Okay, we'll get started here. I am pleased to introduce the CNO Financial executives, CEO Ed Bonach, and CFO Fred Crawford. Under Ed's leadership, the company has undergone a very positive transformation, and which we think has been accelerated as well since well-regarded executive Fred Crawford joined the company more recently. With that, let me turn it over to Ed.
Thanks, Tom, and good morning, everyone. Obviously, forward-looking statements and some non-GAAP measures, but getting to the story, we believe we really are well-positioned because we, first of all, define ourselves by the market we serve, and that's the middle-income market in the U.S. and primarily those 65 and over. That's an underserved market and fast-growing now with the baby boomers having started to turn age 65 last year. The track record that we've got of execution, hopefully, is showing we're not a one-hit wonder. We've been doing things over the last five, six years to position the company and continue to drive shareholder value. In that, risk management is a key tenet of what we've been doing, and we also have done refinancings and in September of last year, did a recapitalization as well.
We continue to generate a fair amount of excess capital that is in large part being returned to shareholders in share repurchases, and we initiated a dividend last year for the common shareholders. What really does make us a compelling value proposition, and why should you be thinking of CNO in your portfolio? Again, it starts with we define ourselves and are differentiated by focusing on a market. We're not product driven. Our products are all priced quite tightly around a 12% unlevered after-tax return. We're product agnostic. We're serving the customers of that middle-income customer. We reach those customers with largely exclusive distribution. With that, it's career agents at Bankers. It is largely a Washington National wholly owned agency that has people also like Bankers going out, meeting with customers face-to-face in person.
We have direct to the consumer with Colonial Penn, primarily with TV and direct mail advertising. With that, we've got a lot of pricing influence. We don't have to have a product line getting pumped up and sacrifice returns because, again, we're serving the customer. Annuities is a great example in that we've maintained our pricing discipline. We have, in some cases, pulled products. In some cases, we've reduced commissions in order to keep offering the product and getting our at least 12% return. In the products beyond that is that we've got a breadth of products. Pretty evenly balanced over time between life insurance, annuities, which are only fixed and fixed index annuities, supplemental health, which includes Medicare Supplement, as well as critical illness or specified disease, and then long-term care. We have the alignment continue with our home office back office.
To serve that market, you've got to be geared to serve that market. You got to be focused on that customer base. We have almost 4 million policyholders. We do tens of millions of transactions a year. To do that, you need to have an alignment with that home office and back office to serve that customer, and then have a culture that really puts a bow around it. That alignment is something that, again, we think is a sustainable competitive advantage to have that whole alignment from market distribution to the culture. What has that done for us? We have returned a great amount to shareholders, a 49% total return in the last year. As Tom alluded to in his introduction, it didn't just start in the last 12 or 18 months.
This started back largely in 2006, 2007, to where we really did reset our business mix. Primarily, what that meant is to get out of the independent distribution of most products like Medicare Supplement and annuities. Why? We didn't have a right or ability to compete there. We didn't have either the scale or the ratings, and the business we were doing was compromising returns that way, and it wasn't focused on the senior middle market. We also in that, which is both business foundation as well as financial foundation, we de-risked the company. We sold through reinsurance, a $3 billion block of annuities, fixed and fixed index, that was sold through independent distribution. It was largely out of the surrender charge period.
We did not see upside regardless of where interest rates were going to go, and we were able to sell that via reinsurance in a competitive bidding process. About a year later, towards the end of 2008, just over $3 billion as well of a closed block of long-term care that we legally separated from by contributing it to an independent business trust in Pennsylvania. Very much the kinds of businesses you are reading about in the headline, meaning that a very rich lifetime benefits, inflation protection benefits. It was sold through independent distribution, all different kinds of over 2,000 product forms. Again, contributed that to de-risk the company and stabilize our base. We have been investing in growth. We are one of the few companies, and to our knowledge, the only company that has a growing career agent distribution force.
We're also growing in Washington National and Colonial Penn, and I'll get back to that in a minute. Then, of course, the return to shareholders that I mentioned, and have had a very good run since 2009, but at the same time, like I said, 49% return last year. What are we doing in investing in the business? We have invested in productivity tools for our agents. We're investing in recruiting. We've expanded our branch and satellite locations at Bankers. We've expanded into different geographic territories at Washington National, and we've added products. A critical illness product that is the bread and butter in Washington National, we've introduced to Bankers.
