I think we're going to get started. Good morning, welcome to CNO Financial Group's 2017 Investor Day. I'm Adam Auvil, Director of Investor Relations, on behalf of the management team, I'd like to thank you all for joining us today. We have a full agenda. We'll cover a number of topics. Ed Bonach, our Chief Executive Officer, will walk us through his recently announced retirement, the transition of CEO responsibilities over the next several months, CNO's ongoing strategic priorities. Gary Bhojwani, President and named CEO Successor, as well as his team, will discuss how CNO is positioned to win in the middle-income market. We're going to have a quick break, followed by Chris Nickele, Chief Actuary, and Erik Helding, Chief Financial Officer, to discuss how we're managing our long-term care business.
Eric Johnson, Chief Investment Officer, and Erik Helding will discuss thoughts on our key financial topics. Ed and Gary will close out the session. At the end of each section, there will be a question and answer. If you have a question, please raise your hand. We'll bring you a microphone so that those on the webcast can hear. Additionally, if you have a question for those on the webcast, please email myself or Chad Arnold. We'll try to get those in. You can find our email addresses on our website, in the investor section of our website at cnoinc.com. Additionally, for those in the room, please place your mobile phones on silent or turn them off.
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 corresponding GAAP measures in the appendix. Please welcome Ed Bonach up to the stage.
Thank you. Welcome, everyone. Thank you, Adam. With our Investor Day, they got me here because I thought it was going to be Saturday Night Live, this will be just as entertaining and hopefully informative. On the CEO succession, just to level set this, these facts hopefully are not new to anyone. It gives the timing of my retirement at the end of the year. Gary, named Successor on our board effective as of the announcement. We've got seven months to transition. Why now, what does this really mean for CNO? Retirement has never been about an age or a date, some financial services companies advertise, what's your number? It's not been that. We don't have a mandatory retirement age. We don't have anything that would give me a date that I would need to retire at.
I haven't, I'll assure you, lost my passion for the company and the energy to be involved and engaged with advancing the company and shareholder value. It is, though, really because of the company and the position that we're in with a strong balance sheet. We've had a number of ratings upgrades, 13, in fact, since 2012. We've grown EPS. The stock over the last five and a half years has almost increased fourfold. We instituted first-ever shareholder dividend in 2012, and that's been increased four times, and then the fifth time here very recently with our annual meeting, and we've returned about $2 billion to shareholders over the last six years. That's a stage to set to have succession happen. We're also very well-positioned with having a ready-now successor in that, like good companies do, we do have a CEO succession process. It's been in place for years.
It intensified over the last couple of years. Hiring Gary 14 months ago was a key part in that succession process and plan. That plan won't end at the end of the year. It will continue to be in place, again, like good companies do. Our transition of roughly seven months is also phased. Having this Investor Day was part of that to make sure that you get to hear, not just from me, but more importantly, from Gary, which we realize with being at the company for 14 months, he's not as well known to you, and his job coming in was very much focused on our three retail businesses. The way that we're looking at this transition is we're in the same plane together in the cockpit together. If the decisions mostly impact 2017, I'm in the pilot seat and Gary's in the co-pilot seat.
If the impacts are more 2018 and later, we switch. He's in the pilot seat and I'm co-piloting, and I'll assure you that we are aligned on where the company is, where it's headed, and hopefully you'll believe the same after we're done today. It's a natural time with the evolution of the business. I think you all saw that even with our last quarter call, the questions are mostly focused on our businesses, growth of the agent force, growth of our customer base, growth of revenues. Very natural in that evolution of the business. We have a strong, experienced management team as well. You'll see here that not only do we have people with years of experience in the industry, many of them also a number of years of experience at CNO, and that's a good thing.
Just like some recent promotions to head different parts of our business, internal promotions, and we continue to have a high priority on developing our own talent and having that pipeline of succession at a variety of different levels in the company. At the same time, we're certainly not adverse to bringing in talent when and if needed. Hopefully you see that in ways that Gary joined us 14 months ago, and we've brought in others over time. With that, these leaders are here today. Many of them will be speaking. Some won't have speaking parts but will be available to mingle with you as we have breaks and other parts of today's activity. Let me also assure you that the direction of the enterprise isn't changing. We're committed to continue to serve the middle income market in the U.S.
We think we are positioned with strong, competitive, sustainable advantage to serve those markets. We really are focused on growth of the enterprise and in particular, shareholder value. Reducing our exposure to LTC also continues to be a priority. It's not hinging on who's CEO or any one person. There's a team of multi-talented, multi-disciplined executives and management involved in this. It takes a village, whether we're transacting on LTC or growing shareholder value. With that let me call up Gary to give us his thoughts. Thanks.
Thanks, Ed. I want to begin by, first of all, thanking Ed, thanking our chairman, Neal Schneider, who's with us today, our entire board of directors, and of course, the existing senior leadership team at CNO for all their support. These last 14 months have been an incredible, exciting time for me personally. They've just been wonderful in terms of welcoming me into the organization and giving me a chance to learn and contribute. It's been absolutely fantastic. We're all very excited to be here today. If there's nothing else that we do today, I hope me and the rest of my colleagues can give you a sense of how excited we are about this business, about this organization, and about the opportunities before us. Before I begin my official presentation, I want to share with you a story to give you a sense of this excitement.
Before getting on the airplane yesterday, I said to my wife, I was very excited to come out here. I said to her, I said, "Did you ever dream in your wildest dreams that I would be the CEO of CNO and get a chance to do something like this?" Without missing a beat, she looked at me deadpan, and she said, "You're not in any of my wildest dreams." It's great to start out with a confidence booster like that. Let's talk a little bit about the space that we operate in. As hopefully all of you know, we focus on the middle market. Most of the stats at the top of this page you know about. You know there's 10,000 folks retiring every day. You know that particularly in the middle income space, most of those folks are not prepared.
They don't have the products they need to ensure that they don't outlive their savings. The last piece on here that maybe is new and I think hasn't gotten enough media coverage is what's happening with required minimum distributions. As you probably know, when Americans turn 70 and a half, they're required to take distributions out of these retirement plans. They've got to do something with that cash. We have the largest population in America, the 70% that comprises middle income. They're living longer. They've got greater morbidity. They've got more cash that they need to do something with and fewer alternatives. As a company that focuses on serving these folks, I don't know that we could ask for a better setup in terms of being able to make a difference, being able to help these folks.
This is a space that we've been focused on for a long period of time. We know how to serve middle income America. When you look at most of the companies that operate in this space, they aren't focused in the same way to the same degree that we are. There's also one other thing that's happening right before our very eyes, it's been a trend that's been going on for the last 20 or 30 years, that's this notion of the risk for Americans moving from dying too young to living too long. When we think about what's happened with pensions, when we think about the inevitable strain that will come to Social Security, that is the most significant risk, particularly in the middle income space. That's a risk that we are uniquely qualified to serve and focused on.
Hopefully, as you hear all of us speak today, you'll really appreciate the degree to which that's true. Let's talk a little bit about our business model. At a very high level, we operate with three brands. Part of the philosophy here is we don't want the customer to have to choose how they want to work with us. Here's what I mean by that. If you want to work with a company that has a captive agent force that's willing to come out, sit down with you at your kitchen table, and talk about your needs and how we can help them, we want you to work with Bankers Life that's been around for 130 years.
At the other end of the spectrum, if you just simply want to work with someone online or on the telephone or do something in a more digital way, we're happy to have you work with Colonial Penn. If you're somewhere in the middle, if you've got an insurance agent or another advisor that's been working with your family for a long period of time and you don't want to move away from that relationship, but you want them to have access to the products we have within CNO, we want you to have that agent work with Washington National. The philosophy we have is to maintain these three brands, at least in the near term, meaning the next three to five years, the primary points of differentiation between these three brands will be distribution.
Bankers Life is our captive company, Colonial Penn is our direct-to-consumer company, Washington National has a combination of independent agents as well as some wholly owned agent force that operates under a different brand. We have lots of work to do to continue to build out more products to offer those products through all three of those brands, but at least in the near term, the primary point of differentiation will be distribution, that's by design. If we take another look at the organization, you can see here we've laid out our three consumer-facing brands. We specified the channels through which they work. We also talk a little bit about the optionality that this preserves. If you think about things that have happened just recently, think for a moment about the DOL, Scott Goldberg will talk about this in a bit more detail.
If you think about some of the regulatory changes that might happen in the future, it's very hard to predict where we're going to go next. We believe fundamentally it makes a lot of sense to maintain that optionality. It also allows us to learn from one another. We can see trends that are happening by virtue of having these three different access points to consumers and share those across the organization. Finally, some of my colleagues will speak to this as well, it also gives us an opportunity to do some lead share. Some of our brands, Colonial Penn as an example, do some very extensive advertising.
