Ladies and gentlemen, thank you for standing by. Welcome to the Financial Outlook Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. If you need assistance during the call today, you may press star and then zero, and an operator will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Darin Arita, Head of Investor Relations. Please go ahead.
Thank you, Cynthia. Good morning. Thank you for joining our 2019 Financial Outlook Conference Call. Please find our presentation for today's call on our website at www.investor.prudential.com. Representing Prudential on today's call are Charlie Lowrey, CEO; Rob Falzon, Vice Chairman; Steve Pelletier, Head of Domestic Businesses; Scott Sleyster, Head of International Businesses; Ken Tanji, Chief Financial Officer; and Rob Axel, Principal Accounting Officer. We will start with prepared remarks by Charlie and Rob. Then we will take your questions. Today's presentation includes forward-looking statements. It is possible that actual results may differ materially from the predictions we make today. In addition, this presentation includes references to non-GAAP measures. The slide deck includes a reconciliation of such measures to the comparable GAAP measure and a discussion of factors that could cause actual results to differ materially from those in the forward-looking statements.
With that, I will hand it over to Charlie.
Thank you, Darin. Thank you all again for joining us this morning. This is an exciting moment for Prudential and for Rob, myself, and our entire leadership team as we look forward to building upon the consistent strategy, strong track record of execution, and robust financial profile cultivated by John and our prior management team while simultaneously seizing new opportunities to grow our business and operate with greater speed and efficiency. In addition, we remain intensely focused on talent, culture, and execution, as well as technology to generate sustainable long-term positive performance and outcomes for our shareholders. Turning to Slide 2. As you will hear more about from Rob in a few moments, we are well-positioned for the future. Our outlook for 2019 and beyond is positive, supported by the strength of our businesses. Our differentiated mix of market-leading businesses complement each other to provide competitive advantages.
By working so closely together, our businesses have a higher growth potential due to greater earnings diversification, increased capital benefits from a balanced risk profile, and providing our customers with integrated cross-business solutions. Our track record of execution is evidenced by significant growth in earnings and book value per share, an attractive return on equity, and strong cash flow. In addition, we continue to invest in our businesses, especially in financial wellness, to enhance our long-term growth prospects. Finally, our strong financial profile positions us well to respond to opportunities that might emerge. We have historically benefited from turns in the credit cycle, and we are even stronger today than we were going into the last downturn. We have a conservatively positioned investment portfolio and a well-capitalized balance sheet with significant financial flexibility. Turning to Slide 3.
We are also well-positioned to meet the needs of customers and tap into significant market opportunities with our capabilities in offering protection, retirement, and investment management solutions through our U.S. Financial Wellness businesses, our international business, and PGIM, our investment management business. U.S. Financial Wellness represents our workplace solutions and individual solutions businesses. We see a tremendous opportunity to address the evolving needs of individual customers, workplace clients, and frankly, society at large through our increasingly important financial wellness solutions. We have the key components to do this successfully, including a workplace platform covering 20 million individuals, individual solutions to cover protection, retirement, savings, income, and investment needs, and a customer-centric approach with different ways to engage with our clients through multiple channels, such as meeting with one of our financial advisors, calling or Skyping with an advisor, or interacting with us in a purely digital manner.
Our goal is to meet our customers' needs when, where, and how they want. By leveraging technology and our scale, we can significantly expand the addressable market, build deeper and longer-lasting relationships with customers and clients, and make a meaningful difference in the financial wellness of their lives. Our international business includes our world-class Japanese life insurance operation and investments in high-growth markets with large populations such as Brazil, India, Indonesia, and China. We approach these markets in a differentiated way, and that has led to steady growth, attractive returns, and significant capital generation. PGIM has also produced differentiated outcomes with strong investment performance that has led to consistently positive annual net institutional flows over the past 15 years.
In addition to providing solutions for its third-party clients, PGIM provides our U.S. Financial Wellness and international businesses with a competitive advantage through its investment expertise across a broad array of asset classes, including specialty classes such as real estate, private placements, and commercial mortgages. In summary, we feel confident about our prospects for the future and an outlook that is supported by our integrated and complementary businesses. Turning to slide four, we have generated strong financial returns to our shareholders by way of growth in earnings per share, book value per share, and return on equity over the past five years. This has resulted in significant capital generation, and we've deployed that capital by increasing dividends and share repurchases and reducing leverage. We've achieved all this while investing in our businesses.
