Ladies and gentlemen, we'd like to thank you for standing by and welcome to the MetLife Year-End 2013 Outlook Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session with instructions being given at that time. As a reminder, this conference call is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results and business and the products of the company and its subsidiaries.
MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission, including in the Risk Factors sections of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, further developments, or otherwise. With that, I would like to turn the conference over to Edward Spehar, Head of Investor Relations. Please go ahead, sir.
Thank you, Steve, and good morning, everyone. Welcome to MetLife's year-end outlook call. Presentation materials for this discussion are currently available at metlife.com through a link on the investor relations page. Now please turn to slide two of the presentation. This is the cautionary statement on forward-looking statements and non-GAAP financial information. This governs the forward-looking statements made on today's call. As the statement notes, actual results might differ materially from the projected results we will be discussing today. For a discussion of the factors that could cause actual results to differ, please see the risk factors in our 10-K and 10-Q reports filed with the SEC. Let me remind you that we'll be using non-GAAP financial measures on today's call. Explanations on how we calculate these measures and the reasons we believe they are useful are included in the appendix.
Reconciliations to the most directly comparable GAAP measures are also included in the appendix. Slide three has our agenda for today. We'll begin with some opening remarks from MetLife's Chairman, President, and Chief Executive Officer, Steve Kandarian. Following Steve, Bill Wheeler, President of Americas, Chris Townsend, President of Asia, and Michel Khalaf, President of Europe, Middle East, and Africa, will provide outlooks for their businesses. Following the business discussion, John Hele, MetLife's Chief Financial Officer, will provide a financial update, including comments on free cash flow and expense saves. We will then have closing remarks from Steve, followed by Q&A. In fairness to all participants, please limit yourself to one question and one follow-up. Now I'd like to turn the call over to Steve.
Thank you, Ed, and good morning, everyone. As you probably know, we are no longer providing annual EPS guidance. Instead, our call this morning will focus on MetLife's multi-year business model, the real driver of shareholder value over time, and our financial outlook. After a careful study and deliberation, we determined that EPS guidance has added little value for investors. Most large financial companies seem to share this view. Our presentation this morning is designed to help you better understand MetLife's future prospects and shareholder value proposition. Turning to slide five, I want to begin by stating that our strategy and 2016 operating ROE target remain unchanged. We continue to shift our business mix away from market-sensitive products to protection-oriented products. This strategic change in our business mix, along with our efforts to grow in emerging markets, means a more balanced risk profile relative to a few years ago.
As mentioned, our operating ROE target remains 12%-14% for 2016. The operating ROE target assumes that regulatory capital rules appropriately reflect the life insurance business model and that we have clarity on the rules in a reasonable timeframe, allowing for meaningful share repurchases prior to 2016. Regulatory uncertainty remains our primary challenge, a view that we have consistently expressed to investors. Turning to slide six, the focus of this call is the outlook beyond next year, as we believe that multi-year performance is the key driver of sustained shareholder value. A discussion of multiple years is more consistent with how we manage the business and with our business strategy than a discussion of next year's earnings. We have proven we will sacrifice some near-term financial performance if we think it makes strategic sense.
For example, because of concerns regarding potentially adverse regulatory outcomes, we have reduced balance sheet leverage, which hurts near-term financial results. Let me define the two distinct multi-year periods you'll hear discussed today. First, the near term refers to the next one to three years or a timeframe consistent with our 2016 strategic plan. Second, the long term refers to the secular growth trend beyond 2016. While it is difficult to forecast earnings beyond the next few years, long-term thinking is critical to building a successful and sustainable business. Our goal is to help you better understand MetLife's business model. The substantial amount of quantitative and qualitative information in today's presentation illustrates this commitment to transparency. Slide seven provides key macro assumptions behind the near-term outlook for our business. We assume the S&P 500 goes up 5% annually through 2016, which is conservative relative to long-term historical returns.
Our U.S. interest rate assumptions are based on the market consensus through 2014, and our own estimates for 2015 and 2016. The consensus estimates are a 10-year treasury yield of 2.88% at the end of 2013 and 3.36% at the end of 2014. We have assumed that the 10-year treasury yield will be 4.5% at the end of 2016. Our estimate for 2016 assumes inflation expectations in line with the Fed's long-term target of 2% in a normal real rate of return for the 10-year treasury. Our foreign currency exchange rate assumptions are based on consensus. We do not consistently hedge currency translation risk. As a global company, our view is that the cost of hedging often outweighs the potential earnings benefit over time. However, we will opportunistically hedge foreign currency exposure if we have a strong view on relative value.
For example, we have hedged our yen-based earnings through the end of 2014. With a diverse mix of non-U.S. operations, our earnings are not heavily dependent on any one foreign currency. Our two most significant currency exposures are the Japanese yen, with yen-based earnings accounting for approximately 10% of total company earnings, and the Mexican peso, which accounts for approximately 5% of total company earnings. Slide eight highlights the framework we will use on this call to discuss each of the business segments in our quarterly financial supplement. I also want to point out that after the business segment discussions, John Hele will provide updates on free cash flow and expense saves. He will also give guidance for Corporate and Other, and the tax rate. For this business segment discussions, we will start with what we are calling baseline operating earnings.
This definition of earnings is the 12 months ended September 30th, 2013, and is meant to be our best estimate of the earnings level you should consider as a starting point for growth. We will then talk about key sensitivities for earnings and our balance sheet, which should provide a better understanding of the earnings trend for each segment. Next, we will discuss the near-term outlook, beginning with a qualitative discussion of opportunities and challenges. This is intended to provide you with insights into our business outlook through 2016. In addition, we will provide guidance on certain key items or inputs that should help you build more accurate earnings models. Finally, we will close with a discussion of a long-term outlook for each business segment, including the secular growth trend beyond 2016.
Before I hand the call over to Bill Wheeler, I want to reiterate that we are committed to helping the investment community better understand our business model and fundamental prospects. We want to provide you with the tools you need to make informed investment decisions about MetLife. Despite regulatory uncertainty, we are optimistic about our prospects and hope that you see the basis for our enthusiasm in the presentations that follow. With that, I will now hand the call over to Bill Wheeler to discuss the outlook for the Americas. Bill?
Thanks, Steve. Good morning. In the Americas, we are finishing up a very successful 2013, where we essentially met our top-line objectives and significantly exceeded our bottom-line profit targets. We expect to build on this very strong year and are projecting solid growth in both revenue and earnings for 2014. This morning, I will review our four domestic businesses as well as Latin America. For each business, I will review baseline earnings for the last four quarters, key sensitivities, near-term opportunities and challenges, near-term guidance on certain key items, and how we view each business's long-term growth prospects. However, before we get into the details of each business, I'd like to start on slide 10, which is a general overview of the Americas region, starting on the left with key strategies.