We're test marketing simplified issue term and whole life at Colonial Penn. We just announced we're introducing, I'll say the next generation of critical illness at Washington National, which will include some accident coverages as well as covering for heart cancer and stroke. We have achieved already benefits of that. If you exclude annuities at Bankers, of course, with the low interest rates, they were down over 20% on annuity sales. We actually grew sales by 12%, as you see here over the last three years, an 8% compound annual growth rate in sales. Here is another way of looking at growing the franchise. The stacked bars are the liabilities of our three core segments, Bankers Life in the dark blue, light blue, Washington National, and then Colonial Penn.
At the same time, you see the liabilities of our runoff businesses in our OCB or other CNO business gradually declining. That's important in improving and part of our walk to achieving a 9% ROE by the time we get to the 2015 time horizon. What are we doing, though, to accelerate this run on and run off? Already talked about investing in that organic growth. We're going to step that up over the next three years. I'll talk about that a little bit at the end in more detail. At the same time, as we continue to work the closed blocks in OCB, put in price increases in non-guaranteed elements where we can, progress with outstanding legacy litigation on these books. We are reducing the beta or the volatility in that business.
We're improving the stability and cash flows of that business, which gives us more options to ultimately look at accelerating that runoff through sale of some of that or all of that business, or reinsurance, which is in essence, a sale of that business as well. That'll help potentially even accelerate our rise in ROE to even higher levels. With that, I'm going to turn it over to Fred.
Thanks, Ed. This next slide really talks about what we would call our normalized earnings trend, or in other words, taking our earnings over the last few years and pulling out significant items. The classic significant items would include things like litigation reserves or the one-time effect of a change in an assumption embedded in our business and reserves. There's sometimes redundancy or deficiency in reserves where there's a one-time adjustment. We do that to then show really the more normalized earnings trends in the company. That's what this slide shows. You can see it's moving very much in the right direction. I would say at the base of this growth is really the slide we just came off of that Ed commented on, that is the roll-on of good, well-priced product and the roll-off of naturally lower return product that's in our runoff businesses.
That certainly is embedded in these results. Beyond that, we've enjoyed favorable benefit ratios overall in our three key claims-driven businesses of Medicare Supplement, Long-Term Care, and Specified Disease. This is not just sort of a lucky period of time. This comes through properly pricing, and very importantly, properly underwriting the business. It also somewhat comes through having a captive distribution agency that is able to be more disciplined in what they sell, as opposed to the constant worry of competing on the shelf with other products and other providers. All of these things come together to provide a more consistent level of performance on the underwriting side, and we've seen that really go nicely here in the last few years. Interesting byproduct of low rates as well. It's absolutely a headwind for the industry and for our company as well.
It has an interesting side effect, that is the annuities that are on your balance sheet tend to stay on your balance sheet. Persistency tends to remain very high. Why? For the simple reason that there's nowhere else attractive to go with that money. That allows us to hang on to those attractive spreads for longer, and it's really contributed to preserving a lot of the net investment income that we have in the company, despite the low rate environment. We've also recently started to create a little bit more of a revenue and earnings stream at the corporate level. Something you'll know if you follow CNO is we tend to carry much more of our excess capital up at the holding company level.
We do that for financial flexibility purposes, we also do it because it's tax-advantaged at the holding company level, where we have a lot of non-life NOLs that we want to take advantage of over time. That corporate investment portfolio is starting to generate real returns, which are working to move the corporate segment, which we oftentimes don't talk about as a driver of earnings. It's helping to really displace a lot of otherwise what would be expense running through corporate. That strategy is building as well. Then we've been deploying our free cash flow. Interestingly, just in the last year alone, we spent over a half a billion dollars in taking out diluted share count. We reduced our diluted share count on these results by roughly 18% last year. We continue to deploy that capital going forward.
It's a quite provocative part of our story, of course. There are headwinds out there. Of course, low rates, which we fight against by having solid asset liability management practices, lowering the turnover on our portfolio, and being opportunistic and smart where we go with the assets. As a result, you can see from our recent results, if you were able to tune into our earnings call here a few days ago, that we've been able to actually achieve new money rates that are right on our plan, and preserve, for the most part, portfolio yields, holding them relatively flat. That's, again, net investment income being helped out by corporate strategies, being smart with the money, good ALM, low turnover, et cetera. Reasonably successful there. There are a couple other headwinds to make note of. One in particular is Long-Term Care.
The good news, as Ed talked about earlier, is that we have been re-rating the product now actively for the better part of five years or so. That has gone a long way to preserve the healthy underwriting margins that I spoke to earlier. As that level of rate action slows, you naturally see persistency pick up, and as persistency picks up or lapse rates start to reduce, you'll naturally see a climb in the benefit ratio. I would characterize this as more a normal climb or expected climb of the benefit ratio, and why we've guided to it being a little higher as we go through 2013 than we've experienced historically. Moving to the next slide.
