Ladies and gentlemen, thank you for standing by, welcome to the 2016 Financial Outlook. 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, 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 Mr. Mark Finkelstein. Please go ahead.
Thank you, Cynthia. Good morning, Thank you for joining our 2016 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 John Strangfeld, CEO; Mark Grier, Vice Chairman; Charlie Lowrey, Head of International Businesses; Steve Pelletier, Head of Domestic Businesses; Rob Falzon, Chief Financial Officer; and Rob Axel, Principal Accounting Officer. We will start with prepared comments by John and Rob, then we will answer 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 a non-GAAP measure. The slide deck includes a reconciliation of such measure 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 John.
Thank you, Mark. I'd like to welcome everyone to our 2016 Financial Outlook presentation. Before Rob takes you through the specifics, I wanted to provide some higher-level observations, I will begin on slide two. The key message is that while we anticipate some near-term headwinds, we believe the earnings power of our businesses should produce an overall ROE of 13%-14% across the cycle, we remain positive on our prospects for 2016 and beyond. Our ROE target reflects our attractive mix of protection, retirement, and asset management businesses facilitates our ability to invest appropriately across our platforms and infrastructure to capture longer-term growth opportunities. At the same time, we are generating increasing levels of free cash flow that support a balanced approach to capital deployment.
This allows us to pursue outsized organic and inorganic growth opportunities and return capital to shareholders through dividends and buybacks while continuing to meet our standards for financial strength. Last month, we announced a 21% increase in our dividend to an annualized rate of $2.80 per share. Today, we announced a new share repurchase authorization of $1.5 billion for calendar year 2016. These actions incorporate our expectation that we should produce deployable capital equal to about 60% of our earnings over time. It also reflects the confidence we have in our balance sheet and capital position. We are also focusing on reducing the complexity and volatility in our businesses. This morning, we're announcing our intention to recapture our variable annuity living benefit riders from our captive and house all of our VA product risks in our statutory insurance entities in 2016.
While we have always managed these risks on an economic basis and held strong reserves and capital against those risks, a practice that we will continue, managing through a captive has added a source of complexity and capital volatility that has distracted from the core fundamentals of our business. Rob will provide a high-level view of the planned recapture later. This action follows the implementation earlier this year of our divisional reporting structure in Japan, which has mitigated the non-economic impact of foreign currency remeasurement on our net income, historically a large source of volatility. These actions should contribute to a simpler story and a more stable capital position going forward. We do face near-term headwinds.
The impact of low interest rates, weaker foreign currencies, more conservative expectations for non-coupon investment income, along with continued higher levels of initiative-related expenses, all contribute to some pressures on earnings expectations that are factored into our 2016 guidance. We continue to navigate the evolving regulatory environment. Having said that, our track record of innovation and execution, together with the investments we're making in our longer-term opportunities, give us confidence in our ability to succeed over the long run. Turning to slide three. This shows our return on equity since 2010. The key takeaway is that you see the strong growth in our ROE from 2010 to current levels.
This reflects key acquisitions that were successfully integrated, including Star and Edison from AIG and Hartford's life business, our success in building the pension risk transfer business, the positive impact of improvement in equity markets, and healthy capital returns to shareholders. It also reflects strong execution across our international and domestic businesses. More recent results have also benefited from tailwinds that cannot be expected to recur, such as the benefits from non-coupon investment income above our average expectations, better-than-expected underwriting experience in our domestic and international life businesses, and favorable pension risk transfer case experience. While our ROE has recently exceeded 15%, we believe a 13%-14% ROE target through the cycle is appropriate given our business mix and ongoing investments to support longer-term growth opportunities. I'll now turn it over to Rob, and we'll later follow up with some concluding comments. Rob?
Thank you, John. Slides four and five summarize some of the key considerations at a business unit level that affect how we think about 2016. As many of you are aware, we do not provide guidance at the segment level or specific sales outlooks, as they can be inherently volatile, and our overall guidance represents a range of potential outcomes. While I don't plan to go into detail as to the specific items or to quantify their potential impact beyond the few key sensitivity items that we've included, we thought these observations might be helpful as you think about your own models in the context of our overall guidance. I won't go through all the points, but here are some highlights.