These strategies have not changed over the past two years. We have experienced strong success as we've executed on them. Our Group Voluntary and Worksite initiatives are now having an impact, and we are projecting that our revenue growth rate here will roughly double in 2014. We expect that Latin America, including a full-year impact from the acquisition of Provida in Chile, will experience a substantial increase in earnings. We see U.S. pension closeouts as an important source of earnings growth, even without visibility on a potential jumbo deal. The repositioning of our retail business has been very successful as we have rebalanced our risk profile and executed on significant expense reductions. We think our U.S. direct business, while still in startup mode, holds great promise. Turning to the middle column, I will discuss our major opportunities and challenges as I review each business.
With regard to our long-term outlook, which is meant to apply to our post-2016 earnings growth rate, you can see our guidelines for each of the major businesses. Overall, we project a mid-single-digit earnings growth rate for the Americas based on our current business mix. Turning to our Group Voluntary and Worksite business segment on slide 11, we show baseline operating earnings of $926 million for the past four quarters. We expect a substantial increase in operating earnings in 2014, driven by strong revenue growth and, most importantly, a recovery in our key underwriting margins. Slide 12 shows the annual earnings impact from a one-point change in our key underwriting ratios. Turning to slide 13, our strategy of building out our voluntary worksite capabilities is starting to pay off. We are projecting a 40%-50% increase in voluntary worksite sales next year.
We have positioned our products on 10 private insurance exchanges, as opposed to the public healthcare exchanges that are in the news, and expect meaningful sales through this channel. Also, by offering our full suite of products down market, we should be able to pick up market share in the mid-sized employer market. In terms of challenges, the Affordable Care Act is causing smaller employers to adopt a wait and see attitude, which means lower activity, lower quote volumes, but also higher retention. It's still hard to predict how changes in health insurance will affect the overall employee benefits market. Our voluntary worksite strategy should put us in a great position if the market evolves significantly. Also, it seems there is always one competitor out there chasing sales by getting too aggressive on pricing.
In general, I would say the overall pricing environment is better than it has been in a number of years. Finally, higher unemployment means lower wage growth, and that puts a damper on the growth of our overall book. With regard to our guidance concerning certain key items on slide 14, we expect mid-single-digit revenue growth in Group next year, with growth accelerating in 2015 and 2016 as our voluntary and worksite strategy continues to gain momentum. In addition, we expect our key underwriting ratios to revert back to normal because our experience this year was driven by higher claims severity as opposed to incidence rates. Changes in severity generally represent normal fluctuations in the business, while changes in incidence rates could indicate a systemic issue. Turning to slide 15, historically, our Group business has been able to outpace the market despite having the leading market share.
In the long term, given our competitive advantages, we would expect that to continue with revenue growth at 4%-7% and earnings growth at 6%-8%. Turning now to Corporate Benefit Funding. On slide 16, we show baseline operating earnings for this segment at $1.214 billion over the past four quarters. Most of the adjustment for excess variable investment income had to do with what, in hindsight, was a too conservative normalization for VII in the fourth quarter of 2012. With a more precise estimate of variable investment income, the earnings would obviously be higher. Looking forward in 2014, we see operating earnings increasing for CBF. On slide 17, we show some key sensitivities. You can see the annual impact of pension closeout sales volume on operating earnings.
Even though we are not projecting an increase in LIBOR during 2014, if short-term rates did increase, it would lower our securities lending margins, which are particularly impactful in this segment. On slide 18, we highlight several near-term opportunities and challenges for CBF. The biggest upside is in pension closeouts. Because of more attractive equity in fixed income markets, we think this area could become very significant. We estimate that there are approximately $800 billion of private defined benefit pension liabilities, which are attractive candidates for closeout. With regard to challenges, a flattening yield curve could put more pressure on our investment margins. Because CBF is an asset-intensive business, new capital rules could have a meaningful impact on ROE and our competitive position. With regard to guidance on our near-term outlook on slide 19, we expect to see moderate earnings growth driven by the pension risk transfer market.
Investment spread margins should be steady next year, with some moderate spread compression possible in 2015 and 2016. On slide 20, the longer-term outlook for CBF will depend on how substantial the pension risk transfer market becomes, as well as the related competitive environment. We are projecting longer-term earnings growth of 3%-5%, but there is potential for significant upside. I'd like to turn to the Retail business segment and start with the annuities area on slide 21. Here we show baseline operating earnings of $1.314 billion over the past four quarters. Given an assumption of modest stock market growth, this represents a good baseline for 2014. The key sensitivities for annuities are highlighted on Slide 22.
With regard to the factors affecting our near-term outlook for annuities on Slide 23, you will see us diversify away from lifetime living benefit riders to areas such as index-linked annuities, for example. Given our 5% assumption regarding equity market return, there is obviously upside with a stronger market as well as upside from additional cost saves. A key challenge I would like to highlight is the legal entity consolidation this year, which brings our annuity hedging program on shore. We estimate this will cost $30 million-$50 million to complete, and most of the cost will be allocated against the annuity line. On Slide 24, we expect a small decline in annuity sales. This is driven by a reduction in variable annuity sales from the $11 billion level in 2013, offset by anticipated growth in our fixed and index-linked annuity sales.
We see small increases in sales in 2015 and 2016. Because of this, we expect net outflows in 2014 will exceed the estimated 2013 figure of $4 billion. We expect variable investment income to decline in 2014, gradually increase in 2015 and 2016, as we have increased our allocation to alternatives. Despite that, we project that spreads will decline over the 3-year period. The long-term outlook for the retail annuity market on Slide 25 depends significantly on whether the industry continues to de-risk. Our expectation is that the industry will have a modest pullback regarding pricing and capacity. Our market share should therefore stabilize in 2014. Our long-term growth outlook of 3% could vary materially based on the competitive environment. Moving on to the life side of our retail business segment on Slide 26, we show baseline operating earnings of $946 million for the past four quarters.
Similar to CBF, most of the normalization for excess variable investment income was too conservative as we now project similar levels in 2014. Additionally, we expect a significant increase in 2014 operating earnings, driven by improved underwriting margins in our P&C and retail life businesses, as well as improved expense margins. On Slide 27, we show the annual earnings impact of a 1-point change in certain key underwriting ratios. With regard to our near-term outlook on Slide 28, we made a major product shift in 2013, exiting the lifetime guarantee market for UL products and emphasizing our whole life line. Some competitors have followed suit, our expectation is that the industry will grudgingly move in our direction over the next several years. This could lead to stronger momentum in our life area in the near term.
As for challenges in this area, we do expect some earnings headwinds in 2015 with the expiration of certain interest rate hedges, as well as lower earnings from our closed block of participating life insurance policies. Most of the performance of this closed block of participating policies, both positive and negative, accrues to the policyholder. However, earnings from this block have recently been above a normal level because of true-ups related to earnings shortfalls during the financial crisis. We anticipate that we will have fully made up for the shortfall by the end of next year, closed block earnings are expected to decline in 2015. On Slide 29, our decision to exit ULSG will likely continue to exert pressure on sales, but we are optimistic that growth in whole life will mean total sales that are roughly consistent with the 2013 level.
