Good afternoon. On behalf of Barclays Capital, I'd like to welcome CNO Financial Group. With us today from the company, we have Ed Bonach, who's the CEO, Fred Crawford, who's EVP and Chief Financial Officer, and we also have Scott Goldberg here, who's VP Investor Relations and Treasurer. It is my pleasure to introduce Ed and turn the mic over to him.
Thanks, Vanessa. Thank you to Barclays for having us here. As I said at a meeting earlier today, thank you for the slow play of upgrades at S&P and Moody's that we're still here in the high yield space. Hopefully, that won't be for very long. CNO Financial Group, give you a little overview of our group and our business. Disclaimers aside, really what we are is a company in the insurance space that's well-positioned. Hopefully, you'll understand more why here in a few minutes. We've been executing on various fronts over the last several years. I joined the company almost five years ago. Fred recently joined from Lincoln in January. We're a company built on core value drivers. Those value drivers are risk management, products that are priced appropriately, strong cash generation, and excess capital generation.
As part of that, risk management is an everyday part of our business and what we do in not only managing our products, managing both the asset and liability sides of the balance sheet. We're defined uniquely, we believe, by the markets that we serve. We're focused on the middle income market, primarily around the age 65 part of that market. Grossly underserved and growing quite rapidly now with the aging of the baby boomers. There's alignment in how we approach that market. In the middle here, you see the different products that we offer that really do meet the needs of this marketplace, which are more protection based as opposed to asset based, but they're also diversified across a broad spectrum of life insurance, annuities, supplemental health, and long-term care. We approach that marketplace with three distinct distribution channels. Our Bankers agent distribution channel, which are career agents.
We've got about 5,000 of them across the country in 250 locations. They sell exclusively for us. We also have independent distribution through Washington National, but it's primarily a wholly owned distribution company inside of that PMA that we distribute through there. Both the career Bankers model and the PMA model are face-to-face sales, lead-based generation to go and get those sales. In virtually every case, our agents are calling on someone who no one has called on, so very different than other parts of the market. We have direct distribution through Colonial Penn. Primarily, the leads are generated by television advertising, followed up with direct mail and call center phone interactions there. The alignment of the markets, their needs, the products, and the distribution. Our three brands you see here, they're distinct underneath the CNO umbrella.
This bubble chart, I think, helps to show how underserved our market is, and why we're so bullish on it. We are in this lower left-hand quadrant. CNO in total is here. You see the affluence along the left side and along the bottom, this product spectrum. Where we're focused is, again, in that middle income, lower middle income market, and primarily protection products, where there's obviously a lot of competition and a lot bigger players in the high net worth asset accumulation parts of the marketplace. We love this space. Our strategy is to stay there, not to try to migrate up to the upper right. We feel this not only, as I said, is underserved, but we do have a right and ability to compete here with the way we approach the market and again, the products that serve that marketplace.
In there, you see other competitors, but very different, again, because we are defined by the markets that we serve as opposed to product driven. The competitors here, take Mutual of Omaha as one example. We compete with them primarily in Medicare Supplement, but they don't compete with us in other product lines. You have American Equity. They only sell fixed and fixed indexed annuities. We compete with them there, not in the other product lines. Again, as we look at it, our secret sauce is that totality of focus on the market, have the right products to meet their needs, and reach that market through our three distinct distribution channels. Now, over the last five years, we've done a number of things to transform the company. Some of you may recall, we used to be called Conseco. A very storied past.
A lot of things that weren't as positive as what's been occurring in the last five years. The things that I want to highlight here really center around two main things, de-risking the company, and also positioning it to be focused on this market and getting rid of a lot of things that we did not have the right and ability to be competing at. First, we sold a $3 billion block of fixed and fixed-index annuities back in mid 2007. Why did we do that? First of all, it was largely out of surrender charge period. Secondly, it was sold through independent distribution. At that time, our assessment was we were only achieving about a 6% return on that business. We thought it was about the best we could do. Why?
Because if interest rates rose, we'd be subject to disintermediation, business leaving us because it was sold through independent distribution and largely out of the surrender charge period. If rates went lower, we would have spread compression. We were able to sell this, had a competitive bidding process. Over 10 companies bid for it. We ultimately sold it to Swiss Re, and we're very pleased that we did that. We also used some proceeds to go and recapture business that we had previously reinsured. Went back to investing into what we do well and drew this Colonial Penn through that transaction. We did a groundbreaking transaction towards the end of 2008. We had over a $3.25 billion book of long-term care business. It was a compilation of a number of acquisitions of different companies and blocks of business that Conseco had acquired over the years.