I'm going to dive into the engine room a little bit before I just get to the ratios, because these engine room comments are actually more important for the long-term health of the company. By engine room, I mean the product risk management and then cash flow testing results in the next slide. Very important to understand about CNO is the mix of our product has everything to do with the successful cash flow that we're generating as a company. We sell basic products, and what I mean by that is they tend not to carry secondary guarantees that require complex hedging strategies to execute on, or where there's questions about what future policyholder behavior may mean for the liabilities we have established and the profitability of the product.
These tend to be tail-type events that we can measure with more accuracy, which allows us to price with greater accuracy and feel more confident in the 12% after-tax IRRs that Ed mentioned earlier. It's not just about what the IRR is in our industry, it's the level of confidence around it that matters, and that's everything to do with the nature of the products and how exotic they are or not. We sell predominantly protection products, and protection products, unlike certain wealth products, benefit from the law of large numbers, just like insurance is supposed to. The problem with wealth products is they oftentimes get more difficult to manage the larger they get. Very good product set and very good product mix.
We also have a nice balance of short duration and long duration, meaning we have product that turns to cash flow very quickly, like Med Supp, for example, and we have longer duration products that naturally meet the risk management needs of our client base. That mix helps with a nice balance of statutory income to GAAP income and ready cash flows, which we can redeploy in our business more actively and which acts as a nice defensive tool. If we go through a credit cycle, we can replenish that capital quickly with free cash flow and capital build from these types of product mix. We have a unique long-term care proposition, and if I were to sum it up in just a couple quick statements, it would be quite simple.
It is a shorter benefit period by and large than you would normally see in the industry, far shorter. The duration in the portfolio is around 13 years, which is nearly half of what you might normally see for a liability duration in long-term care, and it's because our benefit periods are shorter. Once again, also more predictable to price and less risk associated with it. We are able to asset-liability match for that same reason, which is important. We have been actively re-rating, which supports the older versions of product that need more support given the experience we've had in that business and help with the profitability. Finally, as Ed mentioned, we carved off the nasty stuff several years ago and don't have that type of exposure as we go forward.
All in all, before we put a product out the door, we do an embedded value or appraisal of the product, and this is actually part of the compensation of our distribution. If you are a distribution leader and you want to sell more product, and you waltz into my office or into Ed's office and say, "I've got a great idea. We're going to run a special. We're going to pump up the commissions, and we're going to get a little bit more aggressive on the benefit, and we're going to really do a great job on sales this year." That is going to immediately come out of the appraised value of the cash flows of what you're selling, and you are going to, for every dollar you make on sales, you're going to get hit on the value of new business.
That discipline is enormously important in making sure that we're adhering to the returns that we put in our products. Cash flow testing. This is a complicated slide, but we've been getting feedback from investors, "Take me inside cash flow testing a little bit more because we don't understand it." Here's the results from this year's loss recognition and cash flow testing. Loss recognition testing on the left-hand side is a GAAP exercise. Very simply, the story is margins are there. They are larger than they have been historically, in part because with the new DAC accounting, we wrote down a number of intangibles across the industry. By nature, you tend to have a well-supported balance sheet on a GAAP basis when it comes to this testing. New business coming in also helps the margins. Obviously, low interest rates have taken away from margins.
On a cash flow testing, on the right-hand side, all of our legal entities passed all of the standard scenarios requiring no additional assets by virtue of their legal entity testing. That's a very important statement. It means all the cash flow testing came out just fine, but there were winners and losers as you drill down into products. We did add a little bit of reserve to an interest-sensitive block that's in runoff, but it was de minimis, $5 million, which is a rounding error in our capital management. The bottom end of this slide really makes a simple point, even though it looks a little complicated, it basically says this.
When it comes to cash flow testing and the adequacy of our reserves, you don't have to worry about traditional life, you don't have to worry about Medicare Supplement, you don't have to worry about interest-sensitive annuities or annuities in general. There are two lines of business to pay careful attention to, and that's Bankers Life's long-term care business because of the low rate environment, and interest sensitive life, also predominantly because of the low interest rate environment and adjustments we've made to non-guaranteed elements. When you then turn to what is the sensitivities? Fred, show me the numbers. How do I get comfortable with how vulnerable is this? We did that in the form of our interest rate stress test.