There are opportunities for us to collaborate across the organization because sometimes consumers reach out to us thinking they want a direct-to-consumer access point, when in reality, they want somebody to come out to their kitchen table and help them through this decision. Now, we've done a lot of work over the last several years to really understand our market. For obvious reasons, I'm not going to walk you through this chart in detail, but there's a few simple things I want to convey. First, the middle market is not some big monolithic market that moves in one direction. One of the things that we've learned and have a great deal of insight into is the sub-pockets, if you will, or the subcategories within the middle market. The two primary differentiating characteristics have to do with age and income or net worth. Intuitively, that makes sense.
A 65-year-old with a net worth of less than $100,000 probably has needs that are different than a 39-year-old with a net worth of over half a million dollars. Within the middle market, there are considerable differences. Now, we spent a long time studying this. For each of these sub-segments, again, some of my colleagues will talk in more detail about this, for each of these sub-segments, we know the number of products they buy. We know what our penetration is. We know how many of them work with advisors. We've also got a reasonably granular view into where we already have strength and where we need to be stronger. You can see through this chart that we tend to be skewed more heavily to the left side, which is the lower net worth, and we tend to be skewed towards the older folks.
Those are good places to be in terms of our ability to make a difference, we also see lots of other opportunity. Throughout the presentation today, you'll hear my colleagues talk about expanding and moving to the right. What they're really talking about on that chart is being able to serve more of those consumers still within the middle market, but that are slightly more affluent and have the ability to buy more of our products. Now, that will require us to continue to develop more and more products and to make that product portfolio more robust through all three of our businesses. Again, we'll talk shortly about that. The other thing that you will see a natural progression in through all of our businesses is a greater emphasis on products that address income, accumulation, and longevity.
We are not abandoning mortality products, but we are continuing to build out that portfolio. If we take a consolidated perspective, here you see the brand. You can see the different customer segments that we're focused on. You can see the different products, you can also see the representation of the channel. There's one other comment I want to make here because sometimes in layman's terms, channel and medium get interchanged. We think of channel as direct to consumer, independent agent, captive agent. We think of medium as online, face-to-face, fax, telephone. All three channels need to be experts in all of those mediums. We don't view those as mutually exclusive. The last slide I want to share with you in the first part of the presentation is this. I have a very personal connection to what we do at CNO. My parents are first-generation immigrants.
My father still lives in the home that we grew up in. My dad is that middle-income guy that we seek to serve. When I was trying to decide whether or not to join CNO, there were four things I thought that made CNO truly unique in this space. I share those with you briefly, and I would ask you to listen for these four things as you hear the rest of my colleagues speak. Number one, our focus on middle-income America. That is what we do. That is where we are focused. That is what our products are built for. That is what our distribution is built for. Number two, we don't force our consumers to pick how they want to interact with us. Do they want someone to come to their kitchen table, or do they want to work with us online?
Do they have an existing agent that they want to work with? Number three, health and wealth solutions. The vast majority of products we sell that have to do with protecting one's wealth, life insurance, short-term care, annuities, all of these types of products, they are discretionary products. CNO is one of the few companies that in addition to offering those discretionary products, also offers certain health products, particularly MedSup. MedSup is not a requirement, but it's as close as you're going to get in this business. It's not quite auto insurance, but it allows us to have our sales force have a completely different dynamic in terms of opening up the relationship with the consumer. It's not just about purchasing those discretionary products. There's a number of our sales, particularly at Bankers Life, that are initiated with that health side of the relationship.
That's what gets us in the door, then we're able to broaden it. Fourth and final thing I saw when joining CNO a little over a year ago, is this ability to continue to develop insurance and security solutions. I truly believe that it's not going to be enough just to speak to one side or the other of that, particularly for middle-income America. We need to be able to have advisors that can speak to both sides, the insurance and the security needs. As you hear the rest of the presentation from my colleagues today, please be thinking about these four things. I truly believe they're unique. I think we've got something very special here, I'd ask you to think about that as we move forward.
With that, I'm going to invite my colleagues up to join me. Gerardo is going to talk to us about our marketing focus. Thank you.
Thank you, Gary. I will walk you guys through a few slides. Specifically, I'm going to start with the work that we did on market segmentation and how it really is helping us define some of the actions that we're going to be taking. In the market segmentation work that we did, really, the focus was to identify the most attractive customers and macro opportunities that we have. We took a look at hundreds of variables, narrowed them down to about 50, then further narrowed them down to about 15 of them. Those key variables are the ones that are most meaningful and actionable to define acquisition, retention, and growth of customers. We then were able to develop 13 distinct customer segments, the ones that you see in the slide that Gary mentioned.
Once we have these customer segments, we define the segment attractiveness of each one of them. Where we wanted to play based on the size of the market, the growth of the market. Also we did an analysis of something we call the right to win, which means, does this market segment fit the current or the future capabilities of CNO Financial Group? Last, one of the most important ones is the growth opportunities for CNO. As Gary mentioned on the graphic, it is really that opportunity for us exists on this term that we call expanding to the right, on the customer service map. The identification of the most attractive segments also help us make choices on where we want to do investments and efforts regarding products, channel, marketing strategies, and customer experience.
This prioritization allows us to choose the best options for growth at CNO. We basically took these 13 segments. We actually selected five of them, five customer segments that are key to CNO's success. We actually group them into two different categories. The first one is one that we call the depend category. There is two market segments here. The first group is the Anxious in Retirement, this is a very important market segment for us. It accounts today for about 25% of all the policyholders. It is very well represented in the three CNO brands. The product suite and capabilities really matches nicely with what the needs and preferences of these customer segments are. The next segment is the one that we call Getting By, this customer segment accounts for about 15% of policyholders that we have.
It is a vastly underserved market with very basic life insurance needs. Colonial Penn actually is highly represented on this customer segment. The next category we call basically an expansion category, there are 3 customer segments in it. The very first one on this group is the Comfortable in Retirement. This is actually the most important customer segment for CNO. It accounts for close to 30% of our policyholders, and it is very attractive because it has high growth potential and high product ownership. Also because it nicely matches our product offerings and sales approach. The next segment within this group is the Tightrope Walkers , and this is the fourth largest segment within CNO. It accounts for about 10% of our policyholders. Their needs are income protection and life insurance needs.
This is a slightly younger customer base, what is interesting also about these customers is they establish long-time relationships. Very important for CNO to start reaching out to them sooner than we have in the past. The last segment is the one that we call Setting the Stage . This is a very attractive market for CNO. Today it accounts for less than 10% of policyholders, it's a segment that has a very high net worth, and they have very diverse product needs. It is a younger market that has not yet retired, but it is concerned with providing for retirement.
One of the major takeaways from this slide, that I would like you to take from it is these 5 customer segments provide a very nice balance between what we call defending and expanding our product set, more importantly, for CNO has a right to win. In this slide, you will see that we have opportunities to expand our sales through offering more products across all our channels. Moving, as Gary mentioned, there are different customer needs, we want to be able to meet those needs according to how the customer wants to be served. As you see, Bankers Life has the widest product offering with 30 products. Washington National actually has about 10 products, there are opportunities to increase product offering in by all product dimensions.
Lastly, I think very importantly, Colonial Penn, as you can see, provides the biggest opportunity for product expansion, it will become a very important area of growth at CNO because these customer needs reflect the evolving consumer preferences to interact on a direct-to-consumer basis. I think it's an interesting slide and talks about how we intend to leverage our multimedia expertise. We intend to do that, specifically to generate a larger quantity of leads and a higher quality of leads, that then we can share that with our sales channels so they can better connect with prospects and future customers of ours. What I think is interesting on this chart and that you will see is that we at CNO have this very broad expertise that covers the full spectrum of very broad, like DRTV, to very targeted marketing strategies.
What is unique and special is that some of our competitors might have expertise in one or two of these areas, but nobody has basically the capability to do that, cover the full spectrum. We strongly believe that gives us a competitive advantage. Our intention is to continue to fully align all of these mediums to support each other and help us provide further positive impact. There is another sort of element on the important area of attention for us, which is our ability to generate relevant, reliable, and actionable market intelligence. There is four dimensions in which we look at market intelligence, regarding competitors, regarding the industry, regarding what is going on with new trends and disruptors, and then market intelligence that is unique and internal to us. One example of this last category is the Bankers Life Center for Secure Retirement or CSR.
This Center for Secure Retirement was started in 2011, since its inception, we have generated 16 unique original research studies that focus on the retirement experience of middle-income America. Obviously, based on this research, we have gained unique and very specific knowledge of the middle-income retirement market. We are getting to the last slide in that presentation. On this one, I will talk about this integrated marketing process that we have to support our growth. On this side of the slide, we intend to capitalize and fully develop strong capabilities to understand our customers, to successfully reach the best and most promising prospects, specifically in these five market segments that we are prioritizing.
