Thanks, Eric, and good morning. Try to get the presentation up here. There we go. I will quickly go through the forward-looking statements and non-GAAP measures. With CNO, we believe we've got a franchise that's really built on some solid fundamentals and is well positioned in the marketplace. Our target market is middle-income Americans, and primarily those at or near the retirement age. Hopefully, you will understand our track record of execution. We're not a one-hit wonder. We've been doing things for at least the last half a dozen years to position the company even better and on stronger financial footing and with more flexibility. We really do have a business that is largely underwritten poolable risks that can be a value driver going forward. As part of that, we do have diversification and strong risk management with strong capital liquidity and cash flow generation.
As I mentioned, our focus is on the middle income, primarily senior market. With that, we think our secret sauce is the alignment that we have to go and approach as well as serve that middle income market. That alignment starts with distribution to reach that market. Our distribution is largely exclusive. We have career agents at Bankers Life, over 5,000 across the United States in about 270 locations. We've got a wholly owned agency, PMA, that's part of Washington National, and both Bankers and PMA, they're face-to-face sales in the homes, kitchen tables, in the field at farmers and ranchers across America. We have the direct to the consumer with Colonial Penn. That gives us not only access but also pricing power that we've been able to maintain our pricing discipline, and we're not product driven, we're market driven.
As you'll see in another slide or two, with annuity sales on the fixed index side declining, the distribution is still serving the needs of the market with our three other major product lines where all of them have been growing, meaning the supplemental health, the life insurance, and as part of that, also long-term care. We have that breadth of products. That's another part of the alignment. Again, how the distribution can pivot to meet the needs of the middle income market. Combine them with service that has to be geared for this. We have a lot of policies. We have almost four million policies in force, a lot of modest-sized policies, annuity contracts that are less than $50,000. A lot of our life insurance are $25,000 or less. We have a lot of transactions there that we have to be able to serve.
Of course, wrapped in the bow of a culture that really is focused on serving this underserved market of the senior middle income market in the U.S. Eric referred to this as some of the things we've done over the last six-plus years, and it did start with the foundation of really resetting our business mix. What we did in that was we lowered our risk, lowered the volatility, and really got out of areas where we didn't have the right and ability to compete. Two things I'll point out there that are quite important in resetting that business mix. We sold in 2007 via reinsurance transaction. It was a competitive bidding process, about a $3 billion book of fixed and fixed indexed annuities.
They were sold through independent distribution, were largely out of the surrender charge period, we felt we were not going to get any better return whether interest rates went up or down. If they went down, we'd have spread compression. A lot of those had 3%-4% minimum interest guarantees. If rates rose because they were out of surrender charge period, they were a flight risk, again, sold through independent distribution. We in 2008, also happened to be about $3 billion of liabilities in a closed block of long-term care that we spun off into an independent trust in Pennsylvania, and it's been legally separated from us for over four and a half years. That really is a lot of the kinds of business that you're reading about in the last few years that other companies in the marketplace are needing to address.
We started re-rating that business in 2006, got it to roughly break even, contributed some capital, spun it off, it is not part of our ongoing earnings or liabilities or obligations there. What we really did was, in many ways reduce risk, also focus on where we have the right and ability to compete, which is that senior middle market, largely with exclusive distribution to reach it. That helped our financial foundation, so did a capital raise, a recapitalization recently in the latter half of last year. Lowered our cost to capital, gave us increased financial flexibility. The other thing, though, we've been growing our capital base organically with our earnings power, and we'll touch on that in a few slides.
We've also been investing in growth, we're going to be increasing that over the next three years, I'll touch on that in a few minutes, too. While we've been doing all of this, we've really started to return value to shareholders. Just as an example, in 2012, we returned roughly $500 million back to shareholders through the repurchase of shares, as well as convertible debentures that ultimately would convert to shares that were in our diluted share count. We think the markets have recognized that very solid return over the last several years and a 48% rise in the stock price in 2012, which really did lead the peer group. As far as investments in the business, this is what we've done primarily up until now, and we continue to do. We're really increasing our footprint. We're opening locations at Bankers.
We've gotten products approved in different states where we didn't have it before, Washington National, coupled that with recruiting and growing the agent force there. We've increased direct marketing spend at Colonial Penn. In all three of our core segments, we've also introduced new products that have helped also to fuel this kind of sales where, if you exclude the annuities, we've had a compound annual growth rate, as you see here, of 8% over the last few years, actually a 12% growth in the year of 2012. Is it working? We think so. One way to look at that is how we're growing the franchise. The stacked bars are our three core segments, the liabilities there with Bankers in the dark blue, Washington National in the light blue, Colonial Penn. We have been growing our three core franchises.