In addition, we continue to invest in growth opportunities within and across our businesses, including financial wellness and digital data and mobile capabilities. The near-term growth associated with our 2019 EPS guidance reflects market factors, as Rob will discuss, but also our conscious decision to invest for the long-term sustainable growth. We track very closely the investments we are making and the associated return on those investments by means of improved operating metrics. We're already beginning to see benefits. Let me briefly outline four as examples. First, since the launch of our financial wellness capabilities in 2015, we have experienced about $6 billion of full-service retirement plan sales and over $100 million in group insurance case wins that we can specifically attribute to this initiative. Second, our Prudential Pathways program has been adopted by over 400 employers, representing more than 4 million employees.
Third, in the third quarter of this year, we launched Link by Prudential, an online experience that helps customers connect to solutions and financial professionals to help them achieve their financial goals. We have seen good initial interest in and adoption of the platform by those customers. PGIM's expanding global distribution capabilities have significantly increased the net flows of our investment management business. Over the intermediate term, we expect to generate high single-digit EPS growth, reflecting growth in the businesses, capital deployment, and some lift from market factors. We believe that the benefits from the investments we're making can accelerate this growth rate into the low double digits over this period. We will provide more detail about these initiatives focused on product development, distribution, and technology, as well as the specific operating metrics that we track during our Investor Day in June of next year.
You could consider this a mid-year check-in, if you will, on the progress we are making, and we look forward to that opportunity. With that, I'll hand it over to Rob.
Thank you, Charlie. Turning to slide five, our financial targets and expectations reflect an attractive return on equity, meaningful free cash flow, and solid capitalization. As Charlie mentioned, we expect to achieve these targets while investing in the business for long-term growth and increasing capital returns to shareholders. Here are the key changes from a year ago. We expect our return on equity to be at the high end of our 12% to 13% near to intermediate-term target. We now target an RBC ratio above 375% versus 400% for The Prudential Insurance Company of America or PICA. This reflects the effect of tax reform on the regulatory capital formulas and our intention to hold more of our excess capital at the parent company. As we noted on our third-quarter earnings call, our targeted operating range for cash and liquid assets at the parent company is $3 billion to $5 billion.
The low end of the range is equal to approximately two times our annual fixed charges. Finally, yesterday, our board approved a 33% increase in the share repurchase authorization for 2019 to $2 billion. Turning to slide six, we expect our 2019 earnings per share to be in the range of $12.50-$13 a share. To develop a pro forma baseline earnings level for 2018, we start with reported results, excluding notable items, for the months ended September 30, 2018. This totals $9.55 a share. We then added a bridge to the baseline to get to about $12.35 a share. The bridge to the baseline reflects the following items: our third-quarter results, excluding notable items, and an adjustment for elevated fourth-quarter expenses that are expected to be at the high end of $125 million-$175 million typical range.
This should not be viewed as a projection of our full-year results. Rather, we present it as a useful frame of reference for our 2019 guidance. The key assumptions to support our 2019 guidance are included in the appendix. I will address the market factors as these are a net headwind to EPS growth for 2019. Our guidance is based on an assumed year-end 2018 S&P 500 level of 2,700. Appreciation in the market is assumed to be 4% during 2019, consistent with our actuarial assumptions. As a result, the daily average S&P level for 2019 is actually about flat from 2018. You can see this on the assumption slide on page 13 in the appendix. While the majority of our separate account equity investments are tied to the S&P 500, a significant portion, particularly in our annuities separate accounts, are tied to the Russell 2000 and EAFE indices.
We also assume a 4% market appreciation for these indices in 2019, which results in daily averages for 2019 that are lower than in 2018 by about 4% for the Russell and about 6% for EAFE. As a result, equity market performance is assumed to have a modest negative impact on fee income in 2019 when compared to 2018. In addition, we assumed lower than usual non-coupon income in 2019 as a result of the lag effect from the equity market decline in the fourth quarter of 2018 on private equity investments. The combined impact of equity markets on fee income and non-coupon income is about $0.25 per share. While the headwinds from interest rates are diminishing, particularly in the U.S., continued low interest rates have a modest negative impact on 2019 earnings compared to 2018.