Despite the continuation of good variable investment income, we see modest compression of our investment spreads, partially related to less interest rate hedge income. Although individual life is a relatively stable business, we anticipate some earnings variability during the next couple of years. In 2014, we expect a rebound in mortality margins in life and improvement in our combined ratio in P&C, which should contribute to above-average earnings growth. In 2015, we see an earnings decline as a result of less interest rate hedge income and the previously discussed decline in earnings from the closed block. With regard to the long-term outlook on Slide 30, retail life is a mature, competitive business with a long-term growth rate of approximately 3%. Our market share is around 4%, we expect the business to grow in line with or faster than the market over time.
Before I leave the retail segment, I think it is worth noting that over the past two years, we have aggressively rationalized this business, while during that same two-year period, we increased the profits from retail by approximately 85%. The change we have been driving in this market is now mostly finished, and we expect the business to grow in a manner consistent with its market. My last segment this morning is our Latin American business. On Slide 31, we show a trailing four quarters baseline operating earnings of $517 million for Latin America. Remember that we closed the Provida acquisition on October 1st, and we will begin to see earnings from Provida beginning in the fourth quarter. With regard to the key sensitivities in Latin America on Slide 32, you can see how changes in Mexican and Chilean exchange rates affect reported earnings.
Another metric which can affect earnings is the return on the Provida encaje . Provida holds approximately $450 million in seed money in its funds, which is called encaje. Provida funds are invested in a broad range of international and Chilean fixed income and equities. The income from the encaje will flow through operating earnings. While the encaje introduces an element of potential earnings volatility, it is important to note that the free cash flow from this business is quite predictable. On Slide 33, we highlight some of the factors driving our near-term outlook for Latin America. Obviously, the accretion and growth from the Provida acquisition will be important. We are beginning to see meaningful growth from our global employee benefits initiative. Finally, we are seeing substantial growth in direct marketing across the region.
This increase has actually depressed earnings growth over the past several years, as most of the acquisition costs are not capitalized and therefore cause significant strain. We project direct sales growth of 23% in 2013 and 28% in 2014. With regard to the challenges, as we discussed on the last earnings call, Mexican fiscal reform will increase our tax rate and lower earnings in Mexico by approximately $20 million. Also, Solvency II will be implemented in Mexico this year and will increase our regulatory expenses. Although we do not believe this change will require additional capital, the final rules have not yet been released. Finally, with regard to the renewal of certain institutional cases in Mexico, I think a little history is in order. We acquired the Mexican government's life insurance business in 2002, and the acquisition has been a huge success by any measure.
We expected that the attractive margins we inherited in the institutional group business would quickly contract with the introduction of third-party competition. Surprisingly, those margins have persisted longer than anyone would have expected. Finally, over the last two years, they have begun to compress and some cases have been won by third parties on renewal. These results have dampened our strong growth in Mexico and the region, but we expect 2014 to effectively be the last year of this transition. Turning to guidance on certain key items in the near term for Latin America on Slide 34. We expect Provida to earn $190 million-$210 million in 2014 and then produce average annual growth of 10%. We expect the rest of our Latin American businesses to have revenue growth in the low double digits.
Earnings growth will be consistent with revenue growth in the near term because of strain from new initiatives. Turning to slide 35, in the long run, we expect low double-digit revenue growth in the region consistent with the overall market. Earnings growth should exceed revenue growth for all the reasons listed on the slide. I would like to turn the presentation over to my partner, Chris Townsend, President of our Asia region.
Thank you, Bill. Good morning. Let me start by providing you with an overview of our business in Asia. As you can see on slide 37, we're in nine markets across Asia with a presence in the region for over 60 years. Our operations in Japan, the world's second largest insurance market, and Korea account for the bulk of both our revenues and our earnings today. However, we have a growing presence in India and China, together with businesses in South Asia, Hong Kong and Australia. The business in Japan is well diversified by currency, product, and distribution channel, and we have a unique opportunity to leverage these capabilities across the region. Our strategy can be summarized in four key points. First, to secure maximum earnings contribution from our scale businesses in both Japan and Korea. Second, to build a long-term profitable growth platform in China and India.
Third, to ensure a solid earnings contribution from our remaining markets. Fourth, to expand into the high growth, high margin emerging markets of Southeast Asia in a disciplined fashion. Successful execution of this strategy should generate high single to low double-digit earnings growth over time. Slide 38 shows an analysis of our operating earnings. For the past 12 months, Asia has delivered strong results. However, our operating earnings have contained some noteworthy items, and stripping out these items produces an earnings profile that is more reflective of our baseline business performance. Turning to slide 39. I'd now like to provide you with a breakdown of our earnings profile. Japan and Korea account for 90%-95% of our current earnings, and it's important to note that only 45%-55% of Japan's earnings are yen-based, with the balance mostly being U.S. and AUD denominated.
In the near term, we expect the earnings contribution from the rest of Asia to rise and account for about 5%-10% of earnings, with emerging markets accounting for approximately 60% of that total. Beyond 2016, we anticipate that emerging markets will account for an increasing portion of total Asia earnings. Slide 40 shows some key sensitivities. One source of potential earnings volatility is currency risk, but exposure to the yen could be less than some might appreciate. For example, in the JPY-USD range of 90 to 110, for every one yen movement, the earnings impact is between $4 million-$5 million. As you would have noted from our assumptions page, we have factored in a weakening of the yen from 102 at the end of 2013 to an average rate of 106 for 2014.
Asia's earnings and capital position are also sensitive to shifts in interest rates, and we are actively managing this risk across all of our Asian operations. Moving to our near-term outlook beginning on slide 41, we're exploiting a number of opportunities whilst working to overcome some key challenges. We have an opportunity to leverage best practices from our well-progressed agency transformation in Japan and Korea for the benefit of operations in both China and India. The second opportunity comes from continued optimization of our product portfolio. We're focused on selling high margin, less capital intensive protection products, and these efforts, combined with an enhanced focus on customer centricity and product persistency rates, should generate improved gross margins. In line with our enterprise strategy, the third opportunity is leveraging our world class capabilities in employee benefits to take advantage of our growing multinational presence across the region.
A key pillar of our strategy is to enter the high growth markets of Southeast Asia. Deploying our proven expertise in bancassurance partnerships, such as our successful joint venture with the Punjab National Bank in India, provides us with a disciplined route to enter Southeast Asia. Our recent joint venture announcement with BIDV in Vietnam is a good example of this discipline. Finally, we're investing to build a strong digital platform in Asia to improve our front office sales capabilities, both direct to the customer and via our agency force, and looking at ways to upgrade our back office processing capabilities so as to improve efficiency and the overall customer experience. For example, we will be digitalizing our direct to consumer business in China and exporting our award winning iPad based mobile office sales tool from Korea and rolling it out across the region.
As you can see from the prior slide, one of our challenges facing the business could be the continued strengthening of the U.S. dollar against Asian currencies, especially the Japanese yen. The second challenge is the regulatory environment, with the principal impact being around product disclosures, data protection, and in some instances, higher levels of regulatory capital. We continue to engage constructively with regulators across the region, where our focus on customer centricity and portfolio optimization have very much been welcomed. Additionally, our shift to less capital intensive protection products will help to mitigate the impact of any higher capital requirements. The third challenge relates to the distribution management aspects of our strategy to prioritize the value of product sold over the volume sold.
