Q3 2019 Earnings Call
Good morning, and welcome to Great West Life goes third quarter 2019 results Conference call I would now like turn the call over to Mr., Paul Man, President and Chief Executive Officer of Great West Life. Please go ahead Mr. ma'am. Thank you Laurie.
Welcome to <unk> West Coast third quarter 29 seen conference call with me on this call is Nicholas Executive Vice President and Chief Financial Officer.
I will deliver todays formal presentation also joining us on the call at available to answer questions, our shoulder Mo President and Chief operating Officer Europe .
From a Cohen, President and Chief operating Officer, Canada.
Murphy, President and Chief Executive Officer, and empower retirement, and Bob rentals, President and Chief Executive Officer Putnam investments.
Before we started all draw your attention to our cautionary note regarding forward looking information and non item for us financial measures on flood too.
These cautionary notes will apply to todays discussion as well as to the presentation materials.
I'll begin by with an overview of West Coast third quarter results and developments in the quarter and Jerry will take you through a more detailed financial review and after our prepared remarks, well open the line for questions. So please turn to slide four.
The company reported earnings of 79 cents for sure up 4% year over year on an adjusted basis. We're pleased with these results, which reflect solid operating performance the sale of the U.S. individual markets business and our successful substantial issuer bid share buyback in the spring.
Third quarter results also benefited from lower than typical tax rate.
Net earnings were 730 million in third quarter.
Yes individual markets business contributed 54 million to adjusted earnings in Q3 2018.
Excluding this earnings were up 6% year over year, an excellent result, given the headwinds from the actuarial standards change.
Turning to capital the company reported a like out ratio of 139% compared to 136% last quarter.
No cash was $300 million Canadian Q3, and does not include cash from the ceding Commission of $1.1 billion Canadian related to the sale of the U.S. individual markets business.
I would now like to take a few minutes to highlight in the progress we're making on priorities across our three regions.
Turning to slide five in Canada, We continued on our journey to one brand and the amalgamation of our Canadian insurance companies.
We achieved a we achieved an important milestone on October threerd, when policyholders have kind of like great West life in London like voted in favor of amalgamation.
Subject to final regulatory approvals are Canadian insurance companies will combine into a single legal entity under the candid life name effective January Onest 2020 .
Our move to one Brandon one company in Canada is producing benefits by simplifying our business, allowing us to focus more on product development and speed to market things that really move the needle when it comes to customer and advisor engagement and satisfaction.
Well expense growth has moderated in Canada investments in technology and digital capabilities continue.
We introduced enhancements to simple protect in the third quarter, including the addition of critical illness applications as well as functionality that allows advisors and clients to connect remotely and completely online application, making the process more convenient for both.
Simple protect is also delivering a better experience to customers and advisors with faster turnaround times more than half of the policies are placed within one day using the digital applications. This fundamentally changes the customer and advisor experience.
And group.
We introduced the health connected port portal, a new health and wellness platform that offers group one numbers digital health advice and coaching.
We also launched a new paperless claims experience, allowing groupon members to submit all claim types from their desktop or mobile phone.
On the distribution side, our subsidiary financial Horizons group continues to be a consolidator in the managing general agents who spaces.
And acquired towards financial group, and Vince financial group, extending our reach and enhancing our ability to serve a diverse customer base, including the Asian communities in Toronto and Vancouver.
Turning to Europe , our UK transformation is on track supporting our growth ambitions in the broader UK retirement income market and in Germany or future system strategy as well event.
This migration to modern scalable platforms in the UK and Germany will allow us to expand our product offerings driving higher revenues and deliver cost savings over the next few years as we automate and retire legacy administrative systems.
On the distribution side Irish life announced the acquisition of acumen and trust by a majority owned Invesco limited further extending our distribution reach in Ireland.
Subsequent subsequent to quarter end, we completed our minority equity investment in JBC group strengthening our position in the German broker market.
In the U.S. empower retirement entered into a 21 year agreement for the naming rights to the Denver Broncos Stadium, which will now be known as Mpower field at mile High.
This agreement will give empower significant national brand and media exposure in the U.S. showcasing the empower name and value proposition to millions of current and potential customers.
Power continued to deliver solid sales growth in the third quarter with several large planned sales and they are you a reaching us $652 billion organic growth remained strong and the power is on pace for a record sales here.
I would also note the continued improvement in Putnam's financial performance Putnam's pre tax operating margin increased to 9.5% in the quarter driven by an ongoing cost reduction program and very strong fund performance.
As of September 30, 2019, approximately 90% and 86% of Putnam fund assets performed at levels above the left for me then on a three year and five year basis, respectively.
Please turn to slide six.
As Brexit headlines continue to dominate the British media I'd like to provide an update on Brexit as it relates to our UK business. As a reminder, we do not distribute products into that you from the UK.
Our UK business is domestic and our primary businesses group risk and retirement income will remain important to the UK population, regardless of the Brexit outcome.
Impacts to date have largely been limited to currency movement on our translated earnings our UK investment portfolio remains well positioned and we continue to monitor closely.
As in prior quarters. We've included additional color on our property related exposures in the appendix to this presentation.
We have already taken actions to prepare for and to minimize the impact of various Brexit scenarios. These actions pertain to our legal entity structure and governance approaches recognizing the roles in both the UK and that you regulators.
With that please turn to slide seven for further discussion of third quarter results.
