Ladies and gentlemen, thank you for standing by. Welcome to the Prudential Financial 2015 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 do 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 Mr. Mark Finkelstein. Please go ahead.
Thank you, Cynthia. Good morning. Thank you for joining our 2015 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. Before we begin, please take a look at the slides in the deck that cover forward-looking statements and the non-GAAP measure adjusted operating income. With that, I will hand it over to John.
Thank you, Mark. Welcome, everyone, to our 2015 Financial Outlook presentation. We've chosen this timing a little later than a year ago to enable us to use more current information as we set expectations for the coming year. I will make some opening remarks, hand it over to Rob to walk through the assumptions and factors influencing our 2015 guidance. Then we'll follow up with concluding comments. I'll begin on slide two. We remain optimistic about our prospects for 2015 and beyond. Our financial strength and capital flexibility, combined with an attractive mix of businesses and strong execution, have enabled us to deliver a return on equity well in excess of industry averages. We've capitalized on organic growth opportunities and supplemented them with good acquisitions that have been effectively integrated. At the same time, we have returned capital to shareholders in a disciplined manner.
Share repurchases have exceeded $3 billion since we reinstated our share repurchase program in 2011. We have steadily increased our dividend from $1.45 in 2011 to an annualized rate of $2.32 presently. Looking forward, we expect increased capital flexibility. The transactions we announced last week to repurchase our Class B shares and redeem the IHC debt of the Closed Block business will simplify our business structure and enhance our financial flexibility. Furthermore, we expect to convert a higher percentage of adjusted operating income into deployable capital. Overall, we are pleased with the positioning of our businesses. While we can't predict with certainty how markets will evolve or future changes in the competitive landscape, we are confident that the investments we continue to make in our people and businesses will enable us to remain well positioned to deliver value to our stakeholders and customers. Turning to slide three.
As you see, our return on equity has increased from about 10% in 2009 and 2010 to over 15% since 2013. This improvement has been driven by a combination of good execution in our core businesses, favorable markets and investment results, as well as effective capital deployment. While much of the improvement has been driven by factors we believe are sustainable, we have also benefited from tailwinds that cannot be assumed to recur, as Rob will discuss. We continue to believe a 13%-14% ROE objective is appropriate given our mix of businesses and growth prospects. It is an objective that we set to achieve across the cycle and is set at a level that enables us to invest appropriately in our businesses and infrastructure to facilitate longer-term growth.
It also enables us the latitude to capitalize on very good opportunities that might be lower risk, yet create attractive value for shareholders that we might otherwise avoid if we were committed to meeting a higher ROE objective. With that as the opening, I'll now hand it over to Robert Falzon. Rob?
Thanks, John. As you've just seen, our results for the first nine months of this year, as measured by ROE, have been stronger than our long-term objective over a cycle. Many of the items that can affect our reported results in either direction were on the plus side in 2014. Let's review the major tailwinds and headwinds that have played into our results and how we are thinking about some of those items that can affect the comparison of results going into 2015. The strong U.S. equity markets in 2014 have exceeded our modeled expectations of 6% appreciation and have bolstered the growth of our account values and assets under management, driving higher fees, lower costs of our guaranteed benefits, and more favorable amortization factors.
As we've called out during each of the first three quarters, higher than expected returns on non-coupon investments have also contributed to our results, especially in the retirement business. In addition, we've benefited from more favorable mortality than our average expectations, both in U.S. individual life and international insurance, and from strong retirement case experience. These tailwinds were partly offset by the impact of sustained low interest rates during 2014. Going into 2015, we are assuming a return to average expectations of the items we've identified as tailwinds for 2014, producing a headwind in the comparison of results. Low interest rates are expected to remain a factor. While we are assuming a modest increase in U.S. interest rates over the course of the year, we expect to continue to reinvest at rates below the yields of general account investments that are rolling off.
