Good afternoon. Welcome to the CNO Financial Group 2014 Investor Day Conference. I'm Erik Helding, Senior Vice President of Investor Relations, and on behalf of the entire management team, I'd like to thank you for participating in today's event. Today's presentation will cover several topics. First, Ed Bonach, our Chief Executive Officer, will give a strategic overview of our business model, the middle market opportunity, and how we think about the commitment of capital that we generate in our businesses. Scott Perry, our Chief Business Officer, will then moderate a panel that will discuss the investments we are making in growth and infrastructure to increase sales and operating efficiencies and to enhance the customer experience. Eric Johnson, our Chief Investment Officer, will then discuss how we've been able to defend yields and maintain credit quality in our investment portfolio.
After a short break, a panel of our senior executives will discuss how CNO is managing its long-term care business. Fred Crawford, our Chief Financial Officer, will discuss CNO's financial plans. At the end of each section, there will be a brief question and answer period. If any member of the audience would like to ask a question, please raise your hand and we will provide a microphone so that those listening to the webcast will be able to hear. At the conclusion of the event, management will come back up for a final Q&A session, and then Ed will wrap up the day with some closing remarks. Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements.
Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in Appendix. Before I turn it over to Ed, we'd like to share a brief video with you that demonstrates CNO's focus on and commitment to the middle market.
Well, welcome, everyone. Thank you for coming to our second ever Investor Day. Realize that we do have some competition maybe for your attention here, but glad at least you've shown up. We're not going to show the game up on those screens, but I get to watch it right here. If anyone needs a letter from me to excuse you to come and attend the CNO Investor Day, I've got that for you as well. Thank you for your engagement and interest and support of CNO. This video hopefully does show you how we really are committed to serving the middle market and also hopefully helps to underscore some of the opportunity we have with our commitment to the middle-income market in the U.S.
We hope to advance that understanding for you today with a variety of my colleagues here and their remarks as well as their slides. With middle-income America, we still think that one of the key differentiators for CNO is that we are focused on a market as opposed to a product. The opportunity in the middle market in the U.S. is huge. No matter how you slice it or dice it, no matter what report or research you look at, the conclusions are it's a fast-growing market, it's large, it's underserved, and under-insured. A couple of statistics here, where 30% of that market has no life insurance at all, and 25% acknowledge that they're under-insured. We're pretty convinced there's more than that are under-insured, but they don't even know it. They don't even know how to determine what their insurance needs are.
On top of that, our sweet spot of people becoming eligible for Medicare is growing at a rapid rate. With the baby boomers aging, 10,000 boomers a day are turning 65, and that's going to continue for several years. It's not just this year. It's for many years into the future. As we see it, the challenge that the industry's had with, why is this market so underserved? Well, as an industry, we haven't effectively been able to reach it. We think that reaching it is not just part of it. You got to reach it with an appropriate return, and here is where, again, we think we have differentiation as well as sustainable competitive advantage. Our view on how you succeed and how we succeed in this market really starts with you got to know your customer.
You need to know their needs, their concerns, their aspirations. What is it that's on their mind? What do they have in the way of protection, security needs that we can hopefully address through our products and advice? Like I said, you have to be able to effectively reach that market and serve the customers, we believe, with a breadth of products and price points, coupled with good, sound advice, and then supported in the back office through customer service of the customer, as well as actually the distribution and the agents. We think we have that alignment that way to do it. On top of that, part of knowing that customer, we're quite proactive. Go figure. We actually go out and meet these customers. We actually talk to them face-to-face.
We go to their homes, we go to their ranches, we go to their work site, our agents are actually sitting there and talking to them and doing needs analysis, listening to them. Then we supplement that with our own proprietary research. Both our experience and our research show that customers really do want to speak with someone. They need advice, they need knowledge, and they want to be able to provide for their legacy. They want to be able to live comfortably in the future. That's not just having enough savings for a retirement income. They're concerned about their health as they age, and how are they going to pay for that.
With this alignment, we think that that is a key part of not just sustaining our growth, but also it's a catalyst that drives our returns and produces strong cash flow along the way and builds value for all of our stakeholders. This slide hopefully helps to substantiate some of this instead of just our words, that I believe, and I take great pride in being associated with this management team and company with our track record of execution. It's people getting things done, but also it's having that right market focus and the business model in order to produce the kind of results that we have. We've been investing in our business model, and we think that that is already paying off. If you look at the chart here on the right-hand side, our growth rate, we're not one-hit wonders.
Five-year compound annual growth rate of 10% in life insurance sales, while the industry is down 1%. Why did we pick life insurance? It's not because that shows CNO in the best light. We did it. One, we sell life insurance in all three of our core segments. Two, most of the insurance industry sells life insurance. We thought this gives the broadest perspective of us relative to the industry, and on hopefully comparable footing of where are we succeeding, where the industry in general has been having troubles growing over the last five years. Hopefully you'll see and be convinced by the end of this afternoon we're not done yet. We think that our growth rates can continue in this neighborhood and in this zip code. With this, it's not just growing the top line. We've been growing the bottom line.
We've been growing our relative measures of profitability, including ROE. With that, we've been reducing risk and volatility in the company and in our results. Like I said, and you'll hopefully gain more insight into this in the next few hours, we're not done. We're continuing to invest in our business that's going to even better position us to grow and deliver in the future. Certainly, a part of any insurance company is capital, having adequate capital and sources. Also in our story is also how do you effectively deploy that capital? With our priorities here, first and foremost, we need to make sure we're on solid footing. We've done a lot over the last several years to establish that sound footing, and we're going to continue to do everything in our power to defend and maintain that as well as our business franchise. Start there.
Secondly, we're going to continue to invest in our business model to drive growth even further, as well as investing in the middle and back office to drive greater efficiencies. Why are we investing in all of this? Well, how do you bring shareholder value? Yes, if you look on a per share basis, you can do it by continuing to just buy back securities. We're also going to provide value by growing the enterprise. Our objective is not to stay at a $4 billion market cap and just have fewer shares outstanding. Our objective is to grow the value of the company and grow that on the top line and the bottom line. As far as deploying capital externally, we intend to continue to be strategic in that deployment, balanced, and thoughtful, and opportunistic. You'll hear more about that, especially from Fred here in a while.
That deployment is really based on a disciplined approach of analyzing cash-on-cash return. We're all about economic value, and that's the way we look at the world in a variety of ways. M&A is expected to be in the mix of our capital deployment. Can't tell you when, what, how much. What are our lenses for this? First of all, we expect it to be focused on augmenting and/or complementing our business model. How can we accelerate our growth? Accelerate our achievement of efficiency is going to be another key part of how we look at M&A. Also, we expect to leverage our valuable tax assets that will go in part unused if we just rely on organic growth alone.
We're about economic value, and this management team is determined to not let economic value dissipate because we sat on our hands and did not thoughtfully deploy capital. Before I hand it over to Scott Perry and the business panel, I wanted to at least give you a little more of a focus as we look ahead. First of all, pleased to let you know that just this week, we did receive the regulatory approval for the sale of CLIC to Wilton Re, and we expect that transaction to close next week. As I've said before, and our releases have said, this really is an important step for CNO. It allows us to shed some volatile, more complex legacy businesses, and, just as importantly, allows us to focus our attention on growing even further and more profitably our core businesses.
With that, I talked about our capital deployment. It's going to continue to be balanced. We're going to continue to invest in sustainable, profitable growth, and doing that while returning value to shareholders. Accelerating our operating effectiveness is important from both the top and the bottom line. As part of that, to really focus on also enhancing the customer experience. We don't have a business without customers. They're the ones in the end that write the checks to start the whole chain of value there. With customers being served well and appropriately, they are the ones that do refer others to us. We rely a lot on leads. The best leads that we get are referrals from customers that had a good experience with us.
As my associates have heard me say many times, we're going to invest in our talent because in the end, we win and lose with people. Hopefully, you'll get even more of an insight of how we're on this winning streak because of the quality of people that'll be here before you this afternoon. Talking about quality, we look to continue to grow in absolute terms, different profitability measures like ROE, but also the quality of that ROE with lower volatility, lower beta as it grows in absolute terms, too. Needless to say, bullish on CNO and our ability to further grow and deliver as we move forward. Other than what Eric said, no, I'm not going to take questions now. Will later. I'm going to turn it over to Scott Perry and our business panel.
Thanks, Ed. Good afternoon, everybody. As Ed said, my name's Scott Perry. I'm responsible for our three businesses and focus on our business plans and our back office plans to capitalize on the expertise that we do have in this middle market and to generate growth rates that are significantly above growth rates that the industry has seen. Joining me on the panel today, our first panelist is Scott Goldberg. Scott is president of Bankers Life. He's been with CNO for 10 years, and he's been part of the Bankers organization, most recently as one of our leading field vice presidents since 2007. To Scott's left is Barb Stewart. Barb is president of Washington National, and she's been with CNO for eight years and part of the Washington National organization her entire career, most recently leading our marketing and distribution areas. To Barb's left is Gerardo Monroy.
Gerardo is president of Colonial Penn. He's been with CNO since 2001, primarily in marketing and leadership roles in our operations area at Bankers Life. He assumed his role as the president of Colonial Penn in 2012. Our final panelist is Bruce Baude. Bruce is CNO's Chief Operations and Technology Officer. He joined us in 2012. Bruce brings with him a wealth of diverse experiences that the team has benefited from tremendously. Bruce will be sharing a little bit more of his background with you as part of his comments. The way the panel's going to work is we'll each go through a few minutes of commentary. We'll go down the list, and then we'll open it up for audience questions. As Ed mentioned, success in the middle market requires a unique combination of the right distribution, product, and back-office approaches.
Those companies that are planning on moving into this market that have traditionally served the more affluent markets. Make no mistake, there are many talking about that, without considering retooling their approach, may find that it's kind of like trying to fit a square peg into a round hole. The economics of selling a high volume of relatively small policies can be very challenging to distributors as well as carriers that have traditionally served those other markets. That's why at CNO, we feel we're in an extremely unique position to serve and to tap into the middle market because our proven business models do just that. They align the right distribution channels with the right product portfolio, the right back and front office, and importantly, also the right corporate culture to effectively serve the middle market.
For example, each one of our businesses over the last 25 years has built, developed, and mastered distribution capabilities that are highly effective of engaging middle-market consumers in three ways. Face-to-face at their homes, face-to-face at the employer work site, or direct via our direct response advertising model. Over the last three years, as Ed alluded to, we've been investing in these core business capabilities, building them out and evolving them. As a matter of fact, about a year and a half ago, some of you remember, I spoke to you about some of those investments we were making at the time. For instance, at Bankers Life, we've invested in expanding our locations. At Washington National, we've invested in people, products, and geographic expansion. At Colonial Penn, we've invested in products and the expansion of our lead generation capabilities. These investments have helped us grow.
As you can see on the chart, over the last three years, we've generated compound annual growth at approximately 5% over that period, collected premium has grown accordingly. As we look forward over the next three years, we expect those growth levels to accelerate. We expect to be north of 8% on a CAGR basis and collected premium to continue to grow accordingly, generating that economic value. As Ed also alluded to, we're still investing in the business. The pie chart up there shows that in 2014, we'll invest approximately $50 million between the back-office growth enablers and our growth drivers, about equally split. Over the next two to three years, we expect similar investments, again, equally split between our back office and our front office growth drivers.
The financial targets that Fred will be sharing with you later assume that similar level of investment in 2015 and 2016. The investments that we're looking to make are capitalizing on some important trends that we see emerging in the middle market, and we see an opportunity to take advantage of those trends. Those include the increased popularity and importance of supplemental products in the work site marketplace. The changing financial planning needs for retiring boomers. We see the availability, the adoption, and low cost mobile and digital technology as being a significant opportunity. Finally, we see an increasing trend in the recognition, especially in the middle market, of the value and the need for life insurance.
The investments that we're going to make in those areas are expected to achieve improvements in our sales productivity, improvements in our penetration in the voluntary supplemental work site marketplace, expansion of the breadth and depth of our products and services and advice that we're able to offer the evolving needs of the middle market. Finally, improvements in our infrastructure that'll ensure that we're enabled to support the growth and continue to improve efficiencies. To talk more about these investments and specifically as they relate to our business segments and our back office area, I'll now turn it over to our panel and our first panelist, Scott Goldberg, to talk about what's going on at Bankers Life. You want to do it?
I want to pick up on some of the points that Scott and Ed made about the middle market retiree opportunity. I forgot to do it. 80% are concerned about healthcare expenses, 72% don't have a plan for long-term care, half are not receiving any type of professional retirement guidance, and those who are working with an advisor, 84% of middle-market retirees had to approach that advisor first and not the other way around. The reason I bring this up is because it supports what our agents have long been telling us and the narrative of the middle market that many of you are familiar with. That is, that it is underserved. It's been abandoned by carriers who have migrated upmarket along with their distribution. It's been abandoned by employers who have shuttered defined benefit pension plans and retiree healthcare programs.
You have this large segment of middle-market retirees that are concerned about their healthcare expenses, challenged with navigating the annual changes with the Medicare programs, and by the way, would like to optimize and protect the assets they have, generate income, think about their legacy. Unlike high net worth individuals or pockets of the mass affluent, they do not have a network of advisors to lean on. Some of them are going to go online and get information, and some might enroll in some products direct. Some of them who are still working might buy a supplemental health plan at the work site. There is a large segment of middle-market boomers who are nearer in retirement who have their head in the sand.
Take it from someone who works with this population day in and day out, you need to approach them in their homes across from the kitchen table and help them help themselves. That's what we do at Bankers Life. We have 1,000 field managers operating across 300 locations overseeing 5,000 agents. While we've always been able to go wide and acquire a lot of households selling small ticket health products, now we're able to go deep and do some basic retirement planning that is proving to be very meaningful to this segment of the population. This is somewhat of an evolution for us, what I would characterize historically as a single product transaction-based sale to what is evolving towards a multi-product sale as part of a holistic retirement plan.