You see in the short bar to the right, that is the runoff of our OCB or other CNO business, which is largely closed blocks of life insurance, annuities, and a small remnant of long-term care. That's running off at about 5% a year. What are we looking at beyond our organic growth and the natural runoff of the business? We are expecting that we can look at some acquisitions and at the same time that we can entertain accelerating the runoff of OCB through potentially some sale or reinsurance transactions to accelerate that runoff because OCB does comprise about 20% of our GAAP equity and basically at a zero return. It definitely does weigh down our overall consolidated returns, and I'll touch on that a little later here. With that, from a GAAP earnings standpoint, we have had very good increases in our earnings.
All three segments are contributing to that. At the same time, actually, OCB has gotten a lot less volatile as part of this as we've gone through a number of price increases of raising the prices on non-guaranteed elements, particularly cost of insurance or mortality charges and some expense charges along the way. We've had very good in-force management, given us very solid benefit ratios, especially on the health side. Our business is sticky with largely exclusive distribution, and the annuities we have on the books are primarily with Bankers and the Bankers career agents. We've had very good persistency, and with a very disciplined asset liability management process, we've been able to maintain spreads there as well. You don't return $500 million to shareholders without having strong free cash flow. Definitely a tailwind there that we've got.
Now, as far as headwinds, everyone in the industry is facing the low interest rates. We continue to do things to combat that, but it is a headwind. The fact that our focus is more at that at and near retirement age, just natural attrition of our business is a little faster than the general insurance group. That does put somewhat pressure on a faster runoff that way. As far as our comment here on normalizing long-term care benefit ratios, as I mentioned earlier, we've been re-rating our long-term care since 2006. The only long-term care we sell and have really in force is through Bankers Life exclusive distribution. That's that pricing power, that we were able to go out and start re-rating that since '06, and some blocks in Bankers Life have been re-rated, too.
In fact, part of it actually three times in the last six years. It's very tough to do that, in our opinion, if you don't have the exclusive distribution. You have the concern if you had independent distribution, that if you were the first one to go out and reprice, that distribution would leave you, and worse yet, they would go and take the healthy lives and rewrite them with another company. We don't have that dynamic with Bankers Life and the exclusive distribution. On the risk management, as I said, we have a strong ALM. We've been very active in that. We also, because we're not product driven, we price all of our products quite tightly around a 12% unlevered after-tax return.
We also tend to have, because of the age of our market focus, our products have shorter durations, and even long-term care, even though it's our longest duration, it is somewhere in that 13-year duration. We can and do still buy assets to match the duration of those liabilities. Where those companies that sell to younger ages and also have richer lifetime and other benefits, they have durations that are, in some cases, double what we have, and they cannot match the assets and liabilities as we do. The other thing with long-term care is that, again, because of the middle market focus, our product mix is less rich in benefits. We have almost no lifetime benefits in force. We don't offer that anymore. We don't have hardly any with any inflation riders. On average, our benefit periods in force are just under three years of benefits.
At the same time, over half of our sales in the last roughly 18 months have been what's called short-term care, meaning up to one year of benefit. Why is that? It's affordability. Our prices have gone up much like the marketplace. In that, our middle income consumer is saying, "I need some protection." It becomes a gap insurance type of purchase for them, and getting one year of coverage does help fill that gap in many ways. The last thing is value of new business is really economic value or embedded value. What that does is, our sales and marketing people, part of their incentive is based on the value of new business. It's not just sales for sales' sake.
It's got to be business that is at least returning more than our cost to capital, and that gives us that discipline to have those discussions on trade-offs. Do you want to keep offering the fixed annuity product at less than the cost of capital or negative VNB, or do we pull it or do we potentially reduce commissions? Actually, we've done both. We've pulled some annuity products, and we've also reduced commissions on some so that the distribution continues to have annuity products to offer to the market. On capital, our targets are met, and we take them seriously, and we continue to look to have at least 350% risk-based capital on a consolidated basis.
We look to have at least $100 million of ready liquidity at the holding company, plus another $50 million invested to get some return, but in essence, $150 million in total of liquidity at the holding company. Our targeted leverage is around 20%. We're just over that, but we do have amortizing debt, and we have some sweeps, so that number will soon be below 20% here in the next few quarters. We do have a valuable NOL or tax asset, so we pay very minimal cash taxes, which affords us on a statutory basis to have our after-tax earnings be pretty similar to our pre-tax earnings.
We are generating roughly a half billion dollars a year of growth statutory earnings or cash flow that allows us to do things like we have been doing in returning hundreds of millions to shareholders as well as amortizing debt and growing the franchise. The thing you see here is we ended 2012 with roughly twice the amount of our targeted liquidity at the holding company. Hopefully, it's no surprise why we did that, given that we did announce a few weeks ago a tender for the remaining convertible debentures. We have $93 million of face amount outstanding there. The take-up rates we will definitely see here by the end of March. It is a 30-day averaging of VWAP. At the same time, the price of buying those in or tendering those really is driven by where our stock price is.