We intend to make a strong use of analytics and business intelligence, especially, as Gary mentioned, it is because our differentiation for CNO is that we are able to offer this omni-channel experience and campaigns, also because we will be able to provide the dynamic lead management within our channels. This, in turn, will allow us to achieve our vision to using data, with the right data to connect with the right people at the right time with the appropriate message in the right channel. Ultimately, this will help us grow revenues, continue to improve the customer experience, and increase our profits. I will turn the presentation to our business unit president to start with Scott Goldberg from Bankers Life. Scott?
Thank you, Gary. Thank you and thanks for all being with us. Okay. There is a handful of messages that I want to convey today as it pertains to Bankers Life. First, we really are a uniquely positioned company. We underwrite and distribute a diverse set of products through a controlled distribution system that is highly adaptable, highly flexible, and has been able to consistently grow collected premium and earnings. The growth that we have had has been an accumulation of longevity protection products. This is really important because as people are living longer and do not have access to a defined benefit plan, there is a real need for products such as annuities, which provide guaranteed lifetime income, and limited benefit health plans like our long-term care plans, which can help pay for custodial care. That need is not going away.
In fact, in the middle market, it's more important than ever to have products that can solve some of those issues for folks who are nearing retirement. We've been able to expand our platform with the launch of a broker-dealer and a registered investment advisor. This is a big deal because it furthers the ability of our agents to be able to take a holistic approach with their clients. It also creates a stream of non-life income, and I'll talk about that. We're now in the process of reshaping our agency, tilting it more towards experienced agents who are capable of becoming good advisors and fulfilling the objectives of the platform that we've created. Finally, and I'll mention this a few times, we are prepared and ready for the DOL fiduciary rule implementation. Let me go through these.
With this slide, it shows the diversity of our revenue sources. You can see that on the pie chart on the left. Our focus, as Gary was saying, is on living benefits. As you see, the largest sources of revenue for Bankers Life come from supplemental health plans and annuities. Life insurance, which traditionally is sold for its death benefit, is the smallest segment. Fees, which are earned by the sale of third-party Medicare Advantage plans, and now securities are a small but growing part of our revenue stream, and naturally help us boost our ROE.
In any given year, the sales of any one of those product categories may ebb and flow, but because we take this holistic approach, Bankers Life has been able to grow collected premiums on a compound annual growth rate over the last five years of 3%, and has been able to grow adjusted EBIT on a compound annual growth rate of 7%. Let me talk about where the growth has come from. This slide is about annuities. Rising interest rates and favorable market conditions have boosted the industry when it comes to annuities. We've also been able to introduce our first indexed annuity with a living benefit, a guaranteed lifetime withdrawal benefit. This is our GLIA, our Guaranteed Lifetime Income Annuity product. It allows consumers to have a stream of income for the rest of their life without having to annuitize.
With the release of this product, it is now accounting for the majority of our annuity sales. Our annuity sales this past year were up 23%. The industry was up 12%. We did something interesting here. We took a simplified design. As you're familiar with these products from other carriers, they often have roll-up rates and benefit bases. We eliminated those and created a product that's much easier for both our agents and our consumers to understand and has less contract risk for the company. It's been a home run. As I said, it's not only accounting for the majority of our annuity sales, but we're on track this year to do over $1 billion of annuity deposits. As I think everyone in this room knows who follows us, annuities have been a significant contributor to earnings for the company.
If you look at the charts below, you'll see that in terms of deposits, we've been able to grow quarter-over-quarter and over the last 2 years on a compound annual growth rate of 22%. In terms of annuity count values, because of our approach with our clients, because we're often our agents are the ones who hold the relationship and really are their guide towards retirement planning, we have higher persistency than what you would otherwise expect or see at other companies. On a compound annual growth rate, our annuity count values are up 3%. Components of the DOL fiduciary rule are kicking in later this week. What I'll tell you is, in anticipation of this deadline, we've done a thorough review of our products, our procedures, our compensation, and our marketing materials.
At this time, we've implemented all appropriate measures to comply with the impartial conduct standards that go into effect on June 9th, and we expect minimal disruption to our business. The other area, in terms of accumulation and longevity protection products where we've had significant growth, has been with our limited benefit long-term care plans. These are not the long-term care plans that the industry has grappled with over the last couple of decades, where they had lifetime benefits and such. These are plans that on average have a maximum benefit of about $38,000. They have a maximum duration of 12 months. 88% of our long-term care plans are these types of plans. What you can see is there is huge demand for these types of solutions.
We've been able to grow these plans on a NAP measurement basis at 20% compound annual growth rate over the last 2 years. The in-force, while relatively small, has grown at a compound annual growth rate of 8%. How have we done this when other carriers have exited the market? I'll give you two reasons. Number one, we've put together a product that is appealing and affordable. Number two, because we take this holistic approach, our producers are able to position this product as part of an overall retirement plan, and they don't have to be dependent on this type of product to drive the majority of their income as an agent. What are we doing now? This past year, we expanded our platform by launching our own affiliated broker-dealer. It's called Bankers Life Securities. It was just launched in June of 2016.
Let me tell you a little bit of the thinking behind this. Prior to its launch, we had some of our top agents registered with a third-party broker-dealer. What we found is that by going to market as financial advisors, they were not only able to better serve their clients, but they were also more productive as insurance agents. Again, because they're able to position our products as part of a holistic retirement plan. They exhibited much higher agent retention. It became strategically important for us to own and operate our own securities platform and to have a way to invest in programs that would encourage non-registered agents to become registered. Today, every Bankers Life agent who's engaged in securities is registered with BLS, and only agents who are agents exclusively with Bankers Life, the insurance company, are able to become registered with Bankers Life Securities.
As a result of account transfers that we did at the time of the launch, we now have over $1 billion in client assets. We're generating, on an annual basis, approximately over $10 million of GDC, and that's sufficient for us to show a positive contribution margin in our first full year of operations. Today, only 1 out of 12 Bankers Life agents are registered to sell securities, but we have line of sight and a huge amount of excitement around this in our agent force to get this number up to 1 out of 5. The other thing we did, we launched our registered investment advisor. This is for clients who prefer fee-based investment management. It's completely powered by a leading TAMP, a turnkey asset management provider, that powers a set of managed account portfolios.
Our producers do not need to be stock pickers or investment experts. It allows them to foster an ongoing relationship with their clients and generate recurring fee income. Today, I will tell you, we only have about a third of our registered reps with the broker-dealer are duly registered as fee-based advisers. Already we've grown to over $90 million of assets under management, and the momentum is very strong. We expect most of our registered reps who are selling with the broker-dealer to become duly registered as fee-based advisers. It also allows these producers to move to the right. Going back to the concepts that both Gary and Gerardo talked about moving to a slightly more well-heeled client, here with the RIA, our average client has an account size of over $125,000.
That's slightly higher than our average deferred annuity, and as you saw from the previous slide, over twice as high as what we're doing with the broker-dealer. I'll tell you with both of these entities, we've also done a thorough review in anticipation of the DOL rule. With the broker-dealer, we had to pare down some of the product offerings. We've updated some of the marketing materials. We've implemented some additional training and, of course, some disclosures. We expect minimal disruption to this business. Let me now talk a little bit about what's going on with the Bankers agency in general. We are beginning to reshape the agency. If you take a look at what's happened over the years Our first and second-year agents, which is marked by the blue bar, have declined on a compound annual growth rate of about 5%.
Nevertheless, we've been able to grow our experienced agent count by 4% on that same compound annual growth rate over a period of about eight years. In other words, even though we've had declining first and second-year agents, for a variety of reasons, we still year to year have been able to grow this much more experienced agent base. That's very important because that feeds into the strategy of being able to take the new products that we've developed and the new capabilities we released around financial planning, and have a group of experienced tenured agents who are capable of becoming advisers. Consistent with this trend, our intention is to tilt the agency more heavily towards experienced agents who are twice as productive as rookie agents. Our financial advisers are twice as productive as those who are not registered.
Here's a conceptual picture of what's happening now. The right side of your screen is pretty well in hand. That's our experienced agents and those who are on track to become a financial advisor, where we get higher agent retention and better client persistency. We have some work to do on the left side. Look, for many years, we've relied on high recruiting tactics, high volume recruiting tactics to offset our relatively low first-year agent retention. That's worked for us for a long period of time. That approach is becoming less practical in a tight employment market. Just as importantly, to grow this cadre of experienced agents capable of becoming advisors, we need to recruit agents with a higher likelihood of success in our model. We understand that, and we're working towards it.
What you can see listed are a number of initiatives that are already underway at Bankers Life. There's a lot of elements that go into running an agency. I've had the pleasure of being part of Bankers Life since 2007 and being part of this organization as a whole since 2004. Sourcing, selection, financial support, training, these are all elements that career shops focus on to get retention from their agent force. Many of the things that we're experimenting with now are in line with what you'd see at other career agencies. We are replicating the playbook that has been out in the industry for a number of years by doing things like targeted profiles, by adding elements of financing to our new agents.
