the quarter. We remain disciplined and opportunistic with our marketing spend and will invest as attractive advertising buying opportunities become available. Partially offsetting this decline is our continued progress in diversifying lead generation away from non-deferrable television advertising towards deferrable web, digital, and direct marketing activities. All of these considerations are reflected in the full-year EBIT guidance range of $5 million to $15 million. I'll now turn the call over to Erik to discuss our financial results. Erik?
Thanks, Gary. CNO posted another strong quarter on the earnings and capital fronts. We reported net income of $0.36 per share, up 44% from the prior year. Operating earnings per share were $0.34, up 26% from the prior year. First quarter 2017 results were impacted by favorable underwriting margins and investment results, partially offset by higher expenses due to a true-up of our guarantee fund assessment liability related to the Penn Treaty insolvency proceedings. Excluding significant items, net operating earnings per share was $0.35, up 35% from the prior year, and operating return on equity was 8.8%. Turning to slide 11, our segment results, CNO posted combined EBIT, excluding significant items, of just over $107 million in the quarter, up 27% from the prior year.
Results in the quarter reflect favorable annuity, long-term care, and Medicare Supplement margins at Bankers Life, lower supplemental health margins at Washington National, favorable mortality, and lower direct marketing spend at Colonial Penn, and higher corporate segment expenses that were partially offset by higher investment income. Lastly, our closed block LTC business reported approximately breakeven earnings, in line with our expectations. Turning to slide 12 on our key health benefit ratios. Bankers Life Medicare Supplement benefit ratio was 70% in the quarter, slightly better than expectations due to favorable incurred claims. We continue to expect this ratio to be in the 71%-74% range during 2017. Bankers Life long-term care interest adjusted benefit ratio, excluding the impact of rate increases, was 74.2%, better than expectations due to lower persistency and favorable incurred claims.
It is also worth noting that the first quarter 2017 interest-adjusted benefit ratio reflects no additional future loss reserve accrual as a result of the increased loss recognition testing margins we reported in the fourth quarter of 2016. We continue to expect this ratio to be in the 77%-82% range during 2017. Washington National supplemental health interest adjusted benefit ratio was 60.6%, up compared to the prior year due to higher incurred claims, but in line with our expectations. We continue to expect this ratio to be in the 58%-61% range during 2017. Turning to slide 13 and our investment results for the quarter. We put money to work at 5.23%, somewhat higher than the previous quarter, largely related to duration extension trades to improve our ALM matches in lines of business with longer duration liabilities.
Call prepayment activity was muted in the quarter due to the relatively lower levels of refinancing activity. We experienced solid alternative investment results as we benefited from allocation to income-based strategies and higher overall equity markets. Realized gains, losses, and impairments continue to be moderate, and we continue to make progress in repositioning the recaptured assets. As of March 31st, we had approximately $88 million of assets remaining, down from $121 million at year-end. Turning to slide 14 on our capital position. Estimated consolidated risk-based capital was 446%, down from year-end, but within our targeted range. Results reflect approximately $70 million of statutory income, offset by dividends to the holding company of $128 million. Leverage was steady at 19.1%. Book value per diluted share was $22.31, up slightly from year-end and up almost 10% on a year-over-year basis.
Holding company cash and investments was $314 million, up from $264 million at year-end, due primarily to the previously mentioned insurance subsidiary dividends. We repurchased $43 million of common stock in the quarter, a somewhat lower level reflecting the resumption of the buyback program in mid-February and a stock price that was elevated for much of the second half of the first quarter. For 2017, we continue to expect to repurchase $200 million-$275 million of common stock absent compelling alternatives. We are price sensitive when it comes to repurchasing our stock, and the absolute level of repurchases and where we end up within the range will depend on the share price as we make our way through the year. With that, I'll turn the call back over to Ed.