In international insurance, we expect continued growth of our Life Planner count, including targeted low single-digit growth in Japan with a commensurate impact on sales and a slightly greater impact on in-force business, given our high persistency. At Gibraltar, we stabilized the Life Consultant count and see expanding distribution as an opportunity for modest growth. While the weaker yen is a near-term earnings headwind, the contribution of US dollar and other non-yen business and our hedging programs are significant mitigants. In individual life, we expect to continue our strategy of a diversified product mix, targeting new business comprised of roughly one-third guaranteed universal life, one-third term, and one-third other products. Retention of a greater share of mortality risk will also contribute to our revenue growth prospects.
In group insurance, with substantially all of the disability repricing now behind us and improvements in underwriting and claims management in place, we feel that we are now positioned for controlled growth, exercising pricing discipline as we seek new business opportunities. In retirement, we expect opportunities in pension risk transfer to continue to drive account value growth but are not assuming jumbo case wins for 2016 because of their episodic nature. In asset management, we expect earnings to be driven by the growth of core asset management fees, with fee yields on AUM consistent with 2015. We will continue to invest in the business as we launch new funds, build our asset class capabilities, and expand distribution. In annuities, we will continue to execute on our product diversification strategy. While there are still uncertainties on the impact of the DOL proposals, we feel that we are well-positioned to adapt.
In addition, one of our key initiatives for 2016, as mentioned by John, and which is further outlined on slide six, is the recapture of our variable annuity living benefit rider from our captive reinsurer. We plan to manage the risks of this rider along with the risks of the base contract, including the death benefits, together in our statutory entities. We've obtained approvals from the insurance regulators for the key aspects of our recapture plan, which will be implemented in phases during 2016. We'll provide more detail when we complete the recapture, but here are some of the key takeaways. Going forward, we will continue to manage these risks at CTE 97 capital and reserve levels. This reflects our view of prudent management of the economic risk and we believe is consistent with our AA ratings objectives.
Upon completion, we expect to fully manage product-related capital markets risks within the annuities business. Importantly, given our current management of living benefit risks, we expect to fully cover the net impact of the recapture with existing capital and reserves. Upon completion, we expect the recapture transaction to substantially reduce the volatility in capital and capital debt that we have historically experienced due to our variable annuity business. With this reduced volatility and the simplified corporate structure, we anticipate our available on-balance sheet capital capacity will show more stability on a quarterly basis and become less relevant than other indicators of our financial strength and flexibility, including our regulatory solvency ratios, our leverage ratios, cash flow distributions to the holding company, and cash resources at the holding company.
While we are initiating this recapture in advance of definitive guidance coming out of the NAIC's Variable Annuity Issues Initiative, we have been supportive of and highly engaged in this initiative with the NAIC and their consultant, Oliver Wyman, as well as with others in the industry. We are encouraged by the direction of this initiative. The terms of our recapture have been approved by our regulators and are consistent with the issues identified by Oliver Wyman and the NAIC. Turning to slide seven. Here are some of the key assumptions and considerations that underpin our guidance. Our guidance assumes a 2015 ending S&P 500 level of 2,080, growing at 6% over the year and ending 2016 at 2,205. Our international insurance non-U.S. dollar earnings are fully hedged for 2016 at JPY 106 and KRW 1,100 per dollar.
Our interest rate assumptions are based on an averaging of observed forward yield curves. As a benchmark, we assume the 10-year Treasury rate increases to 2.5% by the end of 2016. We expect returns on non-coupon investments, which have been above average expectations for the past several years, to produce about a $0.05 shortfall to our average long-term expectations. We expect our continuing investment in technology, infrastructure, and digital initiatives, together with enhanced supervision costs, to result in incremental costs of about $0.15 per share relative to 2015. We are assuming a modest initial contribution to results from the closing of our AFP Habitat acquisition in Chile. We are expecting an effective tax rate of approximately 25%, modestly below our 2015 expectation, reflecting business mix and the full year impact of lower tax rates in Japan. We expect to maintain our balanced approach to capital deployment.