Here's what we expect. The number of new recruits that you're going to see at Bankers Life, it is going to come down, and it has been. We believe by making relatively modest investments in training, selection, sourcing, we can hold that first and second-year agent group steady. Over time, bring it up, but hold it steady in the near term, and have a group of agents that have higher first and second-year retention and are able to become experienced agents, more productive, and ultimately advisors. You can expect the volume of new recruits to decline, our first and second-year agents to remain relatively flat but have growth in agent retention, and continue to evolve our agency into a higher caliber, more productive agent force capable of doing middle-market retirement planning, even financial planning for this segment. Let me just summarize.
We're uniquely positioned in the marketplace with a diverse set of products, I don't think you'll find that diversity at other carriers. We're growing in the products, accumulation longevity protection products, where there's a real need for this generation of retirees. We've expanded our platform with our own broker-dealer registered investment advisor compliant with DOL, giving us an additional stream of non-life income and helping us have deeper and more meaningful relationships with our clients. Now we are reshaping our agency to take advantage of those capabilities. I couldn't be more excited about the future of Bankers Life. Thank you. Let me turn it over to Mike Heard to talk about Washington National.
Thanks, Scott. I think it's important to point out when Gary introduced the three businesses and put Washington National in the middle of the three, it's exciting to me because listening to Scott talk about some of these things around agent recruiting makes it very easy for me because I'm right in the back seat watching what he's doing. I don't have to open my own work stream, and we get this agent recruiting going. I think it's an important distinction with CNO Financial to have some similar businesses and to be able to learn things from each other and not have three businesses start from the scratch. Very exciting. Thanks for taking the time and your interest in CNO, and to give me 10 to 15 minutes to talk about Washington National.
I wanted to just give you a quick overview of the business first, talk about a couple key trends that we're seeing and where we see some opportunity for growth with those trends. You're going to see we have our own version of the expand to the right play that we would like to run as well. Washington National is an insurance company with two distinct sales distribution channels. It has an in-force block that generates a little over $100 million of EBIT. Some of those are blocks that were acquired through the 1990s. Some of it is the new business we're layering on. To avoid confusion, if you ever look at any kind of statutory accounting, there's some long-term care that sits inside of Washington National, but we report that through the corporate entity just to avoid some confusion.
We have some Medicare supplement and annuity blocks in a runoff right now, we don't actively sell those particular lines of business. This is something that's interesting to me. Look at the product mix. Supplemental health is 93% of what we sell. The other 7% is life insurance. It's not necessarily the supplemental kind of health that Scott Goldberg talked about in Bankers Life. It's not Medicare supplement. This is critical illness, specified disease, cancer, accident, those kinds of plans that we sell in the middle market. In terms of those two distribution channels, one of them, the smaller one, sits inside of the insurance company, and it's called Washington National Independent Partners, and that's where we do business with small independent IMOs. Many of them represent many different kinds of products. Some of those partners sell a very large wallet share of our products.
We probably do 85% of our business with about 25% of those partners if you think of the Pareto analysis there. They generate about 20% of the written premium. We also own our own independent distribution arm. It's a wholly owned agency, and it distributes to the consumer at home and at work. Two biggest markets here being the farm and rural market, and then the small work site market. You can see the agent growth track here. We have a near identical dynamic as the Bankers Life team does, though, where we're getting a whole lot more productivity out of those third year plus agents versus those early years. That's why we're so interested in the work that the Bankers Life folks are doing and be able to copy and paste that into our business as well.
What I wanted to talk about in terms of growth opportunity are two different markets, the farm and rural market and the small worksite market. Let's talk about the much-maligned rural market here. A tough demographic, but still, we think a Middle America market that still needs attention. This will be probably the only graph today you'll see that goes back to 1850, but maybe it's a little more important to focus on what we're seeing here currently. That blue line is the number of farms in the U.S. While that number isn't going down drastically, it's certainly not growing, right? If we want to defend our space in this rural market, just continuing to do what we do, there's not going to be any growth. You can't rise with a tide that's going out. A clear U.S. farm flat to down trend.
The small towns also a downward trend. Here's an interesting thing. Take a look at my electoral college map here. The middle of the country there, the darker the blue, the more sales we did there in 2016. You can see the Louisiana Purchase there dominates through the middle. One of the things I want to highlight on this graph, you can see it subtly, but any state that's outlined in red up here, zero agent presence. No wonder there's not sales there when you look at the two coasts of the country here, no sales. Inside of these states, too, the number of active farms in those states is also highlighted. We think geography is a potential opportunity here.
The other thing, if I take you back to my pie chart of 93% supplemental health and 7% life, I think there's an opportunity for new products here as well for the middle of the country as well as the two coasts. Clear opportunity in the footprint. Let's move to the worksite market, a little bit of a different dynamic. Again, in the rural markets, these small employers are shrinking. Across the country, there's still a moderate growth in employers with 20 to 250 employees, right where we have the sweet spot. We like that there's a little bit of tide growth there. Here's what else we like.
When you look at the voluntary and worksite market, I backed some things out of here from this large number. It's back to what Ed talked about, Gary talked about it, Gerardo talked about it. That's our right to win. In the large group and broker market, no right to win. That's not who we are and not how we play. There's another slice that we take out here in terms of opportunity for, say, individual disability, and some other products in other place that we just don't play from a risk perspective. Still left with almost $2 billion of small worksite opportunity.
What we think we need to do to get after some of that is continue to scale our work site support so we punch a little bigger than we do now in terms of work site, continue some of our brand awareness, and of course, our ratings progression that Ed talked about at the beginning of the presentation is helping us in this space as well. We see that we still have market here where there's a right to win. Two places to focus. There's a third one that I didn't even create a slide for you because these guys did an excellent job with it, and that's that senior market that continues to grow. We have independent partners who serve that senior market, and we don't have the product set or the focus to necessarily answer that call right now.
Some of our independent partners have an actual senior practice. This is another opportunity for us. In our version of expand to the right, our average age on these health products we sell is shy of 50. If we were to be able to move into more of a senior market, we see that as a growth opportunity as well. When we put all this together, three strategic objectives Hold that advantage in the rural to small towns and maybe take advantage of some more product in working on the coast. Accelerate that small work site growth and then serve more of that middle income market, especially the senior market. That's how we see it. Five different ways to do that. One is diversifying our product offerings.
Another thing that makes it pretty powerful to be a part of the CNO franchise, because most of these products I'm talking about exist in the portfolio right now. It's not like a whole new thing that I have to do. I can access Bankers products, Colonial Penn products, or potentially copy products into the Washington National portfolio. Also broadening geographic reach. We could do that organically or inorganically, so there's opportunities there. It's tough to stake out new territory in these rural markets, but we got to figure out a way to do that. Advancing these work site capabilities is also important to us, and then expanding the independent distribution. Again, if we're doing 85% of our business with only 25 partners, I think there's opportunity to go broader in terms of the number of partners there.
Lastly, across all of these is just to improve some of the brand awareness. Washington National, of the three of our brands, is probably the least known. We'd love to do some work there. In terms of what's going on in 2017 to get some of this started, we're launching the short-term care. Scott Goldberg mentioned the long-term care product that's less than 12 months of benefits, and that seems to be a key need in some of the rural markets. We're launching a pilot to see if we can actually sell the Bankers product, and we're learning some good lessons there. We want to create a geographic expansion program in the rural markets so that we can seed sales forces and get them going on those coasts. We also want to continue work site automation.
There's a tool we call OneSource, also has a benefit administration platform that we basically can give to small employers to help them manage all of their benefits. We want to continue some of those enhancements and then do more of an end-to-end kind of value chain gap analysis to figure out where we could be a little stronger to play in that worksite market. Lastly, explore some more additional independent distribution and see if we can grow that part of our business, which right now is only 20%. I think it's really exciting to say we're part of that CNO enterprise, and this helps us to accelerate our strategy. It's not a lot of new things. I think there's still some hay to be made in the rural markets.
I still think we can grow with worksite. That senior market is just laying out there for us right now that we've hardly touched. Great opportunity there. I think as we finish up here, we're going to talk with Joel now about Colonial Penn. Another exciting story.
Awesome. Thank you, Mike. I'm going to wrap up the discussion around the CNO business segments today. Quick overview initially just on the current business model that Colonial Penn has today. Many of you are familiar with it, certainly. A little bit more time in terms of how we're thinking about strategic expansion. Our mission today is straightforward and clear. We offer basic, simple, easy-to-understand insurance protection solutions direct to the middle-market consumer on their terms. We have strong, established brand equity that we've cultivated over decades of serving this middle-income marketplace that helps us create a clear and strong value proposition for both our customers as well as for our shareholders. Speaking of our customers, let me just give you a little bit of a profile of who they are.
