We're going to get started with CNO Financial. Next up is Ed Bonach, the CEO of CNO Financial. Under Ed's stewardship, CNO, we think, has been methodically positioned as a capital return story, and we also think Ed's appointment to CEO and the recent hire of Fred Crawford as CFO gives them a real strong management team. With that, I'm pleased to introduce Ed Bonach.
Thanks, Tom, good morning. I couldn't be more pleased to have Fred Crawford on the team. I think joining us is a testament to the progress we've made, but also to the potential that we have going forward. Glad to have him as part of CNO. If we look and step back at CNO, I think what we have are fundamentals that are quite strong, that we are in the middle market, the senior middle market, and we're well-positioned there with distribution and products. It's an underserved market, and it's a growing market.
We've got a track record of execution, delivering on what we say we're going to do, providing value to the stakeholders, shareholders at the top of the list, and at the same time, de-risking the company, the balance sheet, and moving things to be much more stable, much more predictable, and focused on our core businesses where we have the ability and right to compete. Those are some of the core value drivers that have been increasing profitability, increasing capital, increasing liquidity, de-leveraging, and providing a lot of cash flow to the holding company. With that, if you look at how we're positioned, there are many things driving the growth of our market and the protection needs of that market. At the same time, we have a diversified product set, and one of the distinguishing factors of CNO is that we're market-focused and driven.
We're not focused on any one product. We provide a variety of products to meet the needs of the market that we serve, that middle income, primarily senior middle income market. We serve that market and reach that market in a variety of ways. First and foremost, we have career or exclusive agents through Bankers Life. We have about 250 locations across the country, over 5,000 people in the field making face-to-face in-home calls to a large extent. We have Washington National, and even though part of Washington National does have true independent distribution, over two-thirds of the business from Washington National comes from PMA, which is a wholly owned agency or distributor, and they distribute only CNO products. Then we have the direct to the consumer through Colonial Penn, through television advertising, direct mail, and call centers.
With that, we believe that we do have an approach that reaches that market, reaches it effectively, and again, is focused on that market, serving it with a multitude of products. This bubble chart gives you a feel for the market that we serve and who's in it. There's a couple of things I think are real important here. We're down in the lower left. The biggest red circle is CNO in total. The other smaller red circles are the three business segments that I just mentioned with Bankers, Washington National, and Colonial Penn. You see in that lower left side where you've got the less affluent, so therefore, more middle market, lower middle market, and therefore, needing more protection products as opposed to asset accumulation products.
There aren't a lot of competitors, the competitors that are there, largely, we compete with them on one product line, maybe two. Most of those companies are product-driven, not market-driven. Again, we believe we've got a distinguishing characteristic there by being market-focused. Then you see in the upper right, companies that are much larger than CNO are going after asset accumulation, wealth management types of businesses. They've got balance sheets, ratings, size, and scale that are very different than ours. Hence, we believe we're positioned right using our strengths, using our capabilities to go and dominate that middle income senior market. In looking at our execution, and the reason I go back about five years is that's when I joined. That's right around the time that my predecessor, Jim Prieur, joined. He retired at the end of September.
Then as Tom mentioned, I became CEO. There's a lot of things here, but let me just highlight a couple of them that hopefully help underscore how we focused the company, reduced risk in the company, improved the capital structure. In the third quarter of 2007, we sold a block of annuity business, about $3 billion of annuities, fixed annuities, and fixed indexed annuities. Why did we sell it? It was largely out of surrender charge period. It was sold through independent distribution, and with interest rates, didn't know where they would go, being out of the surrender charge period. We thought that was about as good of a return that we could get, and it was earning in the 6% range after tax. We were able to take that risk off of our balance sheet by selling it via reinsurance.
We actually had a competitive bidding process, had many companies bid on it, actually got paid for it, which I think underscores, again, that with companies that have scale, they saw opportunity in a 6% return business, largely out of surrender charge period to get more earnings out of it. From our standpoint, we were again, de-risking the balance sheet and moving to our core focus of the senior middle-income market and largely controlled distribution. At the same time, we're committed to growth, and we took the proceeds of that to go and recapture some business that had been previously reinsured that was primarily life business at Colonial Penn. Towards the end of 2008, we did a groundbreaking transaction where we had over $3 billion of a closed block of long-term care business.