Our board has approved an increase in our share repurchase program with a $1.5 billion authorization for calendar year 2016, as mentioned by John. This reflects our expectation that about 60% of our after-tax adjusted operating income will become available for deployment over time and complements the 21% increase in our quarterly dividend that we announced in November. We expect our leverage ratios to be within our targets. Turning to slide eight. To level set, this slide starts with our reported results and removes the impact of market-driven and discrete items, and then nets favorable variances from our average expectations that we've called out during the course of the year, primarily including mortality and pension risk transfer case experience and returns on non-coupon investments. This takes you to a baseline of about $7.35 per share for the first nine months of 2015.
We add a hypothetical fourth quarter that is based on our third quarter run rate, but adjusted for the historically higher level of expenses that we typically experience in the fourth quarter. We pointed to a historical average of about $150 million-$200 million of increased costs, or roughly $0.20-$0.30 per share in our last earnings call. This leads to a pro forma baseline range of $9.50-$9.60 per share. While this should not be viewed as a projection of our full year 2015 results, we believe it provides a useful baseline for discussing our 2016 guidance. Turning to slide nine. Starting from our 2015 pro forma baseline range, we take into account the change in foreign exchange rates, including the plan rate for the JPY from 91 to 106, which reduces the baseline to a range of $9.25-$9.35 per share.
Market factors are expected to have a mixed impact on 2016 earnings. We're assuming that the continued low interest rate environment will have a negative impact in the range of $0.15-$0.20 per share, mainly driven by reinvestment rates and investment yields on incoming premiums at lower available rates, net of the benefits of liabilities repricing. However, this is partially offset by other market factors, including our assumed 6% appreciation in the equity markets. We expect solid continued core growth in our businesses with key considerations and sensitivities as I reviewed earlier, and we expect to balance our use of capital between deployment in our businesses based on market opportunities, investments, including the AFP Habitat acquisition, and return to our shareholders, including our increased share buyback authorization. Putting all this together, our 2016 earnings guidance range for baseline adjusted operating income is $9.75-$10.25 per share.
On slide 10, you can see the estimated impact of our earnings per share from a ±10% movement in the equity markets, and a ±100 basis point change in interest rates, assumed in each case to occur at the beginning of 2016 and viewed in isolation. As shown, a 10% move in the equity markets translates to about $0.30 per share in our results, while 100 basis point change in interest rates, defined as a parallel shift of the yield curve, is worth about $0.20 per share for 2016. I would like to caution that these sensitivities are not necessarily linear and are not entirely symmetrical and should not be extrapolated over more severe shock levels in either direction.
They should provide a useful framework to help understand the direction and order of magnitude of two of the more important macro assumptions that affect our results, overlaying the business level sensitivities that we showed earlier. Now I'll turn it back to John.
Thank you, Rob. As you've heard, we remain positive on our positioning as a company and on our long-term prospects. Yes, we have some near-term headwinds, but we believe our unique business model, which has benefited from superior innovation and execution over many years, should continue to generate top-tier returns with growth and strong excess capital generation. Further, we are taking steps to simplify our business model and reduce sources of volatility, which has sometimes obscured our strong fundamental performance. With that, I'll turn it over to the operator to start the question and answer session.
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 Thomas Gallagher. Your line is open.
Good morning. Rob, first question on the annuity recapture for you is, I assume this won't change your view of excess capital because you're indicating CTE 97 is still the level you're going to capitalize the business at. Can you talk a little bit about what this would do to more of the cosmetics in terms of RBC? I assume the reserves will go down and equity will go up if you're going to be using statutory instead of GAAP from a capitalization standpoint. Can you talk a bit about how the mechanics are going to work here? Tom, let me take that in two pieces. Put the mechanics aside from the RBC and capital implications.