Thanks, Erik. Focus on the middle income market, coupled with distribution channels to reach this market and diversified products and services to meet our customers' needs remains CNO's sustainable competitive advantage. Our first quarter results demonstrate again the strength of our business model and franchise. I'm pleased to announce that we will be hosting an investor day on June 5th at the New York Stock Exchange. Invitations, including additional event details, will be distributed shortly. Key themes are expected to include a discussion on the benefits of our diversified product and distribution business model, insights into how we plan to further grow our customer and product base, plans to leverage data to drive profitable growth across the enterprise, and thoughts around our Long-Term Care business and related risk reduction considerations. We hope to see all of you there.
With that, we'll now open it up to questions. Operator?
Thank you. Just as a reminder, if you would like to ask a question, please press star and then the number one on your telephone keypad. Your first question comes from Randy Binner with FBR & Co..
Hey, good morning. Thank you. I wanted to ask Gary a question, and kind of dig a little bit more into the more targeted effort around recruiting and training, retaining agents. It's really the big remaining lever to pull, I think, for the company. I appreciate all the commentary, but maybe a little more detail just on kind of what specific initiatives are going on, when you think you're going to kind of see some of that pay off with some better metrics on the scorecard.
Sure. Randy, thanks for the question. Let me maybe start with a high level comment and then give you a little bit more color. First of all, in general, what we're trying to do is evolve to a model where the number of agents that we bring in every year starts to go down over time, but the percent that we retain and the percent of those agents that go on to achieve what we refer to as successful new agent status, we have certain measures around that, those percentages go up. We envision longer term having the front door go down, but the retention and the success rate percentages go up. We want to do that through a few different ways.
Number one, we have a number of targeted pilots that are going on right now where we're proactively recruiting potential agents or prospective agents that meet certain criteria, that have certain other professional experience in their past or certain other criteria. We're proactively recruiting those folks. We're testing which of those profiles deliver the best conversion rates to successful new agent status. The other big thing that we're doing for the agents that we do have come on board and that achieve that successful new agent status after the first 90 days, there are other changes we can make in terms of compensation and retention and other types of measurements to see if we can increase those percentages of retention over the longer term. There's a number of different things that we have in the mix right now.
I would tell you that if I look at the aggregate numbers on where we're at right now, it's far, far too early to call it a trend or call it sustainable. I'm very pleased with what I see in the early results, because we are finding levers that we believe will work in the future for us. Now, again, these pilots are still too small of a scale for us to declare victory or to talk a lot about them. Frankly, there's a competitive dynamic to this, too. I don't necessarily want to talk about everything we're doing and share all the different ways we're trying to approach it.
The broad theory, to come back where I started, is to reduce the front door, if you will, reduce the raw number of brand new agents we bring on every year, and increase the success percentages and increase the retention.
That's helpful. I guess a follow-up there is I'm imagining it is more difficult to kind of bring folks in the door for this type of work, given the strong job market. Is that a challenge still? I mean, that's kind of an age-old challenge with selling life insurance. Is that still a challenge, and how can you overcome it through these programs?
I've been in the insurance business for 25 years, I haven't yet encountered an environment where people are knocking on our door dying to become agents.
Right.
I think it's always there. There's no question about that. I will tell you, this is part of the story that we tell, if you look at what's happening broadly in America, you look at the needs that the middle market has, you look at the opportunity to go out and help people and make a difference, there's a compelling story to be told there. Are people knocking on our door to get in and do this for a living? Absolutely not. We believe through adjusting the targeted way we recruit folks and refining the ways in which we compensate and measure them, we think we can find the right folks that want to do this for a living.
We happen to think there's a great living to be made, we also believe it's a noble profession where we go out and help people.
All right. That's really helpful. Best of luck on that. Thanks.
Your next question comes from Erik Bass with Autonomous Research.
Hi. Thank you. Gary, I also had a question for you. I was just hoping you could expand on whether you expect any material new initiatives or shift in strategy at either of those businesses as a result.
Yeah, sure. I think if we look forward in our business, what we really see happening in the future, we see maintaining our three distinct brands. We see an opportunity in these three brands to sell quite a few more products in each of them.