Partially offsetting these items is a benefit from the hedged rate for the JPY going from 111 to 105. For benchmarking purposes, we have also provided an EPS guidance range which reflects an alternate equity market assumption that is more consistent with the average expectation in analyst earnings models. Using this assumption, which reflects a year-end 2018 S&P 500 level of 2,800 and a 6% market appreciation in 2019, would result in an estimated EPS range for 2019 of $12.75-$13.25 a share, or an increase of $0.25 a share to our guidance range. We've also included earning sensitivities to key market factors. You should note that we have added a sensitivity of non-coupon investments to the equity market. This item represents a one-time EPS effect based on the mark-to-market impact rather than a change to the run rate level of earnings.
I would like to caution that these sensitivities are not necessarily linear nor entirely symmetrical and should not be extrapolated over more severe shock levels in either direction. That said, we believe these sensitivities, along with the business-level sensitivities contained in the appendix, provide a useful frame of reference for some of the key assumptions that affect our results. Turning to slide seven, our strong financial profile positions us to perform well and capture opportunities that typically emerge from a turn in the credit cycle. We have a high-quality and broadly diversified investment portfolio that benefits from PGIM's strong investment management capabilities and multi-manager platform. We also have a well-capitalized balance sheet with significant financial flexibility, including low financial and credit asset leverage and significant liquidity that could be used opportunistically. More details on our credit asset leverage can be found in the appendix.
Historically, the mix, stability, and operating strength of our businesses, combined with our financial strength and flexibility, have allowed us to benefit from turns in the credit cycle, including acquiring businesses at attractive valuations, acquiring talent and capabilities, and investing at attractive returns. We also experienced an increase in demand for our offerings of guaranteed financial outcomes in volatile markets. To conclude, our complementary mix of high-quality, market-leading businesses provides differentiated advantages. We have a long-term track record of delivering solid financial results, and our strong business and financial profile positions us well to support growth, demonstrate resilience, and seize opportunities. I will turn it back to the operator to take the questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, for any questions or comments, press star and then one. Our first question will come from the line of Ryan Krueger. Your line is open.
Hi. Thanks. Good morning. Could you discuss any portfolio de-risking actions you've been taking to prepare for a potential cycle? Also, if you could make any comments on how you view your portfolio today in maybe comparison to going into the last cycle.
Sure, Ryan. It's Rob. I think we have a heightened appreciation for potential of a credit cycle, although I would add that view is not unanimous across our various investment managers that we have in the PGIM portfolio of asset management. Our views reflective of the positioning of the portfolio, and that portfolio begins as being typically more defensively postured in any event when we look at it vis-à-vis the benchmarks for the industry. Government bonds are about 35% of the general account and actually about 45% of fixed maturities, and the below investment-grade portfolio is just a little over 4% of the portfolio, and 60% of that below investment-grade portfolio is actually in private placements, which benefit from covenant protection and a track record of better performance than comparable publics. From a bond weighting standpoint, what you would see is we are underweight in energy, finance, and telecom.
From an overweight standpoint, we're overweighted in consumer non-cyclicals, utilities, and transportation. If you look at the commercial mortgage portfolio, what you would see is that it is similarly underweight sort of more cyclical areas like office and retail and overweight in multi-family and industrial being warehouse and distribution. When we look at that portfolio and the composition of it, to answer the question about the comparison to sort of prior to the last cycle, Ryan, what I would say is, we have advanced our risk management infrastructure around our portfolio such that you would find that there's probably deeper diversification, both not only from an industry standpoint but also from an underlying security standpoint, and also with respect to the concentrations you might otherwise have in different types of structured securities.
Generally very consistent with how we've always managed the portfolio, but more diversified deeper into the asset classes and individual securities. I made a mention in my opening remarks about the credit leverage analysis that's in the appendix, I'll just sort of point that out again. It contrasts our asset leverage to credit leverage. We think credit leverage is a sort of more relevant way to think about the risk of the portfolio or the risk of the overall balance sheet. When you look through that lens, we believe we compare quite well to the industry, when it comes to sort of the relevant amount of credit leverage that we have. Probably the last thing I'd mention is as we think about this, again, consistent with our opening remarks, we're really not staying up at night worrying about the cycle.
When we look at the quality of that portfolio that I just described, the strength and flexibility of the balance sheet that we have as we talked about, the quality and mix of the businesses we have, and importantly, the level of free cash flow that those businesses throw out, we think that positions us so that we can expect to have a relatively strong performance through any credit cycle. In fact, we'll have the flexibility to be opportunistic as we've been in the past.