As you said, as we've shared in the past, we've got total assets in our captives that are about twice the reserves that we're getting released from at the ceding company, we hold capital to CTE 97. We do intend to continue to manage capital and reserves associated with the living benefit rider economically going forward, consistent with that historical practice and consistent with our view of what's appropriate for our objective of being AA-rated. At this point in time, given the number of moving pieces and the complexity of that undertaking, Tom, we're not going to provide any further insight into how that may actually manifest itself in the statutory results. There are a number of intersecting pieces on that that would make it a difficult question to answer at this point in time.
Having said that, we're very comfortable that both from a statutory standpoint and an economic standpoint, that we have sufficient resources and this will not have a negative outcome affecting either of those.
Just to follow up on that, Rob. Is the right way to view this that it's likely to have a neutral to positive impact on overall enterprise-wide capital from an excess capital view standpoint? Is it really just more neutral because there's not really much of a change happening there?
Well, Tom, I go back to what I said. I think what we're comfortable saying at this point in time is that we're very comfortable that we can fully cover the net impact of the recapture with the existing capital and reserves that we have.
Okay, my follow-up is simply on the non-coupon investment returns. You're using 6%-7% long term. I assume by modestly low or slightly lower near term, is 5% the number that you're assuming on that? The related question is, what is it about your non-coupon investments that you're assuming 6%-7%? I think most of your peers on similar assets are using 8%-10%. Is that you guys have less private equity in your non-coupon investments? Is that something you could shed some light on?
Taking those in turn, Tom, I think what I indicated in my remarks up front, we think it's going to be about a nickel in terms of the relative underperformance vis-à-vis the 6% targeted returns. It's relatively modest, but we wanted to call it out. In terms of the composition of the portfolio and the basis for the 6%-7%, I can't compare our alternative portfolio to our peers, but I can provide you a little bit of transparency in what's in ours. The PE component of our alternatives is a little under a third, and hedge funds make up to about 15%. Real estate is about 20% of it. What we also include in there is our public equity portfolio. That exists primarily in our international operations vis-à-vis our domestic, and that accounts for about a third of that overall alternative allocation.
Blending that in based on our view of what are sustainable levels of returns from those different classes of alternative securities, we think 6%-7% is an appropriate level.
Okay, thanks.
Thank you. Our next question comes from the line of Erik Bass. Your line is open.
Hi, thank you. Just one question on your PRT assumption. I know you'd mentioned you're not assuming any jumbo transactions, are you assuming some level of activity in 2015, or would any transactions that you do be accretive to your assumptions?
Erik, this is Stephen. No, we're assuming continued momentum in the business. As we discussed before, the pipeline looks strong. The marketplace interest in the value proposition of pension risk transfer is strong and I would say growing. We do expect continued momentum and success in the business. What we wanted to emphasize was that if you're talking about jumbo transactions, we should probably use some more clarity around jumbo. If you're going to talk about the very large transactions of, say, $4 billion-$5 billion and above, I'm talking about on the funded side here, we did not incorporate anything like that into our guidance.
If you're talking about some of the transactions that have, aside from the very large ones that we've done, if you're talking about some of the transactions that in recent periods, for example, have been the range in which we play at frequently in the market, say in the billion-dollar range, those we absolutely anticipate further success in that regard.
Thank you. That's helpful. Just on the investment spending, can you just comment a little bit more on where you're making some of the investments, will that run through the business segments, or is part of that going through corporate?
This is Rob. It's at both levels. There is some level of corporate spending that's baked into those numbers. There's not an insignificant amount that's down at the business unit level as well. That investment spending, I think in the total number that we gave you in terms of the increase there, it also includes our regulatory spend. I would roughly think about it as being half and half between what would be at the increase at what would be at the top of the house versus what you would find down at the business unit level.
Got it. Then the business unit investments, it's primarily investment management, and where else would we see that?