Already it is beginning to show up in our numbers, in our agent productivity, and in the sales of particularly our protection and accumulation products. I'll give you some data. Last year, our agent productivity measured as average premium per agent grew by 4%. This year, it's up another 4%. Last year, our annuities grew by 4%. This year, it's up 11%. Last year, our life insurance grew by 13%. This year so far, it's up another 13%. Month to month or quarter to quarter, results might vary. We believe that the momentum we have and this upward trend can continue, and we're making investments to make sure that it does. I want to talk to you about those investments. One, mobile and CRM. We have a mobile workforce, and they need mobile tools.
We're deploying a series of cloud-based software as a service technologies around prospecting, around illustrations, electronic applications, and managing client relationships. We call this the office of the future, and it's a vision built around mobility, tablets, and smartphones. Last year, we rolled out a suite of electronic applications around our simplified issue products. We saw agent adoption north of 70%. Our agent force skews younger than what you're going to find in the industry or at other carriers, and they're hungry for this type of technology. Interestingly and importantly, because these are cloud-based and they're often subscription-based or unit cost based, the amount of investment that we need to make to realize this type of technology is extremely economical. Number two, we're upgrading our infrastructure. We're replacing telecom systems with new voiceover IP.
We're replacing our commission system with a new system that is much more flexible and gives us greater visibility in how we manage the performance of our agents. Number three, we're continuing with geographic expansion. Every time we open up a satellite, that gives our branch managers another location to recruit agents closer to the communities in which they serve. That allows us deeper penetration and fuels agent productivity. This year, we're on pace to open 15 more locations. That is a pace we can comfortably continue for a long time to come. Fourth, I want to circle back to this financial planning notion. We think that there is a very big opportunity to bring holistic retirement planning to the middle market. It has to combine protection products, protection and accumulation products, and investments. Today, only 5% of our agents are also licensed to sell securities.
We think that we can grow that percentage considerably. What we find, based on our experience, is that when an agent is able to bring investments and insurance products as part of a holistic retirement plan to this segment, their insurance sales grow considerably. Of course, we're also looking at our own products, and how we can make them more friendly to a planning process. Things like enhancing living benefits and adding additional health benefit riders to our existing products. Here's an outlook slide. Very much what you've seen before, but I do want to point out and make a comment around our average agent force size. As we have focused more on agent productivity, we have had some locations fall back on new agent recruiting. The weather we had during the first quarter certainly hasn't helped.
Having said that, because we are already seeing our gains in agent productivity boost agent retention, we still expect to finish the year at roughly the same size agent force that we started with. We're making some tweaks to our recruiting programs and are very confident that we'll see the agent force begin to grow, and resume its upward trajectory as we finish out the year. With that, I want to turn it over to Barb to talk about Washington National.
Thank you, Scott. Afternoon. Let's see if we can switch back there. Sorry. It's a little. Here, Scott, I'm going to let you take care of that. It's my pleasure to provide the outlook for Washington National. I'd like to start first with some background. We serve the working middle income Americans with supplemental health and life insurance. About 95% of our sales are in cancer, critical illness, accident hospital indemnity, and a little bit of disability. These policies are sold to accompany an individual or a group high deductible health plan. They fill co-pays, deductibles, as well as non-medical expenses. Our distribution, we have 2,000 producing agents across the country. Our independent distribution, we call independent partners because most have been with us for five to 20 plus years, as well as newer work site agencies.
Performance Matters Associates, or PMA, is our own distribution organization. About 800 producers contributing 75% of our sales. Both distribution organizations participate in the individual and work site markets. For work site, we have 40 years of experience, 25,000 groups, predominantly in the small mid-size market, government entities, and school districts. I'm going to focus my comments today on supplemental health. There are two trends that are positively impacting our sales. The first is an increased receptivity by middle income consumers to buy. There has been a lot of media coverage, as you know, as it relates to healthcare reform. Also major studies like the Kaiser Family Foundation, that focuses on the impact and the financial strain of middle income consumers in the event of a major accident or illness.
A lot of focus on the cost of cancer. Makes sense. I'm going to share something that's a little discouraging, but it's a fact of life. For the men in this room, there's a one in two chance of contracting cancer during your lifetime, and that incidence increases in your 30s. For women, it's a one in three chance. Therapies are becoming increasingly sophisticated, and there's increased use of maintenance drugs, which is driving the increased expenses. We believe this is a largely untapped market. Even our spokesperson, Shannon Miller, Olympic gold medalist and cancer survivor, was not aware of the coverage options that were available to her. We surveyed middle income Americans last year. 75% were not aware that they had coverage options, and only 5% of them actually owned a cancer or critical illness policy.
The second major trend is employers moving to high deductible health plans and their increased receptivity to adding Washington National products to the voluntary benefits program. We offer the higher margin and now faster growing products as it relates to voluntary product lines. As you might expect, following ACA, we now have more competitors entering the marketplace. I want to remind you of our advantages. One, we have own distribution. Two, we focus in that small and mid-size market, which is harder for the new entrants to play in profitably. Three, we have very strong back office in terms of group count set up, billing, administration, and claims. Lastly, we have very strong agent relationships and less channel thrash than some of our major competitors. We're building now on that foundation with an investment in expanding our work site business.
In the second half of the year, we're introducing the Washington National OneSource private exchange technology platform, plus a portfolio of group products. When I refer to a private exchange, I am referring to the ability for an agent to provide a value to employers that eases the burden associated with benefit program administration. Their ability to enroll core, voluntary Washington National strategic partner products with consolidated billing and online ben admin services for the employer. As a recruit recently shared with me, that enables them to have a value add proposition to the employer beyond just trying to spreadsheet benefits Washington National versus a competitor. We anticipate that that will enable us to recruit more agents and acquire more new groups.
In terms of the group portfolio, I'm referring to the addition in the second half of the year of a group cancer indemnity, critical illness, and accident policy, as well as partnering with strategic partners in those voluntary product lines that we don't choose to manufacture. You might say, "Why the group product portfolio?" Well, the larger employers and benefit brokers favor them. Benefit brokers represent about 57% of the voluntary product distribution. We obviously want to take advantage of that. For employers, it enables them to allow all the associates to participate in that voluntary benefits program, regardless of their medical history. For agents and brokers, they're easier products to enroll, especially with the guaranteed issue capability.
For us, it allows us to expand our private exchange offering from what has historically been individually underwritten products to have a more robust exchange, as well as now in the future to be able to participate in third-party private exchanges. The second major investment we're making is in growing PMA. We have been building our recruiting resources and our programs and seeing a net gain in our agent count. We're also just starting the process of recruiting experienced supplemental health producers, and we're adding products to additional states and building management talent so we can expand geographically. Just short of 70% of our sales from PMA right now are concentrated within 10 states. Strong opportunity. We expect these investments, thank you, Scott, to provide an 8-10% annual increase as it relates to our PMA agent count.
We should see sales in the 7 and 9% this year, and the upper range increasing over 15 and 16 as these initiatives take hold, then our collective premium increasing by 5-7%. In summary, you take one thing away from what I've said, we are investing in worksite and PMA to drive our future growth. Thank you, now I'll turn it to Gerardo.
Thanks, Barb. As Scott mentioned, I have been leading Colonial Penn for the last two years. During this period of time, I have learned to appreciate the more than 30 years that Colonial Penn has to successfully reach the middle-income customers on a direct basis. This has enabled Colonial Penn to become one of the top five players, also to establish a very strong brand name and recognized brand name in direct sales. I have also come to recognize and realize that for Colonial Penn to continue to be successful in the next decade and beyond, we need to evolve our model. For the last 24 months, we have implemented a lot of important changes, starting with the introduction of new products, driving efficiencies, improving productivity, importantly, changing some of our leads and sales mix.
When we think about the opportunity, life direct sales are positioned for solid growth. Keeping in mind that today only 5% or less than 5% of the total life sales are on a direct basis, but consumer preference mind changing, and they will actually drive a lot of the additional growth. We are actually learning that the younger middle-income boomers are looking for simple and easy-to-understand life insurance products, and they have a preference to buy them direct. These changes in trends have also increased competition, not only from traditional players, but from new entrants. The most relevant being MetLife. The collective investment in direct channels has increased the marketing cost, especially on TV advertisement.
I would like to talk about some of Colonial Penn's key initiatives, which intend to capitalize on the positive changes, but at the same time, address some of the challenges that I mentioned. First, we're very excited about the new term and whole life, a new product that we recently introduced, which today accounts for almost 10% of our new sales, and within the next two years will account for 20% of our sales. This actually enhances our confidence in our ability to pivot to other sales beyond our core product, which is final expense. Second, we have and we continue to invest in our web and digital capabilities, which are enabling us to access a younger customer base, which on average is 10 years younger than our traditional GDL customer.
These younger customer will help us drive further growth in our Patriot program and actually will position us well for further additional product introductions in the future. Third, sales diversification. Traditionally, Colonial Penn has relied very heavily on TV advertisement. But with the changes that we have implemented, we're projecting by the end of 2016, 40% of our new sales will come from non-TV related sources. This actually have important benefits, not only from sales growth, but for improvements in our marketing to sales ratio, the marketing cost to sales ratio, as well as our total EBIT. Lastly, our telesales organization has been increasing their productivity, and this is a result of our full implementation of our new CRM system. Moving to the outlook. First, we're slightly revising down our sales outlook for 2014 to a range of 5%-7%.
This is mainly reflecting the very challenging first quarter, but it does also reflect some of the positive momentum that we are experiencing in the second half and the further acceleration of this momentum in the third and the fourth quarter. Positively, from a total EBIT standpoint, we're projecting by the end of 2014, we'll be at or near break-even, while we continue to invest in growth. As we look at the 2014-2016 outlook, you will note that we are projecting improvements in our marketing cost to sales ratio, increases in our in-force EBIT, and accelerated sales growth, reflecting the full benefits of our initiatives. In summary, we strongly believe that the continued and future success of Colonial Penn will come from positive changes in our model, accessing new markets, and expanding our product offering.
We are, and will continue to be laser focused on sales growth, on improving the economic value of our business, and on strongly position Colonial Penn to serve all of CNO Financial direct sales needs. With that, I'm going to turn the presentation to Bruce.
Thanks, Gerardo. Good afternoon. I'm Bruce Baude. I'm responsible for technology and operations at CNO. As Scott mentioned, I've been at the company about two years, and I have what I consider to be a non-traditional background that I bring to the role. I haven't spent a lot of years of my career working in insurance companies. I've actually spent most of it working in the BPO space. I've led three different BPO companies, two of them in the payment processing world, and one of them in insurance administration. To succeed in that space, you've got to build a culture and have a tight focus on a competitive cost structure that's continuously improving and be very responsive to the customer.
That's what we're very focused on building at CNO and capitalizing on that kind of a mindset as we look to continue to grow and penetrate more market share. Now, when I think about the middle-income market we serve, I think about it, when you look at it from the lens of my role, as a pretty straightforward proposition. It's about simple and affordable products, and it's about reliable service. One of the luxuries we have is we don't need to think in terms of highly exotic products and the cost it would take to administer those. We don't really have to think about Nordstrom and Ritz-Carlton type white glove service. We need to think about reliable service, consistent, accurate, simple, empathetic. Those are the kinds of words we use to build our service delivery model.
The luxury is that we can design and build our entire back office delivery approach using those simple, straightforward concepts as opposed to have to develop a complex back office. Now, obviously, we feel we compete well in this market today. We're a leader in many ways. The good news is, or the challenge, if you want to look at it, I tend to look at it as good news, is we have lots of opportunity to get better and improve. If you look at our back office, we've got some of the same challenges you'd find at banks and insurance companies all over the country. We've got more platforms than we prefer to have or that we need to have. Our data is not as aligned and efficiently accessible as you would like it to be.
In our case, we also have operations that aren't as streamlined as we'd like them to be. We have some insourced, some outsourced, and not leveraging our scale perhaps as well as we could. We also really haven't invested or put a ton of investment into automation and customer self-service. At the end of the day, the kind of the punchline of that is we have a sub-optimized cost structure as a result of those things. The good news is we can do something about it, and we're still effectively delivering the back office services today, which is enabling their businesses. Our game plan to date has been what I would call an incremental improvement approach, more tactical in nature. The reason why that's been our focus in the back office is quite frankly because the company has been focused on higher priorities.
I'll tell you, we've made some meaningful progress just using elbow grease in the back office, just by paying attention to details, making run rate type of investments, building a stronger team. We've been able to do some pretty effective things to reduce our cost structure and improve the customer experience. Couple of examples I just picked out to put on the slide. We've just, again, through those more incremental process focused things, we've reduced our call volumes in the company by over 10%. We've also deployed a productivity management tool across enterprise operations.
What I mean by a productivity management tool is it's a tool set that we adopt in all the departments that allows us to get a very granular level of the variable cost of every task that we do in the environment, which gives us the ability to forecast that volume and understand how to staff it in the most efficient way. Those are things we're doing today that are moving the needle. What's exciting is, I think now we're at a point where we can pivot into a more strategic mindset for the back office and think about making more significant investments.
The three big levers that we've got to continue to improve the bottom line and achieve some of our other goals is, one, is work on the platform consolidation, leveraging our scale, and building a more efficient delivery of our operations through sourcing strategies and just better alignment. Then the third is, as I mentioned, we've got a big opportunity to automate more of the back office and also really begin focusing on customer self-service. Obviously, one residual benefit of these kinds of investments is going to be improving our cost structure. What you need to understand is my mandate is broader than just cost reduction. I'm here to enable and help all three of these business leaders penetrate and increase the market share of middle-income America. We've got a lot of work to do to refine those investments that we would make.
You can see we're already making a ton of investments as we've been listening to these three. We're poised to sort of turn the page and go into the next chapter of how we enable the businesses to grow. With that, I'll turn it back to Scott.