Thank you. My follow-up was on actually on free cash flow. Would you, absent credit losses, would you expect that 65% conversion to hold up in most downmarket scenarios based on your VA hedging program?
Hi, Ryan. This is Ken. Our VA program, both the hedging program and the capital framework, are actually very much designed to withstand market stress. As an example, our year-to-date hedging program, even in the recent markets, has performed very well. Hedge effectiveness through year-to-date is 99%, and that includes through last Tuesday. Our annuities business is capitalized to absorb market stress as well with capital that's well above what's emerging as the new standard as CT 98. That capital in excess of CT 98 is actually there to absorb market volatility, with no need to contribute any more capital or stop cash flow. We feel pretty good about the resilience of cash flow and the annuities business.
Thanks a lot.
Thank you. Our next question will come from the line of Jimmy Bhullar. Your line is open.
Hi. Good morning. First, I'm not sure if you've disclosed what your CLO exposure is. If you could just give us an idea of the amount and just the makeup of it.
Jimmy, it's Rob. It's about a $7 billion portfolio. It's entirely consisted of triple A-rated securities. The point that we've made in that is that our analysis that we do on that in CLO goes beyond just the ratings that are there. We actually look at the underlying securities within the structure and look at the pass-through leverage. We've been very selective, even within the triple A category of which securities or securitizations we participate in.
On share buybacks, I think the way you're presenting it, you're just showing it as an authorization. Is it fair to assume that that's what you intend to do almost it's sort of in a normal environment next year?
Yeah. Hi, Jimmy. It's Ken again. Yeah, we feel real good about our capital position. Our regulatory ratio's above our double A objectives, leverage better than our targets, and, as Rob mentioned, with highly liquid assets at $5 billion at the holding company. Overall, when we put that together, we believe the increase in the share repurchase program made sense. You can think of it as very consistent with our capital management philosophy of increasing shareholder distributions as our business grows. Share repurchases will be a little more variable depending on our capital position, but will be sort of a regular way that we will distribute capital. As opportunities for capital deployment such as M&A will arise, we'll take that into consideration. Dividends you can expect to be more aligned with sustainable earnings and free cash flow growth.
Very much consistent with the way we've done things. We think it's well understood and has worked well for us.
Lastly on expenses, I guess partly they're elevated because you're spending on technology. Should we assume that technology spending is going to be fairly high for the next several years? When do you get to a point when the benefits sort of start to offset the incremental expenses where you actually overall see more of a benefit on your financials as opposed to the spending being a drag?
Let me take a first shot. It's Rob. Let me take a first shot at that, then Steve, if Steve would like to jump in to add any additional color, he may want to do that at the end as well. I would first point out that actually, if you look at our trend of expenses over a long period of time, Jimmy, what you would find is, actually we've had very controlled growth in expense. We've done that while we've actually been growing the level of investments that we've been making in our business platform in the form of our financial wellness platform and our digital data and technology capabilities. All of which we think form the foundation for enhancing our long-term sustainable growth potential.
You actually haven't seen much of that show up in our expense growth because the earlier investments that we've been making have already begun to pay off, and the returns on those investments are essentially subsidizing or paying for the new investments we're making in our ongoing initiatives. We don't expect at this point that we're looking to throttle that down in any way. We actually think that we're at a level of expense that is very manageable and appropriate to the business and, as I said, positioning us well for long-term growth.
Jimmy, this is Steve. I'll follow up on what Rob said and point out that we really already are realizing the benefit of a lot of the investments that we've been making in the business. First of all, in the results of PGIM, which have been very strong of late. We see the benefit of investments we've made across the business, particularly in distribution, and in strengthening our capabilities in different asset classes and in fact, expanding some of the asset classes in which we operate such as a recent acquisition we made in the relatively modest size acquisition we made in the managed future space in our QMA business. That's just the type of opportunity we're looking for where we're able to leverage our distribution onto the capabilities of a relatively small asset manager that we might acquire.
I also think that the financial wellness capabilities we're building are already driving results at an employer level. Charlie referenced the fact about accelerated sales that we've seen in full service retirement, and in group insurance over the last couple of years that are directly attributable to our financial wellness efforts. Over time, we expect to see the earnings emerge from our deeper engagement with individuals who come to us via the financial wellness platform, individuals who come to us primarily through the workplace, but also directly. Those earnings will take time to develop. We are already seeing very positive engagement metrics as we build that platform. Charlie mentioned, for example, in his opening comments, the Prudential Pathways platform, and that's the program whereby our financial advisors offer education and planning seminars to the employees of our group and retirement corporate clients.