Right now, our Bankers Life brand, which is our captive or career channel brand, has the access to the single largest portfolio of products. Longer term, when we think about Colonial Penn as our direct-to-consumer player, and we think about Washington National as our independent channel player and wholly-owned distribution player, we see an opportunity for those two brands to continue to offer more products and help more of the middle market. Really, what the core of that strategy is about then, it's about us not necessarily trying to force our middle-market consumers to choose whether they want to work direct with the insurer, or they want to work through an independent agent, or they want to work with a captive agent.
We want them to be able to choose however they want to work to satisfy their retirement and insurance needs, we want to be able to meet those needs through any of those three channels. Longer term, it's very easy to say it'll take several years to build out the products, to build out the distribution strategies, to build out the systems. This will be a long-term project, strategically, we see a tremendous opportunity here for all three of our brands to continue to coexist, to have much more commonality in terms of the types of products and services they offer, so that those middle-market consumers can access us in whatever way they choose.
Thank you. That's helpful. Then on Bankers, you provide a lot of different growth metrics, I think the new scorecard is helpful. I was just hoping you could provide some sense of maybe benchmarks or targets that you're looking at to gauge whether the business is on track in meeting your growth objectives.
Yeah. We, of course, like every other organization, we have a budget. We have targets that we look at. We compare ourselves to other competitors. There's a lot of different work that we do internally. I would tell you, at a high level, we know we have a lot yet to do, right? Throughout CNO, there's a lot of things we want to continue to grow and to improve. When I look at the three organizations high level, I look at the type of production they've been able to deliver and the type of earnings they've been able to deliver, I look at CNO as a whole, particularly in a sub 2% GDP world, we feel pretty good about where we're going.
We feel very good, if I use Bankers as an example, of the receptivity for the consumers to our broker-dealer, the receptivity to our annuity products. We like the idea that they're willing to look at us at Bankers to provide other types of insurance and planning services, as evidenced by purchasing annuities and working with our broker-dealer. We see an opportunity to do many of those same types of things within Colonial Penn and Washington National. The short answer to your question is, yes, we have a number of different benchmarks we look at internally and externally. So far we're not satisfied, we are pleased with the progress we're seeing.
Got it. I expect maybe at Investor Day, you would share more of what those metrics may be, just so that sort of we can evaluate from the outside as well.
Yeah, Erik, we absolutely will be happy to have further discussion with you, and hopefully at Investor Day we'll get a chance to ask you how you gauge us and what you look at and what you compare us to.
Perfect. Thank you.
Your next question comes from Sean Dargan with Wells Fargo Securities.
Hi. It looks like in Bankers, your results benefited from some healthy spreads. I know you called out the alternative performance, is this something that will be sustainable to some degree going forward?
Hey, Sean, this is Erik. I think from a spread perspective, yes. The favorability that we saw on a year-over-year basis, I think is largely sustainable. Part of the improvement in margins was just general growth in the block. We do think that is sustainable, assuming we don't see a drop-off in persistency, and that sales sort of remain at their current level. Yeah, I think to some extent, the annuity favorability will continue. On the other lines of business, obviously for Medicare Supplement and Long-Term Care, we were favorable to our expectations, favorable to the benefit ratio guidance that we provided, we did not update guidance or change guidance for the remainder of the year. I think that will revert back to kind of the higher elevated benefit ratios that we guided to.
Great. Just one more. I was wondering if you had any update on potential counterparty appetite to come up with a solution of at least part of the Bankers Life LTC block. Has there been any shift out there in the environment over the last quarter?
Sean, this is Ed. Short answer, no shift. That's not a negative answer. There continues to be we believe strong viable interest. We hopefully, understandably so, can't comment any further about those players and where we are in those discussions. There definitely are qualified players, longer-standing, higher-rated reinsurers, and counterparties that have interest.
Okay, great. Thank you.
Your next question comes from Ryan Krueger with KBW.