It was historically volatile, had trouble getting rate increases to stabilize it. It was sold through independent distribution and again, through a variety of companies. Over the course of 10 years, the company put in $1 billion to support that business. We, in essence, separated legally from it now for over three and a half years or about three and a half years by contributing it to an independent business trust, and it is governed now by an independent board of trustees. It's domiciled in Pennsylvania. The State of Pennsylvania also has continued oversight there, and we are free and clear of that book of business and have been, as I said, for over three years. For insurance companies, risk-based capital is one of the primary measures.
At the end of 2009, we ended the year with a risk-based capital of just over 300%. We ended the year 2011 with over 350% risk-based capital. As part of transforming the company, again, also de-risking it, we recapitalized in various ways that also not only extended maturities on our debt, but we actually de-levered quite a bit. In a few slides, I'll show you more on that. In the middle of last year, we began buying back our own stock. Our stock is valued quite low relative to book value. We're still less than 50% of book value, even though, as I'll show you in a few slides, we've got a good track record of earnings and cash generation. In 2011, we bought back $70 million of our stock.
We had an original $100 million share buyback authorization that was increased by an additional $100 million at the end of February. We have currently $130 million of stock buyback authorization outstanding. The reason I put up this last box that we emerged from a three-year cumulative loss position. One is to show more than three years ago, we did have a string of actions that did result in losses and charges to the company. More importantly, that after 12 quarters of earnings, we are at a position where we can value our valuable tax asset much more realistically. It's still conservatively valued, but less so than in the past. We are in a position where we pay very little cash taxes, and hopefully, in a few more slides, you'll understand even more the importance and value of that to us.
We've been doing all of this while we're growing the franchise. The stacked bars are the liabilities in our three segments that we're actively selling and growing the business, the largest being Bankers. In the green is Washington National, and at the top, Colonial Penn. We have been growing the franchise while we've been de-risking it and transforming our capital structure. At the same time. We have a segment called OCB or Other CNO Business that are legacy runoff books of business, primarily interest-sensitive life. Those are running off as we would want and expect at a rate of 3%-5% a year. Mention about our earnings. These are our GAAP earnings. The reason that we show the stack bar with pre-tax and after-tax is for GAAP reporting, we are required to report as if we're paying federal income tax at a 35% rate.
With our valuable NOL, we're virtually paying no cash tax. We believe our earnings power is more depicted by the pre-tax number that was over $340 million in 2011. I think you get an idea more of the cash generation and the earnings power if you look at our statutory results. First of all, I'll point out that our statutory earnings are roughly equivalent to our GAAP earnings. Now in statutory, these are after-tax earnings. But to my point earlier, we pay virtually no cash taxes. For statutory, pre-tax and after-tax earnings are about identical. Because of our business mix and diversification, we have a stable book of business, and we generate a lot of earnings. Really what we're depicting here is to show how much of that goes upstream to be available for corporate purposes, including paying down debt, buying back stock, and other things.
First of all, there's about $140 million that goes upstream to the holding company from preexisting, pre-approved intercompany agreements for intercompany surplus note interest, management fees, and investment management fees. Those are regular recurring payments that occur every quarter, year in and year out. Over time, those are growing as our asset base is growing, like I showed you on an earlier slide. On top of that, we retain some of our earnings, the top gray part, to support the growth in our business and the growth in our risk-based capital requirements. But because of our strong earnings, we've been able to move up in the last couple of years about $300 million to the holding company above and beyond that $137 million at the bottom. That is why we've been able to buy back stock and de-lever at the same time while we've grown our risk-based capital.
This is another way to look at our monies going up to the holding company. This is taking that $137 million, again, in the preexisting arrangements. On top of that, our dividends from our insurance companies. We're quite well matched with our preexisting prearranged payments actually meeting our obligations at the holding company, and all the dividends are above and beyond that. At our holding company, we've got about $55 million in 2011 that were scheduled debt, and some extra payments we made. We've got about $90 million, which is interest on our debt as well as some holding company expenses. We do not need dividends from the insurance companies to service any of our debt. These dynamics will continue to move more positively. As I said, the $137 million will grow as our assets under management grow.
As we continue to de-lever, the use of cash at the holding company will be declining. Another way to look at our capital, I mentioned about growing our risk-based capital from 300% to now over 350%. Our management target is to keep risk-based capital around the 350% range. Why did we move it up in the last year or so? It's in support of an investment-grade rating. We believe our credit fundamentals in total are investment grade. Eventually, the rating agencies' trailing indicators will catch up to that. We believe that this is an appropriate level to run the company. It was going back to the diversified product portfolio, a lot of cash generation, and a lot of businesses that turn to cash quickly. 350% is more than enough to support our business.
At the same time, at the holding company, we believe $100 million is a prudent amount to keep up there as an extra reserve. Even though we're cash flow positive at the holding company, still believe it's prudent to have an amount of around $100 million. As you see at the end of last year, we closed with just over double that amount with just over $200 million at the holding company. What are we doing with all this excess capital? Excuse me. I mentioned already we've been buying back shares, and we've been paying down debt. Some of the debt repayments are required, some of them have been voluntary.