That currently covers 400 employers who collectively employ 4 million individuals. It's interesting to see, and this is what I mean by these leading indicators, that of the people who participate in a Prudential Pathways seminar, 25% of them request a follow-on appointment with the financial advisor. Of those individuals, 20% of them eventually become a fully advised and paying customer. That's a very robust conversion rate, if you will, and that gives us confidence that like I say, while the individual earnings will take time to develop, we think they're going to be a significant driver together with our employer-based success and that impact will be material in terms of picking up the growth rate in our U.S. business earnings.
Okay. Thank you.
Thank you. Our next question comes from the line of Tom Gallagher. Your line is open.
Morning. The 375% RBC guidance on PICA for 2019, is that your new view of required capital post-tax reform versus the old 400%? Can you talk through some of the moving pieces there? I know that obviously the tax reform negatively impacts it, but I think you also contributed $500 million to that sum in 3Q.
Yeah. Hi, it's Ken. Yeah, let me give a little background on our decision to adjust our RBC ratio target. First, I just want to mention that we're well positioned to maintain PICA's RBC ratio above 400% if that's what we wanted to do. We made the $500 million capital contributions in PICA in September, and that's in anticipation of the NAIC increasing its risk-based capital factors due to tax reform. I just also remind that we've said this a number of times, that we have $5 billion of highly liquid assets at the parent company, which gives us a lot of flexibility.
After discussion with our rating agencies and our regulators, we think making a modest adjustment to our RBC ratio target makes sense for a number of reasons. First, a lower corporate tax rate in the U.S. improves our overall profitability and cash flow, generally improves our financial strength. It also substantially increases the after-tax value of deferred profits that we hold in our reserves, and that's a real meaningful source of loss absorption resources that isn't reflected in the RBC ratio. On the other hand, the NAIC is increasing its risk factors, when we put that all together, we think it's appropriate to slightly reduce the RBC ratio target that recognizes the improved profitability and the increase in regulatory capital, albeit at a lower RBC ratio.
The other second consideration is now that nearly all of our variable annuity business now resides in Prudential Annuities Life Assurance Corporation or what we call PALAC. As we discussed, PALAC is very well capitalized, well in excess of the proposed new standards and well above an RBC ratio of 400%. When you combine both PICA and PALAC, we'll have a combined RBC ratio, again, that's well in excess of 400%, both consistent with our double A objectives and consistent with the discussions we've had with our rating agencies and our regulators. Again, we're holding now more highly liquid assets at the holding company, which improves the overall group's capital flexibility. Those are the moving parts in our thinking.
That's helpful, Ken. Just a follow-up. PALAC, I believe, had an RBC of north of 1,000% at the end of 2017, and I know there's going to be some meaningful changes from VA reform. Any sense for where that RBC is going to shake out after factoring in the impact of VA reform?
Yeah. It's still in motion, and I don't think it's quite settled in terms of where all the specifics will land on the reform. The main components are pretty well understood, and we think, again, we'll be well in excess of 400%. It'll be a more meaningful ratio now that it's calibrated to a CT 98 level.
Okay, thanks.
Thank you. Our next question comes from the line of Humphrey Lee. Your line is open.
Good morning. Thank you for taking my questions. Looking at the corporate losses guidance, you talked about $1.3 billion for 2019. I think that may be a little lower than what you've been talked about in the past, at roughly $375 million per quarter on average. I was just wondering, based on your comments about a little higher expenses related to technology and everything, how do we reconcile the $1.3 billion guidance versus kind of historical in the past?
Humphrey, it's Rob. On a net basis, we're seeing lower expenses in corporate and other, even net of the portion of the initiative spending that's contained there. Understand that our initiative spending is both within the businesses and the corporate and other, and a substantial amount of it is actually down in the businesses. While there are numerous sources of that reduction in expenses, probably the one thing I'd want to call out is what you are seeing is the benefit of our de-designation as a SIFI, and therefore, the reduced amount of spending that we need to make with regard to that designation and enhanced supervision.
Got it. Then I guess since you're probably holding a little bit more assets at the holding company as opposed to in the insurance entity, that may help from an investment income perspective?