In other words, at the end of the day, it's about these two lines of business, and it's about interest rates predominantly when it comes to threats to the balance sheet, and that's why our stress testing was disclosed to help you get comfortable with how bad can get. If you recall those numbers, they're quite manageable from both a leverage perspective and a statutory RBC perspective for the company, given the strength of our cash flow. The capital story for the company is best summed up by this slide. We adhere to very strict policies that we believe establish the company to reach investment grade over time. Leverage of 20%, risk-based capital of 350%, hold co liquidity of $300 million currently, but a policy of $150 million.
If you break that down as to where we ended the year, we ended the year with leverage a little under 21%. Why am I not worried about that? Because I amortize my debt. I'll be climbing down below 20% naturally through the amortization of debt that's naturally scheduled on a payment perspective. Risk-based capital ended at 367%. Every one percentage point of RBC is $5 million of capital. That suggests we have $85 million of room over our policy down in the insurance companies. I like that, not because I intend to necessarily release it to the holding company, but more it offers a nice cushion as I sit here watching interest rate environment unfold and the inevitable credit cycle that will come back in some version someday. I like a little bit of excess there.
Holding company liquidity at $300 million suggests $150 million of readily available capital. Therein lies our announcement of redeeming the convert. Very simply, our announcement during the earnings call on redeeming the convertible securities, we don't have an idea of how successful that's going to be, of course. We've dialed in a premium that we believe to be fair for all parties involved, and then we'll see how it plays out. If it were, for example, to be 100% successful, it would be roughly $195 million down payment towards our repurchase guidance of $250 million-$300 million. We like taking down the convertible as a method of reducing diluted shares because it is a more financially flexible mechanism to do it. It accelerates EPS and ROE.
On the flexibility side of it, paying down the convert does not trigger any sweep provisions in terms of sweeping down on our debt. It allows a little more flexibility. It also is not included in the build of the basket, a basket we have that actually defines capacity in our ability to repurchase stock. We create more flexibility by taking down diluted shares in the form of paying tendering for the convert, so we like that aspect of it. Before turning over to Ed, this is really one of the primary value drivers of the company, and it's a cash flow generation. On the left-hand side of the slide on that left-hand bar, we define cash flow generation very simply as statutory income before interest paid to the holding company on surplus notes.
Before contractual payments to both our asset manager and an administrative platform for servicing the business. Those contract payments and surplus note interest payments are represented by the dark blue bar, or the $158 million last year. What's very important about that dark blue bar is the fact that it covers our interest expense nearly three times before you even get to statutory dividends. Statutory dividends last year were $265 million. We have guided this year to between $250 million-$300 million, which by definition suggests the company to be comfortable in the rolling forward of its cash flow dynamics in 2013. We retain a bit of capital to support business growth. What's really interesting about that retention of capital is how small it is.
We can grow our business without a tremendous amount of capital, and that's because both our distribution platform, as well as the mix of products, back to that slide, are not particularly capital intensive to support our growth engine as a company. A nice, healthy position to be in. The use of that cash flow would be on the right-hand side, a mix very similar to last year, where we would buy back stock, pay down some debt, and obviously, we are committed to building a common stock dividend over time. With that, let me hand back to Ed for closing comments.
Thanks, Fred. The objectives that we have, we've touched on a lot of them here in both of our remarks. If you look on the left-hand side, in the next year or so, what are our objectives? To really continue to grow sales. We expect our consolidated new annualized premium sales to grow by at least 6% here in 2013. We're going to continue to expand distribution and add to our product portfolio. Fred mentioned the operational side, in part because of the history of a lot of acquisitions in the past. We've invested there with bringing in an executive that is over IT and operations that has had a career running business process outsourcing companies, so had to do it in a way to meet customer needs and at the same time, do it in an efficient way.
At the same time, we think we can continue to grow EPS, improve our ROE. The tender does help us to accelerate our pace there. As far as ratings, we're BBB rated right now with a positive outlook from S&P. We obviously had a good 2012, good fourth quarter. That was one of the things that they indicated they wanted to see in order to be looking at upgrading us and get to this 4B territory. Lest we forget, while the industry in general was getting downgraded over 2012 still, we recapped, we produced earnings, and got upgrades from three of the four agencies, with the fourth being S&P putting a positive outlook on us. We're committed to the guidance we gave of $250 million-$300 million of securities repurchases in 2013.