What has been required with our share buybacks up until and through the fourth quarter of last year is by our senior secured credit agreement, we were required to pay down a dollar of that debt for every dollar of share repurchase. We did that in 2011. In the first quarter of 2012, to the extent we make any share repurchases, we're only required to pay $0.50 of debt back for every dollar of share buyback. Why? It's because our leverage has reduced below 17.5%, and that's one of the step downs in the credit agreement that allows us to do that, and we ended last year at a 17.1% debt to cap. We've been investing in our business. We believe that we've got a good franchise. We've been investing in expanding our footprint, growing our distribution at Bankers Life, adding locations, net 15 added in 2011.
We expect to add another net 15 this year, ramp that up to around 30 a year in 2013 and 2014. We've been expanding our footprint with Washington National, adding recruiters, adding then agents as a part of that, getting product approved in different states that hadn't been approved before. At Colonial Penn, we're doing test marketing to move to have some product available on a simplified issue basis. Most of it is on a guaranteed issue basis right now, we're also expanding into marketing into the Hispanic marketplace. Another potential use of our excess capital is to begin paying a common stock dividend. Right now, the only requirement to begin doing that, other than of course, board approval, is with the separation of that long-term care business I mentioned in 2008.
We did do a note into financing that transaction or supporting the capital of the spun-off company. We have $50 million of that note to still pay off. It's an amortizing note, $25 million a year. We paid off $75 million of that. The next required payment is in November. Why haven't we done it before? It's our lowest cost of debt at 6%. Mention long-term care. A lot in the press lately of other companies, Met, Unum, Pru, moving away from long-term care. Why are we still in it? First and foremost, we believe that it serves the market that we're focused on, there are many fundamentals different than the companies that have been exiting the market. First of all, we're the only company distributing the product with career distribution. They sell only our product. They're not selling away from us.
They are focused on the needs of that market, we don't have that risk of someone taking healthy lives and rewriting them with another company because they're offering lower rates. Two, we're able to match our assets and liabilities on this business. As a practice, we do that on all of our product lines, but that has been a big reason why companies have exited this marketplace. It's not because we're smarter than they are. It goes back to our market focus. Our average issue age is 67. The other companies in the marketplace are focused at the at-work population, selling to people 10-15 years younger. Their liability duration is that much longer than, they cannot buy or synthetically create assets to hedge and match that liability structure. We can because our liabilities are that much shorter.
At the same time, because of our demographics and the market focus, there is not a significant amount of long-tail risk on our business relative to the marketplace. Only 5% of our business has lifetime benefits. Some of that in the past was due to affordability. Now, we don't offer that product other than in a few jurisdictions where we're required to offer it. Two, going to the affordability, you see it in our chart here is over the last six years, we now almost have 50% of our business, which is short-term care, meaning up to one year of benefits, something on the order of generally $200 a day for up to one year of care. Why is that? Again, our market. That's what they can afford. The price of these products has increased, this now it's an affordability issue.
To give you an idea, a 67-year-old male buying a short-term care product, one year of coverage, is going to pay around $150 a month, $1,800 a year. If they want to go to a three-year benefit, $200 a day for up to three years of coverage, the price doubles. When our average client has about $150,000 of net worth outside of their home, which is usually paid for, $3,000 a year is a lot of their disposable income that they're spending. It's more that selection that's happening. On top of that, in our underwriting, we don't do any group business, with the cognitive impairments and the testing on cognitive impairment improving over time, we believe we get a disproportionate benefit because we, at a 67-year-old, those are much more indicative and predictive than a 55-year-old.
Summing it up, what do we think the value proposition is at CNO? We've got good growth in our track record and good prospects. We believe that our sales for our three segments combined, they can all grow at at least an 8% annual rate. We believe with our additional investments in growth, that can move to 10 or even 12% sales growth, that's sustainable. We think we do have competitive advantage, again, with our market focus aligned with the products and the distributions to reach and serve those markets. Our profitability, you see the strong growth in profitability as well as the value of our tax asset to where our earnings turn into cash and excess capital a lot quicker than most companies that way. The diversification of our products, active in the risk management.
We are on top of our products as to when we need to re-rate them. Long-term care, Medicare Supplement, credited rates on annuities. We're doing that all on an active basis and on a regular recurring basis. On credit fundamentals, you look over the last three years, we've increased our liquidity at the holding company by almost $150 million. We added over 100 basis points or 100 points, I should say, to our risk-based capital, and we de-levered by over 11 points. Again, strong credit fundamentals that way that we think is not only strength for the franchise, but also for our ratings going forward. Last thing I'll say relative to ratings, the good news is we don't need an investment-grade rating to transact our business. It's not because our end consumers, our customers, are not sophisticated or competent.