Yeah, a little bit, but I wouldn't call that as a material driver.
Okay. Got it. Then I think in the appendix you talked about for PGIM, you're looking at other related revenue, $175 million-$250 million net of expenses. How should I reconcile that kind of compared to what is shown in the supplement? I think in the supplement it's just on a gross basis based on revenue. How do I reconcile the guidance or the expectation versus kind of what's in the model?
The number that you speak about, Humphrey, it's a little bit apples to oranges. One is, as you say, a gross number, and the other is net of expenses. I will emphasize that we don't really look at other related revenue as so much a trendable number that really has an inherent run rate. A lot of the numbers that we've communicated and continue to communicate are more by way of kind of our expectation, our experience or our expectation of kind of the mathematical averages. To the extent we're seeing a growth in the net number, it reflects a variety of factors, in particular anticipated growth in our agency business. To fundamentally get at the point you're making, I'd just point out that one number is gross, the other is net of expenses.
If I were to think about for this year, kind of year-to-date, what would that be on a net basis?
Humphrey, it's Rob. We can follow up with you and get you that specific number. I know we gave the third quarter number. I don't know off the top of my head what the cumulative number is through for the full year. What we provide every quarter is quarterly results, and then we give you a trailing multi-quarter, multi-year number to compare that against. The number that we have incorporated in guidance is not strictly a mathematical formula of averages. It's looking at what our historical experience has been with some judgment put on that with respect to expectations on a go-forward basis. Darin and his team can follow up with you to give you the cumulative number.
Got it. Thank you.
Thank you. Our next question comes from the line of Suneet Kamath. Your line is open.
Thanks. I want to go back to Charlie's comment about the long-term growth potential of the franchise. I think he said maybe high single digits near term, and then eventually low double digits in terms of EPS. I think some of us are struggling even to get to the high single-digit EPS. At least that doesn't seem to be what's built into consensus. Can you unpack that a little bit in terms of where the growth is coming from? Maybe international versus PGIM versus U.S. Just get some high-level commentary there would be helpful.
Suneet, it's Steve. I can address your question. Charlie's comments were grounded in EPS. My comments that I'm about to make will be grounded more in AOI growth. We see near and intermediate term growth expectations for the U.S. businesses, earnings growth expectation to be in the mid-single digits. The primary growth opportunities that we see in that near to intermediate term are consistent with what we've communicated in the recent past as being our most significant growth opportunities. That represents PGIM and our pension risk transfer business. Let me talk a little bit about each. In PGIM, Charlie referenced 15 consecutive years of positive institutional net flows. I think it's fair to say that we're closing in pretty tight on making that 16 years. We continue to feel very positive about our ability to continue that really extraordinary type of achievement.
The reason I say that is because of the range of opportunities that we can access in our multi-manager platform. We do business on both the institutional and on the retail front. We do business across publics and privates and a range of asset classes in each. We are able to source client dollars both domestically and globally, with the latter being a significant contributor to our recent growth. As I say, especially in the institutional market, the business comes in chunks. There will be variability, inherent variability quarter to quarter. On an annual basis and on a year in, year out basis, we feel very positive about our ability to continue to source flows.
On an average fee basis, as we've communicated in the past, we feel our platform has been quite resilient on that front, and we've been able to sustain average fees across the entire platform at about 22 basis points. That's not to say that we're immune from secular fee pressure. We do encounter it in some parts of the business, but we're able to offset that by drawing flows into higher yielding strategies and thereby sustaining that average across the platform. We expect to continue to be able to do that. On the pension risk transfer front, we feel that the pipeline, as I discussed on the third quarter earnings call, is really as strong as it's ever been, and has every prospect of continuing to be that way.
Obviously, that could have some impact on capital markets, and particularly the level of interest rates and what that might mean for funding levels. Nonetheless, as I say, our outlook on the pipeline is very strong, as is our ability to compete within that pipeline. Our strengths in terms of our focus, not exclusive focus, but our primary focus on large case business, our ability to bring that business to a successful close, our ability to successfully onboard the assets that come with large case business, and our ability to onboard the clients who come to us and provide them great service. All of those factors enable us to compete successfully. As an example of that, we've communicated before that our annual runoff in this business in PRT is about $3 billion on the funded PRT side and about $1 billion on the longevity reinsurance.