Typically in the lower middle-income market, generally 55 years of age or older. We are about two-thirds female, one-third male in terms of the customer mix today, and our customers represent a diverse cross-section from all over the U.S. We do business in all 50 states, and if anything, the Colonial Penn customer skews more towards the densely populated urban population centers. We pick up the coast where Washington National picks up the middle. Their needs are straightforward. They want to receive direct, personalized advice around insurance protection solutions, typically final expense insurance based on our product set today. They want that advice to be in whichever way they choose to interact with us.
That can be through a telephone conversation with more than one of our 200 telesales representatives, frequently after responding to one of the many television commercials that we air in the marketplace every year. It could be through their responding with an application to a targeted direct mail piece that we've sent to them around one of our products. As we see in an increasingly growing number, by going to our website, learning more about various coverage options, and then making a purchase. Lastly, in terms of their needs, due to their tight financial constraints, it's imperative for them that they need to know that when the time comes, their beneficiaries are going to receive a quick, hassle-free claims process from us. Today, the product set that we offer is a small focus set of life insurance products led by the flagship Guaranteed Acceptance Graded Benefit Life product.
We do also offer simplified issue term and whole life products with coverages up to $50,000. That's a foundation of who Colonial Penn is today, just to set that. I want to shift the conversation more now into starting to talk about how we're thinking about strategic expansion. I think the best way actually to start to do that is to provide you some good recent industry data that came actually earlier this year from LIMRA's annual Insurance Barometer study that they do on life insurance customer buying preferences. When they asked a representative group of more than 2,000 customers about factors that they considered either very or extremely important when buying life insurance, the top five answers that you see listed here, the largest percentage of times, all align very well with our current business model.
Look at what's listed first by a wide margin, at 83%, easy to understand. Insurance can be so complicated. People are screaming that they want it simplified. We understand that at Colonial Penn. Our tagline is "Making insurance simple." They also want the ability to chat with a person. They want to know that the company is well-known and trusted. They want the language that's used in the product offerings to be friendly and conversational. Again, all things that we do well today. Now, if we look at the bottom part of the chart and we look at a six-year trend here that shows a trend of how customers are purchasing insurance online, it's online activities related to their methods of purchasing.
It's not surprising that visits to a life insurance company's websites or even somebody seeking information on life insurance products has increased meaningfully over the past six years, the top two lines in the chart here. What's fascinating is that purchase or attempted to purchase rates have tripled since 2011. They now make up approximately one-third of all purchases or attempts to purchase life insurance and have shown a 10% spike just in the last two years. Why is this important? CNO and Colonial Penn are strongly positioned to take advantage of these evolving consumer preferences because we already have an effective integrated sales and marketing platform in place that's dedicated to serving this underserved middle-income market. As we start to expand and think about other options, we don't have to build these capabilities from scratch.
Sure, we're going to refine many of them, particularly in the online arena, we don't have to build it from scratch. It's a huge advantage that we have. As we think now about strategic expansion and this phrase that you've heard us use, expanding to the right, we first developed a set of guiding principles that's going to help inform our approach. As both Gary and Gerardo have mentioned already today, we want to be able to offer more of our products across all of our distribution platforms. For Colonial Penn, this is pretty simple. It means offering more products, services, and business capabilities to more of the middle-income market on a direct-to-consumer basis. When we start to look at these guiding principles, new products should be simple, easy to understand, and purchase.
Go back to the previous slide and look at what people are asking for. They want things simple. We want to be able to extend our really good, strong brand equity into more of the middle-income market. We need to have a simplified, largely automated underwriting process for whatever products we offer. Simple, hassle-free. Those products need to be able to be purchased online, through direct mail, or via a telesales agent. All capabilities that we have in place today. Last, certainly not least, you've heard this a couple of times already. We want to continue to leverage and then even extend our dynamic lead sharing capabilities that we have across all of our platforms because we do have a multifaceted controlled distribution platform. Again, a huge competitive advantage that CNO has.
As we want to serve more of the middle-income market, these additional products, first and foremost, need to target slightly younger and slightly wealthier customers for us that can both round out the existing direct-to-consumer customer base that we have, but also, and more importantly, offer greater opportunities to increase share of wallet over time. We want to be able to find competitive, underserved gaps in the direct-to-consumer space, particularly where we believe that online or web digital capabilities are both needed, wanted, and being underutilized. Specific product options could be extending our life insurance portfolio, adding health or supplemental health products, and then in the future, potentially even looking at other non-life or health product solutions. From a timing standpoint, we intend to use a pilot approach, test, learn, and optimize. The phrase that I use is start small, think big, and scale with success.
Starting small from our perspective would be launching a pilot in up to six or eight states. You learn from it. You optimize your marketing efforts. You add another 10 or 15 states. You learn and optimize. All at the same time, making sure that the business that you're putting on the books is meeting the profitability standards that we require. When you get all of that in place, we can then start to think about a national rollout, which is what I would call scaling with success. Lastly, we absolutely need to stay true to Colonial Penn's long-standing value proposition of offering a simple, hassle-free solution. Convenience is paramount. We need to offer our customers quick decision-making for the products that they're looking to buy, and obviously electronic payment options as well.
Lastly, I just want to talk real quickly about how we see the marketing and sales processes evolving. As we are looking to reach slightly younger and wealthier segments of the middle-income market, it wouldn't come as a surprise that we see an evolution in the approaches that we use to be more targeted with web, digital, direct mail types of advertising techniques. Also with the propensity, as we've shown, for more customers to be willing to purchase online. From a marketing standpoint, by using a combination of web, digital, and direct mail marketing strategies with either very limited or even no national television advertising, we're going to gain a few benefits that are very important. Number 1, improved customer targeting, being able to reach the specific customers that are going to be most aligned to the products and services that we're going to be offering.
As well, we're also going to gain the benefit over time of better upfront economics, being able to capitalize the marketing acquisition expenses that we can't today with our more mass-marketing-focused television advertising. We also see, as I mentioned before, an evolution in the sales process itself. As more customers are increasingly comfortable with purchasing online, as sales technologies continue to expand, we see the role of our telesales agents evolving so that they'll play more of an assist role. We're going to add features to their tool set, things that are very common today in online buying capabilities, like live chat and co-browsing with customers. They'll be able to assist and guide the customer along in the sales process rather than driving the process as they do today, typically through making outbound calls in our life insurance business.
With that, we have a lot to be excited about at both Colonial Penn and at CNO Financial. Let me turn it back to Gary.
Thanks, Joel. The format we have right now is there are different presentations that'll come up throughout the balance of the afternoon, but right now we've got a Q&A portion for the portions of the presentation you just heard. I think Adam is going to be walking around with a mic, if you have any questions, we'll go from there.
Who wouldn't mind, stand up, say your name, who you're with. Or you can sit down if you'd like.
Ryan Krueger, KBW. New products across all your distribution platforms was clearly a key theme throughout the presentations. Just curious, how far along are you in the process so far, and how long would you expect to get to the point where you really have more product offerings across the organization?
Sure. Ryan, thanks for the question. We've just re-engineered our new product development process and officially placed it in Gerardo's area. I'm going to ask Gerardo to give you a little bit more color commentary on what we've done there.
Yes. Thank you. Yes, Ryan, we have a new product development process, we are already making good progress. We expect to see significant progress within the next 12-24 months, start with some pilots in some of the, especially, I think we'll start with Colonial Penn, but that will extend to Washington National. Very soon, I think within the 12-24 months, you will start to see more of those gaps that we have, start to fill those ones. The last thing that I would just mention on that is it is clear as we expand our product offerings, that the products will fit the channel. Meaning, do not expect to see a comprehensive long-term care product on the direct basis. That will never apply. As we think about the product expansion, it really has to fit the channel.
Thank you.
Yeah. Thanks, Gerardo. Maybe one other comment I would add to that. As we've rebuilt that process, we've also added a significant capability in terms of our competitive analytics, where we're actively out looking in the marketplace trying to understand what other companies are doing and how we can learn from that.
Hi. Thanks. Sean Dargan from Wells Fargo Securities. I have a question about the distribution of Bankers Life. The progression is to be a producing insurance agent to registered rep at the broker-dealer, which I assume is a Series 6 to RIA. I guess, how much more difficult is it for one of your agents to become an RIA versus becoming a Series 6 registered rep? Is it a slam dunk that you expect most of your registered reps to become RIAs? My understanding was it was a more involved process.
Yeah. I'll answer that. I think in terms of the actual process of taking the exams, whether you're a Series 6 or you have to get a Series 65, I think it's probably a personal opinion on which exam might be harder. There might be people in the room who have some of these licensees. The way that we are stepping people through this is to first get with the broker-dealer.