Hi. Good morning. I had a question on technology. It's become an increased point of discussion within the industry as the industry tries to improve customer-facing technology. I guess, just curious on how you feel CNO is positioned there at this point.
Sure. Ryan, thanks for the question. This is Gary. It's a broad question, I'm going to give you a few different bits and pieces to try and respond to it. First of all, if you think about our Colonial Penn business model and the accessibility that our consumers have and the things we try and do over the web, I think we have something that's, I would say, reasonably competitive from a technology standpoint with a direct-to-consumer model. There are other enhancements we're looking at, particularly as we continue to shift away from the more expensive non-deferrable television advertising to other web-based deferrable expenditures and businesses. I think there's some good things we're doing there. I would say we're at the front to early end of it. A couple of other examples that I can give you.
If we look at what's happening at Washington National and our PMA business in particular, we have a variety of technology solutions that we've deployed in the last 12 months or so. Our work site technology and other things where our agents and our producers, when they're out meeting with prospective buyers, can actually provide certain types of information, collect certain types of information, and so on. There, too, I would describe our consumer-facing technology efforts kind of at the early stages, but I'm encouraged by the progress. Within Bankers, we have similar types of technology. We don't yet have them as accessible in front of the consumer. We have a number of what we refer to internally as insurance desk technologies. We would like them to be more portable and more out there on an iPad and so on. We're working towards those things.
On the whole, I would say that our three businesses are at the front end of a variety of different technologies. I don't feel like we're particularly ahead in any area. I don't feel like we're particularly behind. We have a number of different examples in each of the three businesses. Internally, we've got a number of different things that we've done over the last several years, everything ranging from a finance transformation, where we spent considerable time and money building out a unified general ledger system and so on. There's a lot of different investments internally that, frankly, other folks are probably better qualified to speak to than I am. Those are the high-level things in terms of consumer facing.
Okay, thanks. Appreciate it. On Colonial Penn, if the cost of advertising remains high, is this a situation where you just have to accept lower sales activity, or are there other alternatives that you can pursue outside of that?
Yeah, I would want to emphasize a couple of things. First of all, if we remember that when we talk about the advertising, we're strictly talking about the television advertising. Let's remember that we still do web, we still do mail, we still do a number of other things. Those efforts continue unabated, and if anything, we're trying to accelerate those where we can, and we expect to see future success. This won't be a one or two quarter thing. This will be a two or three year thing. As we broaden Colonial Penn's product portfolio, consistent with my other comments, we would expect to see other success there. I wouldn't want us to get too focused on the television advertising and the strain that puts on the business model.
The other point I would make is even if the television advertising was available today at levels that we felt were more reasonable, we still would want to be pressing these other models because we think as our consumers continue to evolve, it's important to do so. Frankly, there's just a simple economic issue with the television advertising not being deferrable. We have lots of different reasons to want to continue to accelerate those efforts. As to the substance of your question, if the TV ads rate stayed this way, can you expect this trend to consider? I would say in the short term, perhaps. As we build out the web and the digital and the product offerings and other things, I wouldn't want to take this quarter and extrapolate it out for six or eight.
If you want to extrapolate it out for one or two based on this level of TV advertising cost, perhaps, I wouldn't go further beyond that because I expect us to get traction in those other things we're doing to offset the television advertising efforts.
All right, great. Thanks a lot for the answers.
Your next question comes from Daniel Bergman with Citi.
Hi, good morning. Life insurance sales have seemed like they were the main driver of the NAP decline at Bankers. Given that that product has seen falling sales for the past year or two, I was hoping you could elaborate on what you're seeing in that product line and kind of the outlook going forward.
Sure. Let me start with the conclusion. We were not satisfied with the level of our life insurance premiums. We think we should have done better. Let's just start there, and we have a number of efforts going on internally to stem that tide. We have seen a decline, but we believe it's bottoming out. Against that, I would make a few other comments. Remember that a core part of our strategy is to serve the middle market and really to be product agnostic. If they want to buy life insurance from us or if they want to buy annuities from us or if they want to buy medsup from us, we're happy to sell them any of those.
