Okay, let's get going. The last presentation we have of the conference is CNO Financial. As with most life insurers, the company faced certain challenges at the height of the crisis. Since then, they have substantially improved. Look at the capital ratios meaningfully increased. Leverage has been reduced. They have an active stock buyback program. They pushed through several price increases on the long-term care side. As a result of the improved earnings visibility, they've been able to remove a significant portion of the valuation allowance against the deferred tax assets. To discuss the outlook going forward, it's my pleasure to introduce Ed Bonach, CEO, Fred Crawford, CFO, and Scott Perry, COO. Let me first turn it over to Ed.
Great. Thanks, Nigel, and thank you for coming. I will hopefully allow at least 5-10 minutes for some Q&A. As Nigel told me, my job is to speak, yours is to listen, and hopefully we'll both end at the same time. As Nigel said, our fundamentals are quite strong. We are well-positioned, focused on the senior middle income market. It's a fast-growing market and underserved. We've got active, strong risk management. We've got a track record of executing and improving our fundamentals along the way, and it's grounded in core value drivers that drive our earnings, drive our risk management, drive our profitability. As Nigel said, we've got a stock buyback program that's because of generating significant earnings, excess capital, and certainly benefiting from the fact that we have an NOL, a valuable tax asset.
From this slide, what I really think is important is number one, we are focused again on a market. We're defined by that focus on the senior middle income market. That differentiates us from a lot of companies that are product focused and driven. We have alignment. We have alignment on the right-hand side of the slide with distribution, excuse me, to reach that market. We've got largely controlled exclusive distribution, Career Agents at Bankers. At Washington National, PMA is a wholly owned agency that sells only our products. We do also have direct distribution through Colonial Penn. The vast majority of our distribution, again, Bankers, Career Agents, Washington National, largely our wholly owned agency of PMA, and Colonial Penn with direct distribution. We've got products, looking at the middle, that are designed and diversified to meet the needs of that senior middle income market.
The rest of the alignment is the fact that we've got a home office back office that supports the distribution as well as supporting the end consumer in that, and it's surrounded by a culture that is designed to serve those markets and the distribution. This is one way to look at the underserved nature of the market. We are in that lower left-hand quadrant. There aren't a lot of competitors there. Those that are generally are not huge companies, and those that are in that space are generally there for one, maybe two products, but don't, again, serve the breadth of the needs of that market with life, health, and annuity products as we do. The other thing with this market is, of course, the baby boomers are now turning 65, which makes that market growing a lot more.
Going back to the alignment that we have from the distribution products and service, that's where we believe we have sustainable competitive advantage that is very defensible as others seek to try to penetrate the middle market. Mentioned about core value drivers, risk management. I think here this is hopefully depicting that, in that our products, because of the market we serve, are much more protection oriented. They're not what the upper right-hand quadrant of the prior slide is after with a lot of asset accumulation products or investment products that have an insurance wrapper around them. Ours are more basic protection products and also very modest amounts of protection, which fits the market. What I'm talking about are life insurance death benefit amounts of $10,000-$25,000 on average. Annuities that are about $45,000, but again, in keeping with the market that we serve.
Our products are priced with an after-tax unlevered return of 12%. We are agnostic as far as which product is sold because they are quite tightly priced around that 12%, and that's the way that we want to be and want our agents to be so that they're really serving the needs of the market. We're not pushing one product over another as a result. With this mix, we've got products like Medicare Supplement that are relatively short in duration, balancing products like long-term care that are longer in duration, with life insurance and annuities being in between. We also govern our sales profitability by an embedded value or economic value. We call Value of New Business or VNB, which is really a decision and behavior tool so that sales that Scott heads for all three of our businesses, they have to make those trade-off decisions.
Do we do some kind of sales promotion? If so, that reduces VNB. How much more do we have to sell to add the same economic value to the enterprise? Long-term care, certainly, some think that's a four-letter word. We think that done appropriately, and it does fit into our market. It is a reasonable product. We've consistently made money doing it through Bankers Life and have not had any reserve strengthening needs. Some of the core differences to others that have exited the market or still are in it is that, number one, this is only sold through our Bankers Life career agents. That has allowed us, well before other companies finally came to putting in price increases, re-rating their in-force business, we've been doing that since 2006. In some cases, we've re-rated policies two and three times over the last five to six years.
Why did others not get to that as quickly? We believe in part it is because most of the other long-term care has been distributed through independent agents. Being the first one with independent agents to put in a price increase, there was a concern, we believe, by those writers to lose distribution because the independent agents would go and write with someone else who wasn't putting in a rate increase. On top of that, there would be anti-selection. The healthy lives would be rewritten by that independent agent with another carrier. At the same time, we are able to buy assets and investments to support the liabilities of these products. Why? Again, our target market, 65 and over. Our average issue age is 67. Our duration on our liabilities is about 13 years. We can actually buy real assets to match the duration of the liabilities.