Great. Thanks, Bruce. Many of the initiatives that Bruce is driving, he kind of alluded to it, are already helping the businesses transform our delivery value chain, as we refer to it. Again, Scott used the term office of the future. Kind of view this, you can see it up on the slide, this is the value chain broken down from the time we initiate contact with the customer through the sales process, through the customer experience, paying claims, et cetera. We view this value chain as opportunities to deploy technology and investments to improve our efficiency, ensure that that value chain is enabled, and working together to maximize productivity throughout. Scott mentioned this, too, we intend to capitalize on lower-cost technology. The cloud technology is becoming lower cost and very reliable, as well as lower-cost mobile devices that are now going into the hands of our field leaders.
Our customers are much more receptive to things like electronic app and electronic presenters and illustrations, et cetera. We'll be leveraging those kinds of technologies to help improve our efficiency and our productivity in both our sales organization and the back office. Even though we have this slide kind of broken down into where we've been and where we're going, a number of the things down below on where we're going, we're already doing, and I think we've already alluded to that. We've been doing electronic application for a number of years at Washington National. We launched it at Bankers Life. It's 70% adoption rate. We have straight-through processing today at Washington National through some of our e-apps straight to our admin platform. We'll be doing that both at Bankers and Colonial Penn. We're launching a Salesforce CRM tool through Salesforce.com at Bankers.
As a matter of fact, it's being launched this quarter. These things are, even though we kind of see them as where we're going, a number of these things are well on their way and we view as important levers. With that, I will now open it up to questions from the audience. Before I do that, I see Randy's hand. Before we get to the Q&A, I just wanted to say one thing about, we are real close to the end of the quarter here. You're probably wondering how the quarter is shaping up from a sales perspective. As quarters and months fluctuate, but we are continuing what we saw in the first quarter as kind of lower range performance at Colonial Penn and Bankers with on-target performance at Washington National.
Although, I think Scott alluded to it, as we look at June, we're seeing a very strong June across all three of our segments. Again, that's one month, but we're expecting that momentum to continue. Looking at Colonial Penn and Bankers to be in the kind of low single-digit range for the quarter with Washington National more in line with our target, but accelerating the second half of the year and being consistent with the guidance of the targets that we shared with you earlier. Now we can go to the Q&A section, and I saw Randy's hand up.
Before your question, if you could say your name and company, please.
Thank you. Randy Binner with FBR Capital Markets. I wanted to ask one about Bankers kind of looking longer term, the sales outlook kind of touching 2016 is 10% now, so that's higher. Usually, when we talk about your visibility into growing sales, we talk about opening up branches, recruiting more agents, kind of things that are easy to quantify and have a line of sight into. The commentary was more kind of about your initiatives in productivity and financial planning. Maybe could we dig into that a little bit more and understand I mean, these are good initiatives, and I get that, but how does that lead to the line of sight into kind of touching double-digit sales growth in 2016?
Thanks for the question, Randy.
This is my first year into the role, having been a banker since 2007. One of the things I think we have an opportunity to do because of technology, because of mobility, is to make system-wide improvements. Opening up satellites is something we're going to continue to do. They take time to develop. Our satellite initiatives are going well. Satellites last year contributed to 28% of our total sales. This year, they're contributing to 33% of our total sales. That strategy we like, but it is almost by definition at the margin. You open up 15 a year, maybe you open up 20 or 25 a year. What about the other 275 to 300 locations that you have? The ability to make system-wide improvements on the existing offices, naturally is a big lever.
Our view is that the gains we can make in productivity through things like training, through things like technology, are really good for the system and bring up the overall sales across all existing offices. We have this opportunity to do that because of changes that are happening with tablets, mobility, smartphones, cloud-based technology, and because of the shift that we're beginning to see among consumers more around planning. On the slide, on the outlook slide, we had some numbers of what you could see around agent productivity. If you have the same number of agents, but their productivity has gone up by 4%, that translates into a 4% sales growth.
Yeah. Just to push back a little bit, though, because I think we've heard similar. I think Torchmark kind of has had a similar argument over the time with kind of going to laptop presentations, and I've heard it from some others. Have you studied this? Can you prove it? How do you kind of quantify how that actually equates to higher sales? If you could kind of give some color on that'd be helpful.
I think you'll be able to see that as you study the quarter and throughout the year. This year, to tell you a little bit about, play off some of the comments I made. New agent recruiting was down, but it led to some improvements in retention, and we have roughly the same size agent force that we did when we started the year. Having said that, sales are up. To some extent, you can almost see a one-to-one relationship around agent productivity and sales growth.
I'd just add, Randy, that we talked a lot about productivity because this is a new focus because some of the things that we're able to do today systemically that we haven't been able to do in the past for a variety of reasons. It doesn't mean we're losing focus of growing our agency force. We're going to be expanding, as Scott said, continuing to grow our agent force, looking for more ways to recruit. At the same time, we see the path to a larger agent force and growth in sales being a combination of volume and productivity.
Thank you.
I saw Eric's hand up over here.
I think someone was in the back.
Oh, I'm sorry. You had somebody.
Hey. Ryan Krueger with KBW.
Hey, Ryan.
I had a follow-up on Randy's question, I guess. Maybe one thing that I think would be helpful is in terms of the productivity improvement, how does that break out between higher amounts of policies sold per agent versus just selling larger policies over time?
That's a good question. We'd like to obviously improve both. Those are the two levers, the amount of policies per agent and the premium per policy. Right now, where we've been able to make early gains is on the premium per policy. Our fastest-growing product right now is life insurance. Historically, it's been dominated by final expense. It's beginning to shift to be more of a fully underwritten product. To give you some numbers around that, our average life premium at this moment is about $880 annually. Now, for someone who's in our sweet spot, a 65-year-old male, $880 a year for permanent insurance, that's like a $10,000 base amount. Our fully underwritten products start at $25,000.
We're just at the beginning of moving from this simplified issue world to this fully underwritten world, and a lot of the gains that we've made in productivity have been around that shift. In fact, our pending is up in our life insurance. We have a good view already on how this is working because we can see the submitted business coming in. With some of the investments we're making around technology, CRM tools, and such, we think that'll really give us the lift on policies per agent. I expect that to begin to materialize as some of the pilots roll into full-scale initiatives and translate into some of the higher outlook numbers that we're showing in the out years.
Thanks. That's helpful. In terms of the 5% of agents that have securities licenses, how do you plan to-
Selling in the out years.
Thanks. That's helpful. Then in terms of the 5% of agents that have securities licenses, how do you plan to-
Selling in the out years
Thanks. That's helpful. Then in terms of the 5% of agents that have securities licenses, how do you plan to incentivize more agents to get those licenses? Then is the idea to sell third-party products or to have your own securities products? Thanks.
Today, we have a strategic relationship with ProEquities, who serves as our broker-dealer. We have roughly 250 to 300 agents who are registered to sell securities. We're working with ProEquities to increase that number by promoting the program through training and such. We're also looking at what the future model should look like for us. Should we take the broker-dealer and bring that in-house, for instance? Presently, I'm told by ProEquities that there's some 50 to 100 agents who have already raised their hand to begin to get registered. We're beginning to see this momentum happen. With regard to products they sell, naturally, all those folks are insurance agents, and they're some of our most productive insurance agents. We are selling third-party products, packaged products predominantly, variable annuities and mutual funds from third parties.
I think that there is an open question for us if we were to manufacture either of those types of products. The reality is, that might be step 3, 4, or 5, and we're focused on steps 1, 2, and 3. That's not a decision that we feel we need to make at this time.
Yeah, just to build on Scott's comments on incenting them. One of the incentives is, at this point on, our existing FAs tend to be our most productive Bankers Life insurance producers. There's a natural incentive. They see that as part of the career progression. If I get securities license, I can now have these broader conversations and look what it means for my insurance business, my overall income. It's kind of a natural incentive, and we're seeing an increased interest in pursuing those contracts.
Thanks for adding that.
Thanks. Erik Bass with Citigroup. You mentioned new competitors that are targeting the middle market. Particularly, we're seeing that with the direct channel and things like kiosks at Walmart. I was just wondering if you could talk a little bit about the impact you think that could have on the traditional agent market.
I'll just make an overall comment, and I'll toss it to the group. We are seeing more activity. It seems like most of that activity is geared more towards alternative distribution. We have yet to really see any meaningful impact other than in kind of the markets that we're not in, frankly. Major medical market with the exchanges, some of the advisor work that seems to be maybe going online a little bit to the younger market, more affluent market. We've not seen a lot of it directly other than probably the place that we've seen it the most has been in our direct channel. From an agent perspective, we've not seen much disruption, and I'll kind of let Barb and Scott comment on it from an agent perspective.
I'll start. You mentioned Walmart in your comment. Did I hear that, Eric? We have participated in the Walmart program through some of our healthcare partners, and we plan to participate in that program again for this coming Medicare annual election period. We have our toe in that water. They need agents, and the idea is to locate them where there's traffic. It's not nearly as productive as what our current model is. We do it because it's incremental, because it's seasonal, because we want to keep an eye on where that channel might be headed. We don't even take as much opportunity in that channel as we're being asked to do because it's not as productive for people's time and for folks who are working on 100% commission. They're very good about knowing where they're going to make the most money.
Yeah, on that point, we are finding even on the major med side, and we've been approached by a number of organizations. Although there are some sales that go through online, nobody touches it. The vast majority of those sales, there's a salesperson involved, whether a person comes out on a face-to-face basis or they're helped over the phone. Barb, what are you seeing on your side?
I would add that we're not seeing any significant impact. I'll give you two examples. One might be consideration of web brokers like an eHealth, so direct to consumer. What you see with our product lines is that they are sold more often as it relates to an agent-assisted sale because they're not natural pull products. You have to speak to people about the financial impact that they can incur and why something like a cancer or critical illness or accident policy might be a benefit to them. The same would apply for the private exchanges which are specific to self-enrollment for employees. Even when there is a defined contribution from the employer, you're typically going to tick off your medical coverage and what might have been employer-provided benefits in the past, your disability, your life, et cetera.
By the time you're in cancer and critical illness, you're usually tapped out. It really has not had a significant impact on us at all.
Thank you. If I could just ask one on Colonial Penn. You had mentioned getting to breakeven EBIT by the end of 2014. Should we assume that that grows from there going forward? Is part of that because, I guess, your mix shift towards more deferrable expenses?
Yeah. Erik, I think we intend to maintain that level of profitability at our breakeven, but at the same time continue to accelerate our growth. We could actually improve the profitability but reduce the growth rate, that's not an equation that we want to consider. Part of what my research is looking for is to accelerate our growth while continuing to maintain a near breakeven total EBIT standpoint.
Okay. Thank you.
Thanks. Chris Giovanni from Goldman Sachs. A question for Gerardo in terms of, you mentioned the increased competition in the direct channel.
Sure.
A lot of companies are spending a lot of money to try and figure that out. In the past, you've seen companies, instead of making those investments, just make acquisitions. I guess, why should we not expect to see more M&A in the direct space? Is it because the nature of direct is changing, so there's legacy direct businesses that aren't going to ultimately serve the end consumer? How do you think about that? If M&A does become more impactful, how would you expect that to impact your business?
Great question. First, and maybe tying the conversation. MetLife coming directly into our space, big competitor, trying to figure out the best way of going direct. If you look at the model that they're using, it's very similar to the model that Colonial Penn has. There is a lot of things that they're doing, and other things that we're doing to adjust our model to address basically an important competitor. I think we will see, the potential to more entrants coming in. From we have learned, we have learned from doing this for over 30 years and really fine-tuning our model, and today evolving that model.
That doesn't say that nobody can come and be successful immediately, but it does take time to be able to find the right balance and formula to be able to target your customers and achieve, basically acquire those customers at the right cost. We're seeing it, and Met was very vocal on sort of their sales targets. If I listened, that was $130 million in sales, but with a $40 million negative earnings on that investment. It comes with a cost, and I think what we're trying to be very judicious is to be able to continue to grow and accelerate that growth, but really maintain the economic value that we have for the enterprise.
Yeah, I'll just add on your point on M&A, I think it's a fair point. I think the M&A may come a little bit later as these models flush out. Let somebody else make the investment, go figure it out, then there may be some activity. It wouldn't surprise me at all to see some of that activity.
Okay.
We probably have time for just one more question.
Just a question for Barb. The comment on PMA I thought was interesting in terms of 70% of the sales coming from just 10 states. Curious if you could kind of mention some of the top producing states, then what has been the challenge to try and expand beyond just those 10 states to be a bigger piece of the pie?
One of the biggest challenges for us has been to actually expand our product availability. In particular for PMA and in the individual market that we serve, we have a terrific product offering which provides a benefit of both a return of premium, which is unique to our product set, along with claims paid. That combination is we only make available through our PMA distribution organization and in the individual market. As a consequence, while we've been expanding our product line for those that are generic across all distribution channels, we really throttled back on expanding that until we were ready to actually expand the organization itself, which gets back to my comment I made on developing management talent.
It's the combination of the product placements, which we are going through the process now, getting state approvals, then combining the management talent so that when you can go in and populate a state and build teams, just like we were talking about with Scott and branch development. It just takes a little bit of time, but we're definitely on track and moving forward.
Some states where, did you mention the states where we're strongest?
In terms of where we're strongest right now, really the strength is in the breadbasket of America for our individual channels. When you think about North Dakota, South Dakota, Iowa, Illinois, et cetera. For the work site, it's more focused, a little bit of Great Lakes, the Mid-Atlantic, then very much in the Southeast, which is somewhat common amongst other work site providers as well.
I think we have time for one more.
Thanks. I have Sean Dargan from Macquarie. I have one more for Barb. About the private healthcare exchange opportunity, just to be clear, the opportunity for Washington National is to place your products on exchanges built by the likes of you, Mercer, and Towers Watson, or are you building your own exchange?