Roughly right now, with an $11 stock price, it is about $195 million if it is totally tendered for the remaining convertible. We talked about this half a billion dollars of free cash flow or cash flow generation. On this waterfall, hopefully you will see, we need about $50 million-$75 million of capital to support our growth. Our growth from the past slide, like you saw, we have had a compound annual growth rate of about 8%, excluding annuities. It is accelerating. We would expect even including annuities going forward, that we will grow at least by a 6% rate on sales, and then increase that to 8%-10% over the next three years. Because of our modest size of policies sold, because of the mix of business, it is not super capital intensive.
That $75 million is where we would get if we are growing more at 8%, and also had more of a mix to more capital intensive. It is not going to double in that, which leaves a lot of capital to where we do believe that we can continue to return a lot of that to shareholders. We recently, with the tender, reinforced our guidance that we gave at our investor day in December, that $250 million-$300 million is our securities purchase guidance for 2013. If we are totally successful with the tender, that would get us a large way, roughly that $195 million, towards meeting this $250 million-$300 million guidance. At the same time, as I said, it is not just about securities repurchase.
We will continue to amortize debt, we will continue to pay dividends, just declared again, a quarterly dividend, which we initiated back in May of last year. Moving forward, what does this all mean? On the left-hand side, the near-term objectives, we talked about a lot of those. We really are investing in organic growth. We have got a great opportunity, we will continue to open Bankers offices. We will continue to look to expand into new states with Washington National, we will continue to invest more dollars in direct marketing at Colonial Penn. We are going to continue to help the field with technology, add additional products, and in that, just to give you a couple of examples.
In the second half of last year, supplemental health product in Washington National, which is the bread and butter critical illness specified disease product, we introduced a version of that into Bankers Life. It really started picking up on the sales side in the last quarter. We expect that to continue to grow. Another example is at Colonial Penn. We have almost exclusively offered guaranteed benefit life insurance. The way we protect ourselves there is a two-year benefit of just the return of premium, and then the death benefit kicks in. Now we're offering a simplified issue product. We've got a simplified issue product and experience with that at Washington National. We're leveraging products and expanding that. We'll continue to consolidate back office systems and improve our efficiencies. We see us focused on continuing to grow EPS and improve our ROE.
On the ratings front, we're 3B rated right now. We have a positive outlook from S&P. We believe that all of our financial credit metrics speak to them, hopefully in the course of this year, moving us up in the ratings, that we'd be in the 4B category. Should they do that, then in the last year, we will have gotten at least one upgrade from all four rating agencies, which is definitely swimming upstream from the general trends there. Again, we think warranted by our credit metrics, our financial performance, and our cash flows. We will continue to be balanced in how we deploy that capital. The securities repurchase, common shareholder dividends, debt pay down, and also definitely investing in our organic growth. Where do we think that'll take us over the next three years? That's on the right-hand side.
We are committed to investing $80 million-$85 million in our three core businesses above and beyond what we've been doing to even capitalize more on the underserved middle income market. The accelerate the run-on and the run-off, I touched a little bit on that before. Accelerating the run-off, we do think that there are opportunities to look at OCB transactions, probably reinsurance, as we continue to stabilize that business and improve the cash flows of it. On the run-on We do think that with our strong capital cash flow and liquidity, that we can look at some non-organic growth. Just so no one gets concerned, it's going to be bite-sized. It would be something that we can self-finance. It's going to be something that fits into our core.
That has got to supplement or fit directly into what we're doing because that was going back to one of the early slides, resetting that business mix. We're not going to stray away from the market that we have and the value proposition we have of serving the middle market largely with exclusive distribution where we have a right and ability to compete. We do think that should get us to a 9% run rate ROE by the end of 2015. We do think that we'll continue on that upward trajectory with ratings to be investment grade. Two things on that. The beauty of our model is that from the business standpoint, our three core segments don't need an investment-grade rating to compete. They are focused on that market. It's underserved. There's not a financial spreading. There's not a lot of competition.
On the fringes, would an investment grade help us? Yeah. AM Best tends to dominate that more. We get an A in our name, definitely will help on the margins, but hopefully, as you saw with our track record, we don't need that to grow and grow profitably. Also, where do we expect to be by 2015? Announced this in our investor day, that we're looking to increase our dividend and our payout ratio to at least 20% by 2015. To get that payout ratio, to get the 9% run rate ROE, it's organic. It is not considering the things along the bottom here, which are potential additional ROE catalysts.