For example, we're shifting commission structures that reward long term product persistency, and these are likely to impact sales in the near term but should improve long term value creation. The final challenge is lower brand awareness across some of our Asian markets. Building a strong brand is important in Asia, and whilst we have good recognition in Japan and Korea, we need to do more to grow brand awareness in China and throughout Southeast Asia. We're doing this through investments in sponsorship and financing corporate social responsibility activity via the MetLife Foundation. Turning to slide 42, I'll comment on a number of the guidance items for the next three year period. First, we expect that proportion of sales from absence and health and group protection products will grow to approximately 35% by 2016.
Given the higher margin, lower capital requirements of these products, this shift in the sales mix will have a disproportionately greater impact on value creation. Second, we see revenue growth of 5% to 10% on a constant currency basis, but expect 2014 to be at the lower end of that range. Third, we expect distribution expenses to grow proportional to sales growth. An operational scale and efficiency will allow administrative costs to grow at a rate that is at least 50% less than our revenue growth rate. Fourth, we expect to see high single to low double digit earnings growth, again on a constant currency basis. Looking to the long-term outlook in the next slide, we see continued growth across the region. I believe that we can generate revenue growth faster than the underlying market.
Asia is the world's fastest growing insurance market, and MetLife's Asian operations are well placed to exploit this growth to drive shareholder value over time. Finally, on slide 44, I would like to speak about our dividend outlook for Japan. As part of our successful conversion to a local subsidiary in 2012, we established a business with a strong balance sheet solvency position and released close to $1.6 billion of capital back to the U.S. This was double the level anticipated at the time of acquiring the business from AIG and represents the equivalent of three years dividend, reflecting the fact that the new company would take time to build distributable earnings. Moving forward, retained earnings are projected to build quickly and net of our reinvestments in the business, we expect dividends to be approximately 30% of GAAP earnings by 2016, rising to above 50% in the long term.
With that, I'd like to hand across to Michel.
Thank you, Chris, and good morning. Slide 46 gives an overview of our business in EMEA, where MetLife has a unique geographic footprint with a mix of developed and emerging markets. In Western Europe, we focus on niche segments that generate attractive returns. In emerging markets, we have leading positions as measured by gross written life premiums in 20 markets across the region, and our sources of earnings are well diversified. Emerging markets overall contribute approximately 80% of earnings today. It's worth mentioning that diversification is an area we focus on as we believe it provides us a competitive advantage. It ensures we have a good, strong, balanced book of business, providing us opportunities for profitable cash generative growth. Our diversification extend to products and channels with a healthy mix of retail and group business, and the majority of our business is in protection and traditional life products.
Similarly, our sales are well diversified across distribution channels with bancassurance, agency and the independent channel accounting for most of our sales today. We do see direct to consumer, which comprises around 10% of our sales as a fast-growing channel in emerging markets. We believe our unique footprint, leading market positions, and diversified business model will provide us with the ability to grow double digits in sales, premium fees and other revenues and earnings over the long term, which I will discuss later in my presentation. Now turning to slide 47. This slide shows reported operating earnings for the trailing 12 months. We generated almost $300 million of reported operating earnings. During this period, we had some relatively large one-time items, which for the most part, were discussed on the second quarter earnings call. After adjusting for these items, we come to baseline operating earnings of $291 million.
Now turning to slide 48, let me give you a sense of some of our key markets and currency mix. Our largest geographic operations are in Poland, the Gulf and Russia, which collectively account for over 50% of our emerging markets earnings. Two of our fastest growing operations are Russia and Turkey, where we predominantly sell protection products. We enjoy leading positions in both markets and expect continued strong growth given the low levels of insurance penetration and growing middle class. From a currency mix perspective, our earnings are primarily exposed to fluctuations in the EUR, Polish zloty, and the RUB. The remainder includes exposures to the Turkish lira and certain other currencies in Eastern Europe. In terms of our outlook, which I will address further on the next couple of slides, we are projecting some currency headwinds in 2014, with most currencies weakening by a couple of percentage points.
For example, we are assuming that the EUR and Polish zloty will each weaken by roughly 3% over the course of the year. Our diversified basket of currencies helps mitigate the region's currency risk to earnings, and therefore we currently do not hedge our earnings for such possible fluctuations. On slide 49, let me discuss some of the opportunities and challenges we see for the near term outlook and to some degree, longer term. First, in terms of opportunities, we see bancassurance and direct to consumer channels as key enablers to drive our emerging market growth. This includes continuing to focus on transferring our know-how from West to East in order to accelerate the development of our direct to consumer channel. Next, we see a tremendous opportunity in EMEA to build on the strength of our global relationships and employee benefits.
We are focusing on a number of key markets, including the Gulf, Russia, Poland and the U.K., where several multinationals have established operations. We are leveraging our leadership position in the U.S. employee benefits space and have seen good success in this area with 24% sales growth during 2013, and we expect this trend to continue. Lastly, we have an extensive multi-year project to branch several countries into our Irish insurance carrier in anticipation of Solvency II. Depending on the final rules and our ability to fully leverage our diversification, this could be an opportunity from a capital perspective. In terms of challenges, as we had mentioned previously, the anticipated change in the Poland pension system will slow the growth of our Polish operation.
We are seeing the economies of Central and Eastern Europe starting to feel the effects of the slowdown in the Eurozone, and this could put pressure on future growth rates. Lastly, the MetLife brand is not as well known in EMEA compared to the U.S. and other parts of the world. In order to fully leverage the strength of MetLife, we plan to invest in building our brand in key markets over the next few years. Turning to slide 50, let me discuss the outlook for certain key items over the next three years. First, we expect sales to grow 15%-20%, and while doing so, we expect the business to require less than half the earnings to fund this growth, which displays the strong free cash flow generation of this region.
We project premium fees and other revenues to grow at mid to high single digits in the early years, accelerating to mid-teens in the outer years. Keep in mind that the pension reform in Poland will impact revenues by around $100 million over the next three years. We think of EMEA as a growth engine for the company, and we expect underlying earnings growth close to mid-teens. However, in 2014, certain items will pressure our growth rate. On the second quarter earnings call, we estimated that the Poland pension reform could have a $15 million-$30 million impact to earnings. The draft bill has recently been issued and is currently being debated in the Senate after being approved by Parliament. We believe that the ongoing impact to our earnings will likely be closer to the high end of the range.
In addition, as mentioned earlier, we also plan to invest in building our brand in key countries over the next three years. These items are the primary drivers to $35 million-$40 million of earnings pressure in 2014. Finally, turning to slide 51, let me discuss the longer-term prospects for the region. Munich Re has produced projections of emerging market growth rates of high single digits for the Central and Eastern European region and the Middle East over the long term. With our strong position in some of the larger growth markets in these regions, we believe we can grow faster than the market. Given our focus on attractive niche segments, we believe our growth can outpace the broader market.
Lastly, in terms of expenses, while we will continue to invest in our business, especially in emerging markets, to drive growth, we expect that expense growth will be slower than that of the top line and would result in an improvement in our profit margin over time. With that, I would like to turn it over to John Hele.