We are hedging the JPY at JPY 91 to the USD for 2015, compared to JPY 82 for 2014, representing a headwind in the comparison for the nearly half of our earnings in Japan that are JPY-denominated. We expect to ramp up investing in technology systems and infrastructure across our businesses. While this impacts our results, we believe these efforts will enhance our competitiveness, lead to operating efficiencies going forward, and enable us to be more responsive to enhanced regulatory oversight. We expect to benefit from greater financial flexibility in the coming year, which over time should help mitigate the headwinds in the comparison of results that we've identified. Our business momentum is driving solid capital generation, and as John mentioned, we expect a growing proportion of our earnings to translate into capital available for deployment.
In addition, the restructuring of the Closed Block business that we announced last week will add to our financial flexibility by freeing up, for general corporate purposes, funds that were essentially trapped in Prudential Insurance. Let's move to our earnings guidance for 2015. Turning to slide five. Here are some of the key assumptions and considerations that underpin our guidance. Our guidance assumes a 2014 year-end S&P 500 level of 2,020, growing at 6% over the year and ending next year at 2,144. Our international insurance non-USD earnings are fully hedged for 2015 at JPY 91 and 1,120 KRW per USD. Our interest rate assumptions are based on an averaging of observed forward yield curves. As a benchmark, the 10-year Treasury rate increases to just under 3% by the end of 2015. We're expecting an effective tax rate of approximately 27%.
We expect our capital deployment to be supported by an increasing ratio of cash flow to adjusted operating income. To be more specific, we are now expecting that about 60% of our after-tax adjusted operating income will become available for deployment over and above the organic growth needs of our businesses. This is an increase from the roughly 50% level that we've experienced historically. This ratio may vary from one year to another, and that it is an expectation of an average over a multi-year period. It assumes that AOI and net income generally converge over time. In addition, we expect greater flexibility in terms of readily deployable capital due to our Closed Block business restructuring, which I'll discuss in a moment. Finally, our year-end leverage ratio based on capital debt is expected to be within our 25% target. Slide six walks through our earnings guidance. First, to level set.
Through the first nine months of 2014, our earnings per share, excluding items we've identified as market-driven and discrete, was $7.51. Recall that throughout the first three quarters, as we discussed our results, we called out additional items that tend to fluctuate and were, in the aggregate, tailwinds, as mentioned earlier. Adjusting for the non-run rate items we called out, including favorable Mortality and excess non-coupon investment income, as well as similar items that were not significant in any individual quarter but still impact year-to-date results, provides an annualized run rate of $9.25. This simple annualization doesn't fully reflect the inherent quarterly variability in our results and should not be viewed as a projection of our 2014 results. However, we believe this view provides a useful baseline for discussing our 2015 guidance.
Starting from this $9.25 annualized baseline, we take into account market factors such as our 6% U.S. equity market growth assumption and the interest rate assumptions that I mentioned earlier. We expect continued fundamental growth in our businesses, including the contribution of several significant pension risk transfer transactions that came on board in the retirement business late in 2014. We expect to benefit from deployment of excess capital in ways that are accretive to our results, including the mid-year acquisition of an ownership position in a leading Chilean pension provider that we announced in October. As in the past, we expect to balance our usage of capital between deployment in our businesses based on market opportunities and return to our shareholders. Putting all this together, our 2015 earnings guidance range for baseline adjusted operating income is $9.60 to $10.10 per share. Turning to slide seven.
Earlier, we talked about headwinds and tailwinds, including equity markets and interest rates. On this slide, you can see the estimated impact to our earnings per share from a plus or minus 10% movement in the equity markets and a plus or minus 100 basis point change in interest rates, assumed in each case to occur at the beginning of 2015 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 2015. I would like to caution that these sensitivities are not necessarily linear and not entirely symmetrical and should not be extrapolated over more severe shock levels in either direction.
Nonetheless, 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 businesses. Now, taking a look at our estimated year-end capital position on slide eight. We calculate our on-balance sheet capital capacity by comparing the statutory capital position of Prudential Insurance to our 400% RBC ratio target, and then adding capital capacity held at the parent company and other subsidiaries. Our year-end 2014 estimate of our capital position gives effect on a pro forma basis to the Closed Block restructuring transactions that are expected to close at the beginning of January, as well as the business-as-usual activity we expect during the fourth quarter.