The reason for that is, for one m any times, they're taking money that's invested in a security, they might be helping someone diversify by rolling it over into a more conservative insurance-based product. When you're doing that, we want them, from a regulatory standpoint, to be with the broker-dealer in order to effectuate a transaction. It's more of that process. I think you also have to understand that just because of the way that this has developed across the industry, our agents who were licensed to sell securities were already licensed with a third-party broker-dealer. Very few of them were fee-based investment managers. Part of that is, as you may know, is because the technology to do it in a way where you didn't have to be a portfolio manager has really evolved rapidly over the last five to eight years.
Going back much further, you were asking someone to be almost their own portfolio manager. As people who are full-time insurance agents, that didn't make as much sense. For these reasons, this is the path that people are on. Someone who's with the broker-dealer, we're talking about just taking another exam, a 65 or 66, to become a fee-based investment manager.
Just one quick follow-up. Do you know offhand what percentage of your fixed indexed annuity deposits are in qualified plans?
Yeah. It's roughly two-thirds.
All right. Thank you. Erik Bass with Autonomous Research. Certainly, one of the themes you've talked about is sort of expanding, going after more affluent customers. I was just hoping you could talk a little bit more about how you do that without the agents sort of losing some of the focus on your traditional client base. How do you keep your agents from sort of trying to upsell and chase bigger tickets? How does the competitive environment change as you move up market a bit?
We'll talk at a high level, and then if each of you guys want to speak to that a little bit. First of all, I think we've got to remember that when you've got salespeople that have an incentive via commission or any type of other volume-driven incentive, you're always going to have a desire to want to sell the bigger ticket. That exists whether or not we're trying to expand to the right. That's incentives and human nature and so on. That said, if we look at our market positioning, if we look at the creation of our products, if we look at how we price and position those products, all of that is geared around appealing to the middle market. There are certain products and services we offer. Our short-term care is a perfect example, with an average max benefit of $38,000.
Someone with a $2 million net worth, that's not going to be that appealing to them. There's a natural element of the design of our products that is going to keep our distribution focused in that middle market where we've got the expertise. There are other things that our folks are doing. Scott, I don't know if you want to talk about any of the pilot programs or how we think about the GLIA as an example, and the success we've had there.
Yeah. I'd say that, to answer your question, Erik, our approach in terms of how we go to market isn't necessarily changing. If you think about it, we do all the typical lead generation things that you would expect. That's everything from getting leads through direct mail, and Gerardo went through some of these, on the internet, knocking on doors, networking, et cetera.
Typically, our agents are working with people who are similar to themselves, so they're working middle-market communities. We used to talk a lot about this idea of The Millionaire Next Door. If you knock on 10 doors in a community that has all the attributes of being a middle-class community, one or two out of 10 you end up finding they're really much closer to that mass affluent. What we want to be able to do is build out the product's capabilities and agent confidence training to be able to sell more deeply to that one out of 10 or two out of 10, and in that way, tilt more towards that higher end of the middle market. We don't see it as necessarily cannibalizing it.
As a matter of fact, that middle-market approach is what enables us to go and then find some of those households where you can go a little bit deeper and add some additional value. Could I just-
I was just going to say one other thing, Scott. What's the cross-sell ratio within Bankers Life as proof to your point about the focus on the middle?
Today, about a third of our sales in every year are coming from cross-sales. On average, a typical household has one and a half policies. Now, obviously and intuitively, that number goes up when the household has more resources and more assets to protect.
Got it. Thank you. I'm assuming since it's the same product set that you're offering, there's no difference in margins or targets as you move up, but you just get a bigger ticket.
We're not intending to take a different approach to our pricing in terms of the IRR on the products. Each product has to be developed with its own IRR and a risk-adjusted return.
Yeah. The thing I want to add just very briefly, Erik, it is I will start really with the customer segmentation work that we did. If you remember, the one customer segment that we're expanding is the Comfortable in Retirement. We're not going after what we call the castle builder because it just doesn't fit that well. We will get some of them, but that's not our intention. I think also you touched on it, is the decision that we made not to go after some of those market segments is also the competitive environment is substantially different. We're very comfortable going after Comfortable in Retirement, and we'll start with elements of lead generation, targeting the specific customers, and then channel those ones to the appropriate channels.
I might add, Erik, at Washington National, our version of expand to the right is largely going older, and we have independent distributions right now selling Medicare supplement and annuities to the same customers we're selling supplemental health products to, and they're asking us, "Why don't you offer those same offerings?" It's the same customers, just some different products that we don't offer right now.
Thanks. Randy Binner, FBR Capital Markets. I just wanted to ask on, and this is for Scott Goldberg on the GLIA product. Just to clarify, is that an indexed annuity? The question being, you had commented that you were comfortable with sales there being good post-DOL, fiduciary rule implementation with the Best Interest Contract. I'm just kind of looking to expand that a little bit more, how that would operate versus the Best Interest Contract or BIC.
Thanks for the question, Randy. It is an indexed annuity, which is our most popular annuity product. It does, in many cases, when it is being funded by a qualified account, it is going to fall under the DOL rule. We've taken the step to comply with the rule. Today, when we have an account that is being funded by the sale of a security, we get a financial advisor involved. We take very much a teaming approach in the way we go to market.
You have your newer agents, who tend to be non-registered, open up households, often with a health sale, and then they might go back to the office and team up with a more experienced agent, or in cases when it's being funded by the sale of a security or with the DOL rule would involve qualified money, go back with a financial advisor. We're going to be taking that approach as part of our compliance strategy. We've done all the other things that you would expect. We reviewed our compensation to make sure it's reasonable. We've made sure that there's no misleading statements with our marketing materials. We've beefed up the training with the financial advisor set. We've added the required disclosures.
All the things that need to be done at this stage to comply with the impartial conduct standards has been put in place and is really being done in partnership with this group of financial advisors that's an easier group and really a more sophisticated group of producers that we can more closely monitor and make sure they're acting as fiduciaries.
Just to follow up there, your broker-dealer would be the financial institution, though, as named in the Fiduciary Rule, right?
The present time, as you know, that's something that we don't have to contemplate in this interim transition period.
I mean, as of January 1st.
As of January 1, if there's no changes, then our plan would be for the broker-dealer to be the financial institution.
You're going to take that risk that the trial bar could come back. I mean, you're going to mitigate it with all the things you mentioned, but you're prepared to take that risk because that's been a debate among some folks who sell indexed annuities, whether or not they want to take that risk.
We think that indexed annuities is a terrific product for the market. You have an opportunity to participate in the upside of the equity market with no downside risk. It really fits the middle market. It's a big part of what we do. To answer your question, yes, we're prepared for the broker-dealer to become the financial institution, and we've done all the procedures to comply to give us the lowest risk profile that we can attain.
One more just on indexed annuities. The yield curve's flattened a little bit and the 10-year's a little bit lower here last few weeks. Is that usually something we'd see as a signal that would see product mix shift away from annuities?
I think generally that statement's correct. What's happening for us is the majority of sales are now coming from this indexed annuity with a living benefit, and it's completely changed the talk track for our producers. Living benefits on indexed annuities have been popular for five to eight years, but for us it's still relatively new. It's been terrific for our agents to be able to go and talk to clients about lifetime retirement income and not just talking about the other features, capital preservation and accumulation. When you're pitching it around lifetime income and the payout rates are intrinsic to the way the product is structured, those variables that you talked about make that conversation less sensitive to that conversation.
Humphrey Lee, Dowling & Partners. I'm hearing you loud and clear in terms of expanding your product suite across the platform. When we think about the potential addition of products on Washington National and Colonial Penn, is there any kind of a diminishing return at some point that you have too crowded of a menu to fit, let's say, a direct marketing distribution like Colonial Penn? If we were to look forward a few years down the road, would Washington National or Colonial Penn be kind of as rich of a menu as Bankers or how should we think about that going forward?
I think maybe, again, a couple general comments, then I'll invite these guys to comment. The first thing I would say, I think it's really important that we try and think back over how consumer buying habits on virtually everything have evolved over the last 5 or 10 years.
If you think about what Amazon has done, and so many other businesses, how quickly they have changed over this last period of time, I think it's very dangerous to try and predict exactly how much consumer behavior is going to shift, even on financial products, over the next 5 or 10 years. That's a fancy way of saying I don't think we should get too worried about are we going to have too many products in a direct-to-consumer platform that may not appeal to consumers. That said, I'd like to let these guys talk specifically about the products they're thinking about.
Yeah. I just want to jump in here. We have to start to shift the conversation towards, as Gary started off answering the question, we have to start to shift the conversation to what do consumers want. How do consumers want to interact with us? We shouldn't be as concerned within our organization what that looks like within the different segments within the organization. We need to have a unified front to the consumer so that we can interact with them in whatever way that they choose to. I think, as you've heard, there are certain products, as an example, that are probably going to be way too complicated to create an easy enough process for somebody to consume online. That's fine. That's why we have other distribution platforms to allow us to serve those customers.