We'd prefer to sell all of them, but we're happy to sell any of them, and our goal is really to serve the market and not push one particular product over the other. I personally am not surprised to see a growing trend. Again, if you remember, we're focused on the middle market. These are folks, the vast majority have a net worth below a quarter million dollars. The biggest concern these folks have, particularly those that are approaching or in retirement age, is not a mortality concern. Rather, they have an accumulation in income and a longevity concern. I would expect to continue to see accelerated sales on things like annuities, on things like medsup, on things like our Short-Term Care products. Those are completely consistent with our strategy. They're completely consistent with the needs of our marketplace.
I want to emphasize again, we expect our field force to do better than they have done with the life insurance. There are a number of different initiatives we have underway to deal with that. I'm not surprised at a higher level simply because the consumer demographics are changing. I would also then come back to one of the first comments I made. We really like the idea of longer term having Washington, having Colonial Penn have access to these other products as well so that we can deploy them through those channels.
All right, great. That's very helpful. Maybe just shifting gears, I believe you mentioned earlier how the board was sensitive to CNO's stock price in terms of the pace of share purchases. Just given the buybacks have been really the main source of capital deployment in recent years, if the stock price remains high going forward, what types of alternatives should we be thinking about in terms of your capital deployment mix? Is M&A a possibility? Really, any thoughts on how you guys are thinking about that would be much appreciated.
Yeah. Dan, this is Ed. I'll start out. Certainly, M&A continues to be an option for capital deployment. In that, we've talked about it previously, it's unchanged that there are certain things that screen higher in that, such as distribution opportunities or entities as well as asset management kinds of properties that can also leverage our capabilities or bring additional products potentially to our broker-dealer and RIA. That's not to say we don't and won't look at other things, but those are highest on the M&A front. There are certainly other potential uses, I'll let Erik comment on those.
Yeah. Dan, I think, the way we think about the buyback program is, to the extent the stock trades closer to or above book value, then we tend to buy back less. Under a situation like that, relative to our 2017 repurchase guidance, I would expect to probably come in towards the low end of the range. Not to the extent that we traded a more significant discount to book value than I'd expect to come in at the high end of the range. That's generally the way we think about it, and frankly, that's really the way that we manage the program on a daily basis.
All right. That's very helpful. Thanks so much. Yeah.
Yeah. Dan, sorry. The other thing, tying back to considerations relative to reducing our relative long-term care exposure, there is a potential to need to deploy some capital in a risk-reducing transaction. That's another consideration on capital deployment.
Great. Thank you.
Your next question comes from Humphrey Lee with Dowling & Partners.
Good morning, and thank you for taking my question. Just a follow-up question on the Bankers agents. I hear you saying some of the pilots that you're working on and some of the underlying shift in terms of how you're focusing on the more experienced agents. When you think about the current size of your agent force and looking at your medium-term business plan, do you feel like your current size of the agent force would be insufficient to achieve those medium-term goals? Is there a number that you have to get to in order to be more successful in terms of your top-line production?
Humphrey, thanks for the question. This is Gary. I'll share with you at a high level the way I think about the top-line production, then I'll just point to a couple of data points. At Bankers Life, I feel like the current agent count we have and the agent count we believe we'll end the year with, in other words, when we extrapolate out, I think it's more than adequate to meet our goals for this year at a top-line level. There are a few different components that go into that cause me to have that optimistic view. First is, if we take a look at the product mix and the collected premium levels that are coming in. If you take a look at it as an example at our annuity sales, or if you take a look at the success we've had on our medsup programs.
If you take a look at what's happening there, you can see that despite the fact that the average number of agents over the last 12 months has gone down slightly, it's basically flat, but it's gone down slightly. Even though that's the case, the collected premiums have gone up. We are seeing these agents, if we just measure productivity strictly by the total premiums that are brought in, we're seeing that go up. That has a fair bit to do with a shift in the product mix, because an annuity premium, as an example, if we're bringing in on average $100,000, that's going to drive a lot more than one average life insurance policy. In the aggregate, to meet our top-line goals, I feel comfortable with the number of agents we presently have and we believe we'll end the year with.