When we announced the Closed Block restructuring, we indicated our expectation that the transactions would reduce overall on-balance sheet capital capacity because we were using a portion of the surplus and related assets resident in Prudential Insurance to redeem both the IHC debt and the Class B stock that are supported by those assets. We also indicated that we would see an increase in readily deployable capital because the excess of the surplus and related assets over the cost to redeem those two securities becomes available for general corporate purposes. As we reported in our 8-K, the amounts required to redeem the IHC debt and repurchase the Class B stock total about $2.8 billion, or approximately $2.6 billion after taking effect of the tax effect of the make-whole payments on the debt.
The redemptions will be funded by a $2 billion dividend from Prudential Insurance, for which we have received approval from the regulators, and by funds available within the intermediate holding company that are not included in the capital position of Prudential Insurance. When we factor in normal fourth quarter activity, the net result is a reduction from about $5 billion of overall on-balance sheet capital capacity that we reported as of September 30th to roughly $3.5 billion, as you see here, before our funding of the AFP Habitat Chilean joint venture that is expected to close during 2015. Of the $3.5 billion, we would consider about $3 billion to be readily deployable, an increase of $1.5 billion from September 30th.
We will continue to manage Prudential Insurance to a capital level that we believe is consistent with double A ratings objectives and estimate that as of year-end, its RBC will exceed our 400% target after giving effect to the Closed Block restructuring. In addition, our capital position assumes a debt-to-capital ratio consistent with our 25% target. Finally, in Japan, Prudential of Japan and Gibraltar Life are also expected to continue to report strong solvency margins well above our targets. I'll now turn it back over to John.
Thank you, Rob. To conclude on slide nine, our expectations for a solid 2015 are led by an attractive business mix and favorable underlying fundamentals that we expect to produce solid baseline earnings per share growth, even if we do not experience the same positive tailwinds we've seen over the last couple of years. Likewise, we believe our business mix and disciplined capital deployment will enable us to produce a return on equity across the cycle of 13%-14%, representing a healthy premium to industry averages and our cost of equity. Additionally, our capital flexibility is increasing. The Closed Block restructuring adds to our readily deployable capital, going forward, we expect more of our adjusted operating income to be available to deploy towards outsized organic growth, M&A, or capital return. With that, I'll turn it back to the operator so we can take your questions.
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, it's star and then one for any questions or comments. Our first question will come from the line of Ryan Krueger with KBW. Your line is open.
Hey, thanks. Good morning. I had a question about the free cash flow guidance. Can you give us a sense for some more specifics on what drove the increased expectation to 60% versus the historical 50% you had guided to?
Sure, Ryan, it's Rob. Our expectation for the higher percentage of deployable capital reflects both the mix of our businesses and the evolution of those businesses to a state where they're generating more cash flow. By way of example, our asset management business, which is a high cash flow generator, has grown in significance over the last couple of years, and we're benefiting from the cash flow characteristics of the pension risk transfer business in the transactions that we've done in recent years, including this year. In addition, the businesses like annuities, which were growing more rapidly earlier, have moderated in their growth. As a result of that, they're generating more cash flow.
We've seen across our businesses a trend toward generating more deployable capital, and we feel that that 60% guidance number is now the appropriate number for us to be using, recognizing that it is an average over a multiyear time period.
Got it. Thanks. Can you give us any sense of magnitude-wise the systems and infrastructure type of investments you're making over time? How should we think about the magnitude of that?
Sure. Let me start first by characterizing the investments. First, they're aimed at enhancing or retaining our competitiveness and improving efficiencies. Just to make the point that cost savings do emerge on these, but they're not the driver. To answer specifically your question, I would bucket them into three areas. The first is systems and processes which are aimed at improving efficiencies. The second would be technology enhancements to our customer experience and analytics. The third would be infrastructure for responsiveness to enhance supervision.
Okay, got it. Thank you.