Yeah, I would see it for Washington National as kind of two different solutions. One is the wholly owned distribution would be similar to Bankers, I think you'd want to put in products at some pace so you don't just bury the distribution with a whole bunch of new. On the independent side, you have some flexibility because the distributor's going to signal to you their readiness to take in another one of your products.
Humphrey, maybe one other perspective to add. If you think about the slide Gerardo showed. Were you going to let me talk about that?
Yeah.
Go ahead then.
Just bear with me. We shift the thinking from a customer-focused standpoint. The way we want to offer it is really if the customer comes on a direct-to-consumer basis, then we're able to offer that solution. Even the customer might move, start the conversation on a direct-to-consumer basis, and at some point, move from web to phone, which again, we've developed that capability. If the product requires a face-to-face agent to come and then sit down, then we offer that capability. That's basically what we're aspiring to do, this omnichannel approach. When we have product limitations like we have today on a direct-to-consumer basis, when somebody's looking for a product on a direct basis and we don't have it, we don't have a sale.
That's really sort of the process of omnichannel is serving the customer where they want to be served and move that customer, that lead, through our channels seamlessly.
If you think about the chart that Gerardo showed, there were 30 products within Bankers, and I think 10 within Washington, and three within Colonial Penn. I think in the foreseeable future, let's call it 3 to 5 years, I don't think Washington or Colonial Penn are going to get all the way up to 30 products. I think that's realistic to say they're not going to get to 30. Would I be willing to say that in 5 or 10 years they won't get to 30? No, I wouldn't say that at all. I would say it depends on how the consumer evolves and how their buying decision evolves. Because remember, the people that are buying them today, let's say the average age of purchase is 55. Today, those people are 45. They may be more comfortable. We don't want to try and pick that issue.
I think both of those numbers will go up, meaning three might go up to eight products, and 10 might go up to 15 products. I'm making up numbers. Longer term, we don't want to force that bet. We want to say, let's see how this thing develops. We want to build the capability, the expertise, and the distribution muscle to be able to serve those consumers however they want to interact with us, whatever happens with buying habits.
Hi, Daniel Bergman from Citi. I was hoping you could elaborate a little bit more on the plan to broaden the Washington National distribution and geographic reach. Really just curious in terms of, is there an expected cost to that plan and kind of the timeframe that might take? Also, if you could talk a little bit about the pros and cons of doing that organically versus inorganically and kind of any preference in terms of the path that might go.
Yeah, maybe I'll start with the second piece of that question first. The inorganic is going to get you there a lot quicker. Where the struggle is how do you get sales guys started in new territories, especially when you're going to want to borrow some of your successful guys and move them and basically start from scratch. That's what's going to take a little more time. That organic way, I think 12 to 24 months before we'd start to see any result. I would then want to point out to you, though, in some of those geographies, the good news is we already have supplemental health products there, just nobody's selling them. The long pole in the tent becomes more the distribution startup. We don't have to go through a bunch of filing and all of that on the product side.
In terms of thinking about the upside potential, is there any way to frame once you're in those markets, how you think about the potential sales or earnings, however you think about it relative to where you are now?
Not necessarily a number, but if you look at some of that map, I think we sell almost 10 times in Iowa what we sell in North, South Carolina, Kentucky, Virginia combined. There's rural markets in those states, and we're selling almost nothing. Yet we can do that kind of business in a single geography like Iowa. I don't have a specific, here's my expectation.
I think there's one other perspective that's really important and comes to the heart of our strategy. It is true that Washington and Bankers currently have different geographies. They currently have different product mixes. One is more urban, one is more rural. They sell different types of products. At the core, you're still talking about a middle-income American. At the core, you're still talking about somebody on average with half a million dollars or less of net worth, and you're still talking about someone without a pension program, as an example.
If you think about the success as an example that Bankers Life has had with the GLIA product, with our indexed annuity, there is no significant reason why some of the existing consumers of Washington National, 93% of whom simply purchase supplemental health, there is no compelling reason why they wouldn't also have a need for a product like the GLIA. There's a lot of mining we need to do to take advantage of this, and the wonderful thing is there's nobody else that's as focused on this middle income space as we are.
I just want to build up on the comment. On the cross-selling, the capabilities that we have, as you heard from Scott, a third of the sales come from cross-selling. In the case of Colonial Penn, a tremendous amount of what we call upselling, which is equivalent of cross-selling. Right now, Washington National, 93% of the sales on critical illness, tremendous opportunity, just even with the existing customers to expand some of the product offering, life insurance, some others. We will help Mike on a centralized way in which it might not require, again, some of the agents to do that. We might help via, again, direct channels like direct mail, some of the things that allows us to elicit some growth.
Thanks.
Any additional questions? No. It is break time. We're running a little ahead. The break time was going to be about 20 minutes. Let's call it 30 minutes.
We'll leave at 20.
You want to leave it? Okay. We'll leave at 20, we will reconvene here slightly before 3:00. Thank you.
[Break]
My name's Adam.
I know. Too late for me to change.
All right. We're going to get started again, and I'll turn it over to Chris to cover LTC.
Thank you, Adam. Good afternoon, everyone. Thanks, as everyone has said, thanks for being here. My mic is now on. Good. We're going to start our LTC discussion by talking about recent experience, kind of provide a level set. The short story here on recent experience is that the block has been performing pretty much according to our expectations. If you look on the top right-hand side of the slide here, you see our last five quarters of results. I'll call your attention to earned premium, which is fairly flat over the time period. Normally, you'd see a steady decline. The rate increase action that we've been implementing over the last year and a half has managed to hold our rates steady. You see two different loss ratio patterns here.
You may recall that when we did implement or begin implementing rate increases, we said we were going to show loss ratios two different ways. The way we're required to report it, then adjusted to remove the shock lapse effect. On the left-hand side, you see the impact of that, with the green line being a fair amount higher than the orange line because with the green line, we've removed the impact of those shock lapses and the reserve releases that go along with them. As we move across to the right-hand side, those lines start to come together, which is what we expected. That's because we're just about done in terms of the relative volume of rate increases. We will more likely than not stop showing those two different lines on a go-forward basis. That'll be up to Erik.
The other thing I'll point out is that the last two quarters, the fourth quarter of 2016 and the first quarter of 2017, we've had particularly good results. That's because in the fourth quarter last year, some seasonality benefits as well as some beneficial lapses on the non-rate increase business, that drove the loss ratio down a little bit. In the first quarter of this year, we've seen some positive claims variance. More importantly, no FLR accrual in the first quarter of this year, that's what has driven that loss ratio down even further in the fourth quarter. You may recall that about three years ago, we did a comprehensive review of our assumptions, the ones that we use in our loss recognition testing. We reflected those for the last several years in our testing.
I'm happy to say that our experience since then has been very much in line with those assumptions. We haven't had to make any tweaks of any consequence. In fact, at the older ages, at ages 94 and above where we've actually seen quite a bit of additional experience over the last three years, our results have been slightly better than what we had assumed. We've reflected that in our assumptions, that has helped with our improvement in our margin. If you look on the lower right-hand side of the slide, you'll see our long-term care loss recognition testing margin roll forward from 2015 to 2016. We improved our margin by $140 million year-over-year, which is quite nice. That's taken our margin at this point in time to 7% of our net GAAP liability.
Still somewhat thin, but well above the 4% from the prior year. We're happy about that. That improvement in our margin is actually what's driving the fact that we are no longer accruing future loss reserves for this block. The accrual of future loss reserves is a GAAP requirement, so it's not elective. We have to follow an approach, a modeling, and a calculation. Our FLR balance has grown to the point where at this point in time, based upon current assumptions, we do not have to accrue additional future loss reserves. I'll point out, however, that on the statutory side, where asset adequacy reserves are elective, we continue to accrue asset adequacy reserves at about $12 million a quarter or close to $50 million a year. We do this for two reasons.
One, to protect against the possibility of an assumption change that is in a negative direction and will provide us with a capital cushion. At the same time, there is discussions that at some point in time, we may have to have long-term care stand alone for asset adequacy analysis. Today, it's grouped with other health lines of business. In the event that we have to have long-term care stand alone, we want to be positioned from a statutory capital standpoint for it to do that. I'll make one additional point with regards to benefit ratios. We expect those to continue to climb over time. That's just the nature of the beast as it relates to long-term care. You're familiar with the fact that we've got gains followed by losses, that is going to drive a steady increase in our loss ratio over many years.
That's just the expectation. It's not a problem. It's just the expectation for the block. Moving to the next slide. Let's talk about risk management of the long-term care block within Bankers. Any discussion of the risk considerations of this block has to start with the block's makeup. When I say that, I'm going to say something you've heard multiple times already from Gary's team earlier. We sell primarily to middle-income individuals that are at or near retirement. What does that mean? That means that, in general, relative to other companies that have been active in this space, we have a higher issue age and a higher attained age on our block. That higher attained age means that we have what I would describe as less risk from an assumption divergence standpoint.