First and foremost, building our own exchange. There are a lot of definitions as you probably know, of what private exchanges look like. What's covered frequently, as you know, is Aon, a multi-carrier model, multi-employer model, focused on health and dental and vision. Instead, I want you to think about our private exchange is one that is single carrier in terms of our product lines, but then brings in those strategic partner products because you really want to offer, as a private exchange, having that robust voluntary product line, as well as our employers that we are working with are really self-insured primarily. The offering that they will want for enrollment plus supplemental services, HSA, wellness, et cetera, telemedicine, for that portfolio is a service to them. We're not trying to get into the Aon world, and we are definitely agent assisted.
Now, you might think of us more like a Liazon in terms of a private exchange offering. The only difference is that most of our agents, historically, are classic work site agents. They know and they like to enroll the voluntary product lines, unlike typically a broker. The benefit to us in our private exchange is that we will be able to get the concentration of sales to justify the enrollment of all the portfolio in our product lines. That's where the agent is going to make their money. Does that make sense?
Great. Well, I want to thank the panelists. I want to thank all of you for your engagement and your questions. Our goal is to continue to drive growth significantly ahead of the levels that the industry is growing, reaching that 8%-10% compound annual growth rate by 2016. At this point in the presentation, I'd now like to turn it over to Eric Johnson to talk about our investments. Eric?
Well, hello, everybody. I hope you can all hear me out there. I'm Eric Johnson, as Scott said. I've been with the company for 12 years. I've been in my current role for approximately 10 years. We got here a little earlier than the bulk of you this morning. We actually had a chance to go on a tour of the stock exchange floor this morning. I was reminded that the last time I was down there was 1983. I was a trainee at Manny Hanny at that time. The Mets were good. The Knicks were good. More to the point, the prime rate was 18.5%. 10-year treasuries traded in the 14s. Money market accounts were a fairly new innovation by Merrill Lynch.
Obviously, what I'm trying to tell you there is that I have participated in quite a few wide-ranging market cycles involving real estate, credit, and rate commodities, et cetera. In many respects, I see low for longer, in that same very manageable context. You can expect me in this presentation to be pretty brief, for two reasons. One, when I'm done, you get a 10-minute break. Second, after the break, you get to talk about long-term care. I want to make sure that there's plenty of time for those two things. Obviously, there will be also some time for questions if you have any of me. Now, basically, I'm responsible for the company's invested assets, the bulk of which we manage using our own internal core competencies. We have approximately 75 people in Carmel, Indiana. We also use outside third parties for highly specialized allocations.
Example would be in alternatives, emerging markets, and areas where we think someone can do it better than us. We're not too proud to use their expertise to the company's benefit. As an overall gestalt, I would say, we're all about active management, both tactical and strategic, and very active allocation shifts, focusing on income and not really total return, really trying to defend book yield and protect quality at the same time. This very complicated looking pie chart here reflects the different major allocations that we had as of March 31st. Really over the last, I'd say, since the financial crisis, we benefited from three large trends. One of them is the healing in the corporate credit in America, a trend which I think is obviously come pretty much to its end. We begin to see signs that it may be reversing itself.
Obviously, healing of the real estate markets, both residential as well as the commercial, I think both of which have some continued room to run. Last, improvement in municipal credit, which has been significant, although somewhat overshadowed in the press by large events, Detroit and Puerto Rico. Underneath that, the broad range of municipal credits have improved in quality in the last couple of years. These are really our three large allocations for us, corporate credit, real estate, and municipals, all of which we added to in different ways during the period of the financial crisis, all of which have done us a lot of good. What you should expect from us is to continue to look for that next one where money can be made to the good of the company.
That's really my job is to make sure we stay one step ahead of those changing trends, get off the ones, or get down in the ones that have had their run, and then find the next one. I'd also want to point out that while protecting the company's book yield our post-crisis key risk metrics really haven't changed very much. We've been protecting yield, but protecting the balance sheet also. These numbers look very small to you from where you are. They look very small to me from where I am. What they tell you is that the proportion of below investment grade securities to the overall invested assets is basically down from 2009 to today. The average NAIC rating in the portfolio is up very slightly from 2009 to today.
I think we've done a good job of protecting both the balance sheet and yield. We've had an emphasis on quality, and that's reflected also in a favorable credit dilution trend in the portfolio. What this shows is the trend of impairment since the financial crisis. Very big numbers in the financial crisis, although smaller than most companies, believe it or not. Today really not very significant amounts. My goal, I will tell you across the cycle, is to deliver roughly a credit dilution in the range of 15 basis points per year. We should be able to do that, and I think that would be a good result compared to other companies, and a good result for us. The same factors I just described are reflected in also the pattern of realized gains and losses since the financial crisis.
There's a couple of things at work there. One, the credit markets have been very accommodating, and second, we've really reduced the level of turnover in our portfolio substantially to keep yield on the books. We've had years in the past where we've had turnover 30%-40% a year. Today you look at it more in the 8% to maybe 10% a year range. As long as rates stay low, turnover is also going to stay low. What this all has kind of added up to is a very low rate of attrition of book yield during this so-called low for long period around a couple basis points a quarter. I think that reflects all the comments I made earlier.
When you listen to the discussion later about long-term care, and I'm sure everyone will be thinking low for longer, remember that we have protected our company's book yield during this period which has a wide range in benefits for the company's results. We talk a lot about headwinds and tailwinds in dealing with the markets. We certainly talk about headwinds a lot. Low rates, limited supply of investable securities, desirable, investable securities. Diminished amount of liquidity in the street. I think one we'll begin to talk about now will be declining underwriting standards both in the commercial mortgage space, in consumer lending, and probably also in the corporate world.
Certainly higher and higher levels of event risk, where I think we're now in one of these periods where every morning you turn on the Bloomberg or whatever you turn on, and what's the next M&A transaction is what you're looking for. During the financial crisis, you weren't so worried about that. You were more worried about the next insolvency. Now you're worried about the next M&A transaction. Those are kind of the headwinds. There's also tailwinds for us as a company particularly. We have a very strong capital position which is stronger every year, which allows us to do things that we couldn't have done before. We have very stable investable cash flows. Very few surprises in terms of the company's cash flows, which is a very strong position to be investing from.
We are at a point where we have no significant known legacy issues in our investment portfolio. When I got this job, it was all about legacy issues. I spent all my time dealing with legacy issues. We don't have any legacy issues now, so we can actually spend our time on making good profits. We have a wide toolkit of things we can do. Speaking tactically, which is the center of the Venn diagram. Big picture of what's allowed us to make the new money rates we've been making during the last year or two. We've been going up in quality, but down in structure. I think has been a very effective tactic. We've been a little bit investing off the run to pick up some spread there, and we've kept turnover low.
We began that two years ago on the basis that we didn't assume low for long was going to go right away, and we'd had to deal with it for some time to come. I think we woke up early, and that has done us some good. One question Ed mentioned to me yesterday. One question that people often ask him is, well, how are you earning these new money rates of 5%, 5.25%, whatever we crack off each quarter. Here's the how. What we're investing in now that's causing that to happen. CRE loans, commercial mortgage loans, kind of in the 10 to 20-year finals. Some IO period. A lot of multi-family, some office. $10 million-$15 million individual loans generating good book yields for us. Long corporates. Some financial hybrids.
When EM softened up last year when we had the rate spike, we added significantly to our EM portfolio on weakness. That's done us a lot of good. Also in the world of esoteric ABS, we've done a lot of work in lately. For example, last week we were involved in a couple of esoteric transactions that put on pretty good book yield. One in drug royalty transaction where we put some money to work north of 5%. Yesterday in the secondary market took down somewhere north of 5.30%. A good chunk of a seasoned CRE CDO that was re-REMIC-ed. We took the senior piece in the re-REMIC. 40% credit support pool underlying of 30 CMBS AJs from the 2006, 2007 period north of 5.30% with about a two-year average life. That's great money. We'd do that every day if we can.
We're finding smart ways of doing things in different spaces, and that's how we're making the 5.20%. Also, we've had a modest layering into alternatives over the last couple of years. Really adding up to around 1% of our invested assets starting from zero. Really the attempt there is to drive some market-sensitive earnings to complement the rate correlation inherent in our business model. In other words, introducing some pro-cyclicality as a way of diversifying our company's market exposures. It's well within our risk capacity. Highly diversified exposures. It will introduce some volatility into some of the quarterly earnings pattern, but I think well within our capacity to bear that. It's also an effective platform for our CLO businesses. Many of you know we manage CLO transactions. We just closed another one this week.
We have five that are currently outstanding with north of $1.5 billion in AUM behind it. All of this creates good earnings opportunities for us. Lastly, we also manage the company's funds at the holding company to the extent there are funds there. One way you could think about this for modeling purposes would be as a balanced fund. You could use that as a modeling proxy. There are really three key points to make here. One, we are making tax-advantaged income. Second, we are definitely preserving liquidity for a rainy day. Third, also preserving liquidity for strategic optionality should other better uses of funds become obvious. Just one last point for you all, which is that what we haven't been doing is using duration to generate yield. We're really all about discipline in the asset liability management area.
What this chart will show you is that we very carefully and methodically keep a good balance of assets versus liabilities. Where we're making book yield and where we're making investment spread is on credit and principally and to some degree volatility, but mostly credit in its different forms. The key points I want you to take away from this is that we've done a really good job protecting the company's book yields. The related risk has been very thoughtfully managed. I think that will prove itself over time. ALM is a core discipline for the company, and that's really not where we're taking our risks. On that, if there are any questions, I'd be happy to have them. Randy Binner has his hand up.
Thanks. Randy Binner, FBR. The FHLB program has been an enhancement, I think, to your overall yield activity. There's a new head of FHFA, there's been some comment it has been an enhancement to that overall, I guess, five and a quarter you talked about, and how you see CNO fitting into the changing regulatory landscape there.
Yes. I think you all heard the question. I'll go ahead with the answer. We have roughly today, putting CLIC aside, roughly $1.6 billion outstanding in advances from the Federal Home Loan Bank. We use those proceeds to buy invested assets, and between the two, generate a spread, which becomes a net investment income for the company. I don't know if we've disclosed the exact amount of earnings that come off of that. What I can tell you is that the spread between the amount borrowed on funds, between funds borrowed and funds invested tends to range between 150 basis points and 225 basis points. You could average those two, and that would give you a good sense of what we're earning. It's a meaningful amount. It's a good business for us.
It's a good business because it meshes well strategically with how we invest money, which is as a spread investor. It allows us to invest in quality assets using a little bit of investment leverage. In essence, it's putting our invested assets to work as collateral. Since the assets and liabilities are matched in duration, we're not introducing curve risk, and we're not introducing liquidity risk. It's a desirable activity for us. Now, in recent months, there have been a couple of canaries in the coal mine. Canary number 1 was a release late last year from Washington, where the Federal Home Loan Banks were reminded by their regulator of what they consider proper lending standards to insurance companies.
I believe that Director Watt issued that release because of a lack of conformity among the Federal Home Loan Banks as to how they were lending money to insurance companies. Margin requirements, documentation requirements, underlying credit analysis requirements. My understanding is that the objective of the release was to encourage the Federal Home Loan Banks to move to a more uniform process of evaluating and dealing with insurance companies. That was number 1. Number 2 was recently, there's a moratorium on lending by the Federal Home Loan Banks to REIT captive insurance companies. My understanding is what's behind that is that there were REITs that were forming these captives solely and only to raise this leverage. I think the regulators perhaps think that might not have been in the spirit of the activity.
I don't think either of the two things I've just described will affect us necessarily in any way. Why? Because we do business with Federal Home Loan Bank in Chicago as well as in Indianapolis. Frankly, because we were a below investment grade company, they really put us through the wringer. Right? We're as documented and as analyzed and as margined as you can be. We're already at the conservative end of how those programs work. Both of those banks have confirmed that to us, and they've reassured us that we shouldn't expect any changes in the program. I feel good about it. I think for at least the foreseeable future, it'll continue to be part of what we do. There wouldn't be a basis on which the existing credits could be pulled early in any case, and the assets are match funded.
There really isn't any risk on the table other than the risk of not continuing this when the existing advances roll off years from now. I wouldn't worry about this very much.
Thank you.
You're welcome. Anything else? Am I done? All right. At this point, you've earned your break. Let's take 10 minutes, refresh ourselves in a soccer game, and talk about long-term care.
Welcome back. We thought strategically placing a long-term care after the break would assure that we'd get some level of attendance back after the break. It being certainly a hot topic.
In the industry, but also an important topic for CNO. What that has done is drawn an obvious focus on the one area of the company that continues to be a potential source of volatility that we've got to manage carefully and actively every single day. That, not surprisingly, is long-term care, a highly complicated business and task. We've got a panel assembled here today of experts that travel around this business in a very sophisticated way and I think will provide a level of insight into what we are doing to manage this business, calm down potential future volatility, and defend the balance sheet in our financials. With that, let me introduce the group.
First, to my left, starting over here is Tim Bischof. Tim runs corporate actuarial and reports to me as CFO. He also is in charge of enterprise risk management at the company. Very important, housed within this operation is also what I would say transactional-based risk transfer. For example, the most recent Beechwood Re transaction and re-insuring the runoff long-term care business we have, Tim led much of the charge on executing on that transaction as part of his risk management and corporate actuarial responsibilities. Tim will cover later on in the presentation some sensitivity analysis and stress testing for us. Next to Tim and in the center is Chris Nickley. Chris is a member of the senior management team at CNO, is a direct report to Ed, and is a peer of mine and other members of senior management.
Chris is in charge of product and product development, product pricing, and product risk management. Interestingly, Chris also was in charge of the OCB runoff businesses of the company and was a critical part of the team, for obvious reasons, in orchestrating the exit of those lines of business. For the purposes of this discussion, Chris will not only talk about the nature of our product risk management and long-term care these days, what are we selling and why, but also Chris has for a number of years, and his team, led the charge on re-rating activities. I would hazard a guess in saying that this company is probably as sophisticated and as knowledgeable on the dynamics facing state-by-state re-rating as any in the industry, having done several rounds of it, and Chris has led that charge for our company.