Thank you. Our next question comes from the line of Erik Bass with Citigroup. Your line is open.
Thank you. Can you just discuss a little bit more how you're thinking about deploying the excess capital? I guess, is there any level of capital deployment that is assumed in your guidance in kind of an aggregate for 2015?
Erik, it's Rob again. I think what you can assume is that we will continue to maintain an appropriate balance between supporting growth, M&A, and returning capital to our shareholders. We recently announced a 9% increase in our quarterly dividend, reflecting our confidence in earnings and cash flow and our sensitivity to balancing those three constituent uses. Our share repurchase program was authorized by the board in June of this year, and we'll revisit with the board on the topic as appropriate. The level of redeployment and the use of redeployment can vary, and that is, in essence, reflected in the range of guidance that we've given of the $960-$1,010, depending on when and how that capital is redeployed.
Okay. I'm assuming you're not assuming any additional pension risk transfer deals in the guidance, only the completion of the deals announced at this point.
Erik, this is Steve. We do expect the pension risk transfer market to continue to develop in 2015 because of some of the same drivers we've talked about before. Maintenance of healthy funding levels, new mortality tables, and increasing PBGC premiums. We saw some of those developments in 2014, where, as Rob mentioned, we announced several deals that, because of their timing, had little benefit in 2014 and will mainly benefit 2015. In terms of new transactions in 2015, while, as I said, we expect the market to continue to develop, we will continue to have a part in that development. Given the inherent difficulty in forecasting this business, either in respect of magnitude or timing, we're not relying on jumbo deals to meet our guidance range.
Okay, thank you.
Thank you. Our next question comes from the line of Thomas Gallagher with Credit Suisse. Your line is open.
Good morning. My first question is the $3 billion deployable capital figure, does that include any benefit from your capital hedge that you have against the yen?
Tom, it's Rob. The way the capital hedge works is think of it as having two components, and if you'd like, we can revisit on this. There's a mark-to-market on the hedge, and then there are settlements associated with the hedge. Only the settlements actually work their way into our redeployable capital. The mark-to-market on those hedges are not a component of our readily deployable.
Rob, that number, the settlements year to date was $350 million, $360 million. Is that right?
Actually, the settlements year to date were probably closer to around $400 million. The mark-to-market on a year-to-date basis was probably close to the number you're thinking about, Tom. It's about $350 million. On a cumulative basis, we've got about $1.1 billion of unrealized gains in those hedges.
Is that as of the end of 3Q? If so, have you updated that because the yen's weakened pretty considerably since the end of the quarter as well?
That is only as of September 30th. Obviously, we can't speak to what's happened post September 30th, but you could assume that the historical pattern of the reaction of the mark-to-market and the settlements on those hedges would continue to manifest itself as the yen depreciated further.
Okay. Then can you give any color around the core growth expectation that's embedded in your guidance? Which businesses are you assuming better growth from? Can you bracket it between the core growth expectation between the Japanese business versus the U.S. business at all?
Tom, this is John. Let me start with that. The way we think about this is we really have three components of growth. The first is the core growth, meaning the organic piece. The second is step function growth. The third is market-related growth. The core growth is and has been relatively consistent year-over-year without even getting into the individual lines of business. From an overall company point of view, that's a pretty consistent experience. The second piece, the step function growth, is just by its nature, opportunistic and not that easy to foresee. The forms of that can be M&A or like a Star/Edison or Hartford, or they can be outsized organic like pension risk transfer.
From our point of view, we tend to think of both the identification of those opportunities and the execution around them as being part of our distinctive competence. We also think we have the capital capacity to pursue them. By their nature, they're unpredictable, particularly the shorter the time interval you use in terms of how to think about it. The third one is the market factors, which Rob's talked about, which are naturally variable in nature, they're going to be headwinds in some years and tailwinds in others. Overall, our feeling is we've got a good picture. It's a healthy comparison, rising from both relatively predictable core aspects to it as well as sort of the opportunistic and market overlays that inevitably are harder to foresee.