It's just a fancy way of saying that the time to run on our block is shorter than the time to run on other company's blocks. If the assumption that you've set and the experience that you start to observe starts to diverge, if that divergence lasts seven years with one company's block and 20 years with another company's block, things can go off the rails to a much more significant level with other blocks of business. The other thing that we see is that higher attained age means a shorter duration of our liability, and that shorter duration allows us to match our assets and our liabilities, which ultimately results in mitigation of interest rate risk. The last thing, in terms of the middle market, is that our benefits are less rich. Let's talk about that for a second.
Only one-third of our insureds have an inflation benefit, less than 50% of those have the 5% compound inflation benefit, which is the most dangerous form of an inflation benefit on long-term care. Lifetime benefits, which we do not sell and haven't sold for many years, represent only 10% of our reserves and only 4% of our insureds. Benefit periods of four years or less are 73% of our reserves and 87% of our insureds. Again, this is all part of the risk profile of the block, which we feel is better on average than what you see in the industry. The industry, as you know, has been repricing long-term care for quite some time. That repricing and the exit of some companies has resulted in this product becoming less and less affordable, certainly for some insureds, less affordable in terms of the robust benefits.
We do feel that this is a benefit that our consumers need, and we meet that need through offering the shorter benefit periods that Scott talked about earlier and that we've talked about today. 95% of our current sales of this product have a two-year or less benefit period. What are some of the examples of actions we're taking to manage the risk of this block? Well, real quickly, you're familiar with the rate increase actions that we've taken since 2006. We have implemented and successfully completed five rounds of actuarially justified rate increases. That has mitigated, certainly, the impact of the block on our loss recognition testing margin. We have piloted and are implementing several initiatives to adjust the claims cost curve, I'll talk more about that in a minute.
We do regular comprehensive studies of our persistence and our morbidity to make sure that our assumptions are always as aligned as possible with actual developing experience. The coinsurance of our business since 2008 is actually an important risk management tool because we reinsure, we have a reinsurer who's looking over our shoulder. They come in on an annual basis, they review our claims processes, they review our underwriting methods, and they make sure that what we're doing is consistent with their expectations from a risk management standpoint. Through that relationship, we bring best practices in both the underwriting area and the claims management area into Bankers Life. If you've watched our claims reserve history, you'll know that we have a very good track record there.
Our claims reserves in Bankers have been redundant for over 10 years, which is in contrast with what you've seen in some other instances. Of course, we've opportunistically acted to reduce the risk in other ways through product repricings and, as we've said, the offering of shorter benefit periods. Let's talk a minute about claims initiatives. This graphic does a good job of illustrating the claims initiatives which we are testing. You'll see that we've got initiatives that are being worked in all phases of a claims development. Pre-claim, at the time of claim, and managing a claim once it has started.
It's important to recognize that a good deal of study and analysis is needed for us to test these initiatives to the point where we can say, yes, they are delivering improvements in the results, and therefore, we can adjust our assumptions on loss recognition testing. Right? Some time ago, you may recall that we projected that these types of initiatives would deliver in an area of $100 million of benefits to our loss recognition testing margin. Thus far, we have actually tested and operationalized a number of initiatives that have added 75 of those $100 million to our margin. We're doing it, and it's working, and we will continue to do it. Studies will continue.
Some of these, as I said, can take a long time, years, because you have to have a control group, you have to have a test group, then you have to see the results. It can take a long time. We're very happy with the results we've seen thus far. Studies continue, and we're very confident we'll be able to meet our original projections with regards to this. There's a good deal of information on this slide, and it's a little bit busy, so allow me to make a few observations. The first thing that you need to take from this is that our long-term care block is not homogeneous. Right? It's not this monolithic block of policies where every policy is like every other policy. What we've done here is we have shown the block several ways.
We've divided it by product type and by issue year cohort. This is something we talked about in our last earnings call, and then we've shown you statistics related to each of these. Each one of these cells makes its own contribution to the risk profile of our long-term care block and its own contribution to our loss recognition testing margin, some positive and some negative. Let me call your attention to the net GAAP liability that we show for each cell. This gives you an indication of the relative size of each one of these cells, and you could use this net GAAP liability as a bit of a proxy towards the risk, if you will, that each one of these represents. We also show annualized premium for each cell. What does this do?
This provides insight into if assumptions start to diverge and we want to pursue rate increases. It gives you some idea of how a justified rate increase might be able to move the dial as it relates to each one of these cells. Another thing that I want to point out here is the average attained age. We talk about this a lot. I talked about it a little bit earlier. You might be tempted to just say, "Okay, well, that's nice. I see you got attained age here." Let me talk about this a little bit more and call out. If you look at the 2002 legacy column, the average attained age in that column is in the mid-80s. Right? Somewhere around 85. If you look at the 2008 and subsequent, the average age there is in the early 70s, let's say 72, 73.
I would say that over a general, both of those ages are higher than what you'd find for similar blocks in other companies. What does that mean? I talked about less time to run and assumption divergence risk. Let me try to boil that down for you. If you were to look at the half-life of that legacy column, in other words, how long does it take for that block of business to run off 50%? From a policyholder standpoint, the half-life of that column is six years and nine months. In other words, it's less than seven years. The half-life of the reserve is a little bit longer because of the nature of reserves. That's about 12 years.
If you move over to the right-hand side, the half-life from an insured standpoint is more than double, and the half-life of the reserve is two and a half times what it is on the left-hand side. Why am I pointing this out? When we've talked about managing this risk, we've talked about trying to reduce the footprint of long-term care. One of the things that we do in our discussions with parties is educate them on the unique profile of our business. This is one of the important factors, because ultimately, this higher attained age, this shorter half-life, this shorter run time period, we believe will lead to less of a bid-ask differential and increase our likelihood of being able to get something done with this line of business. Let me also call your attention to the margin sensitivity information that we've shown.
It's summarized at the bottom of the box and on the right-hand side. We've shown margin sensitivity, and this is loss recognition testing margin, and it's a sensitivity to a change in either one of these assumptions. For morbidity, we're assuming here a 5% pop in the morbidity rate across the entire curve, instantaneous and across the curve, and forevermore, a pop up in that morbidity rate. It's also assumed here that there would be no management actions following that kind of a pop-up, which, of course, is not a realistic assumption. This is illustrative. It's intended to give you some insight into the risk that is represented by an assumption change, and then where within the block the bulk of that risk might be, which cells contribute more to that risk than others.
As you see in the bottom of the morbidity column, $330 million impact of that 5% morbidity change. That's about equal to our LRT margin today. Again, if that assumption was to start to change, it wouldn't happen instantaneously. It would take years. We would react to it with rate increases and other actions. It is illustrative. It gives you some insight. The same thing with the 5% level interest rate. In this case, what we're assuming is new money and the portfolio yield both drop down to 5% and stay there forever, and that's a significant change. In fact, an unrealistic one, particularly with regards to the portfolio yield. It gives you insight into where the risk is more pronounced relative to this division of our in-force block.
I show you this because it gives you insight into where our focus is going to be as we look for ways to mitigate the long-term care risk and decrease the footprint of long-term care. What types of risk reduction options are being considered? As you can see on this slide, we've got a fairly comprehensive list of options that have been discussed and considered and are still being considered within CNO. This is not an exhaustive list, but it's a pretty comprehensive list. It is not intended to be an indication of all of the things that we're working on equally. In fact, once we compiled this list, we started to rank order them from the standpoint of which of these is going to accomplish the goals that we want.
Eric's going to talk a little bit about some of the goals that we wanted to accomplish. The way we've laid this slide out gives you some indication of the relative degree of focus. We're focused more on traditional forms of reinsurance, coinsurance, stop-loss coverage, whatever. Less likely that we would do some kind of a separation or isolation type move related to long-term care. Whether we do a combination action or not really depends upon what our first step is and then what that means from a capital standpoint and from a risk reduction standpoint. It may or may not make sense for us to do something in combination with another move. This is to give you insight in the things that we're working on. What you need to know is that there's a cross-functional team within CNO.
A lot of people under me, a lot of people under Eric, that are working on this on an ongoing basis. I've heard the question asked, "Ed announces retirement. What does this mean for long-term care and the efforts that we have to reduce that footprint?" Nothing changes, really. I mean, nothing at all in terms of this is still a big focus, and it will continue to be until we get the job done. As you can imagine, there's a lot of analysis required to figure out which of these is best. That's not just on our part, but on the part of parties that we bring in.
We have engaged with quite a few interested parties, we're working with them to allow them to see the data behind our business so that they can confirm the unique demographic profile of our block and the experience that is evolving, all of which will help to improve