Next to Chris, on the far end of the panel, is Loretta Jacobs. Loretta joined us about a year ago and has a very deep expertise in long-term care. Loretta came out of CNA once upon a time, John Hancock, but also more recently, EY, and has a broad and deep set of experiences in long-term care. Loretta is interesting and somewhat unique in our organizational structure in that this is really the only, what we would call dedicated product line leader that we have in the company. In other words, the amount of energy and the coordination to properly run a block or blocks of long-term care business and new business requires spanning across the enterprise in a unique way. A while back, we created a position that would focus and dedicate itself to managing that business.
Loretta, we are blessed to have her as part of our team, and she'll bring some insight to the table. Chris is going to really lead the discussion here, then we'll move to Q&A, and I'll come back up and help with that. Chris?
Thank you, Fred. Our goal today is to provide you with insights into where we stand with regard to managing our long-term care business risk. Loretta, Tim, and myself each represent different areas of focus within what is our long-term care working group. This is a group that we formed a year ago to bring focus to the long-term care issue. It's not that we haven't always had strong long-term care subject matter expertise directed at managing long-term care, but the formalization of this long-term care working group strengthens our coordinated and focused approach. This is not unlike what we did with the creation of OCB, where we obviously achieved great success, and we expect to see similar success coming out of this long-term care working group. This team approach assures proactive engagement of the product area, the operations area, valuation, and ERM in creative long-term care risk management.
The long-term care working group will continue CNO's history of action-oriented long-term care risk management, as shown on this timeline. We were an early mover in the pursuit of rate adjustments on in-force business, making rate changes in 2006, 2007, 2008, and again in late 2010 and into 2011. In 2006, we filed for a 35% rate increase on comprehensive long-term care for issues of 2002 and prior, and we ultimately achieved better than a 90% approval rate on those rate increases. In 2007, we filed for a 30% rate increase on comprehensive long-term care issued between 2002 and 2005, and we ultimately achieved better than the 75% approval rate on that rate filing.
In 2008, we went back for a second bite at the apple on the comprehensive long-term care issued in 2002 and prior, with another 35% rate increase filing, where we once again exceeded 90% approval rates on that action. In late 2010, early 2011, we went back for a third time on 2002 and prior comprehensive long-term care with inflation benefits, and for a second time on comprehensive long-term care issued between 2002 and 2005. We went for 35% on the first group, 30% on the second group, and thus far, we've achieved a 60% success rate on getting approval and implementing those rate increase changes.
We feel that our success with rate increase activity has been very strong, but it's also clear that approvals have become more difficult with some of our more recent filings, particularly where we've gone back for a second or a third rate increase on the same block. It may be that we are somewhat a victim of our own success with regards to moving early and getting multiple rate increases. As our timeline shows, we don't just focus on rates. We've partnered with third parties to assure best practices are being implemented in the management of our long-term care. For example, in underwriting, we reinsured 25% of our block with RGA, and they've helped us make sure that our underwriting process is tight through the regular audits that they do as part of their reinsurance duties.
We have an existing relationship with The Long Term Care Group, which helps us on the operations side. We've also actively de-risked our long-term care through block transactions, which Fred made reference to. Both the SHIP transaction and the Beechwood transaction together have reduced CNO's long-term care risk profile by 45% from what it otherwise would be if we had not done these transactions. We continue to work with reinsurers to explore other creative solutions at long-term care risk management, where we have a proven record of success. Last year, the long-term care working group identified more than 10 initiatives designed to improve the margins of our long-term care block.
In 2014, we are pursuing several of those, Loretta will speak to them in a minute, as well as continuing to gain approval on rate increases that have been previously filed where we have not yet been successful. We are also updating assumptions on our blocks in preparation for analysis of any potential 2015 rate actions. As you see, the reserve pattern shown up above gives a good illustration of the relative risk profile of comprehensive long-term care versus, say, home health care or short-term care. This reserve pattern, along with our past product sales mix, helps to explain why 85% of our current net GAAP liability is behind comprehensive long-term care as opposed to home health care or short-term care.
De-risking actions that we've taken, as well as the rate increases that we just discussed, have materially improved our risk profile, but there is more being done. For example, take a look at our sales and in-force mix between comprehensive care, home health care, and short-term care. Note that since the release of short-term care 15 years ago, short-term care sales have increased steadily and now represent 65% of our new insurance in long-term care. Our evolved sales mix is materially shifting our in-force away from the higher benefit, riskier long-term care, comprehensive long-term care, and in the direction of less risky, shorter benefit period, short-term care. With that, I'll turn it over to Loretta.
Thanks, Chris. I'm going to spend a few minutes going over with you our claims management strategy for long-term care. I want to say from the outset that we believe claims management is one of the cornerstones to managing the long-term care business effectively. Based on our company's experience, which is as deep as any company in the industry, as well as my personal experience, which to age myself a little, I've been involved in long-term care for 20 years. I have worked on either directly as an employee or as a consultant in some form, almost every major block of long-term care business in the U.S. We've been able to develop programs that address each phase of the policyholder's life cycle with us.
I can tell you, I believe these programs that we've been developing and are implementing are comprehensive, they're focused on the need, and they're innovative relative to maybe what you'll see from some of our other carriers out there, where claims management strategies are just still being in the formative stage. We've developed them. Obviously the best result for us, as well as for our policyholders, is to help people stay healthy and avoid the need for long-term care. That's great, right? It works for them. It works for us. How have we done that? We've been offering, actually, preventive heart disease and stroke screening opportunities to our customers since late 2005. We're currently developing expanded offerings in the wellness space that are both targeted as well as broad-based.
Now, while we hope and we're excited about the opportunities those present, we understand that some people will still become disabled and have the need for long-term care. If that happens, we believe the best opportunity to make a difference is to find out about that claim as early as possible. Why is that important? That gives us the opportunity to provide valuable education to the policyholder and their family about how to use benefits economically, wisely, and in accordance with policy requirements. You heard Chris talk about the mix of our business and the relatively short benefit periods that most people have. That means there's a cap on their benefits. Therefore, if that's the case, a message around how to utilize benefits effectively and perhaps extend them over a long period of time should resonate well. That's what our expanded intake process does.
It allows people to report their claim to us before they've even put care in place, talk to us about it, talk to us about how they can use the best benefits available, to help them understand what works. We also can clarify the policy requirements so that customers really understand what their policy covers and what it doesn't cover. That helps the customer and us avoid that dissatisfaction that can occur when there's confusion or just complete misunderstanding of how the policy works. Finally, for those claims that come on board that actually have a set of diagnoses that lead to recovery, and over 10% of long-term care claims actually do end due to recovery, we can enroll them as quickly as possible in our Enhanced Care Management program, which is actually designed to help accelerate their recovery efforts.
Which is actually a nice segue to what happens on the ongoing claim phase. When the claim is ongoing, we've developed protocols to help reduce both claim length, which is the total time that we expect someone will be disabled and on claim with us, as well as claim intensity, which is the amount that we would expect to pay per day, per week, per month, per year while the claim is going on. With regard to claim length, I already talked about it. Our Enhanced Care Management program is designed specifically for those types of claims, such as hip fractures, arthritis, other musculoskeletal disorders, where there is a strong propensity to recover as long as the customer gets access to the type of care that is best able to help them.
These programs are designed to help the person get that care in place and get it to work and enable them to recover. As far as claim intensity goes, we're testing several initiatives. First is an Enhanced Controls Process. This is designed primarily for our home care claim situations to provide some additional structure to the processing of those claims. In particular, we're developing a telephonic way to check in and check out by leaving a voicemail for the actual caregiver to identify the exact time they're spending taking care of our customers, rather than putting it down on paper and having it be on our system. We're actually able to record the exact time. We're actually also promoting the use of Medicare and other community resources to help customers.
Medicare covers physical therapy and other skilled care that our customers can use to either completely recover or, even if they can't completely recover a measure of independence that can make the difference between them needing 24-hour-a-day care or only four or five hours a day of care. That works for the customer. I will say that all of these programs, from the wellness to the care coordination, the controls, all of them, we need to study and understand their impact, both to the customer as well as to our claims experience. We need to test it, and when we understand it, then we can quantify it and include that information in actuarial analyses as needed.
Of course, we know that from studying, we may find that it would work better if we modified some of the programs, get feedback from our customers and their families about what's working better and what we can tweak. That's great. We'll do that because we want to do that. We want the programs to work as effectively as possible. We need to continuously consider additional programs. We're not just going to stop here and say we're done. We'll keep thinking and thinking out of the box because it's important. In the end, we're going to keep doing this. We're doing it today. We're going to do it in the future because this is good for our customers and it's good for us. With that, I'm going to turn it over to Tim, who's going to talk about risk management.
Good afternoon, and thanks. Thanks, Loretta. Chris talked to you about the product portfolios. He talked to you about shift of business. He talked to you about rate actions. He basically talked to you about how we've been risk-adjusting our portfolio. Loretta talked to you about active and progressive claim management. I'm going to talk to you from a risk management perspective. The risk management perspective at CNO is action-oriented, it's practical, and it's opportunistic. We've been looking at long-term care for a long time. Chris talked to you about a SHIP transaction, 2008. We talked about rate increases in 2006, 2010. Talked about a Beechwood transaction last year. We've been looking at our business and risk adjusting. We wanted to talk to you today about the tools that we use to understand the business, the tools that we use to analyze what tomorrow will look like.
For GAAP, we use formal testing. We do loss recognition testing. We talk to you about that publicly. We tell you we have adequate margins, although they're thin. We do a lot of sensitivity testing on that. We look at GAAP profits as well. Similarly with statutory, we tell you that we do our asset adequacy testing, we do our reserve testing. Again, we look in the background to distribute the earnings. For risk, we stress test. We stress test the business plan. We stress test the actuarial models. We stress test to understand what capital needs might be there. We also stress test to understand alternatives. Loretta talked to you about a couple of claims management alternatives. We stress test those. I guess another term would be, we look at what they look like distributable earnings and GAAP income-wise.
However, we don't build them into our models. We don't build hope into our models. We build in what's statistically valid. Not always a popular statement, but that's the way we do it. We wanted to talk to you today about three scenarios, three interest rate scenarios of the lower and longer variety. Before we do that, I want to go back to comments that Chris made, that Ed made, and then generally. We've reduced the risk of the portfolio immensely over the last 10 years. We sold $3.5 billion of long-term care. We sold $3 billion of annuities. We're about to sell $3 billion of universal life business. We've reduced our risk significantly. When it comes to interest rates, we've also then consolidated our risk in certain lines of business, in particular long-term care.
As we do that, we wanted to talk to you about that. What you see on the screen today is Bankers Long-Term Care earned rates that we use for our models. They're much longer duration than our regular portfolio, therefore they have higher yields. The scenarios that we put in front of you, there's three scenarios. Again, lower, longer variety. The mild scenario is simple. Hold new money rates flat for five years and then allow them to follow through the ultimate. The moderate scenario follows the mild scenario in its trajectory. However, at all points, we reduce the rates 50 basis points. All new money rates are shifted down. The severe scenario is simple. You drop new money rates 100 basis points immediately, and it stays there forever. This is an exercise, and with an exercise, we don't allow management to act.
There's no rate increase actions. There's no portfolio actions. The action we ask management to take is to read the results. The results. For the mild and moderate scenario, it's fairly simple. There's really no capital impact. There's no GAAP capital, there's no stat capital impact. For GAAP, there's a reduction of earnings due to pre-funding lower income in the future. For stat, there's no impact. For the severe, there's multiple impacts. For GAAP, immediately, we take a loss recognition charge. What happens is these lower earnings in the later years cause a lower margin. As we lower our margin, we eat through our baseline. As you eat through your baseline, you then take a reduction to your intangible assets. Our margin drops to the point where we have to take a charge, we take a charge.
The other impact in the severe scenario for GAAP has to do with, again, this pre-funding of losses that are in the later years. Pre-funding lower earnings out of today's earnings. For statutory, it's different. It's acute, it's immediate. We take $120 million in this scenario increase in actuarial reserve. The reserve goes up, our capital goes down. Our capital goes down by 25 basis points. Our consolidated capital moves to somewhere around 400%. Obviously, in these scenarios, it's painful. However, clearly, we managed through, and maybe that's the most important part. Through these stress tests and the other stress tests we've talked about in the past, is we've managed through. There's no re-envisioning of our strategy. There's no reconstitution of the products we're in. We managed through.
We managed through. We managed through. Today, I just talked to you about some of the tools that we use to understand our business so you might be able to understand how we're looking at today to prepare our balance sheet for tomorrow. With that, I'll turn it back to Chris.
Thanks, Tim. What are the takeaways? Well, in summary, it is important to recognize that we have a comprehensive strategy for managing our long-term care product risk. We have been proactive and successful in taking rate actions. We have active third-party engagement to assure that we have best practices for managing our business. Our mix of business is generally better than the industry and getting better day by day. We are actively exploring operational initiatives that would benefit both the customer and CNO. We have the capital ratios to withstand stress test scenarios, as Tim just explained. Lastly, there is active industry, legislative, and regulatory engagement, which is very important to the ultimate long-term health of this line of business. With that, we will now take some questions.
We want to move into some questions about long-term care. I think one of the things I failed to say is these three individuals up here have something in common. You probably noticed from their bios, they are all practicing actuaries. I think the appropriate question to start with is, apparently the U.S. lost, but yet advanced. For the panel, in a team of four, with four teams, and one team winning, tying, and losing, how does one advance as a top two team? If you could walk through the math. We will avoid the math on that. Nevertheless, really good news for the U.S. if you had not heard, and I imagine most of you have heard. With that, let us take some questions on long-term care.
Erik Bass with Citigroup.
Yep.
Just first, if you could clarify the chart on the GAAP earnings impact to make sure I am looking at it right. Is that assuming, is this severe scenario, that you basically are resetting your assumptions at time zero and assuming 100 basis points lower interest rates in going forward? Then that would be the annual EPS impact for the next three years?