Tom, it's Rob. I would probably just jump in and add just a couple of thoughts, which is that we don't provide segment-level guidance, I think you could expect to see a continuation of the recent themes that you've seen in our businesses. We benefit from core organic growth in our insurance businesses and our asset management businesses, while some of our other businesses, like retirement, could be a little bit more episodic. As John indicated, we see core growth at a fundamental level across our businesses.
Got you. Just one follow-up overall. I guess this is a bit of a broader question specific to Japan. I think there's been a considerable increase in concerns over
The market becoming a lot more competitive and that it's pressuring both margins and growth for that business for most of the non-Japanese companies that operate over there. Can you talk about whether that's a trend that you're seeing and if that's embedded in your guidance or are you not seeing that impact?
Sure, Tom, this is Charlie. At the risk of seeming a little overly optimistic or naive, we think our business model will hold. Let me take a little while and explain why. If we take a step back, we've been in Japan for 25 years, and we've really focused on three key aspects of our business. The first, of course, is proprietary distribution. Through that distribution, we've focused on needs-based selling. By virtue of that, we focused on the third component, which is death protection . The result's been the creation of an earnings stream comprised mainly of M&E margins or insurance margins, and not of investment margin, specifically because we focus on death protection and not savings products.
That's led to steady growth and low volatility over the 25 years we've been there, through the lost decade of stagnation and deflation, through earthquakes and tsunamis, even a nuclear meltdown. As importantly, through the ups and downs of the yen-dollar rate. The yen was 123, and we kind of forget this, in August of 2007, and it's gone up and down, and was going up and down before that. You can contrast this to other firms that use either part-time or third-party sales forces selling savings products or third sector products. As sales have gotten harder, you're right, some of these firms are looking outside of Japan. Our strategy couldn't be more different, and it really focuses on proprietary distribution. That started with the LP model long ago. We expanded that into middle market and affinity groups.
Don't forget that the teachers group represents 25% of Gibraltar sales, and that's not going away anytime soon. That enables us to maintain healthy margins as we go forward. The second aspect is as we did get into some third-party distribution, we did it in a proprietary fashion. Banks have secondees, which are proprietary to us, and we really started that model. Now with the IA channel, we have proprietary wholesalers. These two channels are additive to us. We're not dependent upon them. They represent maybe a third of our sales. Most of our sales are still from proprietary distribution. The question is then how do we continue to grow in Japan's current economic condition? I think there are three ways as we think about it.
The first, obviously, is the normal LP and life consultant growth, and we've seen some of that growth in both systems. The second, we flagged the inheritance market during our investor call or our Investor Day, and we're conducting specific training in both Prudential, Japan, and Gibraltar to take advantage of this when the tax rates go up at the beginning of next year. The third is by increasing our penetration in the third-party distribution markets. One, by the number of agents selling within the institutions with whom we have relationships, the second is by the number of type of products offered, and we're beginning to make real headway with recurring premium insurance products. Is it easy? Absolutely not. We have a bunch of headwinds, and as we said on Investor Day, we won't enjoy some of the tailwinds.
Is this what we've been doing for 25 years? You bet. That's why we think the business model will hold. While we are changing and adapting to the market and with the market, we're also holding onto the core attributes of what we think is a non-replicatable model that provides us with a sustainable competitive advantage going forward.
Tom, it's Rob again. Let me jump in and just finish off the Japan story with sort of two other observations. The first is you asked about the value of our hedges earlier. Let me give us sort of a more complete view of that because I think it's important to understand how we're managing that FX risk that we have in the form of our concentration of earnings in JPY. Recall that less than half the earnings are actually JPY denominated. We have US dollar and AUD related earnings in that business. Our expenses are all JPY based, so it means that our earnings coming out of that are less than you might otherwise think in terms of JPY exposure. Importantly, we have the income hedge, and I know the market is generally very familiar with that. It's a rolling three-year income hedge.