Other companies that are primarily selling in the below age 65 market are selling to issue ages 10 to 15 years younger, they cannot buy assets long enough to meet those durations there. At the same time, we have less risk in our products that we are selling because of affordability. Middle income market, very limited wallet to be able to expend on protection products, long-term care being one of the more expensive ones. We've seen a shift as we and others in the market have increased prices on long-term care products that short-term care, which means up to one year of benefit, has become the majority of our sales. We also have a price point somewhat higher than that for home health care, then the highest price point would be comprehensive long-term care.
Again, because of the market, that tends to be two years, maybe three years of benefits. We don't have a lot of lifetime benefits, inflation benefits. Therefore, again, the risk profile is considerably less than others that have been in the market. Lastly, we don't do any group business, the underwriting we do is all on an individual basis, which tends to be more predictive and indicative of underlying risk. Talk about track record of execution. I'm not going to go through all of these in any way. I think if you look at the third quarter of 2007 annuity block sale, you look at the spin-off of our former closed block of long-term care, which did have a lot of lifetime benefits and inflation benefits, was sold by independent distribution. That's been legally separated from CNO for three and a half years.
We have no tail risk, no obligation, no legal connections there. We also sold in the annuity block, $3 billion, largely out of surrender charge period, also sold by independent distribution. We had the risk of disintermediation if interest rates rose or spread compression if interest rates fell. De-risked the company considerably with those two transactions. In the last few years, we've recapitalized the company and have put it in a foundation, a balance sheet that is quite strong and generating a lot of capital to initiate not just a stock buyback but also a common stock dividend here recently. This shows the growth that we've got in our core businesses, which are the stacked bars. Again, Bankers, Colonial Penn, and Washington National. The gray bar that's declining is our closed block runoff segment called OCB or other CNO business.
To show that over time, that will be and continues to be a lesser part of our business. The earnings that we have are pretty comparable to the size of the stacking of the prior one. In here, we do have now with the new DAC accounting, especially impacting direct response business at Colonial Penn, where we do have, on a GAAP basis, a modest loss because of expensing all of our direct advertising. In that, it is more heavily weighted to the beginning of the year, especially in a presidential election year as we get in the second half of the year. It is less effective to do television advertising with all of the presidential ads there. We have been maintaining a diligent process of not just re-rating long-term care when necessary, but we do that for Medicare Supplement.
We stay current on credited interest rates, also in the OCB segment, we're about two years into putting in certain price increases on non-guaranteed elements, which are primarily cost of insurance charges on interest-sensitive life business. That's led an OCB to a $25 million improvement in EBIT from 2010 to 2011. Here's really one way, there's a couple more slides here following that show the cash generation, the excess capital generation of the company. If you look at all of 2011 or the last 12 months, the left bar there, that's the three-stack. There's about half a billion dollars we generate annually in statutory, what I call, gross income. That's on a capital base of about $1.8 billion in our statutory legal entity, so about a 30% return on statutory capital. What do we do with that?
You see the middle shaded area is what dividends we've sent up to the holding company. The top of that bar, the $155 million, roughly, is what we retained in the business to support growth and growth in RBC. The dark blue part is what we have been using for expenses, there are fees going up to the holding company that cover our expenses there in debt service. We have RBC at 360%, slightly above our target of 350. We've got liquidity of about over $170 million, which our target is $100 million. Next slide will show you $100 million is roughly one year of expenses and interest at the holding company. This really shows the two prior slides in a different way. If you look at 2011, take that half a billion dollars. What did we do?
$155 million we kept in the insurance companies to support the growth and to increase RBC by over 20 points. We also paid down debt by $145 million. We had $90 million in holding company interest and expenses. We repurchased $70 million of stock, we did add about $40 million to liquidity at the holding company. If you play that forward to 2012, our RBC, as you just saw, is already above our target. We don't need to build RBC any further. Out of that $155 million, we only need approximately $50 million to support our expected business growth. There's another $100 million that's freed up for capital deployment. You look at the holding company debt, we did a couple of voluntary paydowns of debt, including the $50 million of the senior health note, which allowed us to then commence a dividend.
That number will free up about another $100 million of deployable capital. The holding company interest and expenses will be marginally less because we continue to de-lever with debt paydowns, but it'll be approximately the same. We don't need to build any more liquidity, that $40 million is also not something that'll be deployable now going forward. The only changes of deployable requirements in 2012 are with the initiation of our common stock dividend. That's about $20 million a year, we have $20 million of required debt amortization in 2012. You net that all out, we've got an additional $200 million, roughly, of deployable capital. That's on top of the base there of $70 million of stock buybacks with the commensurate $45 million of debt paydown.
We are now at $0.50 on the dollar of required debt paydown for every dollar of stock buyback or common stock dividend. Very strong cash flows, even more deployable. Share buybacks are clearly at the top of our list as far as what that capital deployment would be. We're still trading at roughly half a book. We think it's a screaming buy from the standpoint of our capital deployment. We don't need to de-lever further at a 17% debt to cap, but we'll have some natural de-levering, as I mentioned, with some required pay-downs. We're investing in the business, but that's not going to significantly increase the roughly $50 million we need to support that growth. Look at the company in summary. We've got above-average growth prospects. We got a market focus of an underserved growing market.