I believe it's the next slide. I understand your question, Erik. Actually, we don't eat through our entire margin. We eat through our entire margin, but we have an addition at $225 million of intangibles. What would happens is we start writing down our intangibles. After you write down the whole $220 million intangibles, you'll reset your assumptions. However, the other part of the column is the future loss reserve. We're looking at our best estimate assumptions along the way about the future. Your question was, did we reset our assumptions? The answer is, you don't reset your assumptions you work through your $225 million. For us, we have the future loss reserve, we have an ongoing best estimate view of what we want to accrue for the future. Did that answer your question?
I think so. Basically, if rates were 100 basis points lower when you did the testing at the end of 2014, this would be the impact for 2014. If it continued to be flat going forward, that would be what we'd expect in 2015 and 2016?
Yeah. This is a scenario, though, right? It's a very aggressive scenario, but that's right. The columns also include some of the investment income loss, in the out years, $2 million and $3 million in 2015 and 2016. Yes, that's right.
Okay.
You have a continued drag from an FLR reserve build, you have lost income in terms of when you factor in turnover at lower rates and lost investment income, that carries through. Immediately, you've got to make an adjustment to your intangibles. Not a very sort of common outcome on a GAAP front. Statutory, you have more of immediate hit, which was portrayed on that slide.
Got you. I guess related to that point, you have about a 25-point hit to the RBC ratio. I think you've commented in the past one reason for keeping the RBC ratio in the 400 or 400%-plus range
is as a cushion for long-term care. Would that imply that if you did eat through it, you're using that cushion, but you wouldn't necessarily have to kind of maintain a 400%?
Yeah. It's a very good question. I'll actually touch on that later in my comments. It'll illustrate it a little bit more, the crux of your observation is right, and that is if we're entering down the road. When people ask me what do I pay attention to when it comes to dialing in capital as it relates to the risk profile of the company, I pay attention to a lot. Three of the primary tools I pay attention to is loss recognition testing, cash flow testing, and stress testing. Those three basic tools are by far the most influential to me in thinking about what we dial in from an RBC perspective and a leverage perspective. By the way, one thing that CFOs learned coming through the crisis, one general observation is when you're seeing these reports, round up, right?
That's what everybody would tell you, right? You're wise to do so. Generally, when I look at the accumulation of this data, I think in terms of 25 points or so of RBC, yes, on hand to absorb and not be disruptive to our strategy, investing in the growth of the company, certainly not disruptive to our ratings and ratings trajectory. Basically want to be able to absorb it and move on, as Tim mentioned. When I think of leverage and some of the GAAP implications, I think of 100 to 200 basis points of leverage. Two percentage points of leverage is something you want to have on hand and be careful about, be able to absorb and move on. That's really, in a very general way, how I back off these studies and think about the capital. Tim mentioned this and really realized this.
All those bars that you just looked at, couple observations. Had we still owned the OCB businesses that we are soon here to sell, one, all of those bars would be in the neighborhood of 20% higher, secondly, there's very thin actuarial margins in runoff blocks of business. Not surprisingly, in years past, you've seen us take GAAP hits due to interest rate adjustments, and they've all been on effectively a singular block of business, a large $2 billion-plus interest sensitive block of business that is now on its way to Wilton Re as part of a strategic move. Can't impress upon you enough how important those moves were as it relates to asset leverage and interest rate risk, as Tim mentioned earlier.
Thank you.
Humphrey Lee from UBS. Just a question about the business mix shift in long-term care from comprehensive care to short-term care. Based on the current sales level, looking at the in-force mix shift from long-term care to short-term care, if you maintain the same level of sales going forward, would you be reaching to an equilibrium in terms of the business mix shift, or do you still expect the in-force book to be shifting towards the short-term care over the comprehensive long-term care? If so, how should we think about it going forward?
I'm going to repeat the question just to make sure I understand it. I think what your question is look at the current pace of sales or mix of sales, particularly short-term care. Is your question how to think about the trajectory of the shift in the in-force mix over time by virtue of the sale of new business?
Right, because on the short-term care side, you do have a short duration compared to long-term care as they run off, the long-term care still will be on the books compared to the short-term care block of business. Would you reaching to equilibrium in terms of the mix shift, or would this still continue to go forward if you maintain same level of sales?
Yeah, I think the short answer to your question is that it's going to take a long time. The in-force block, as you saw, when we started selling short-term care, more and more short-term care, we saw a decrease in the insured that had long-term care relative to the total portfolio. That change over a 15-year period was maybe 10, 12 percentage points. Going forward, if we maintain the current mix, we will continue to see movement away from long-term care and into the other products, but it's going to take time. That's just one of our elements of risk management strategy. We're not just going to sit here and wait for the portfolio to turn over. We're going to be looking at all of the things that we talked about. It's helpful, by itself, it's not going to solve our problem.
By the way, that last statement Chris just made is the key to managing long-term care risk. It would be nice if there was sort of that one thing that would change the risk profile, but that's typically not the case. For us, it's been a combination of changing, first of all, pricing, repricing, and restructuring what we sell, changing the mix of what we sell and the mix of business over time, looking proactively at rate actions where possible on in-force, managing the claims more actively, and I thought Loretta did a nice job of this. Realized for a great amount of the industry, players that have been selling more through third party to 40 and 50-year-olds, it's not uncommon for a large player in long-term care to have as little as 1% of their policies on claim.
Compare that to a healthcare company that has been proactively and early on managing the claims dynamic for a long time. Why? Because it's mattered tremendously to their financials and their actuarial outcome. This is that next stage for this industry, we're ahead of that in some of the things that Loretta's talking about. Look for opportunities to shift the risk more dramatically, i.e., through reinsurance or things like the SHIP transaction. We've got skills in all those areas. These are the team members that focus on that, it's going to take a combination of those things to shift the risk profile over time.
Okay. In terms of potentially if you're looking into another rerating actions in 2015, would it be more because of interest rates or is it because of experience?
You really don't go in looking for rate increases on interest rates, but I'll let Chris talk about the dynamics around rate increase.
Yeah. Fred's right. Interest rates certainly impact your bottom line, but they're not a justification for rate increases. It's the experience of the block, the utilization rates, the length of the benefit period, the persistency of the block because of the shape of the curve. Those are all the things that we assess on a regular basis, and we true up both the historical results and then our best estimate of the future, and we build a lifetime model and then take a step back, look at the lifetime loss ratios that are projected from that, and then we make our decisions as to whether or not we need to pursue rate increases.
Sean? Yeah.
Thanks, Fred. When we think of order of magnitude of where the experience has differed versus original assumptions, is interest rates the biggest piece or is it mortality or morbidity? I guess, at the end of the day, what's most impactful when we're thinking about risk to statutory capital?
We study our business. Our business is different than other people's business. We study it a lot. At one time, we studied the SHIP business as well, and we had to beat it. It differs. It really does. The lapsation rate has been one that's changed since 1990 to, say, 2010 pretty significantly. While the morbidity has worsened, the lapsation is really different. The people who were selling in the '80s and '90s rate increase a lot more from lapse rates in my mind, but that's my opinion. Chris?
Yeah. No, I would agree. I think persistency. When you look at the drivers of rate increase activity on blocks that were written 15 or 20 years ago, we were rate increasing back in '06, before interest rates were where they are today. It was persistency, and just the shape of the claims curve for long-term care is such that it's low for long, if you will, with regards to utilization rates, and then it ramps up. The leverage that higher than anticipated persistency applies to your claims cost curve is significant, and that's probably the primary driver.
If I could just make one simple. People that you didn't expect to stay, and they have claims. You look at the block again. More people stayed. Well, you need more premium for those people. That's the simpler way to think about it. It's not that they have particularly more claims. Since you have more people, you need more premium.
We have time for one more question, although realize that we'll come up and do questions at the end, and obviously, questions surrounding Long Term Care are fair game. Maybe one more question, we'll go on.
Thanks. Ryan Krueger with KBW. I guess question on the future loss ratio accrual. Is that a common industry practice? I guess my understanding was that for FAS 60 products, you don't really change future assumptions until you enter loss recognition testing. You only true up for actual to expected performance every year.
Sure. There's two tests you do, and maybe that's the easier answer for Erik is you test one thing just on present values. Does the present value of your future earnings, is that present value of the outflows less than the reserves you're holding? Is the reserve big enough? That's really what you have for your loss recognition. For future loss reserves, you're looking at the tail. For certain groupings of products, you look at the tail. You look 20 years out. If there's losses, then you have to pre-fund those losses. That test is more about earnings. You have gains followed by losses. For those cohorts, wanted to make sure to work that in there.
For those cohorts, what you do is you discount those losses, and you look at them, you say, "I need to reduce my near-term earning to fund for those losses." Future loss reserves are based on best estimates, as well as your loss recognition testing present values, you don't take a loss recognition testing event until you've burned through your entire margin. Ryan, did I answer your question?
Right. I think so. I guess, well, maybe just one follow-up. If I look at the severe bar you show in 2016, have you already taken that impact in 2014, or is that an incremental impact that again happens in 2016?
Your question.
Have you already basically taken the full impact in 2014, or is this an additional incremental impact that occurs every year?
Sure. The LR, the loss recognition testing event is the write-down of intangibles. That's one time. What you have in the other bars is you have the accruals for future losses plus the reduction of net investment income in the roughly $30 million shown on those bars.
Okay.
Okay.
With that, I think we'll move on to the next section, and certainly, we can hit on some additional questions after I'm done. Thanks, folks. Thanks. Last but not least, we want to walk through some financial analysis before I'll invite Ed and Scott back up on stage, and we'll take questions from across any of the categories from today. First, let me just say while I have you here, that we appreciate your support. We've got a number of different types of groups here in this room. We've got equity analysts, equity investors. We've got debt investors. We've got banks who in part support us with their capital, both as investing in our debt as well as contingent capital.
The fact is, we got a number of people in this audience that provide us capital or lend us their balance sheets and just want to make sure you know, certainly from me, but also from the management team, that we appreciate your confidence in us and your support. We appreciate you coming today as well. The point of an investor conference is pretty straightforward, to bring you closer to what is actually the strategic thinking of the company and how we envision moving the company forward. My section's no different. We're doing something a little bit different this year in that I'm going to attempt to bring you a little bit inside our financial plan. This, by the way, is the same financial plan that we go to our board with and get approval on.
This is the same financial plan that we typically share in some detail with the rating agencies. While we're not going to go into line item by line item and assumption by assumption, we're going to give you somewhat of the punchlines of how we see the next three years coming out. The plan. Our capital plan is built, frankly, substantially similar to most companies. Nothing unusual about it. Really interestingly, the building of a financial plan actually follows somewhat the agenda that we had today for our conference. What are the opportunities in the marketplace? How do we bounce off against those opportunities? That would be the strategic planning process. Typically, launch is actually right as we speak. Starts launching midway through the summer, late into the summer, it's a lead into the financial plan.
The output from that strategic planning process is very straightforward, where do we need to make some investments to capitalize on opportunities or close gaps that are uncovered in our strategic plan? When you hear Ed talk about the opportunities in the marketplace, when you hear Scott and Scott's panel talk about the various investments that we're making, all they are doing is giving you at a high level the output of that strategic planning process last year that led to green-lighting $45 million-$55 million of investments. We get into earnings drivers and key earnings elements. These are oftentimes involving the actuarial teams, including members that we just had up here. Things like benefit ratio trends, spreads, certain policyholder behavior dynamics like lapse rate assumptions. Eric Johnson was up here and talked to you about our investments.
Obviously, one of the very critical assumptions embedded in the plan is what is going to go on with investment yields, where are you going with the money, and what's expected to yield. After it's all said and done, this masterful plan of ours is going to spit out a level of capital generation and what are you going to do with that capital. That ends up being kind of that final touch of a financial plan, capital management. Let me give you some basic observations about our financial plan. One, you're seeing a gradual shift of investing our deployable capital towards strategic initiatives, and that's because we're seeing more opportunity.
That's why we wanted to profile more of them today for you so you could see what in fact are you investing in and why, and what do you hope to get out of it. That was the point of the business segment panel. You're seeing a shift there. Interestingly, that shift is actually not stealing away from redeploying our capital in the form of share repurchase and common stock dividends, i.e., returning capital back to you, the shareholder. It's actually what it's doing is we're seeing less in the need of capital to build up the balance sheet, core ratios, leverage down, RBC up. We're seeing that now shift on over into accelerating the growth model. Makes actually a lot of sense for the stage in the game that we're in. The second major dynamic coming into the financial plan is we set course on investment grade.
That's critical. This is not just critical because we aspire to higher ratings and wouldn't we all feel better with higher ratings. This is mission critical. If you walk out of this room and over to the trading floor and ask them what concerns traders most, if we enter into a weak economy or some sort of global disruption, they will say, well, first and foremost, I'm probably frightened of financials. Secondly, oh by the way, the sub-ROE and add shareholder value over time. Going through life as below investment grade is no way to go through life. Okay? We are driving towards that goal. It's that simple. We want to return a sizable amount of deployable capital to our shareholders as somewhat of a proxy for the use of that excess capital. We don't have M&A in our plan.
We don't have, we think we kind of maybe will invest in this in our plan. We have identifiable strategies supported by CBAs. As a result, I'm sitting on a lot of capital generation throughout the life of that plan. What do I do with that capital? As a proxy, I'm using it to buy back my stock. Naturally, there's a lot of energy on a per share basis in my forward plan because I'm constantly plowing my deployable capital back into share repurchase because what I'm really saying to all of you is whatever opportunity that you deliver to me, whether you're bankers looking at M&A or whether you're our management team coming up with new ideas, it's going to have to compete against the returns I can otherwise enjoy by buying back my own currency. That's really what our plan says to everyone. Quality ROE.