You'd see it in part in the investment management business, Erik, as you mentioned. You'd also see it in terms of the investments we're making in our digital platform and data analytics across our businesses and systems investments in some of the other domestic businesses. Charlie will speak to the international dimension.
Yeah. Then that's relatively true on the international side too. We have some end-of-life issues. We also are making investments in systems to create better efficiencies and do things for customers to make it easier for them. It's consistent amongst the businesses.
Got it. Thank you.
Thank you. Our next question comes from the line of Jimmy Bhullar. Your line is open.
Hi, good morning. On the technology and infrastructure spending, how should we think about that level of expenses beyond 2016? Seems like technology and infrastructure type spending should continue at a similar rate beyond 2016, is that correct or not?
Yeah, Jimmy, it's Rob. Yes, our expectation is this is, as we spoke about it last year, it is a multi-year phenomena. We should expect this elevated level of spending for the next couple of years in any event. In the foreseeable horizon, we'll continue to make these levels of investments. It will eventually drop back down, not in the immediate future.
Okay. You didn't quantify the earnings impact from AFP Habitat, are you expecting any initial investments or integration spending or investments into the business that will dampen the earnings in the first few quarters that you have the business?
No, we don't think so. This is an investment in a joint venture. We're extremely comfortable with AFP Habitat. Therefore don't anticipate significant expenditures once we make the acquisition of the joint venture interest.
Okay. Just lastly, on share repurchases, you've been fairly stable in how you've paced the buybacks over time. Should we assume that'll continue even though your buyback number's going up a little bit from 2015 into 2016?
We haven't changed our philosophy with regard to how we think about share buybacks. We've just changed the quantum, Jimmy.
Okay. Thank you.
Thank you. Our next question comes from the line of Steven Schwartz. Your line is open.
Hey, good morning, everybody. Rob, I was hoping first that you could just update us on the yen macro hedge, maybe the size of that gain now and how it's going to get paid out over time.
Sure. Well, what I would do in that respect is actually repeat or cover where we were as of the end of the third quarter, because I can't really update you beyond that. In terms of actually realized gains from the macro hedge on an after-tax basis through the first nine months of the year, we had about $400 million worth of harvested gains there. At the end of the third quarter, the mark to market on the yen hedge was at roughly around $2.12 billion. A significant portion of that amortizes between the third quarter of this year and the end of 2017. About three-quarters of it actually will amortize over that period of time, or be harvested over that period of time. As that occurs, that would then go into our capital capacity.
Okay. On the VA recapture, just a quick two there. I want to try to follow up on what Tom was asking, and I think the effect on your views of excess capital following this. I think, I guess a yes or no. I think Tom's question really was, if you look at this on an economic basis, and presumably the 400 RBC capital standard that you had set up as a base was viewed as economic standard. Does this really have an effect on the excess capital from an economic standpoint in your view?
I'll repeat what I said before, Steven, is that when we bring this together, we think this is a more effective way to manage the risks that we have associated with the VA business, both the host contract and the rider. There are operational efficiencies associated with doing it that way, and as John indicated, it reduces complexity and gives us greater flexibility for how we think about moving capital around the enterprise. The volatility that you've seen related to our annuities business in the past has in part been driven by the fact that we don't have complete fungibility in any given quarter of our ability to move gains in one part of the organization to areas where they will be offset with losses in other parts of the organization. We get that increased flexibility.
Beyond that, I think we'll go back to the statement, which is when we look at the level of reserving that we do and the way in which we hold capital for this business, and we think about then moving that over into the new construct, we're very comfortable that we have the appropriate level of economic reserves and capital to manage this in the same way on a go-forward basis.
Rob, this is the last one. Does the new structure, does that mitigate kind of the capital swings associated with the short interest rate position in the hedging?