It was an amalgamation of a lot of acquired books of business that were part of the, I'll say, the history of the company in acquiring companies and businesses. It was losing money. We had contributed over $1 billion in the prior 10 years to support that business. It did not have really any potential to have significant positive returns, and we had to do a lot of things just to get it to a break-even status. What we did was spin it off into an independent trust in the state of Pennsylvania because the business was all in a company domiciled in Pennsylvania, and it has now been legally separated from CNO for over three years. There is no recourse back to us. In essence, what it was we mutualized it. Why?
It was in the best interest of the policyholders that there is no question it is for their benefit if there are rate increases put in or any other actions. At the same time, during the last several years, we have been building capital. Now, over two years ago, we reached the 300% risk-based capital level, and you will see in a few slides, we are now near a 360% risk-based capital level. We did go and refinance the company. We reduced the amount of debt. We extended maturities, and really have the company positioned well, we believe, to continue to grow and move forward. We did get an authorization from our board to buy back $100 million of stock. Through the end of 2011, we had used about just over $65 million of that authorization.
Lastly, the reason I put this emergence from a three-year cumulative loss, when we separated from that closed block of long-term care, we did take some write-offs that put us in a three-year cumulative loss on a GAAP basis. Why it is important that we are out of it now is that we are able to more reasonably, yet on a somewhat conservative basis, value our valuable tax asset, our NOL, and we did release over $200 million of that tax valuation allowance in 2011 so far. The advantage is that we continue to have a sizable allowance, and we think that we can utilize even more of it than shows up on our balance sheet in a net basis. Why do I say that? In one part, we continue to grow the franchise.
The stacked bars here show the liabilities of our three businesses that we are growing and selling new business in Bankers, Washington National, and Colonial Penn. The gray bar that is declining is our remaining closed blocks of business called OCB or Other CNO Business. It is largely interest-sensitive life insurance business, and it is running off as we would expect as time passes. We have continued to improve our profitability. You see this here over the last three years, roughly, of how our GAAP pre and after-tax income has grown. At the same time, we show in the yellow portion of the bar the taxes as if we are paying taxes on a GAAP accounting basis. Going back to my comments on the NOL, we are not paying taxes.
In many ways, one should look at CNO using the total pre-tax income because it is totally accounting that we impute a tax as if we're paying at a 35% federal rate. In reality, we're paying very little in taxes on a cash basis, and you'll see that here in a minute when we switch to statutory. Mention about our focus on getting us to where we have the ability and right to compete while de-risking the company. We have an active risk management process. I think this slide helps to underscore several of the things here in that. We have a diversified product portfolio. We're focused on serving a market. Over time, all of these product lines pretty much are equally balanced, based again on consumer preferences. We do price our products to achieve at least a 12% unlevered after-tax return on capital.
We are actively managing that business with managing credited interest rates, re-rating products if needed, be that Medicare Supplement, long-term care, supplemental health. With our long-term care, given how much press there's been, and even very recently here with earnings being announced by some companies, we think that we are fundamentally different and have much less risk than the companies that are now in the headlines. Number one, it happens to be at the bottom of this chart. We don't do any group business, never have, and as long as I'm CEO, never will, with long-term care. Two, because again, we're focused on a market that is primarily seniors, our average issue age is in the 66, 67-year-old range. What does that mean? We think we benefit, number one, disproportionately by the advances in underwriting tools, that cognitive testing in particular.
We are able to benefit more when it's applied to a 67-year-old than a 50-year-old. Two, because we issue at higher ages because of the market we're focused on, even though they're still long liabilities, they're not so long that we can't go and invest to match the duration of the liabilities. We have been doing that for years. Actually, we extended our maturities of our assets over two years ago to factor in the future cash flows that would be coming in, which is a hedge against interest rates staying low or going lower. Over the last several years, more market driven, again, we're not product driven, but because of the cost of these products going up over time, our end consumers have been choosing lower benefits and therefore lower premiums.