All right. That means basically lowering the risk profile of our company, lowering the beta on our company. It's not just about more ROE, it's about the quality of that ROE. Our plan. We have in our plan about a 7%-9% compound annual growth rate in operating earnings off of normalized 2013. We have the normalization in your package, so it's not a mystery. Okay. On an earnings per share basis, that's 14%-17% compound annual growth rate. Here's an interesting thing to keep in mind. I think you're all aware of this, but just to give you a little help. We enjoy wonderful tax assets. We put those tax assets to work each year.
Those tax assets convert to cash flow, and if I'm, again, as a proxy, putting my deployable capital into share repurchase, that tax asset dynamic is really kicking my EPS growth rates in high gear. In fact, throughout the planning period, our tax asset utilization contributes about 200 basis points to my compounded annual growth rate in EPS. What is 14%-17% in this dynamic would otherwise be 12%-15% if not for those tax assets. Now, the relative earnings drivers have been very stable. Things like benefit ratios and Med Supp, long-term care, supplemental health, spreads in our annuity business, mortality, those are really fairly steady throughout the planning period. In other words, we're not seeing significant shift in the trend lines of those earnings drivers and have not planned for significant shift in those trend lines.
What's really contributing to the operating earnings growth rate is pretty simple, more premium, selling more product, and particularly selling more product at a pace that is greater than the natural runoff or lapsation in our blocks. As we get rid of runoff blocks of business, guess what happens? We move into an environment where we're putting on more than is running off as a company, finally. Finally, right? Premium growth rates. Now, the other thing that's happening is operating leverage. You would expect, you would hope, certainly that's our mandate, that operating expenses are not growing at the same pace as the revenue side of it, and we see and enjoy that as we go forward. Now, there are variables, right? No plan would be a plan without be carefuls and risks. Well, what are they? They're relatively straightforward.
We are assuming a recovery in new money rates. The interest rate forward curve that says things are going north, we have things going north in our plan. Rates have remained stubbornly low. Today, we're reminded again of how stubbornly low rates remain, right? We need a little cooperation from that dynamic over time to support our earnings. You saw a little bit of a window into how that might hurt in the sensitivity testing that Tim took you through. The long-term care working group that we have, key members up here on the stage just a moment ago, are trying to stabilize the patient as much as correct issues over time and add value. Their efforts in stabilizing the patient are very important in the near-term planning.
That is somewhat calming down benefit ratio volatility and starting to make progress on building more actuarial margins such that we reduce the risk profile of taking charges. The amount and pace of investment can change. These guys are charged with coming every year with new and improved ideas, to degree their ideas are really good and compete for my return on capital, then I might change the pace of investment. Last but not least, credit conditions. Our plan assumes favorable, stable credit conditions. If there's a return of a credit cycle, that means things will change, obviously. Big question for us, capital targets, but also importantly, recapitalization. In fact, a year and a half ago on a slide, we had something I think we called it Recapitalization: The Sequel.
In other words, as far back as a year and a half ago, we started talking to you about the reality that we may have a recapitalization in our future. The reason for that is depicted on this slide. You can see as we move out in the financial plan, RBC remains at relatively elevated levels, up around 420%. Why would RBC remain at those elevated levels? Because of what I just got done talking to you about. When I get a loss recognition test, a cash flow test, and a stress test that tells me I need to be concerned about low for long interest rates, I want a little cushion in my capital because I do not want to disrupt our efforts to go after the middle market opportunity. Leverage is climbing down, dropping. Leverage is dropping, and there's nothing I can do about that.
I am amortizing my debt. I'm required to amortize debt. This is one of the joys of being below investment grade. You are required to amortize your debt. I have $200 million of amortization of debt over the next three years in my financial plan. Leverage drops like a rock. Okay. If you come to me and say, "Fred, your ratings are up, your stock price appreciation and value is presumably attractive. Your leverage is climbing below the shaded area of my target range," then it's not a matter of if we will capitalize, it's a matter of when and to what degree. What are the considerations on recapitalization? Here's how to think about it. One, bond restrictions. I've got $275 million of high-yield bonds outstanding. That's a challenge. Why? One, those bonds have a couple very interesting conditions.
One is, I can't just reinvest the proceeds of the sale of assets, like for example, the one we just announced, unless I'm redeploying that back in my business. In other words, I'm somewhat restricted in using that money for buying back stock. The second is I have a basket that I have to adhere to, meaning a basket that allows or regulates my repurchase or dividend. That basket builds with my free cash flow. If I move ahead of the building of my free cash flow with an accelerated repurchase, I could run into challenges under the bond agreement. This is a short way of saying that the bond restrictions require takeout. Takeout is expensive. Taking out those bonds is north of $30 million of penalty if I do it before the call date.
The call date is September 30th, October 1 of next year, where the call price goes down to 105 and becomes about a $13 million proposition. Yeah, I realize conditions are present to where a recapitalization could add shareholder value, I've got to stare at the obvious penalties and NPV dynamics associated with bond restrictions. I'm also looking at ratings momentum. If I continue on the current ratings path I'm on, can I put in place a more permanent and lower cost and much more flexible debt structure come a few years out or a year out? Markets. Markets are favorable now. What if they moved away from me? How much do I give up if markets move away from me? I need to be careful. I might be patient to my downfall, right?
If I'm too patient, I could see certain spreads and rates move away from me because they're attractive right now as we speak. All of this is a big economic analysis, and as Ed mentioned and others mentioned here on the stage, we are economically driven. What's the answer? The answer is not if. The what degree I've just answered for you. We're going to dial in leverage that's in and around the midpoint of our target range. I would feel comfortable around 20%. The issue is when. I can tell you with some level of confidence that it's highly likely that it would be in our economic best interest come call date to move forward with resetting our capital structure. The issue becomes between now and then what makes the most sense. It's under assessment as we speak.
We'll continue to watch it and see what makes sense for our shareholders and for our company, and for our long-term quest towards investment grade. Ratings. This is a nice chart. Ratings have been moving the right direction. I hazard to say you will not see a ratings chart like this in our industry. We've made steady progress. Eight upgrades since 2012. S&P has us on credit watch. Their intention is to upgrade us once we close on the CLIC transaction. Watch positive. Moody's and Fitch have us on positive outlook. We've actually been somewhat surprised positively where rating agencies have sometimes made multiple moves in a short period of time, or not only upgraded us, but gone further to say positive outlook. I do, however, believe that investment grade is a higher bar to jump over.
I think the agencies would tell you that, too. That's a fairly significant step for them to make and for us to achieve. We're going to need to be patient and keep clipping along at the same pace. What's the path to investment grade? Time and stability of performance, active management of our long-term care exposure. Long-term care, no matter what we do to work it, on its best day is C-rated in the eyes of the rating agencies. You have to do a lot of work to create an upgrade environment when you're in that business, and we're doing that. A continued build of our franchise is important. The good news is that the rating agencies have overcome their so-called Conseco hangover. There is not that hangover anymore. We are still recommending water and aspirin in some cases.
They have gotten over that. They've moved on, realized they're dealing with a different company with different dynamics moving forward, and you're seeing that in our ratings, and it's quite encouraging. The here and now. There's ratings, there's call date provisions, but we can't be patient to the point of holding our cost to capital hostage. We have to be appropriately efficient in managing our capital. We've stepped up the repurchase certainly in the second quarter. Year to date, we will have bought back $135 million worth of our stock. If you do the quick math on that, we bought back about $40 million in the first quarter. You can see we stepped up the accelerator in the second quarter, particularly with the pullback of our share price, and we're quite disciplined on that front.
We are increasing our guidance to $350 million-$400 million of repurchase for 2014. If you recall, we had mentioned that we thought we would be near the high end of our previous guidance of $225 million-$300 million. That's being stepped up to $350 million-$400 million. We're assessing recapitalization dynamics. We show here capital utilization. There's some interesting information content in that pie chart. We generate in our financial plan about half a billion dollars a year of capital. This would be essentially statutory earnings before the movement of money up to the holding company in the form of intercompany contractual arrangements for asset management and service agreements, and before surplus note interest payments. It's nearly statutory EBIT before those charges. We don't pay much in taxes, as I note. That's about half a billion dollars a year and pretty convention.
If you look at that pie chart and do the math, you're going to notice that pie chart is traveling a little north of $500 million. If I'm moving $400 million up and have a pie chart of north of $500 million, what it's telling you is I'm spending down a level of my excess capital at the holding company. We've been at $300 million plus, carrying a little bit more than we would normally do or need to do. Come 2016, we become a taxpayer. That's going to take some cash flow away from us, but it would be my hope and our hope that at that time, we'll be dialing in a capital structure that qualifies for no longer needing to amortize our debt the way we do. In fact, we really are very close to that point right now with our current ratings.
Probably would have a couple percentage points of amortization, if that, as opposed to today, where we're amortizing $50 million-$60 million a year of debt. A nice offsetting dynamic there. On the tax assets. We are utilizing those assets, and there's no free lunch. Obviously, as we convert those assets to cash flow, buy back stock or redeploy it, the value of that asset starts to come down. What this is giving you a window into is come 2016 or the end of your plan, how should I think about the value of those tax assets? That is really the orange bar there. Effectively, what is today some $600 million of economic value, or sometimes we loosely say $2.75 To maybe as much as $3 a share, depending on the discount rate you assume.
That gets spent down to closer to $2 a share as we get out towards 2016. Some interesting things. One is we did a heck of a job last year in creating $100 million more of economic value than the last time I talked to you up here on this stage at the last investor conference. That's nice. That's a great benefit. The other is we still have some pent-up opportunity, and it's largely in non-life income. Ed mentioned it relative to M&A earlier, if we can find ways in which to generate more non-life income, we have the opportunity of creating up to another $125 million worth of economic value if we can do it right.
That basic asset is set to expire in 2023, this is really assuming in our GAAP financials and economics, if we are unable to change the course of what we currently do today, including growth rate, we will leave on the table $125 million. As you can imagine, management's actively engaged in looking at what we can do about that. It was mentioned earlier in a number of different ways, this is an interesting slide. Just take a peek at this for a second and realize that back in 2007, we maybe had a little north of $30 billion of reserves as a company. Through all of the transactions that we have mentioned, we have taken down or taken off of our balance sheet $10 billion worth of high beta volatile reserves.
I mentioned it earlier, it's not just a matter of those reserves being volatile. They were highly sensitive to interest rates and credit markets. Reducing the asset leverage in the company and the interest rate exposure has been very important part of that puzzle. With that comes an interesting dynamic, that is 800,000 policies went away with all that activity. When 25% of your policies go away, guess what you need to pay attention to? Your administrative cost structure in a big way, right? The formula of a Wilton Re, of a CSC, of these aggregators, of Protective and others in the industry has been loading more policies onto a given structure and driving that operating leverage. We have been doing the opposite. It's for good reason.
Otherwise, we'd be showing you a very different interest rate stress test right now, and a worldly different long-term care stress dynamic. It's been for good economic reason, we've got to address our cost structure. Step one is going to be addressing the cost reduction in line with the transition of business to Wilton Re. We are being paid annually $30 million in year one, $20 million in year two, acting as a TPA for Wilton as we transition that business. As we transition that business, our cost structure needs to come down aligned with that such that we don't have any negative impact to our plan. There's a phased approach to this. Phase one is we need to address that and have plans around that.
Phase II is more what Bruce talked to you about, and that is how do we solve for what we need to look like to do better in driving market share in the middle market? We're heavily focused on phase I in the financial plan that you're looking at. Now in closing, ROE. All we're really doing here, if you follow this, is we're trying to give you the component parts of a traditional valuation of our stock as you go forward. What are the main observations here? We see ROE organically in the 10% range in 2016. What I call ROE capacity is nothing more than if you were to assume a logical recapitalization, how much ROE would that contribute? And that's the orange bar that pops it up to 11%.
What's the capacity to pick up your ROE? Let me give you some valuation observations. If you own our stock today or you're thinking about owning our stock, you have the following things to consider. Our plan says operating earnings growth rate of 7%-9%. Book value build of 4% CAGR over the three-year period. That's while still having a level of excess capital. I'm still ending the day at a 420% RBC. No matter what, sitting on something like $2 a share of tax asset. Colonial Penn's not in this thing. These numbers right here, Colonial Penn, because of the DACing dynamics, literally does not appear on this. They don't drive GAAP-based economic benefits. They drive economic benefits.
What we've said to you before is if you take in-force earnings at Colonial Penn, something in the neighborhood of five or six times that is the economic value of that business. Okay? Maybe you want to round and call it $1, $1.25 a share, whatever you want to call it. It's not going to be in this classic valuation. Then lowering beta. We carry among the highest levels of beta in the industry at about 1.6. It was only a few years back that thing was hovering close to 2. Why does that beta exist for our company? Okay, it exists for a few simple reasons. I firmly believe it's because in part we're a below investment grade financial.
The same reason why those folks that are trading down the hall from us would run away from us is the same reason why you would naturally have a higher cost of equity implied in your stock. When I say getting to investment grade is also about driving more value, we're talking about lowering our cost of capital overall, and that makes a big difference in the valuation. There's no reason why our beta would be traveling around 1.6. We deserve a Torchmark beta? Because we're in the long-term care business, and we need more years to stabilize and prove that out. We should be somewhere in between, in my view. Driving towards a lower risk profile. If we can combine these elements, all right, let me put it to you straightforward.
I just got done telling you that we revised guidance to buy back between $350 million-$400 million of our stock. I'm going to ask you a crazy question. Does that mean, in your view, that management very likely finds the buying of our stock as a decent investment? I would suggest to you the answer is yes, that would be the case. Plans are plans. They have risks. We may hit it, we may exceed it, we may miss. They are what they are. They have natural risk profile around it. We're trying to drive towards a greater valuation, and the nice thing about our financial plan is it's largely execution-oriented as opposed to having to rely on outside factors. If we can execute, we can drive this. Let's now invite Ed and Scott back up on stage and take your questions.