We've married that with an equity hedge where the notional value of which is about $14 billion. The overall theory is that hedge generates assets in a JPY weakening environment that can be deployed to mitigate the earnings and ROE impacts of that depreciation in the JPY. We, in fact, calibrate the equity hedge such that in conjunction with our income hedges, it achieves that outcome. That $14 billion that has a $1.1 billion of unrealized gains in it, those gains as they're realized, as they settle, become available for us to invest at a return which will allow us to replace the earnings that we've lost by virtue of the depreciation in the JPY. We think that that will work effectively to the benefit of shareholders going forward to mitigate any JPY exposure that we've got.
The second thing I want to highlight is that we've undertaken some structural changes within our Japan operations that will largely mitigate the GAAP driven volatility in net income and book value from FX remeasurement on a go-forward basis, but commencing in the first quarter of 2015. We will have a noisy fourth quarter by virtue of the ongoing depreciation of the yen, but that restructuring will then substantially mitigate that beginning in 2015.
Hey guys, thanks a lot. That was helpful from both Charlie and Rob. Just one last quick follow-up. Rob, this capital hedge, how long has this been in place for? Have you significantly grown or reduced it in size in response to the recent movement and changes in currency?
The hedge has been in place for several years. I want to say it goes back to earlier than 2010. I don't remember when we first began.
I'm sorry, Mark. A lot earlier.
A lot earlier.
There was a different policy approach, we've had a structural short yen on the balance sheet, meaning U.S. dollars in assets funded with yen liabilities. That actually goes back to more like 2003.
Thank you. What happened in around 2010 is that we began to calibrate that in a way that I just described to you, which is we began to be more disciplined around the size of that hedge against the economic value that we were getting out of Japan, such that we could replace the ROE in earnings in the way that I just described it. The answer to your question is, yes, we're adjusting that all the time to reflect both the change in the yen and the change in the yen-based earnings that are coming out of our business. During the course of this year, between last year and this year, that has gone up by a couple of billion dollars.
Maybe just one qualifier. It's not a trading position. When we talk about current circumstances, we're calibrating and implementing around a more structural theme related to the value of the franchise in Japan as opposed to a view on the yen.
Okay, thanks, Mark.
Thank you. Our next question comes from the line of Seth Weiss with Bank of America Merrill Lynch. Your line is open.
Hi, great. Thanks for taking the question. I had a question on the Closed Block restructuring deal, specifically how it may be contributing to next year's EPS. I guess the way I'm thinking about it is you highlighted a billion and a half dollars of greater deployable capital, but I believe that there may be even a greater amount of capital that, while not readily deployable, is now generating earnings for common shareholders that wasn't before part of the financial services business. Maybe if you could help us think about how much that capital position is and how that may be contributing to common shareholders earnings per share and what type of return you're assuming.
Seth, it's Rob again. The way I would characterize it is that the way we've described the available capital coming out of the Closed Block restructuring, there are no sort of other hidden sources of capital. The $3 billion reflects fully the readily deployable that comes out of that transaction that did come both from PICA and from surplus and related assets that we had outside the insurance company, if that's what you might be referring to. The full benefit of that has been reflected in our capital capacity and in the readily deployable. The accretion that results from that, which is some combination of reduced costs and earnings on cash, and then ultimately the redeployment of that capital is reflected in the guidance that we've given and how it is redeployed will influence whether it's the higher or lower end of that guidance.
Okay, that's helpful. I suppose my calculations before have been about $2.5 billion of new capital when I think of what was $5.3 billion of statutory resources that I believe were in the Closed Block. If you subtract out the $2.8 billion that you highlighted, that's how I get to the $2.5 billion. Is that not the right way to think about it?
Yeah, I think the math that you've done, if you look at sort of the capital capacity, that if you follow the math that's outlined in the 8-K, there are really only two items that you don't have in order to get to sort of the right number. If you think about it, we started about $5 billion of on-balance sheet capacity. The uses, all of the surplus and related, substantially the surplus related that is which disclosed in the 8-K was already in our balance sheet capacity numbers because they were in PICA and they were in our RBC calculations. What happens is that $5 billion goes down by the use of proceeds that are articulated in the 8-K, which is about $2.5 billion on an after-tax basis.