Yes, that is in fact the point. As we've looked at the way we've managed the rider within the captive to the extent that there are in any given quarter that we would have seen volatility in capital because we have losses within the captive, we would have gains in other parts of the organization. We were not necessarily able to offset those because we couldn't get the capital out of the areas in which we had gains and over into the areas where, in this case, the captive, where we had the shortfall. By eliminating the captive, consolidating it back in with the Host, we'll substantially mitigate that dynamic that you've seen in the past.
Okay, thank you.
Thank you. Our next question comes from the line of Yaron Kinar. Your line is open.
Good morning. I want to go back to the guidance, slide nine. The 975, 1,025 range, you offer basically three buckets driving that, the market factors, core growth and capital deployment. Which of these buckets would really lead to you coming in at the lower end versus the higher end of that range?
I think about it this way. If you look at each of those three buckets, start with the market bucket. I think we've given you the assumptions that are in there. From a market standpoint, rates we indicated are having a negative impact of $0.15-$0.20, and we've given you some sensitivity metrics so that you can calibrate what would happen to that based on movements in the, we've given you all the 10-year. We've, I think, given you the indication of our alternative performance against our expectations. There is a correlation of that performance with equity markets that drives a not insignificant component of that. We've given you our equity market assumption, which is about a 6% growth. We've given you sensitivities around that number as well.
To the extent that we're more than less than the 6%, you can do the calibrations there. I think you've got a good sense for how the market component of this could contribute or detract from our growth depending on how events actually play out against the assumptions that we have built in the forecast. I'll go to the far right-hand side. The core growth is driven by all the things that we walked through upfront. Obviously, we can outperform our baseline expectations, but a lot of that is actually driven in large part by an installed book of business as opposed to incremental sales. While we think there could be variability around sales and upsides, it won't have as material an impact as what's driven from the embedded book. Which brings you to the middle piece, which is capital deployment.
What we have there is we've given you some transparency, I think, at how some of that capital will be deployed, the Chilean acquisition, the increased level of buybacks. Where we are in the range will be influenced by how that excess capital is actually deployed during the year and the rate at which it's deployed.
Okay. This last part actually is a good segue to my second question. When we look at capital deployment opportunities or your appetite to deploy capital, are you also considering, let's say, blocks similar to what you did with Hartford a few years ago? I think there may be a few blocks out on the market now. Or is it mostly pension risk transfers and the Habitat acquisition?
Well, this is John. If you look back, you've seen a mix of those types of activities. A series of these have had step function impacts, whether it's large scale PRT transactions or whether it's activities we've done with AIG, the Star incident or whether it's Hartford. We're certainly open to those sorts of things. As we thought about our business, our sentiment around this is we like to do, not have to do, meaning we're feeling very focused on our core businesses and the core growth prospects and innovation and execution. We've shown a pattern over time, more in certain phases of the cycle than in others, of being opportunistic in a variety of different ways. As Steve pointed out, it's hard in the PRT business where large scale activities are lumpy and unpredictable.
It's just difficult and probably unwise to be layering them into financial planning. Certainly we have an interest for that and we certainly have the capacity for it as well.
Thank you very much.
Thank you. Our next question comes from the line of John Nadel. Your line is open.
Thank you, and good morning, everybody. My first question is just about the increase in the buyback authorization. I know money is fungible. I'm curious, what's really specifically driving that? Is that just more confidence in the 60% free cash flow, or is there some element there that we should be considering related to the monetization of the yen equity hedge? I ask this specifically because I think over time, excuse my voice, the equity hedge is intended to provide an offset to the translation impact of a weaker yen on your operating income. If we look at slide nine, you're clearly showing us a 2.5%-3% headwind from currency. I'm just wondering how to think about the increase in the buyback authorization.
John, it's Rob. Let me try to address that for you. I would think about the buybacks first and foremost being consistent with the 21% increase in the dividend. Both the dividend and the buybacks reflect a couple things. One, it's confidence in the strength of our balance sheet. It is driven by the increased level of earnings translating into free cash flow. We previously gave guidance that that number was around 50%. We increased that most recently to the 60% number. That's about a 20% increase, sort of not inconsistent with the level of increase that we did in our dividend. It also is in part the harvesting of the yen equity hedge gains. As I mentioned when Tom or whoever asked the earlier question, we realized about $400 million after tax of that in the first nine months of the year.