There's one other dimension that we intentionally have not yet gone into detail, and that is the plans relative to our broker-dealer and RIA. Remember that part of our strategy is, again, focusing on that middle market, having more of our life insurance agents become securities licensed, and thereby putting us in a position to meet even more of their needs. That would in theory, well, more than in theory, I think in actuality, also increase the average productivity per producer. We feel good about where we are at the moment. We'd like the number to grow, we also feel it's attainable when we think about our goals for the balance of the year.
Okay, thank you. Then maybe shifting gear to your earlier comment about kind of widening the product mix across the three different platforms, and especially at Colonial Penn. When I think about the direct channel, you need kind of very simple value propositions that is well understood by consumers in order to generate these type of direct sales. Looking across the product lineup out there, what do you think that would fit into that category that is easily understood or well understood by consumers in terms of the value proposition that you can sell directly?
Humphrey, that's a very good question. Here's what I will share with you on that. We ran a small-scale pilot at the end of 2016. We were testing out a particular product, and again, for competitive reasons, I don't want to go into all the details. We tested out one particular product and discovered that, you know what? The type of consumer base that's attracted to our brand, where we have the market credibility, they weren't really going to buy that particular product. We shut that pilot off after trying for roughly three to four months. We're in a funny place right now with the evolution of this demographic because there's quite a few consumers that do want to deal direct, that want to respond directly and work directly.
We haven't, and I think it's fair to say the industry hasn't figured out precisely which products fit that mix. There are certain types of products that I believe will always be a little bit too complex or rely too much on an advisor to be able to fit that. The short answer, Humphrey, is that we're continuing to experiment. We have a couple of other proposals that we'll actually be discussing with the management team at Colonial Penn, who'll be making a proposal to us, in fact, next week about the next pilot that they want to try for the next type of product. What I'm saying, Humphrey, is I don't want to disclose precisely which products we're trying.
I do want to tell you that we're experimenting, and we're continuing to try and find which type of product will work best with this demographic on a direct basis.
Basically, we're probably looking at something that will probably roll out nationwide maybe next year the earliest?
No. All of the pilots we've done for this type of an experiment would be initially very small scale, proof of concept, this type of thing. The pilot that I was referring to that we ran in late 2016 was, I believe, in just three or four states. This is something I want to do in a very disciplined, methodical way. We've got a business at Colonial Penn that's running, I believe, quite nicely. I don't want to screw that up. I want to do this in a very slow, disciplined way, and initial pilots will definitely be on a geographically focused basis.
Okay. Thank you for the call.
Your next question comes from Yaron Kinar with Deutsche Bank.
Good morning, everybody, and thanks for taking my questions. I want to start off with Colonial Penn. Could you maybe remind us what the ratio of segment leads generated through TV is? Also maybe touch on what the cost of sales ratio is for TV versus the other channels.
Right now, television leads represent roughly two-thirds of the total number that come in.
Okay. Can you talk about the cost of sales ratio for TV versus the digital platform or other platforms?
I believe historically we've not disclosed that. I can tell you that we've got a very robust process internally, you can see that in our television advertising buying. When it goes above those measures, we don't continue, and when it comes below, we get back in. We prefer not to disclose that.
Can you say whether the cost of sales ratio is relatively similar for TV versus the other platforms or?
Yeah. Yaron, this is Ed. I would say short answer, yes, on, if you want to say, an economic basis. When you get to GAAP reporting, they're very different because the non-TV ad spend is largely deferrable.
Right. Okay. Turning back to Bankers Life for a second. Clearly you're taking on some initiatives to change the composition of the agent force to maybe a more seasoned force. Longer term, though, do you have any thought or idea as to what the headcount growth can be in a longer-term trajectory?