Hey, thanks. Randy Binner again from FBR. Thank you for covering all that. It's all kind of bigger picture, but as analysts, sometimes we got to get through each quarter. We worry about EPS impacts. I guess my sense is that it seems like the timing of the recap is maybe extended out more in time than it was before. I'm wondering, is part of it that the loans are relatively inexpensive right now, so they're L plus 225 and L plus 275? If you term those out, would that actually cause EPS dilution? Is that one of the things that's kind of causing you to wait to see the whites of their eyes on this?
If it was just focusing on the leverage loans, the cost of debt and getting improvement on cost of debt would be a challenge. The reason for it is despite our ratings improvement, we hit the market, particularly with that second refi. If you remember, we recapitalized. We did another little mini refi. People sort of forget about that, but that little mini refi was done literally. We don't time the market, but boy, we timed the market. It was done at a real low point, tight spreads and low rates. It really locked in a nice cost of capital on those loans. What we would achieve, however, is pretty good benefits on the bonds. You're going to get, with the ratings improvement that we've gone through, the bond portion of it would improve.
The overall cost of debt, I would say, Randy, would still be net better than where we sit today if you include the bonds that are six and three-eighths. We could do better than that. However, I've got something standing in the way, and that is one whole heck of a penalty to take those bonds out.
that kind of puts the whole time until late 2015.
Think of NPV on this, right?
Okay.
A couple things to think about when it comes to NPV. Where are rates going to be and spreads going to be come October 1st of 2015? Where do I think they're going to be? What's the forward curve say? What's the best information we have? The answer is we don't know. It's hard to predict. What's the sensitivity analysis? At what point in time am I indifferent between a penalty today and moving more aggressively? Second big question is, I just got done preaching to you about how we see valuations, okay? A real big swing factor in NPV is what am I going to do with the proceeds, right? What's the stock if presumably I'm recapitalizing, meaning I'm redialing in a new capital structure? That by definition means I'm buying back in my equity.
What am I buying it in at, and what is my forward view of that valuation and the NPV on it? My mood and my analysis on this could change literally just by movements in share price.
All right. That's great.
I'm trying to tell you we're very mechanical about this and very sort of economic about it. There are non-economic considerations, like meeting with the rating agencies and making sure that we don't disrupt the fundamental strength in the balance sheet. Most of it is largely economic driven.
Just to clarify, that would mean you could move even if you don't have the rating as long as the NPV of your analysis works out.
Just like the last recapitalization we did, we can move when the economics make sense. It's not a matter of that. It's really a matter of what are the considerations. All I want to do with you today is not signal timing, not signal we are going to do this. This is not some sort of announcement. All this really is doing is bringing you inside literally the corporate finance thinking that is going on in the company so that you understand what might be on our mind and how we're thinking about it.
Thank you.
Erik Bass with Citigroup. I think you revised your outlook for the liquidity at year-end to be $400 million. Is that, should we think of as a modeling assumption, or is that kind of the target cushion that you want to have? Or if an M&A transaction or some other opportunity presented itself, could you bring that lower than what's kind of shown in the plan?
Very simply what that number is first and foremost a year-end number, okay? I say that because if you all are doing the math and you're saying, "Hey, wait a second. You had $300 at the end of the quarter. I think you're going to fetch something around $220 from this CLIC deal. I'm not getting the $400." It's a year-end number. What's happening with that? Well, I just lifted my share repurchase guidance. I've got some debt to amortize. I've got other things that are going on that will naturally moderate that number as we go forward. Most notably is the kicked up level of repurchase. That's nothing more than taking the excess liquidity that we've had on our balance sheet for a while and feeling more comfortable with it. Removing these other CNO businesses is not just about the collection of proceeds.
It's about the reduction of risk profile, and do I feel better about where I can steady-state my capital? That's what's really in there. There's no thoughts on M&A or anything like that. It is literally just a mechanical push of where we see the inflows and outflows through year-end 2014.
Okay. Maybe one question on M&A since you brought that up. If you could update us on maybe what you're seeing in the market. Valuations have certainly come up for some businesses, but are you seeing things that are of interest? Maybe if you could talk about what type of properties that might be.
Yeah. A couple things just for some color on M&A. One, we've built a formal, mature M&A engine inside the company. What I mean by that, this is no different than any other mature company with excess capital and opportunity. What I mean by that is we've got an actual corporate development group that is making contact with bankers, deal flow players, business brokers, reinsurers, private equity players, the usual array of players that are in the mix and driving the deal flow in the marketplace to understand what's going on and what might be of interest, where it could make sense. We've got formal criteria that are set in screens, very detailed criteria as what we would be interested in and not interested in.
Really basic things like middle market focus, captive control distribution, less rating sensitive, not just because of our ratings, but we don't think it actually makes sense to be in a highly rating sensitive business. These types of criteria are put forward. As a result, we're now starting to get players in the marketplace as a feedback loop coming back to us with thoughts, some of which are actionable, some of which are not. As we sit here today, we have done nothing. Why? Because we're very selective, it's going to take something unique to really work for us. It's going to take something that would otherwise augment what we could do on our own. We think we can do a lot on our own. We're active. We're looking at things. I think in terms of valuations, yes.
Clearly, what people are wanting to see in the way of evaluation for properties on the sell side, I think, has gone up with sort of stock price or stock market recovery and so forth. For us, the levers are interesting. We have areas of our business that could use more scale. We have a non-life asset that we're looking to try to do something about. We bring those types of weapons to the table, it's going to have to compete against what we could otherwise do with our capital at very low execution risk. I don't suffer a lot of risk when I go out and buy my stock back.
Thanks.
Thanks. Chris Giovanni, Goldman Sachs. Three quick long-term care questions and then ROE. I guess, in the plan, what's the expectation for interest-adjusted loss ratio for long-term care? Can you help us think about the mix of where you are in terms of active life reserves versus actually purely paying claims? Lastly, in the past, I think you've talked about trying to reduce the LTC reserves as a percentage of the total reserves for the company down closer to 10%, and wanted to get a sense of timeframe to get there.
In terms of the benefit ratio assumption in the plan, as I mentioned earlier, relatively stable around that 79%, 80% range. Stays relatively stable. We saw a bleed of that ratio over most of 2012 as rate increases started to moderate, and therefore persistency started to kind of pop up, and that was driving a higher level of benefit ratio. We don't see that moderating, reducing, or getting better, but we don't see material deterioration in that. What could swing that possibly is the degree to which we do the homework and see that there's maybe more availability to take certain rate actions could play with that benefit ratio, but right now it's too early to make that call.
In terms of the mix of active life reserves and claims reserves, I want to remember that if we've got $4 billion plus of reserves GAAP-wise on our balance sheet, I think something a little north of $3 billion is active life reserve. Is that appropriate? Yeah. We'll have a little bit more on claim reserve because we have a little bit more on claim. I think we're up around 5%, 6% of our policies on claim. As I mentioned earlier, most of the industry is quite a bit lower than that. We know a lot about claims management. That's why you absolutely need to pay attention to what Loretta's talking about. That's a difference maker for this company.
Yeah, let me add to that because we have 5% or 6% of our policies on claim and long-term care doesn't mean that it's a lower quality book of business. It's indicative of a higher average issue age and higher average in-force age, so you naturally have more people on claims. At the same time, think of what Loretta and the group talked about. We've got insights into claims management, what moves the needle that we believe is largely at the lead of the industry, again, because we're seeing more of certain things before the industry sees them. Your last question.
I honestly, personally have said this in public forums, want to certainly be careful about it. That is, I have a view that no matter how valuable the product is to the marketplace you serve, there are certain products that naturally carry greater volatility with it. In my past life, variable annuities fell in that category. For some, maybe universal life with secondary guarantees. For our company, long-term care, where I believe you have to be really careful about how much that business occupies in your total economics. Not so much just reserves, but economics. For our company, for example, it may be 20% of our reserves or a little more. Remember, I'm in the Med Supp business, which carries a lot of economic benefit to the company, but not much in the way of a reserve build.
I'd probably put long-term care at something like 15% of, say, our economics as a company. My belief is that it's got to be at a level where we continue to serve our clients satisfy the needs of the middle market, but over time, find that business being at a level where I can stand the volatility and not have it be in any way sort of threatening or concerning or an overhang or overshadow to the company, whether it be ratings, whether it be bond spreads, or whether it be stock price. I generally or generically believe that to be something around sub 10%. I think that's going to happen naturally, not because of actions that we take on long-term care just exclusively, but we're simply growing the other parts of our business much more dynamically.
Just on the ROE, the prior target was 9% for 2015. Obviously, you had some actions that maybe lifted the ROE by 100 basis points or so based on what you did earlier this year. I guess how should we think about reconciling the 9% target that you had for 2015 versus now the 10% for 2016 and maybe the walk to get there? Is it just a pretty steady pace in terms of the ROE improvement?
Yeah. The tugs and pulls of ROE build organically are relatively straightforward. First, the highest impact animal there is capital management. That shouldn't be a surprise, because I've got $1.9 billion of statutory capital, and I'm throwing $400 million up to the holding company a year based on my tax position. Guess what? Capital management's a big player when it comes to ROE development and EPS development. That's a big player. This is even without recapitalization. Recapitalization just takes advantage of the low leverage, the so-called leverage capacity that we have at the holding company. The other driver is really the running on of higher return business and the running off of lower return business that takes place, most notably the growth rates in the business and natural earnings growth.
That growth rate is somewhat offset by lower portfolio yields because even though we've done a decent job of defending new money rates, they still are traveling below portfolio yields, so you see a natural bleed in the portfolio yield, and you've got to keep pace with that. Operating leverage has helped, remember, I'm not really seeing a lot of that in my plan because I've sort of assumed operating leverage benefits in the sense that I've got a placeholder in there. I'm being paid by Wilton Re to the tune of $30 million this year and $20 million next year, and I need to reduce my cost structure accordingly. Do you follow what I'm saying? It's almost like I've been spotted a cost reduction in that dynamic. That will build over time. Those are really the tug and pulls. It's not too much more mysterious than that.
Yeah, I'd add to that. When we talked about how we were going to get to the 9%, we talked about four levers. The fourth was non-guaranteed rate increases in OCB and other actions there. We obviously have that now, it will come next week, tied off. The other three remain that Fred just touched on.
Thanks. I just had one question about the capacity to get further rate increases on the LTC in force. There's a notion from at least one of your competitors that if the states don't approve the rate increases that you're asking for, that those states' Medicaid budgets will feel a hit from more lives going on Medicaid for long-term care. Does that argument carry any weight with you? Is that something you use, or is the private long-term care market so small that it really doesn't matter?
It is of concern to us. It's of concern to me as a taxpayer as well as an executive and a player in that marketplace. I think it is something that's important not just for CNO, not just for our industry, but I think it is important beyond that for the country that there be some kind of public-private partnership to address this. We've got a growing number of people that are in those healthcare-rich needs ages, and the burden on state Medicaid plans is growing. That's got to be addressed, and I don't think the private side is the full solution. The more that we can have people understand the need for long-term care protection, understand how private long-term care can fit into that mix, it's good for us as a company, but I think it's good for the states and us as taxpayers as well.
We are saying that in various forums, including in meetings with different state regulators and legislators, as well as even at the national level.
You're trying to get politicians to think beyond their midterm elections and whatever else is going on. Both of you guys have come back from discussions on this, including in Washington, feeling like, look, there's sort of an embracing of that dynamic. The idea that this sort of holistically changing the world of long-term care performance as we see it
I think it's going to be a drumbeat. Eventually, I think you get more the attention of the legislators before you get the attention of the regulators. Eventually, those two things come together, and I think it's just the recognition of, in order for this to be a viable market for the private sector, it has to be one where capital can get a decent return. They get it, but whether it really changes the dynamics, I don't think it's a short-term proposition. It'll change dynamics over time.
It's nearly impossible to exhaust the questions from analysts and investors. Do you have more questions for us or any topic that we covered today? If not, we'll exit, and Ed will have some closing comments.
Great.
Hopefully, in these few hours this afternoon, you come away with knowing that we do have a focus, we do have a strategy, and we do have a plan. That, coupled with a track record of execution, we really believe that we can execute on that strategy and plan. Hopefully, you come away with not only have we been investing in our business, we continue to invest and expect that to be both on the distribution side as well as the home office side that's going to drive more growth and more efficiencies. With that, we're economic value-driven, and that the absolute level and the quality of our profitability are both on positive trajectories. They have been, and we expect those positive trajectories to continue. Why am I, why is the board, the management team bullish on CNO? One is we see the opportunity.
It's significant. That middle-market focused strategy, middle market being underserved and growing is really compelling with the opportunity. Like we talked about with the alignment, we're well-positioned to continue to serve that market. We have distribution that's largely exclusive to go and reach that market. We go there with advice. We go there with a breadth of products and a breadth of price points to serve a variety of needs of that middle-income market on the protection and financial security sides. We're shifting some of our investment more to get some efficiencies. We've been doing all of this with, I'll say, more manual labor, less integrated, less streamlined systems and processes, and we think we have operating leverage to bring that even more. We think that there are a lot of catalysts that are going to drive our valuation.
Scott talked about with the team our above-average potential for profitable growth. All of the segments looking to grow sales in that 6%-10% range over the next few years. As Fred touched on, we've already lowered beta, but we're continuing to do things and have the volatility reduced that beta can decline even more, and we have strong cash flows. That's not expected to materially change, at least over the next three years as we go forward. We have strong cash flow generation, and cash is king, and we like the kingdom that we're in with our business model and the business mix.
Again, we have the operating leverage that in the last couple of years to get the 9%, that lever hasn't been contributing as much as some of the other levers, but we're looking to have it contribute more of an equal weight with the three levers as we go forward. Hopefully, again, we've earned the trust and confidence with our track record of execution. We really do believe that we're no longer CNO, the project, but we're CNO, the growth and return opportunity. Thank you again for your interest and support in CNO, and I and the management team will still be around after this if there are any other questions. Thank you.