Over two-thirds of our sales are now short-term care, meaning only up to one year of benefits, and home health care. Yes, we still do offer comprehensive long-term care. It's usually capped at somewhere between two to five years of benefits, but that's less than 25% of our sales now. Again, the risk profile is very different than some other companies. Lastly, it's sold through our Bankers' agents. That's the only way we sell it. The chance of anti-selection when we do put in a re-rate of that agent not selling for us any longer or moving healthy lives to another carrier is really mitigated by the fact that we sell through our own exclusive agents. Mention about statutory.
There's a lot of things on this chart, but hopefully it does help you understand the strong capital and cash generation that we have at CNO in our insurance companies. Focus first on the bottom dark blue part of the bar. Roughly $140 million a year, we move from the insurance companies up to the holding company through pre-approved, long-standing agreements between the insurance companies and the holding company. Those agreements are threefold. There are surplus notes or intercompany notes that the insurance companies pay interest on up to the holding company. There are management advisory agreements, where basically we do charge a margin on the management services provided to the insurance companies. There are investment advisory fees that also move up to the holding company, because all of the assets are managed by one of our non-life companies for all of the insurance companies.
Those are regular recurring cash flows to the holding company. Over time, those should be growing because of the investment advisory fees. You saw on the few slides ago how we're growing our liabilities, which means that we're growing our assets under management, these fees over time should be growing. At the same time, because of our improved earnings and the fact that we're not paying hardly any cash taxes, we're generating a lot of excess capital, and we have been moving excess capital up to the holding company. In the shaded gray middle portion of the bar, you see how the dividends up to the holding company have been increasing over time. The $180 million over the last 12 months, it's within our range of what we would expect.
We would expect that the excess capital that can be dividended to the holding company going forward is between $75 million and $200 million a year. Why such a wide range? Well, it depends on a lot of factors: how fast we're growing, what products are selling most predominantly, and of course, any environmental economic factors as well. The top solid gray portion of the bar shows how much of the statutory earnings have been retained in the company, or in the insurance companies. What that leads to is in this next chart, where you see that that's why we've been able to, on one hand, move capital upstream to increase, on the right-hand side, the liquidity or the assets at the holding company. On the left-hand side, why we're able to also improve the risk-based capital and absolute capital that we hold in the insurance company.
One last thing I'll mention here on the liquidity, you see where between Q2 and Q3, the liquidity at the holding company dropped by about $60 million or so. We bought back quite a bit of stock in the third quarter and paid down a commensurate amount of debt. Plus, we actually prepaid $25 million on another note that we had, so that there was a lot of continued de-levering as well as stock buybacks that occurred there in Q3. That leads to, as my predecessor, Jim Prieur, said, a classy problem. What do we do with the excess capital? I just mentioned that we definitely are buying back stock and paying down debt. You'll see in a few slides our debt to cap at the end of the third quarter is down to 18%.
We are, though, very committed and focused and have a priority on growing our businesses organically even faster than we have been growing. In doing that, we're doing several things. We're opening up additional locations at Bankers, a net 15 increase in 2011. We expect another net 15 increase in 2012, ramping up somewhat from that in subsequent years. We're investing in field management training programs because that's a gating factor in how fast we can open locations and branches at Bankers is having the right management in the field so that there's not just good recruiting and productivity, but we do it in a compliant market-appropriate way. We've been getting product approved in states for Washington National where it previously wasn't approved, so expanding their footprint. At Colonial Penn, we have increased a degree our core spending for media and direct mail.
At the same time, we're beginning to test market some other expansion in the Hispanic market and also looking at some beyond guaranteed issue, some simplified issue expansion there as well. As far as the holding company, like I said, we're moving excess capital up to the holding company. Why are we doing that? Two reasons. One is just good capital management, in my opinion, to have capital as high up in the structure as possible gives you maximum flexibility. Also having that capital earning investment income interest in the holding company creates non-life income, and that helps us utilize our tax valuation allowance or our NOL, I should say, more efficiently because we have some life NOL, some non-life, and some capital loss carryforward. Being a life company, having other streams of non-life income is much more tax efficient.