Thank you, Michel, and good morning, everyone. Turning to slide 53, I will cover three topics. First, I will provide an update on free cash flow. We know this is a key issue for investors, and rest assured it is a top priority internally as well. In addition to our strong risk management culture and return on capital discipline, we are increasingly focused on cash. Second, I will provide a progress report on expense saves and some of the reinvestment initiatives that should produce long-term efficiency gains, as well as position us to be a more customer-centric organization. Finally, I will provide guidance for next year on corporate and other and the tax rate. Turning to slide 54. We are pleased to report the free cash flow outlook for MetLife has improved since we discussed the topic with you at our May 2013 investor day.
In May, we expected a free cash flow to operating earnings ratio of 35%-45% during 2014-2016. Our revised forecast suggests 35% next year and a range of 45%-55% for 2015-2016. As you know, we have targeted a ratio of at least 50% over time. Please turn to slide 55 for near-term guidance on key items affecting free cash flow. Higher U.S. subsidiary dividends are the main reason for the better free cash flow outlook relative to our expectations in May. The upwardly revised estimate for subsidiary dividends is primarily attributed to, number 1, a refined estimate of the impact from onshoring variable annuity guarantee risk or the four-way merger that we discussed with you in May. Number 2, the increase in the equity market. Number 3, our lower expectation for interest rate hedge losses.
On the last point, the free cash flow forecast has improved because we assume interest rates rise at a slower pace than our prior projections, because rates have already increased more than we had assumed. This element of our revised forecast deserves some explanation because it may seem counterintuitive that a more rapid increase in interest rates would hurt free cash flow. The issue is the asymmetrical impact of interest rate movements under statutory accounting, similar to what we experience on a GAAP basis. Under statutory accounting, interest rate derivatives are marked to market, but the associated liabilities are not as sensitive to changes in rates. As a result, when interest rates rise, our near-term statutory earnings and surplus are negatively affected, and therefore, so is our dividend capacity.
Over time, the benefit from improved statutory earnings overwhelms the negative impact from derivative losses, but this is not captured in results through 2016. Finally, there is still some drag on free cash flow from rising interest rates because we assume the 10-year Treasury yield increases to 4.5% by year-end 2016. As we have mentioned to you in the past, we are looking to improve the effectiveness of our hedging strategy under statutory accounting. However, there is no benefit from potential changes in our hedging strategy reflected in our current projections. Turning to slide 56, I will provide an update on the $1 billion in total efficiency improvement that we first discussed at the May 2012 investor day. I'm pleased to report that we are on track to meet our expense reduction targets on both a gross and net basis.
This slide provides you with our current expectations for gross saves as well as reinvestment costs in 2013 and 2014. I would like to focus on the reinvestment cost and specifically highlight some of our technology initiatives that are designed to significantly improve service to our customers. We are investing in global data centers across all three regions to consolidate local data centers and improve quality. We are also heavily investing in The Wall, a technology that allows us to more effectively meet the needs of our customers that have multiple policies with MetLife. We think this technology differentiates us from our insurance company peers. We are investing in customer relationship management technology, global sales and compensation platforms in U.S. operations. We believe these initiatives will enhance agent productivity, improve relationships with distribution partners, and increase customer satisfaction.
Our ability to fund these important technology projects and still deliver solid financial results is made possible by the success we are achieving on our gross expense saves. We anticipate gross expense saves on a cash basis of $1 billion by 2015. In terms of earnings, net savings are expected to meet our $600 million pre-tax target in 2015. My final topic on slide 57 is guidance on corporate and other and the tax rate. This is also the only slide that includes guidance for 2013, as we are pre-announcing a fourth quarter litigation asbestos reserve charge of $100 million to $120 million after tax. As disclosed in our 10-K, we have litigation asbestos reserves as a result of claims related to certain research and other activities by MetLife from the 1920s to the 1950s.
The lawsuits allege that MetLife learned or should have learned of certain health risks posed by asbestos, and among other things, improperly publicized or failed to disclose those health risks. MetLife has never engaged in any asbestos-related business, nor has it sold casualty insurance coverage to any company in an asbestos-related business. The frequency of severe claims related to asbestos has not declined as expected, and we intend to reflect this in our provisions. With regard to the 2014 outlook, we are forecasting an operating loss of $550 million to $750 million in corporate and other, which is more than the average annual loss we would anticipate during 2015 to 2016. A driver of the elevated loss estimate for next year is enterprise initiatives of $160 million to $200 million, with most of this range being one-time costs associated with our $1 billion efficiency program.
Finally, we anticipate an effective tax rate of 27.5%, a modest decline from 2013. I will now turn the call back to Steve for some closing remarks.
Thank you, John. Turning to our final slide, I would like to conclude with a few key takeaways before we open it up to questions. There is no change in our strategy or return on equity target. Moving to a multi-year outlook discussion is consistent with how we manage the business and, we believe, provides better insights into the true drivers of shareholder value. I hope the presentations from Bill, Chris, and Michel highlighted for you the attractiveness of our portfolio of businesses. Long-term growth expectations of our business segments range from the mid-single digits to low teens, even as the risk profile of the company improves with our shift to more protection-oriented products. John highlighted for you the strong progress we are making toward achieving a 50% ratio of free cash flow to operating earnings.
We understand the importance of distributable earnings and look forward to the resolution of regulatory uncertainty in the hope that capital management will soon become a more substantial part of the MetLife story. I think the level of detail we have provided this morning highlights our commitment to transparency. We believe transparency will contribute to a lower cost of equity capital, a lower cost of equity capital means a higher valuation over time. I would like to turn the call over to the operator for your questions.
Ladies and gentlemen, we'll now begin the question and answer session of today's conference call. Our first question will come from the line of Suneet Kamath of UBS. Please go ahead.
Thanks, and good morning. Thanks for a lot of the detail you provided. I guess if I take your segment earnings outlook near term, you gave us a lot of growth rates. If we try to roll it all up into a consolidated growth rate for the company, it feels like maybe we're talking about something around the 6% range. That's what we came up with for next year. Is that about in line with what you're thinking?
Suneet, we see it around 7%, perhaps 8% on a trend basis beyond 2016. We mentioned some near-term impediments, if you will, to that rate. Longer term, we're thinking 7%-8%. Obviously, that depends upon the overall economic environment that we're facing. I think what's also important to remember is, while we look at that as a reasonable growth rate, we're also lowering our risk profile, and especially reducing so-called fat tail risk in that process. Again, we're going back to our goals and our strategy, where we're trying to not only drive up return on equity, but also drive down our cost of equity capital because it's that differential that's so critical to our valuation in the marketplace.
Understood. I guess the follow-up question sort of related on the ROE outlook for 2016 to 12%-14%. Steve, you gave some qualitative comments around the capital management assumptions that are embedded in that outlook. I was just wondering if you could help frame those assumptions versus what you had told us in the past when you originally set that target. About $8 billion of share repurchases on a gross basis, $5 billion net of the converts over that 2014-2016 period. Is that still ballpark what you're factoring into this outlook?