We think we do have, with that alignment, the competitive sustainable advantage. We've got consistent profitability with 13 straight quarters of GAAP profitability, strong statutory earnings, and excess capital generation. We've, over the last three-plus years, increased RBC by over 100 points. We've reduced leverage by about 10 points or 10% from 28-something to 17-something. We've increased liquidity by over $100 million at the holding company, while we've also bought back $90 million, roughly, in stock, $70 million in 2011 and $20 million in the first quarter. With that, I think we have time for some questions, Nigel.
Why don't we start off with a question on interest rates? Obviously, you addressed some of it in the prepared remarks, but if interest rates remain this low into perpetuity, at what point do we need to be concerned about material earnings degradation and capital problems emerging?
I'll let you answer.
Sure. Just a couple of comments leading into it that are helpful for CNO. One is in the most recent drop in treasuries, note the fact that we've seen some expansion in spreads. While I think there's a lot of attention paid more immediately the last few weeks in the drops, in this particular case, we've seen new money rates largely unaffected because spreads have gapped out across most credit-related products. There's been a way to continue to invest the monies and preserve that and support things like spreads in our annuities and so forth. Clearly, over the past several quarters, there's been a steady bleed in new money rates, and if they were to remain at these levels for a prolonged period of time, they definitely eat into GAAP earnings growth rates as well as statutory earnings growth rates.
A couple of things about CNO that are important. The balance that Ed mentioned earlier is very important to understand, so that we've got businesses that are much more underwriting profit-oriented businesses that actually, when doing things like loss recognition testing and cash flow testing, they actually support greater cushions under a low-interest rate environment because you're discounting those profitability measures at a lower discount rate. That helps with offsetting the natural bleed that you have in more interest-sensitive products, such as long-term care or interest-sensitive life. We've got a nice balance in our portfolio of products, and that helps when it comes to those actuarial testing of GAAP reserves and intangibles and cash flow testing. On that front, we go through a very disciplined process of looking at those two tests each year.
On the cash flow testing front, which is where we are primarily focused because that goes to the capital generation story and the cash flow dynamics of the company, we have been very pleased with the results of our tests. We test under all of the so-called New York seven, which includes three stress down scenarios. All of our legal entities pass all of the seven tests, which include tests that hold rates low for long and even stress them down. That's in part because there's a relatively conservative approach to the establishment of reserves on a statutory basis. You will see some leakage in stat earnings capacity as you go forward, we don't see it certainly for the foreseeable future as it being a material capital-related issue, even if rates remain at their low level.
We run things in a very tight ALM dynamic, which helps hold the bleed on portfolio yields year to year. We've seen really five or six basis point type reductions in portfolio yields, despite new money rates traveling over 100 basis points below our portfolio. That's because we have very tight ALM and have tight controls around reinvestment risk. I don't want to suggest that low rates are not a headwind to certainly earnings growth rates, statutory earnings. They clearly have an impact. Some of the balance in our mix of business, the controls we have around ALM, the dynamics of reinvesting our monies in 4086 does a nice job of finding yield in the current markets. These are all things that help us out quite a bit.
Other questions. If we can deal with the issue of repricing long-term care. One of the things that we've been hearing is generally because there's so many companies looking to introduce price increases across the marketplace, there's almost a backlog at regulators in getting those through. I know you've been doing price increases more proactively than others, which probably puts you in better stead. Any commentary surrounding what you're seeing on that front?
Sure. That is the case. The regulators are
inundated with filings. It's taking longer to get filings through. Fortunately, as you mentioned, and as Ed mentioned in the presentation, we've been at it since 2006. The bulk of our re-rates occurred between 2006 and 2009. The 2010 and 2011 filings are one of our smaller filings. So far, we've achieved 100% of the filings have been submitted, and 85% of them have been approved. We're kind of cleaning up the last 15% or so. In the process, once you get the filing approved, there's various stages of implementation. Sometimes you agree with the state for a multi-year implementation. We're not at that same point of at 85% implementation, but we're getting there.
We feel that getting out ahead of the curve, that has also given us experience in dealing with the regulators and anticipating questions and issues that we can get out in front of those. It allows us to achieve higher degrees of success. It is taking longer, but our position has been helpful.
I'd add to that also because we started early and have done, in some cases, as I mentioned, two or three increases on the same block, the increases that we have to do in a second or third type of filing are smaller. That does help also the approval process where companies coming in now are going for 40+% increases, and those are getting a lot more pushback, as well as, of course, as Scott said, the departments are inundated with requests.
Even, just playing off your first question, Nigel, too, I'd add that even though we have a shorter duration long-term care block in general, for the reasons that Ed mentioned earlier, and we were able to run tight asset and liability matching on that, which is unusual compared to many in the industry, it still is a line of business that's more susceptible to low interest rates, clearly. What helps that is when you are pulling other profitability levers to help offset the natural drag or depletion of any cushion you have actuarial, and these rate increases are very important to that. While not tied to interest rates, it's a lever that needs to be pulled. If you have not been pulling that lever, you are that much underwater as it relates to interest rate risk going forward in terms of cushions.
Any other questions? Okay. Well, I think we're good. Many thanks for the comments. Really appreciate it.
Okay. Thank you.
Thank you for having us.
Thanks for inviting us.