Now, looking out a few more years to 2015, we are planning to invest $80 million-$85 million to continue to grow our distribution and extend our reach to serve that underserved middle income market. We do feel that will accelerate the growth of our company and the run-on. At the same time, as I mentioned that with what we're doing in our OCB segment, stabilizing that, improving the economics and cash flows, we think that it does give us the possibility to accelerate the runoff through some type of reinsurance or sale transaction. Enhancing the customer experience. You could say any business, it's important to do that, but ours is, we think, even more important because we really do have so much information and control of that customer experience.
With largely exclusive distribution and focused on that middle income market, we can really use that to improve our persistency with customers, improve our ability to have referrals from that customer, and serve their extended families and households as well. I think all of this, using just organic growth and pricing discipline, we can get at least to a 9% ROE by the end of 2015. That does not factor in any accelerated runoff transaction with OCB. It does not include any type of non-organic acquisition, which certainly we can entertain. At the same time, we're focused on our core business. If we did an acquisition, it would, number one, need to fit into that core. Number two, our stock, even though it's had a nice run up in the $11 range, our book value, excluding AOCI, is north of $17.
If you further exclude the economic value of our NOL, we're still in that $15 range. Does not make sense for us to issue stock to go and acquire something. That sizes it into something that we would have to self-finance, most likely out of our free cash flow. We do think with the credit metrics we have, the financial performance, that by 2015, the BBB investment grade is very realistic and achievable. We have that as a goal primarily for the capital market flexibility. Another beauty of our business is it is not rating sensitive. We can continue to grow at an outpaced rate relative to the rest of the industry in spite of our ratings.
With the investments that we're making and expecting to make over the next three years, we believe that our sales growth should get to the high single digit, low double digit sustainable run rate in sales, so in that 8%-12% range. As we announced in our December investor conference, we are looking to increase our payout ratio for common shareholder dividends to that 20% range here by 2015. With that, turn it back to Tom here for any Q&A.
Thanks. We have about five minutes for Q&A. I'll just kick it off with a cash flow question. Fred, if I have the numbers correct from that slide, I believe it was $265 million of statutory earnings, $158 million of fees that are additive to that, if I think about cash flow that finds its way to the holding company, and only $70 million or so that needs to be retained in the subs to support business growth. I guess what strikes me is $72 million is a relatively low number, certainly versus peers, and it might just be your business mix is a lot less capital consumptive.
Right.
If all those numbers add up, when we think out over the next several years, what is the amount, if you get through all of the convert buyouts and whatnot, and you get to a steady state of leverage, how much, if I add just very simply common dividends plus buybacks, does your business model support if you pro forma that right now? How much could you do and would you plan to do on an annual basis?
Yeah. I think just the way I would describe it is, we talked about this a little bit on our call, is right now our outlook for 2013 is relatively stable capital conditions, meaning we would expect a repeat of these types of dynamics that you're seeing in the bar chart that was described on the cash flow. We've gone further to actually guide on that by guiding on statutory dividends of $250 million-$300 million. Last year's statutory dividends being $265 million. That suggests there to be a level of expected growth if things cooperate in that capital generation and free cash flow. We think a kick up in the modest amount of capital held back to support growth in the business is actually a good kind of negative to that story. We obviously are hopeful we could see more vibrancy come back into the annuity market.
It's an important product. It's a profitable product for us, and it is a more capital-intensive product. What's an interesting byproduct of a low rate environment and the repricing that has gone on in the industry to reflect the low rates is rate-intensive products also happen to be asset intensive, which also happen to be capital intensive. You're naturally finding shorter duration products getting more vibrancy than longer duration. It is contributing somewhat to the denominator in RBC. In other words, the required capital is not kicking up and soaking up your earnings and not allowing you to dividend as much. Embedded in our ROE target of 9% by 2015 is the assumption of there being a relatively steady pace of capital creation and redeployment. We haven't, and we'd be reluctant to guide beyond 2013 on those dynamics for obvious reasons.
I'd characterize the threats, if you will, as being really twofold. One is low for long interest rates where we've really identified you how big that threat could be if you hold rates flat for the next five years or even if you drop them 50 basis points and hold them flat. We outlined, in fact, it's in the appendix of this presentation that you all have. It's really a repeat of the stress testing we did. That's one threat. The other threat, of course, is the degree to which a credit market or credit cycle comes back in. That's difficult to predict, but obviously what I'm telling you is that embedded in the 9% ROE is active capital management consistent with the kind of capital generation we've enjoyed here this past year and expect to enjoy in 2013.
It's also requiring some level of cooperation in the marketplace.
Got it. Time for one last quick question if there is one. Okay, thanks a lot guys. Appreciate it.
Thank you.