What we've said is no repurchases of shares in 2014. Obviously, we have not done any repurchase of shares during this period of our strategy that we're talking about, that began back in 2012. We also mentioned the fourth quarter earnings call of 2012, that if we did no buybacks of any stock by the end of 2016, that could impact our ROE target range by 100 basis points. That would suggest that 12-14 becomes closer to 11-13 if we did no buybacks. We are hopeful that we'll be able to get things resolved on the regulatory front before the end of 2016, and that we'll be able to do some share repurchases. At this point in time, I really can't commit to what that number will be because we don't know the outcome yet of our potential non-bank SIFI designation.
If so designated, and if that designation holds up through appeals, what happens in terms of the rules that come out of Fed? Those rules are not yet written or at least not yet disclosed to the public. It's just too uncertain for us right now to put any sort of stake in the ground regarding what kind of share repurchases we'll be able to do.
Got it. I guess maybe the other thing that's different is the equity markets are obviously higher than where they were in your 2012 outlook, and I guess interest rates are higher as well. Maybe that's helping you get to the 12%-14% as well?
Well, look, there's lots of pluses and minuses we can add up. You've mentioned two things in the plus column. Overall, we're still in that range of 12%-14% for ROE by end of 2016. That assumes the share repurchases we discussed of $8 billion gross, $5 billion net.
Got it. Thank you.
Our next question will come from the line of Ryan Krueger of Dowling. Please go ahead.
Hey, thanks. Good morning. I had a question about the common dividend philosophy. I guess you mentioned, obviously, the continued uncertainty with capital rules from the Fed on impacting buyback. Just hoping you could give us an update on how you're thinking about the common dividend and if that's another increase is still on the table as you think about the uncertainty right now.
As you know, we raised our common dividend for 2013, and we're now paying on a quarterly basis. Just as with share buybacks, we are looking closely at how things are evolving out of Washington regarding the non-bank SIFI issue. At this point in time, we have nothing more to say about where our dividend will go. Obviously, our goal is to raise dividends as our earnings increase. We want to pay out an appropriate amount of our earnings to our shareholders. Again, it's the same issue that we have with respect to share buybacks regarding dividends.
I guess my follow-up is, I think you've said on buybacks that you're not going to do any buybacks until you really have full clarity on what the rules might look like. Is that essentially what you're thinking for the common dividend at this point as well, or would you consider doing something without the full rules out?
Look, we're continuing to monitor the situation with respect to capital rules coming out of Washington, potentially, that could impact us. As we learn more, that will inform our decisions around both dividends and share buybacks. Obviously, we raised our dividend without doing any share buybacks. The two are not necessarily going to be completely connected in terms of our activities here. We are continuing to monitor things in terms of the regulatory environment for us, and that will inform our decisions around both share buybacks and dividends. We don't have to necessarily wait for the final rules, if you will, but we need more clarity than we have today.
All right, thanks. That's helpful.
Our next question will come from the line of Jeff Schumann of KBW. Please go ahead.
Thanks. Good morning. Yeah, just one fine point. In retail life, can you give us a little more specificity on the level of closed block true-up income you've had that could go away?
Not a lot more of specificity, Jeff. It's important enough that it's worth mentioning, I guess, is the way to think about it. It'll cause an impact to whether we actually grow earnings in individual life in 2015 versus not. It's that order of magnitude of size. It's not a number that we've obviously historically disclosed. This is kind of an unusual event, but it's kind of an interesting phenomenon, and it's worth highlighting so that people understand it's coming.
Well, if we try to sort of decompose this ourselves, what line items has this been running through?
You know what? I think maybe best if we follow up with you on that in terms-
Okay
of where it shows.
All right. Thank you.
Our next question will come from the line of Chris Giovanni of Goldman Sachs. Please go ahead.
Thanks so much. Good morning. Wanted to see if you could provide any update on the RBC impact from onshoring your captive, a year-end RBC estimate. Along those lines, I guess with the assumption, the regulatory capital rules reflect the life insurance business model, where would you expect to run your RBC in the near term and then as you look out over your longer term plan period?
Okay. Well, it's a lot of questions in that, but I'll be happy to see what I can do. This is John. As we mentioned at our May Investor Day, we expected the foreign merger that post that transaction being done in 2014, that our combined RBC would still be above 400%. Based on the work we've done to date, we still expect that to be the case, and we expect that foreign merger would all happen in the fourth quarter of 2014. With regard to year-end guidance and those other points, we're not going to give you anything really further on that. How the regulatory calculations come out from the Federal Reserve, if we are picked to be a SIFI, and how that works with RBC is something that we have to sort out.
It's highly dependent upon how the Fed looks at things, whether they do it on US GAAP. You may have capital rules on US GAAP, statutory is on a different accounting framework. How does it impact our international businesses? These are very complex items that we have to work through, and until we see where the Fed's going on this, we really can't give you any further guidance on that.
Okay, thanks. My follow-up's just on the expense saves. Bill, you called out in a number of instances the potential for cost saves to exceed the target. Wondering if there's any way to quantify that. Would this lead to an increase in kind of the enterprise-wide initiative of the net $600 million of expense saves, or would other regions maybe offset the benefits in the Americas?
Well, this is John first. I'll let Bill follow up. In total, we are on track to the expense saves of the $1 billion gross, $600 million net. That does provide quite a large reinvest over time, which, I gave you some highlights of that. Right now, we're very focused on getting to 2015. It's been a huge initiative across all businesses, across corporate areas, and the actual business units. It's quite a substantial change. Obviously, we hope post that, we're going to keep getting better at this, and that actually the technology investments will compound and help us over time and to become more efficient. We haven't given guidance or really quantified that for you yet.
Chris, I don't have much to add except to say, look, we've had a lot of success in terms of taking out some costs, especially in our retail business. I think we feel that there's opportunity for more. That would not come at the expense of some other part of MetLife, I don't think. It would be incremental. The overall picture for Met, I think, would still be the same as John said.
Okay. Thanks so much.
Our next question will be from the line of Tom Gallagher of Credit Suisse. Please go ahead.
Good morning. First question is just on the annuity segment. Can you just elaborate a bit further on what you're thinking about the sales mix between variable annuities, fixed annuities, equity-indexed annuities? Is that a different type of index-linked annuity? I just want to be clear on, should we expect a precipitous drop in variable annuities from here, or overall, what are you thinking about that into 2014?
It is not precipitous. It is a modest drop from 2013 to 2014 in terms of our VA business. As I'm sure you know, Tom, the VA business itself is evolving in terms of the riders and the strength of the guarantees of the riders and whether a VA has a rider. That mix is shifting as well. We do expect a tick up in both fixed and then index-linked as well. The net overall is, I would say, a modest decline in overall annuity sales, and those are kind of the moving pieces.
Got it. Bill, on that segment, I wasn't entirely clear. I got the longer-term expectation. Wasn't entirely clear about 2014 because I think you were referencing mainly, at least directionally, where you expected earnings to go. Can you comment on 2014 for the annuity segment, what the expectation is from a bottom-line standpoint?