We still got another $2 billion out there. Incidentally, I think when I provided how much of that was actually maturing, it's about 50% of that I think matures through the end of 2017. We understand and have communicated to you that that yen equity hedge is designed and calibrated. Over time, the gains from the hedge can be redeployed to offset any dilution in earnings resulting from the depreciation in the yen. That doesn't happen immediately. There is a lag, as we're harvesting and realizing it has to be redeployed. The actual harvesting doesn't line up entirely with the dilution associated with the earnings.
If you look over a multi-year period of time, what you will find is that the redeployment of capital, either in the form of acquisitions or buybacks, will be well correlated to the dilution that we're seeing in earnings per share from the yen. You should expect those things over time to offset.
If I could summarize it this way, Rob, would this be a reasonable expectation? We can think about capital return or deployment, dividends plus buybacks, around 60% and then plus or minus whatever the change in the yen hedge may be?
We look at buybacks as being a variable, not a set-in-stone number. When we look at capital redeployment, we look at the variety of ways in which we may go about doing that. To the extent that there are opportunities either within the business, super organic growth opportunities like we've talked about with PRT, or there should be exogenous things like acquisitions, we might alter the level of buybacks that we're doing in order to finance those. Similarly, to the extent that we're anticipating that those sort of things, we're holding capital in order to have the flexibility to pursue them, but they don't manifest, we might alter it in the other way.
I would say we don't want to become overly programmatic about the direction we would give on that, but I think what you should think about is we generate a lot of capital, 60% of earnings every year, and that we're good stewards of that capital and don't tend to hoard it, but rather redeploy it to the benefit of shareholders.
Thank you. The last real quick one is just on Habitat. Since you announced the deal, and boy, it's been some time now, the Chilean peso has weakened considerably versus the US dollar. I'm just wondering how we should think about the cash outlay, assuming this thing's going to close in the next couple of months, if the Chilean peso didn't move from here versus the dollar. Do we think about a cash outlay here that's going to be substantially less than what you had originally announced?
I think we gave you a range before of about $530 million-$620 million, and we feel comfortable with that range. We have not hedged the acquisition, so obviously there will be a benefit in terms of U.S. dollars, but that's the range we gave. We feel comfortable with that.
Interesting. Okay, thanks.
Thank you. Our next question comes from the line of Jay Gelb. Your line is open.
Thanks. My first question is on slide eight, talking about the 2015 adjusted baseline results. Could you give us some more insight on what that $0.20-$0.30 EPS headwind will be from seasonally increased expenses?
You're talking about the bridge to the full-year basis? I think the number we gave was the $0.20 to $0.30 adjustment from our third quarter run rate. Is that what you're referring to, Jay?
Correct.
I'll actually turn that over to both Charlie and to Steve to talk about sort of the seasonality that exists within the international and the U.S. businesses. Specifically, at a corporate level, we tend to have higher level of expenses at corporate in the fourth quarter. It reflects things like some of the spending that we do and accruals that we make that are catch-ups tend to get caught up in the fourth quarter and therefore not evenly distributed during the course of the year. It's also driven by level of expenditures that we have down at the businesses. Charlie and Steve?
Sure, I'll go first. It's Charlie. In terms of the international business, you do have seasonal expenses that sort of come in the fourth quarter. One of the obvious ones is mailings. You have a mailing that happens in the fourth quarter every year, especially in Japan. We have a lot of customers, and actually, that's a fair amount of money. You also have some technology and systems costs that tend to be back-ended and spent in the fourth quarter. It's a variety of different things. It's nothing in particular, but it is consistent, and it does happen.
Jay, the answer on the domestic side would be very similar. I'd say principal driver of fourth quarter seasonality of expenses is mailings. That's when we're sending out a lot of contractual materials, a lot of disclosure type materials, and that's reflected in our fourth quarter historical seasonally high expense level.