The two pieces that you don't have are that there are certain surplus and related assets that were not part of our capital capacity, to your question you asked earlier. That's about $0.5 billion or so. That gets freed up and gets added to the capacity. You've got another about $0.5 billion that call it sort of fourth quarter effects because we're benchmarking this off the third quarter. The combination of those two takes that $2.5 billion down to about $1.5 billion. We started at 5, we wind up at around 3.5. That's the math. Now, of the 3.5, we estimate that around $3 billion of that is readily deployable because a substantial portion of the net proceeds from that transaction become readily deployable, but not all of it.
Okay, that's helpful. Thanks. One very quick follow-up, just unrelated. You didn't highlight anything on increases to your own pension expenses for next year. Just want to verify that there is no headwind from pension expenses for your own obligation.
In fact, Seth, we built it into our guidance. Yes, there are some headwinds from our pension obligation. The new mortality tables came out that will be used for GAAP purposes. We will be reflecting those new mortality tables in our pension liability. That will cause the liability to go up. We're estimating, I don't want to give any precise numbers, but it's somewhere between, depending on the finalization of those mortality tables and the review of our liability, it's going to be somewhere between 4% and 7% of that liability will go up as a result of that mortality change. That change in that liability will be amortized in over some period of time. That's been built into our guidance.
Okay. Are you able to help us out in terms of what the EPS impact is there, and if it's ongoing or one-time?
It is ongoing in the form of amortization. No, I don't have a specific EPS impact for you on that.
Okay. Thanks a lot.
Thank you. We have time for one final question. That'll be from the line of Suneet Kamath with UBS. Your line is open.
Thanks, good morning. Just wanted to go back to the readily deployable excess capital and make sure I'm thinking about it correctly. The starting point is $3 billion. I think you said in the past that you normally like to keep a billion and a half as a buffer or a cushion. I think you have roughly $600 million for the Chilean acquisition or Chilean investment, I should say. That would get me to roughly $900 million of readily deployable that is above and beyond the cushion. Is that the right way to think about that?
Suneet, it's Rob again. No, actually, your starting point would not be correct. The billion and a half you're thinking about is the minimum cash number largely backed by capital that we keep available to handle liquidity issues and potential stresses. That is not included in our capital capacity or readily deployable. That is actually deducted out of both those numbers. So when we give you a $3 billion number for readily deployable, it is the amount in excess of the billion and a half that you're thinking of.
Okay, because I thought on a prior call, maybe as Mark said, in normal cases, we like to keep a billion and a half of, or we have been running with a billion and a half of readily deployable. I guess you're saying that I'm mistaken there?
Well, we have in the past generally said that we would typically be above the bare minimum threshold, but the cushion notion that you're talking about is not as rigid as a rule that we're following.
Okay, got it. The second question is on, I guess, a follow-up to Ryan's question on expenses and the multi-year investments that you're making. I think he had asked if you could help us size it up. I don't know if you did. I think you gave us the three buckets, but should we think about any of those three buckets? Well, first should we think about it as almost split evenly across those three buckets? Is there any one of those buckets that you think will be just an ongoing cost of business for the foreseeable future?
Well, they are multi-year. For purposes of I think this discussion, we should assume that they'll repeat year to year. I think if you're looking for quantums on that, the guidance I can give you, if we compare the level of net spending that we're doing in 2015 against the net spending that we did in 2014, it's an increment of about $0.15 a share, if that's helpful.
Okay, got it. Just the last definitional question. I think a lot of these life insurance companies talk about cash flow a little bit differently. So when you're giving us this 60% long-term average as a percentage of operating income, is that before or after holding company expenses, including the dividend?
After.
That's after interest expense and dividends?
Correct.
Got it. Okay, thanks.
Thank you. Ladies and gentlemen, today's conference call will be available for replay after 1:00 P.M. today until midnight December 18th. You may access the AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code of 336284. International participants may dial 3203653844. Those numbers once again, 1-800-475-6701 or 3203653844, and enter the access code of 336284. That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.