It's because of the underserved nature of that marketplace. The number one feedback we get after a sale, we do post-sale surveys, is, "I'm so glad that someone came and sat down with me and explained how Medicare works or took time to listen to what our needs are, and then give some solutions there." It really does underscore the underserved nature of that middle income senior market. With that, I'll stop and see if there are any questions. Yes.
Can you talk about the IG rating? Is this a goal of yours? That's why you've raised the RBC to 350, and then what is the rating agencies looking for? Is it just operating history? I know you just came out of bankruptcy in 2010. Are you going to keep the 350, and then also would that change your capital allocation strategy moving forward?
Yes. First, before I answer that, the holding company came out of bankruptcy in 2003, so quite a while ago. The reason for aspiring to and having a goal of an investment-grade rating is because of this audience and other related audiences, capital markets. To have better pricing and access to the capital markets, that's really what's driving it. That will lower our cost to debt. It should reduce our beta in our stock and also should expand our investor base by having an investment-grade rating. On the margins, it'll help some of the Washington National business, especially in the worksite, but that's not what's driving it. As far as what the rating agencies are looking for, short answer is more time. They are recognizing our improvements. They definitely are seeing upside positive pressure on our ratings because of our fundamentals.
I'd say that's the biggest thing, is overcoming some of the overhang of our legacy. I don't know, Fred, anything to add to that?
No.
Okay.
That's right.
Did that answer your question?
Yeah. No, thank you. Then could you just talk about interest rate sensitivity? Interest rates have spiked up recently. Just any color on that would be helpful. Thank you.
Yeah, I'll start and then turn it to Fred. Actually, it's sort of nice to get a question about interest rates going up because most of the questions we get are the sustained low interest rates, low for long. The 10-year Treasury going up 30 or so points is not a major concern for us. Number one, go back to we have a practice of active asset liability management, very tight tolerances on the amount of mismatch. What I mean by that is, generally, less than half a year mismatch, if at all. Secondly, because of our diversified product portfolio, coupled with most of our business through the career agents, it is not, I'll say, a sensitive business that way. Actually, our persistency in just about any market is better than the rest.
Lastly, I'll say to that is that you have to also think differently about our company in that with our market focus, for example, our annuities average contract size in force is less than $50,000. We don't have mega contracts that run a lot of risk of running on us.
I'd only add that we obviously stress both our GAAP and statutory capital conditions for rates up and down. You do it as part of statutory requirements under cash flow testing, which are very severe and strict in their nature. Then on the GAAP basis, we do that also to really support the intangibles on our balance sheet on a GAAP basis. Because of the tight ALM standards that we have and the diversified nature of the business, because remember, some of the risk and quicker to turn to cash businesses actually benefit in a low interest rate environment because you're offering up a lower discount rate to those future profits. You have that nice balancing in terms of supporting your intangibles and your capital under up and down rates. We don't see rates down, for example, as a capital issue for the company.
It would be somewhat of a headwind to GAAP and stat earnings. If rates were to remain low for an extended period of time, you'd obviously see portfolio rates come down. Not so much that it consumes growth rates and earnings. It's more a headwind that we'd have to deal with. On the GAAP side, you'll have a little bit more sensitivity to intangibles. Best way to, I think, depict that is that we've seen rates come down quite considerably over the last 2 years, and in each year we've suffered about $13 million of pre-tax each year charge on a GAAP basis related to a particular portfolio of interest rate sensitive life business we have. Obviously, that's a fairly minor dollar amount as compared to a full year's before tax earnings generator.
Ed, you talked about how cash flow comes up from your insurance companies to the holding company. Could you talk a little bit about the stability of that cash flow, what things you expect could cause volatility to that, and how you have perhaps positioned the company to address those sorts of volatile moments?
Yeah. On the $137.7 million that comes up, it's not volatile at all. Those are prearranged, pre-approved by regulators' agreements that come up on a quarterly basis. The only thing that will move on that is over time, as I said, with one of the three components of that being an investment advisory fee, that should grow over time as we continue to grow the franchise. As far as the dividends, and you saw that in 2010, it was about $85 million. It was over $200 million in 2011. Why such a difference? Well, in 2010, it was still $85 million. Our expected range of dividends from the insurance companies is at least $75 million, up to $200 million. Again, that's on top of that roughly $140 million. The things that'll vary or why the variability is our rate of growth.
The faster you grow, the more capital you need to retain in the insurance companies to support that growth. Secondly, the product mix. Medicare Supplement is annually re-rated. Short-term business doesn't need a lot of capital. On the other extreme, long-term care needs the most capital. It's the mix of business with life insurance and annuities being in between. Then third is what's happening more in the macroeconomic capital markets. If there are any then as we saw the last quarter with some collateral, all downgraded, you had to hold a little more capital, if you believe those are still good investments