Okay. Rob, I might be overly simplistic about this, if I look at your 2015 baseline of between $9.50, $9.60, versus the third quarter year-to-date 2015 baseline results of $7.35, the difference at the midpoint is around $2.20. Is that the right way we should think about the outlook for 4Q?
Yeah, I cannot comment on an outlook for 4Q. We did not provide this analytic as a way to give you a view toward where 2015 would turn out, rather to establish a basis upon which we could talk about 2016 without giving any forward-looking guidance on our results for the fourth quarter.
Okay. The street's just above that. Then the second, I guess, broader issue is I'm just seeing some reports come out that the Democrats are likely to block the fiduciary rule from being part of the omnibus spending bill. Given that breaking perspective, I think it'd be helpful to get Prudential's view on where we're headed with the fiduciary standards proposal.
Jay, this is Steve. I wouldn't venture a comment on the different legislative efforts and things going on between the Congress and the executive branch on how it relates to outcomes here. I just emphasize that our advocacy position, both in our own voice and as part of the industry voice, has been consistent around focusing on the markets that we serve and making sure that the final regulation does not have an adverse impact on the access of Americans to financial advice and to certain types of financial solutions, in particular, guaranteed retirement income solutions. That's been the consistent thrust of our efforts. In terms of our own efforts to cope with the range of outcomes that could come with the final regulation, those have been underway for some time and are very robust efforts.
We have efforts in each of our most relevant businesses in this regard, Prudential Advisors, our retirement business, our annuities business, and we have oversight regarding all of those efforts and corporate level coordination of all of those efforts. That work is well underway. For reasons I've outlined earlier, in earlier earnings calls, for example, I think our business mix and our business strategies will make us highly resilient in the face of a range of outcomes on the regulation. In regard to quantifying any of those impacts, that's not something we're going to do in this call. I will say that any kind of expense increases around compliance requirements and the like, has been factored into our guidance and is part of the guidance that we've provided on this.
In regard to sales level impact in the annuities business, for example, as Rob pointed out, it's true of most of our businesses, just about all of them, certainly true of the annuities business, that earnings are really driven by the in-force. Even if there were a meaningful impact on sales in 2016 as a result of the regulation, that would not have a significant impact on the guidance we provided.
That's helpful. Thank you.
Cynthia, I think we have time for one more call.
Thank you, that will be from the line of Humphrey Lee. Your line is open.
Thank you. Good morning. Just a clarification on the higher expenses. Related to the recapture, I assume there will be some expenses related to that effort. Would that be included in your kind of $0.15 expectation for higher expenses?
Humphrey, it's Rob. The higher expenses are actually associated with initiatives and with regulatory costs, not with recapture. To the extent that there were any expenses associated with that recapture, however, they are included in our guidance.
Okay. In terms of, I think it was slide five, you talked about kind of roughly $3 billion of new funded business to offset anticipated annual runoff in retirement. Is the $3 billion referred just to the PRT deals or including kind of everything else, kind of including your normal kind of full-service business as well?
Humphrey, the $3 billion refers to PRT runoff.
Okay, it's just simply for the runoff for the PRT. That seems a little bit quicker than I would expect it. Is there any color that you can provide?
Let me jump in on that, actually, Humphrey. One of the things that we often highlight about the pension risk transfer business is that it is entirely retired lives. Therefore, it has a relatively short duration. One of the reasons why we particularly like this business, which is that while we're taking on longevity risk, it's longevity risk without a significant amount of risk or variation in terms of expected outcomes. What you find is that depending on the individual blocks of business that we have, either funded or the pure reinsurance transactions, you can have durations in there that are as short as eight years and maybe as long as 10 to 12 years, but relatively short. If you think about that duration, take 10 years, you're going to have about a tenth of the portfolio rolling off.
When you take that against the total block of business that we've done, you can sort of see that there's a substantial roll down that needs to be replaced with new blocks of business.
Got it. Thanks.
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