Summarizing this, if you look at CNO, we think we got a pretty compelling value proposition. If you look at our positioning in the market, as I said, we have been growing. We've got above-average growth potential because we're focused on a market that is underserved and growing with the baby boomers starting to turn 65 this year. We think we have not only a competitive advantage, but we think we have a sustainable one because of the way we approach that market with the multiple distribution systems and having a system of distribution of face-to-face, like at Bankers and at PMA, that meet the end consumers in their homes. At the same time, we have the direct-to-consumer with Colonial Penn. We do have core value drivers of growth in our earnings, GAAP and statutory, which generates a considerable amount of capital.
At the same time, with the diversification of our products, plus the markets we serve needing mostly protection products, the risk profile is quite low relative to a lot of other companies in the life and health space. As I mentioned, we are well capitalized. If you look over the last three years, we've increased our risk-based capital by over 100 points. We've reduced our leverage by over 10 points to now about 18%. We've, as I said, extended the maturity structure of our debt, and we've increased the absolute amount of capital as part of that. With that, I'll stop and see what kinds of questions we have.
Thanks, Ed. I will start it off. Can you talk a little bit about 2012, 2013, how we should be thinking about capital management? You have $140 million or so of fees, and then you have this $75 million to $200 million potential annual dividend. Just based on the type of growth you are seeing today, what do you think 2012, 2013 look like in terms of how much cash you will have available? Also talk a little bit about the interplay of where you need to get your debt to before you can just freely unencumbered buy back stock with your free cash flow.
Yeah. Good question. Maybe I will start in reverse order. Currently, part of our capital structure has a senior secured credit facility that requires that we pay $1 of that facility down for every $1 of stock that we buy back. That is until we get to a 17.5% debt to cap. Ending Q3 at 18%, with the expectation we will continue to earn an income, increase our equity. It is not unreasonable to think that we would get below that 17.5% with our Q4 numbers. Once we get below 17.5%, we are only required to pay back $0.50 on the dollar. For every $1 of stock buyback, $0.50 of debt pay down. Once our debt to cap gets to 12.5%, there is no requirement to pay that senior secured credit facility down any further.
As far as capital or excess capital generation, that roughly $140 million that comes up to the holding company from the insurance companies through the pre-arranged, pre-approved arrangements, that really does cover our holding company expenses. It covers the interest, the debt service, and actually, there is a positive margin which covers certainly for 2012 and even into 2013, it would cover any debt maturity or required payments other than if we buy back stock. The only real payments we have due on debt other than interest is we have another $25 million due in November of 2012, which is the fourth of five amortizing payments on a Senior Health Insurance Company of Pennsylvania note that was part of separating the long-term care business. We have $10 million of other payments. We can service all of that out of that roughly $140 million that we get.
I would encourage you to look at dividends then, insurance company dividends that come up to the holding company as really being the capital that we can use for excess capital deployment, whether that is additional debt pay down, stock repurchases or other capital deployment. At least $75 million a year, and with our earnings history, we have been trending higher than that.
Would you say, if I had to look out to 2012, 2013, even 2014, is your expectation just based on where we're at today, that you'd be closer to the $200 million or the $75 million, the $70 million?
I'll answer it this way, Tom. I think that we will be higher than the midpoint would be the expectation. That's got a lot of ifs in it, what I mean by that is that while we believe we are positioned well regardless of the economic environment, we certainly don't have the fluctuations because of equity markets. Sustained low interest rates, it'll eventually put pressure on excess capital in that it'll reduce it. It won't go to zero, but it'll move below the midpoint of that range if we really do have this interest rate environment going out past 2013.
A follow-up question, is it practical to think about getting down to a 12.5% debt to cap ratio, or is that too far in the extreme direction? Would you be better off just restructuring your debt to remove those restrictive covenants?
I think the latter. I think it's another natural progression of the company to an investment-grade thriving, growing insurance enterprise is to have a debt structure that is more typical of others in our space.