No, damn it, I can't. Look, I think my remarks were pretty clear actually, in terms of the baseline that we see in 2013 is a good run rate.
Okay. That's fair. Then just if I could follow up with one last one for Steve. I heard what you said on buybacks. Can you comment at all about what your thoughts on M&A are? Obviously, you've done a meaningfully sized acquisition fairly recently in Chile. Can you comment at all about how you're thinking about M&A and whether you're willing to use up to a certain amount of on-balance-sheet cash to do M&A?
Tom, you're correct. We closed on the Provida transaction in the third quarter of this year. It was $2 billion of on-balance-sheet capital that we utilized, which we think will generate a very good return on that capital. Our plan for 2016 had in it roughly $400 million of earnings via acquisitions. Provida represents about half of that. We're halfway through our goal for 2016. Basically on target, given the timing of the start of our strategy to where we are today. We would anticipate potentially using more on-balance-sheet capital for further acquisitions. We are always looking in the marketplace at opportunities that fit into our strategy, and I think you know that we are very disciplined buyers of businesses.
If those opportunities present themselves, we certainly will pursue them aggressively, but in a very disciplined way in terms of being over time accretive to our shareholders and being consistent with our strategy.
Got it. If I just extrapolated your last deal and assumed it was similar, that would assume about another $2 billion of deployed through M&A through the end of 2016. Just very rough numbers, obviously.
Well, I don't want to give kind of an extrapolation specifically off of that one transaction, but we certainly have capital still available for acquisitions that fit our strategy.
Okay, thanks.
We have a question from the line of John Nadel of Sterne Agee. Please go ahead.
Good morning, everyone. Two questions. One, I think I got from John's commentary that the $160 million-$200 million of after-tax investment spending in corporate in 2014 is supposed to be one time or largely one time in nature. I just wanted to get confirmation on that. The second question is a bigger picture one. You've been reluctant historically to talk about ROE by region, let's just say the Americas versus Asia versus EMEA. I was wondering if you could just give some general outlook for those three key regions, approximately where your ROE is currently in each of those three and how much you expect each of those regions' ROEs to expand over this through 2016 forecast period.
Okay. Hi, John. This is John. I do want to confirm that most of that corporate and other increase in 2014 is some of this one-time cost regarding the $1 billion expense saves. That's where we book it. The second question about ROE by region and in total, well, if we knew what the capital rules might be, if we're going to be picked to be a SIFI, I might know what the required capital would be, and we could understand how to forecast these things. Until we understand better what the potential required capital may be by our businesses, we don't give detailed guidance or results by region yet with the ROE. When we have more clarity, that's when we're going to start thinking about doing that.
John, if I could just follow up on that. The overall company 12%-14% ROE is at least based on Steve's opening commentary, just assuming that the regulatory environment is, I guess I'm going to put words in his mouth, I suppose, but it's static over the next couple of years. If we use that same assumption for each of the businesses, I was wondering maybe under that assumption, if you could help us in that regard. Because clearly the overall company ROE could change if the rules change.
Yes. What you say is quite correct. We have not given the details by region and don't plan to until we understand the capital rules better.
Okay. Thank you.
Our next question will come from the line of Jimmy Bhullar of J.P. Morgan. Please go ahead.
Hi, good morning. I had a question first for Steve. On the overall ROE, you're comfortable that it's going to be in the 12%-14% range that you mentioned before. If you think about it, the equity market's a lot stronger than you would have expected at the beginning of the year. That at least has added, let's say, about $0.20 or about half a percentage point to your ROE. Book value growth in the last couple of years has been very weak. 2012, 0%. Year to date, you're up 2.7%. That should boost your ROE by over a percentage point if you assume normal book value growth. Rates are up.
Obviously, U.S. currency is stronger, but I'm just wondering what else is there that is resulting in you not being comfortable with being able to do more than you would've said before other than the currency? Was the guidance just a little bit of a stretch at the time you gave it out? Secondly, I just had a clarification for maybe Bill could help with on the currency hedging for Japan. I think you're hedged in Japan through 2014 if the JPY weakens beyond JPY 90. If you could confirm that's right, and you don't have any hedges for 2015, so would that imply that if the JPY stays where it is right now, earnings in Japan would most likely drop in 2015 just given that the hedges are rolling off? Just want to confirm that that's right.
Jimmy Bhullar, you've correctly pointed out some of the positives that would put upward pressure on our target of 12%-14%, but there have been some negatives as well. When we did a strategy work back in late 2011, early 2012, and presented in May of 2012, we had anticipated that the economy, certainly in the U.S. and in Europe, would come back a little more strongly than it has to date. That's one of the headwinds we face. The second thing I'd say is that we pointed out some specifics to you recently in our earnings calls regarding a contract in Mexico that is no longer going forward with a governmental entity. Michel Khalaf mentioned the Poland pension business. There are pluses and minuses. FX is another potential minus for us, some adverse movements there for us. I think there's pluses and minuses.
You've pointed out some of the pluses. When you take them all in total, I think we're still comfortable with the 12%-14% range for ROE for 2016. Again, that's dependent upon share buybacks.
Jimmy Bhullar, this is John Hele. With regard to the hedges, we have a range for 2014 between the first quarter, the fourth quarter, 90-100. The average is about 96. It goes by quarter. You're correct, we don't have anything on right now for 2015. This will have an impact. However, we also have some underlying earnings growth that Christopher Townsend had mentioned that can help offset. Christopher Townsend, do you want to add anything to that?
I'll just add to that. Look, we've been buying rolling hedges right through 2013, and as you see from what John Hele just said, for 2014. We'll look at that for 2015 to protect the earnings depending on how the JPY performs throughout 2014.
Thanks. Just lastly, you did not mention anything on your assumption for variable investment income that's embedded in this guidance. Are you assuming a change in your yields on what you'd consider sort of alternative type assets for 2014 and beyond versus what you had assumed in 2013?
Jimmy, it's Steven Goulart. Our forecast for VII really hasn't changed that much from our results this year, although we have typically given a range for VII, we would say that our expectation for variable investment income is $900 million-$1.3 billion for the year. Again, that usually gets sort of straight lined by quarter. It's roughly flat to last year. It's up slightly from our forecast last year, but pretty flat.
Is it up from the forecast just because your view on the assets is more positive or the amounts are higher? I'm just trying to get an idea on if a higher assumed yield on those investments is adding to your guidance in any way.
Our yield assumptions are also fairly flat to last year. It's a combination of growing balances in that probably more than anything else, as well as comparing some of the actual results this year in areas like prepayments versus what our expectations will be for next year.
Okay. Thank you.
Our next question will be from the line of Sean Dargan of Macquarie. Please go ahead.
Thanks. Good morning. I have a question for Bill around Group Voluntary and Worksite benefits. You mentioned the opportunity from private exchanges. I assume you mean the type of platforms that Marsh & McLennan are rolling out. I was wondering how much of the PFO growth acceleration in 2015 and 2016 do you think will be coming from that channel?