Our planning assumption and our actuals for the past several years have been that we should be able to generate sales that are meaningfully in excess of that runoff. We have every expectation that that will continue. Some more recent data. Our year to date sales in pension risk transfer, including some transactions that have been announced here in the fourth quarter, is $5.5 billion in funded business and $6.5 billion in longevity reinsurance. In the fourth quarter so far, of that number in the fourth quarter so far, we've written $2.1 billion in funded business and $3.2 billion in longevity reinsurance. Again, that's business that has been announced either by ourselves or by the counterparty. All of that gives us, like I say, great confidence that we'll be able to continue to achieve success in the growth of that business.
That's for the near to intermediate term. Over the longer term, we feel that the increasing results from our financial wellness investments and our financial wellness value proposition will enable us to pick up that growth rate from the mid-single digits to the mid to upper single digits, along just the ways that I expected. The acceleration of our results with employers and the gradually increasing visibility of our results with individuals.
Suneet, this is Charlie. Let me just pick up on this part of the question for international. At the Investor Day we held in Japan, we said that the growth rate for international would be 4% to 5% on a core basis. You haven't seen that in the past few years just because of the headwinds that have been there. Certainly, the FX headwinds and interest rate headwinds. When you look at the core business and the growth of the book, the existing book in the business, which grows every year, and add on to that, the sales, you get a consistent kind of mid-single digits return. This year, we also disclosed in the third quarter call that there's a bit of a tailwind from FX as opposed to headwinds in year past, because we hedged at the 105 level versus 111 before.
There's still a modest headwind from interest rate reinvestment, but from reinvestment given the interest rates. That's becoming more modest as we go. On the international side, think about sort of a mid-single digits return.
Got it. That's helpful. Maybe just a quick one for Steve on PRT. We saw this week a pretty large deal that did include some active lives. The question is, I think historically, you've avoided that part of the market, at least on the jumbo case side. Is that something that you are interested in pursuing, and is it something where you have to take on that kind of business in order to get some of these jumbos going forward? Do you see that as a potential outcome for this PRT business?
Suneet, it's a good question. Obviously, without commenting on an individual transaction, I would say that we have written deferred lives. We think that's a necessary part of the business, but we've been able to keep that to a very modest level. We expect that to continue. We feel that we can continue to be successful in the business while maintaining our focus, not exclusivity, but our focus on retirees. Any deferred lives that we do take on, we don't feel will impact the overall risk profile of our in-force pool. The average age of the individuals in our PRT business is about 74 years of age, and we would look to be able to maintain those in-force risk characteristics in any business we take on, including business with modest levels of deferred lives.
Okay, thanks.
Thank you. Our next question comes from the line of Alex Scott. Your line is open.
Hi, thanks for taking the question. The first one I had was just on capital deployment. You gave a guide for how we should think about cash flow, 65%. Can you give us a feel for how much capital you're deploying into the volume growth, though? It sounds like there's a fair amount of momentum that you're expecting there. I'd just be curious how much you're sort of planning on putting behind that new business growth.
Hi, this is Ken. First, we feel really good about the diverse sources of cash flow that we have coming to the holding company, and that's driven by our business mix. Our businesses are profitable and generating capital sufficient to support their growth and including the investments to build capabilities. Some businesses need to retain a portion of their capital to support their growth, and those businesses would be our life insurance businesses and retirement, including the growth in pension risk transfer that Steve just described. But we also have businesses that have very strong and stable cash flow. Steve described a lot of growth in our PGIM business, but that's a fee-based business that provides a high rate of cash flow, and we're getting cash flow from that business each quarter.
Also, our variable annuity business has very strong profitability and a stable capital profile that I described, and that also is generating a high rate of cash flow. Again, we're getting cash flow from that business each quarter. Our international insurance business has also been a very stable source of cash flow. Overall, when we put that all together, we think 65% is about the right cash flow profile to expect
Given our mix of business and our growth opportunities, that might vary a little bit period to period, but over time, we think 65% is about right.
Okay. The second question I had is just on CLOs. I know you already talked a bit about general account exposure to it. I guess I'd just be interested in the exposure you have, I guess, in the fees within PGIM. I think sometimes those fees could potentially be impacted by weaker credit markets, so I'd be interested to know how that could occur. Are we anywhere close to that or are we still farther away from any impact there?