Got it. The other question I wanted to ask you, which I've gotten a bunch on recently, is long-term care. Obviously, post the Unum news, it's been in the headlines. I guess my question on it is, as I see it, there were two issues with Unum, and I want to know from your view, do you see it as Unum specific or is this an industry issue? Because the two things that came up, Unum cited Operation Twist, the assumption of sustained low interest rates, and now that's being incorporated into their forward projections. That was a contributor to their charge. In addition to the fact that they have a decent size lifetime benefits block of business, and they said what they're seeing is longevity is a risk that they hadn't fully factored into the reserves.
Those are really the two things that I saw that created the charge for Unum. Just curious, are those two issues an issue for you, specifically on long-term care, and do you think this is also an issue for other companies in the industry?
Yeah. Let me try to answer it a couple of different ways. I'd say first going back to Unum, one other thing, at least in my reading of it, is that it seems that better than expected persistency is also one of the issues, especially on the group business, where I think some assume that when people change employment that they wouldn't necessarily retain their long-term care coverage and there would be a certain lapse rate there that isn't necessarily happening. As far as CNO, we again see ourselves fundamentally different than some of these issues that Unum and others have dealt with or are dealing with. Number one, on the low interest rates, like I said, our average issue age is 15 plus years greater than the companies that I know of that are writing or have been writing.
They're focused more at the at work population, and especially those that are doing group business, which again, we don't do group business. Their focus at average issue age is much younger. What does that mean? They've got to invest a lot longer if they're going to match their assets to their liability durations. We're able to still buy actual assets that will match the duration of the liabilities. I can't say it for Unum, but I certainly can for MetLife because it was about a year ago where I shared a panel at AIFA with an executive from MetLife, and it was right after they decided to stop selling the long-term care business, was that they just couldn't get or even construct artificially or synthetically assets long enough to match their liabilities. I think that's a very fundamental difference that CNO doesn't have relative to the industry.
I think, yes, everyone on one hand faces the longevity risk. Here again, I think CNO has it to a much lesser extent because, again, we're issuing to people 15+ years older on average, so that the delta to what we've expected for how long a policy is in force to someone issuing at 47 or 50 is much less. On the lifetime benefits, I can't recall the exact statistics offhand. Going back to 2008 when we spun off and separated from our former closed block of long-term care, we did a side-by-side of how prevalent was lifetime benefits in the closed block versus Bankers' long-term care block. My recollection is more than double the exposure to lifetime benefits in our former closed block than in our Bankers block going forward.
To where that's been going is that's a decreasing percentage at Bankers to my points earlier that we're selling a lot more one-year benefits, AKA short-term care, and also home health care benefits. We don't have that long tail risk of rich benefits.
Got it. Any questions in the audience? Pierre?
If the low rate environment persists, could you talk about what repricing actions you could consider and when you would be looking at those, and for what products?
Yes. On repricing, to my point that we actively manage our in-force business. We have a number of repricings that we're doing on an ongoing, regular, day-to-day basis. What I mean by that is, with our annuities, we sell only fixed and fixed index annuities. At least every month, we are looking at new money, credited rates, participation rates, and caps on those products, and setting them appropriate to what we believe we can earn and invest in. We're doing the same thing on the in-force annuity business as they end their, normally, it's a one-year guarantee on the rates credited there. With Medicare Supplement, we, like the industry, look at repricing that to factor in medical inflation at least annually. With long-term care, we were out repricing our long-term care business starting in 2006.
At that time, we were looked at as, "What's wrong with CNO or Bankers?" Because we were the only ones doing that. Well, thankfully, we were doing it and we continue to do it. We've got a block that we're still putting in rate increases on at Bankers, and that we will continue to do that when our claims experience supports and justifies that. Then in other supplemental health, we sell primarily specified disease through Washington National or PMA of Washington National. There, we've also found we added a couple of riders, for example, that had higher costs for certain cancer drugs that we put in a price increase there. Again, we're committed to managing the company and the products responsibly. Yes, we want to grow, but we want to grow profitably.
More important, that is what falls through to the bottom line than what's showing up in the top line.
All right. With that, we are out of time. Thanks a lot, Ed. We are going to be doing a breakout in Hong Kong next