Yes, we have an idea. No, we're not giving you the number.
Okay. Fair enough. Thank you.
Your next question comes from Thomas Gallagher with Evercore ISI.
Hi. Question for Erik, I think. Just want to understand, you came in with a favorable long-term care benefit ratio, well below the guide you've given. You're maintaining the guide. Why not improve the guidance on that? It's quite a bit a ways below the range that you've provided. Just curious, is there something seasonal about 1Q that you're seeing that you think is going to reverse in terms of the persistency and incurred claims that you're highlighting?
Yeah, Tom, this is Erik. Part of the reason we were hesitant to change the guide was it's only been one quarter, we saw two different things happen, which totaled about $3 million or $4 million in total, which isn't a very big number. You hit on it. It was slightly better than expected incurred claims, which does move around, and that could revert back in the second quarter. It was slightly lower persistency, which did come as a surprise to us, and that also could revert in the second quarter. Our philosophy is, during the first quarter, we kind of evaluate the results. We do go through a process to determine if we think it's going to recur in the future. But at this particular point in time, we don't.
We'll go through the second quarter, we'll see what happens, at that particular point in time, we may or may not adjust the guidance.
Okay. I assume on those two ratios that are kind of moving the needle, you've seen a fair degree of quarterly fluctuation. Is that sort of what's behind it?
Certainly on the claims side, you do see that tend to move up and down a little bit. I'd say the non-rate increase related persistency tends to be a little bit more stable. That one being a little bit lower in this quarter was a little bit of a surprise.
Okay. Same question on the Medicare Supplement in terms of what you think drove the result and why you still expect the result to be elevated in terms of the benefit ratio.
Yeah, I think it's a very similar answer, Tom. Just, we're in the first quarter here. We had expectations that the benefit ratio was going to be consistent with the levels that we saw in 2016. We happen to have a good quarter. I think what's actually positive in the quarter, which we didn't really talk about, was this is a year in which we actually did take bigger rate increases on that block. We were actually expecting persistency to be a little bit lower, but it actually was pretty comparable to last year. That was a good thing, and that's good for the block overall.
Yeah. Tom, just a little bit on terminology. We wouldn't say we expect loss ratios, benefit ratios to be elevated. We expect them to be in our guided ranges, which are higher than what we experienced in the first quarter.
Got it, Ed. Just a question around the things you're thinking about for the long-term care solutions. Is third-party risk transfer still really viable? From everything that I've heard out there, more and more companies seem to be thinking that's going to be much harder to do, at least based on current macroeconomic conditions. We've heard more discussion around trying to isolate blocks, less third-party risk transfer, more potential movement to try and isolate and then eventually legally separate. Is that something you're also considering, or is it really just third-party risk transfer is the place you're focused?
Our considerations are broader than just third-party risk transfer reinsurance solutions.
If it's broader, are you able to discuss what else that might mean?
Yeah. I think that would be some of our intention as far as subject matter in the investor day on June 5th.
Okay. Got you. Then final question is the Tennenbaum capital commitments. I think you have, last we checked, $100 million left to invest there. Can you give an update on timing of that?
Yeah. Hi, this is Eric Johnson. That, to some degree, is a function of the rate at which they draw fund commitments for two of their particular investment strategies. One of which is a special situations lending strategy, the other of which is just a middle market direct lending strategy. As you all know, those have been very competitive markets. Rather than get over their skis from an underwriting or risk management perspective, I think they've been very sensible about taking what value comes, but not prioritizing getting money funded over having a good quality portfolio. I would think that probably is one year or more of time to elapse as it fully funds up. Very happy with their perspective on the markets and their good caution as to action.
Understood. Thanks.
This does conclude the question and answer session. Please go ahead with closing remarks.
Thanks, Sarah. Thank you everyone for your interest in CNO and hope to see you on June 5th at the New York Stock Exchange. That concludes the call.
This does conclude today's conference call. You may now disconnect.