Alex, it's Steve. I'll address that part of your question. I think that while there's some aspect of that in our overall business profile, I think it's a pretty manageable level in terms of our overall asset base and our fees. Certainly, the PGIM business has some degree of exposure to market conditions as it relates to impact of those market conditions on our asset levels and therefore our fees. We think the particular aspect that you're targeting is a pretty manageable portion of our overall business.
All right. Thank you.
Thank you. Our next question will come from the line of Andrew Kligerman. Your line is open.
Hey, good morning. I'm looking at your ROE guidance, higher end of 12%-13%, which was pretty much where it was last year. This year, you've performed at about 13.5%+. If I look at the midpoint of your guidance, I still get 13+. One, maybe you could reconcile that guidance for us. Secondly, historically, you've talked about a 50 basis point ROE decline per year over the next few years, and I think that related to international pressures. Could you give a little color on that and tie that in?
Andrew, it's Rob. Sure. On the first part of your question, I think your math is all directionally correct. At this point, we're not ready to change our guidance around the 12%-13%. We've been asked the question when and under what conditions, and I think the answer's been while our performance continues to have a bias toward the upper end of that range, we'd like to see a sustained longer period of time of higher interest rates, which has been the principal headwind toward reestablishing the 13%-14% that we previously had in place or that we believe is sort of the longer-term natural rate of ROE for the mix of businesses that we have. I would just reiterate that we're in sort of the same position.
Performance continues to be at the high end of that specified range, interest rates are jumping around as you've seen just in the last day or two by way of example, we're not yet prepared to commit to a higher level from a guidance standpoint. Secondly, with respect to the 50 basis points, we did talk a little bit about that in Tokyo Investor Day, and that was guidance we gave a couple of years ago when we saw that as we were reinvesting free cash flows and looking at some level of reinvestment of the portfolio, that we expected that the returns in Japan would come down. They have. You saw a business that was generating ROEs that were in the 20s to a business that's now generating an ROE that's about 18% or so.
We believe now that given there's been largely that phenomena is behind us, and while we still have some gap, as that gap converges, it's not a large enough delta that it's putting pressure on our ROE. We believe within Japan, we'll continue to be able to sustain an 18% ROE in the business. That 50 basis point guidance that we had given a couple of years ago was appropriate for the last two or so years and is no longer appropriate to how we think about our ROE in that business going forward.
Got it. Thank you. Then just with regard to the corporate and other line, your $1.3 billion guidance, just looking to the fourth quarter, typically we'd see a lift up in the fourth quarters due to deferred compensation, and it would usually be pretty significant. If I recall correctly, it would be tied to the stock price. Unfortunately for Pru and the entire life group, stock prices have not done so well. Looking to the fourth quarter, do we see a number that's in the 300-ish range? Same thing with the fourth quarter of next year, maybe your $1.3 billion guidance for corporate and other losses might be a little too heavy if the market keeps acting like it does. Maybe a little commentary about that.
Yeah. Obviously, the corporate and other does serve as a partial hedge against declining markets in that we have certain expense items which are sort of inversely linked to the markets. Net net, I want to make clear that's not a good thing for the business.
No.
We favor a condition of appreciating markets. Yeah, we factored in the 2,700 S&P 500, Andrew, into the guidance that we provided that we expect in the fourth quarter that $125 million to $175 million of you see a sort of higher level of expenses in the fourth quarter will be at the higher end of that. We have things going both ways in the quarter, but nonetheless, even with a lower equity market and our stock included as a component of that, we expect to be at the higher end of the $125 million to $175 million for this year. Then going forward next year, the assumption embedded in there is that equity market returns are at the 4%. You'd have a very different outcome during the course of 2019 than what we might be seeing embedded in the fourth quarter.
I see. Thanks a lot.
Thank you. With that, I'd like to turn the conference back over to Charles Lowrey for any closing comments.
Thank you. I just have a few final thoughts. We're excited about how our businesses can collectively make a meaningful difference in our customers' financial lives and deliver long-term value. As we look forward, we are confident in our strategies and our carefully chosen mix of high-quality complementary businesses. We have a proven ability to execute, and we have talented employees with a purpose-driven culture. As a result, we will meet the changing needs of our customers, and by doing so, can deliver attractive returns to our shareholders. Thank you for your interest in Prudential and for joining the call today. I wish you all a great holiday season and look forward to reconnecting in 2019. Have a good day.
Thank you. Ladies and gentlemen, that concludes your conference call for today. Thank you for your participation and for using AT&T Executive Conference Service. You may now disconnect.