You're right. That's what we are talking about. We actually are positioned now on 10 private exchanges. We think they're the best 10. There's quite a few of them, actually. In terms of revenue growth there for 2014, or sales, let me put it this way, sales, let's say. I think we think it's just a little south of $50 million from zero in 2013. It's good. It's a good start in our mind. We expect it'll grow from there.
All right. Just a follow-up to that, just when I think about what, I guess, the employee has for choices, is it a defined contribution model where they're given X dollars and they have to choose medical? I guess, what kind of carriers are you going up against in the exchanges?
It's a little hard to generalize because there are a lot of different models
Yes, usually the employee is getting some funds from his employer. He might be buying health insurance, he may not be. He might just be buying voluntary benefits. Our competition, it's not really all that different than I would say our competition is in many aspects of the group market today. Though I would tell you, not all group carriers or people who are doing worksite market or voluntary marketing are participating on the private exchanges. If anything, I would say they're not all getting listed, obviously. I would say the competitive situation is probably more attractive. That's good. That's why we're excited about these exchanges.
All right. Thank you very much.
We have a question from the line of Eric Berg of RBC Capital Markets. Please go ahead.
Thanks very much, and good morning to everyone. Steve or John, why do you view the decision to increase the dividend as fundamentally a different one from share repurchase? You were willing to increase the dividend. You've not resumed share repurchase, yet both essentially have the same call on cash and both face the same regulatory uncertainty. Why decouple these two decisions?
Eric, it's Steve. They're not decoupled, but we made a decision that of the two, when we decided to take some capital management actions on our side for 2013, that we would increase our dividend. We thought that was appropriate given the dividends of our peers in the industry and where we stood on a yield basis. That was our decision at that point in time in late 2012, effective 2013.
My follow-up question also is in the area of capital management. You've made it very clear that this matter of the regulatory future of the company is very much a fluid and therefore uncertain situation. I have a sense, too, that your insight into how all this will end is also quite limited as a result. You don't know how this is going to end, which is in turn inspiring your whole capital management strategy and inactivity in an important sense. Do you have a sense for the timetable? In other words, if we were to compare this to a baseball game, what inning are we in?
Eric, it's hard for us to be very specific because the timetable is not within our control. FSOC designates companies as non-bank SIFIs. The process is theirs. You'd have to ask them about their timetable for MetLife.
Okay.
There is a process in the law regarding appeals. For example, we have up to 60 days to file an administrative appeal if we're designated on a preliminary basis as a non-bank SIFI. FSOC has 30 more days to hold a hearing. FSOC has another 60 days to make a final determination about designation as a non-bank SIFI. The company so designated would have up to 30 days to file a judicial appeal under Dodd-Frank, if they so chose. That's sort of a laying out of the timeline under the act. Again, in terms of a specific timing of a preliminary designation, you'd have to ask FSOC that question since we don't control that. Now, shifting over from whether or not you're designated a non-bank SIFI to the rules, those rules would come out of the Federal Reserve.
To date, nothing has been disclosed to us or others, and we have no indication from the Fed as to when those rules will be forthcoming, presuming in a draft form for us and others to comment upon. Again, how long it would take them to finalize those rules will be within their control. Once again, you have to ask the Fed their expectations around timing for the rules.
All right. Thank you very much.
We have a question from the line of Erik Bass of Citigroup. Please go ahead.
Hi, thank you. Can you talk a little bit about the impact of rising rates on net income? I realize that there are a lot of moving parts, but how should we think about Met's ability to grow book value ex AOCI if rates rise and follow your assumptions?
Well, there obviously is some impact as rates rise with regard to these derivatives that we bought some time ago. They provide great income protection, but the prices as rates rise, you have the one-time hit through net income as well as in the statutory system as well that impacts our cash flow that we've given you some guidance on. There is an impact on it. Slowly rising rates isn't that bad, obviously. If you get the sharp increase, it's a large amount, but the next year you're fine because you're at that basis. That's as much as I can say.
Okay, that's helpful. Just one question, I guess, for Bill on pension closeouts, which you talk a lot about the opportunity, but I believe in the past you've indicated somewhat of a cautious approach, at least to the jumbo market, ahead of getting clarity on SIFI rules. Has anything changed in your near-term appetite for this business?
No. We like the business. We're a big participant in, I would call the regular flow of closeout deals that come out every year. This year we did not see a jumbo deal in the marketplace, but we had some good sale activity in that segment of the business. You have to look at these large jumbo deals almost like an M&A transaction. They're very big. There's significant capital. It's a big capital deployment decision, and you got to make sure you get the right kind of pricing, given the particulars of the case. You would always be cautious about a piece of business that big, even if you didn't see potential capital rules changing in the near term.
Got it. Is it fair to say then there's really not a difference in the way you look at kind of doing a number of small deals versus doing a jumbo transaction since it's essentially the same business? It's just getting confidence in the price, and kind of the hurdle rate for a jumbo deal. You have to have greater confidence in that?
Well, I think intellectually it's maybe not that different, but just it's a size issue. Let me give you an example. Our closeout volume this year will end up a little north of $1 billion. Okay? That's the normal market. A jumbo deal could be $5 billion, it could be $10 billion. There was one a couple years ago that was $25 billion. Okay? That's why you need to be cautious.
Got it. Okay. Thank you.
Our next question will be from the line of Yaron Kinar of Deutsche Bank. Please go ahead.
Hey, good morning. Thanks for taking my questions. If I look at the investor day comments, you talked about the potential impact to reserves and DAC from rates remaining kind of flat indefinitely. With your current outlook on rates for 2014 and then 2016, how are you thinking of that impact? Is there still negative potential hit or can we start thinking about maybe seeing some reserve releases and then favorable unlocking?
Hi, this is John. We gave you the impact if things go down to a variety of measures. Under the accounting in GAAP, say GAAP loss recognition or DAC, sometimes you have to add to reserves, but you don't get it back if it gets better. Other things dynamically change under some accounting. The DAC, if things get better, like the equity markets as you know the retail business gets better in annuities, because the DAC amortization changes. It's a little complex to give you exact guidance on that. All the growth numbers and segment numbers we've spoken about in company growth here all reflect the economic scenario that we've said, the equity markets and the rising rates and where we're starting the year at with the equity markets. Our asset balances, and that's what we've reflected in today and today's outlook call.
It would also reflect any ongoing additions or releases in DAC or other types of metrics. It's sort of included in what we've projected already.
Okay. Then a follow-up question for Bill, if I can. When you talk about maybe up to $50 million of potential sales in the private exchanges, are all those new or is some of those basically moving from one existing pocket to a new pocket?
I would say virtually all of them are new.
Okay.
As opposed to what might've been a base group coverage historically, is now an individual worksite sale. The financial dynamics of that are different as well. I would call that almost all net new.
Okay. Thank you very much.
Okay. We're at 9:30. I want to thank everyone for joining the call. Have a good day.
Ladies and gentlemen, that does conclude our conference call for today. On behalf of today's panel, I'd like to thank you for your participation in today's conference call and thank you for using AT&T. Have a wonderful day. You may now disconnect.