Again, that run- on and run- off, that if we do a transaction or more, that is not factored into our 9%. Also, what we're labeling here recapitalization, the sequel, or maybe it's refinance. Certainly, the debt markets are attractive to borrowers still. We get to that 4B territory, interest rates stay where they are, not out of the question to potentially go back, reduce our cost of debt, and potentially also increase even more our flexibility there. Again, not priced in or factored into our 2015 milestone. More significant operating efficiencies are also not factored into this. We believe we can get there organically, and all these things across the bottom would be on top of that. With that, open it up for questions.
Maybe to start off, you talked about with OCB, the progress that you've made on kind of stabilizing the business. Do you think at this point you're to a point where considering a transaction makes sense, or are you still driving more value by kind of going after the non-guaranteed elements and doing things internally? Maybe with the interest you've seen from private equity and reinsurance has kind of been picking up, how does that play into your thought process as well?
Yeah. No, good questions. Thanks, Eric. Definitely, I'll start with the last part of that question. We see the increased activity in the reinsurance M&A market as positive. We see that as positive for us as a potential seller of parts of OCB. We also think it's just a good fundamental that any business that isn't attracting capital eventually will die. Having capital attracted to the industry we think is good and certainly should give us more options. As far as OCB and our plans, we really believe number one, do what we can control, and we can largely control the management of the margins and the non-guaranteed elements there. We expect to continue to go and where justified, pursue price increases.
At the same time, we've been quite public in talking about there is some legacy litigation that we've gotten to settlement, and now we need to see that through the process of things like agreeing on administrative procedures. What types of correspondence go out to policyholders? How does that work? We need as part of this, there's a so-called fairness hearing. We see that those need to run their course to bring, if I can say, more certainty to the settlements we've reached there, which we think, again, reduces the volatility and gives us more options. When a specific transaction might take place, it involves at least three parties. We have to be, of course, ready and being willing to do something. We have to have a buyer or reinsurer on the other side.
To my legal settlement side, we have to have the court docket and timelines be such that they line up. I'll assure you on this front, we are pushing forward on all of those fronts to continue to give us more options. Optionality is good in this case for us.
Perfect. With the long-term care business, you talked about why you're different. Maybe if you could talk about where do you see the industry going as a lot of competitors continue to pull out of the product. If rates remain low, is this a product that five years from now there is a market for, or how do you see that playing out?
Yeah. Another good question. To my earlier comments on any industry that isn't attracting capital eventually dies. We don't see that as good that the long-term care industry is retracting or that the number of companies actively selling in it is reducing. We also think there is a great need in America, especially middle-income Americans that we focus on because, the way we think of it, if you're of less socioeconomic status, you really can't afford any long-term care, even short-term care, and you're going to have to rely on the government programs, namely Medicaid. Where on the other hand, with so many companies now not offering lifetime benefits, reducing the richness of benefits, if you want three or five years of benefit at $200 a day coverage, if you're above middle income, you can figure out what you need to save to self-fund that.
It really is that middle-income part of America that needs it, but we need to attract capital to it, and we also need the regulators to understand the importance of that. The good news is some of them really do see that and do see how having long-term care can help take pressure off of government programs. Unfortunately, we also have some regulators that are loath to give any justified price increases. If companies aren't allowed to manage the business to reasonable return, it goes back to if you want to attract capital, then the industry will shrink. We hope it doesn't continue on that vein, but it needs some regulatory cooperation, and certainly interest rates being above where they are now would also help the industry in general.
Perfect. Go ahead, yeah.
Two quick questions. Number one, you talked about expanding your presence. Can you just talk about maybe which geographies you're focused on, maybe which ones you're de-emphasizing as well? Then on the NOLs and cash taxes, I didn't spend a lot of time thinking about that, but just refresh us on the NOLs and kind of what we should expect in cash taxes. Thanks.
Yeah. I'll answer the second one first, in that we do have sizable NOLs broken down between life, non-life, and capital. We do have NOLs on the life and non-life that go out to 2018 and 2023. In the next five years, we don't expect to be paying any significant amounts of cash taxes. As far as our expansion or contraction, well, let me answer it this way first with Bankers, as I think that'll answer both sides of this with a specific example. Where we're expanding with Bankers, with the 270 locations, it's across all 50 states. One of the key things we look for is where could we open an office that isn't too close to another existing office, but also where do we have field management talent to staff that?
Part of our investment in growth is we are investing in accelerating the pipeline of field managers. We're investing in training, we're doing some new things in recruiting there to get that pipeline filled because we definitely know if you don't have a quality manager in that office, that office is generally not going to be successful. Our Bankers offices are all leased, when we do have an office that isn't meeting the expected sales targets, we close them, but it's not because of a specific geography. If the office didn't meet the hurdles, we'll cut the lease or not renew it at the end of the year or two years and try to get to another location there.
That really is what drives us more, is where do we have talent and where do we expect success or where do we not have success that shifts where our offices are?
Any other questions from the audience? If not, we're getting to the end of our time. Thank you very much, Ed.
Great. Thank you.
Thanks.