Let's go sales were up 22% year over year, mainly driven by strong large case sales in Canada, and Adam power and Canada sales were up 22% supported by strong large case sales in both group insurance and group wealth. This included higher investment only and bulk annuity sales, which can be lumpy.
Individual customer sales were relatively flat compared to last year and lower with lower lip segregated funds sales, partly offset by higher mutual fund sales.
In the U.S. empower recorded sales of US $13 billion. This continuing strong momentum reflected growth across all customer segments and included several large plan sales.
Putnam higher institutional sales were balanced by lower mutual fund sales.
As shown in the appendix Putnam saw positive net flows into retail neutral funds and thats outflows in institutional quantitative equity strategies consistent with current industry trends.
In Europe sales were comparable to last year with higher fund management sales in Ireland offset by lower bulk annuity sales in the UK.
Turning to slide eight let go fees were up 1% year over year in Canada fee income was up 2% with higher fees in group and fees remaining steady in individual.
In the U.S. fees increased 5% adjusting for the U.S. individual markets business that was sold in June .
Power fees were up 8% in local currency, reflecting growth in participants and anyway.
Putnam fees were down 3% in local currency due to asset mix and lower average AUM, partly offset by improved fund performance fees.
In Europe fee income was up 3% or 6% in constant currency.
Hi, merely due to higher management fees in Ireland and Germany.
Referring to slide nine let's go adjusted expenses continued to show a moderating trend up 1% year over year.
2% in constant currency with excellent cost control across segments.
In Canada expenses were up 3% inline with our expectations, but still supporting continued investments in digital capabilities to drive differentiation and growth.
Moving to the U.S. expenses were up 1% and flat in constant currency adjusting for the sale of the individual markets business U.S. expenses were up 7%, reflecting higher expenses and empower related to strong sales and participant growth expenses Thats Putnam were down 10% in local currency, reflecting reflecting current.
And initiatives and Europe expenses increased 1%, 5% in constant currency as we balance business growth and strategic investments with good expense discipline across operations I will now turn the call over to carry mcnicholas.
Thank you Paul.
Starting with slide 11 earnings in the quarter was 79 cents per share an increase of 4% year over year EPS growth reflected solid operating performance to say that the U.S. individual markets business and the substantial issuer bid.
Earnings in the quarter also reflect a lower than typical tax rate, resulting from favorable developments in certain tax matters in Canada, and the geography of basis changes this quarter.
In Canada earnings declined 5%, mainly due to the impact of basis changes, including the actuarial standards change and policyholder behavior experience losses, partly offset by strong investment trading gains.
In the U.S. earnings were up 31%, excluding the 54 million from the divested individual markets business in Q3 2018.
For patent and Mpower I'll switch to us dollars to disrupt their results.
Core net earnings improved the U.S. 9 million from a loss of 6 million in Q3, 2018, reflecting lower operating expenses.
Mpower U.S. dollar earnings were steady year over year up 14% when excluding the 6 million dollar impact of the actuarial standards changes on that business.
Europe's adjusted earnings were up 12%, 17% in constant currency, reflecting higher basis changes and better investment experience in the UK, partly offset by less favorable claims experience.
Please turn to slide 12.
This table shows segment and total life for results from a source of earnings perspective, and as a reminder, the so we categories that bottom line are shown pretax.
Earnings this quarter showed healthy expected profit growth improved new business results and the contribution from changes in assumptions. This was partially offset by the impact of the extra standard changes and lower than usual experience gains and losses.
Excluding U.S. individual markets business expected profit was up 8% year over year, reflecting strong business growth, particularly in Europe , and reinsurance improved Canada group margins and improve performance at Putnam.
New business strain was lower than both prior quarter and prior year as gains recognized on group or bulk annuity sales in Canada and the UK.
Experienced results overall this quarter were broadly neutral, which is lower than our historic run rate.
Solid trading gains were offset by life longevity disability, and policyholder behavior losses, as well as expenses related to strategic investments.
Management actions and changes in assumptions contributed 65 million this quarter.
Included in that the implementation of revised actuarial standards reduced pre tax earnings by 65 million at the lower end of the range, we indicated last quarter.
Other changes in assumptions, therefore contributed 130 million.
We have included more detail on both experienced results and changes in assumptions on the following slide which I'll come to shortly.
Earnings on surplus of 20 million, reflecting gains on the sale of certain surplus assets plus gains on seed capital in Canada and Putnam.
The effective tax rate on shareholders earnings was 7%, reflecting the jurisdictional mix of income this quarter in particular with respect to basis changes along with favorable developments on certain tax matters in Canada.
Turning to slide 13.
These tables expand on the experience results and management actions changed assumptions to highlight various items in the quarter again on a pre tax basis.
Starting with experienced results yield enhancement with solid supported by equity release mortgages originated through the retirement advantage operation. We acquired in 2018. This operation has now been rebranded to Canada life home Finance.
You will note, however, mortality morbidity and policyholder behavior results were all below expectations this quarter.
Well the higher than unusual higher than usual claims are generally considered impaired volatility we have seen policyholder behavior losses on some lines for number of quarters.
Policyholder behavior is influenced by a variety of factors, including interest rates underwriting price competition and technology advantage advances that we and others in the industry are monitoring.
This quarter based on the trends we've been seeing an hour experience, we reviewed and strengthen the assumptions for Canadian term insurance business.
Other notable assumption changes this quarter were positive contributions from updates to assumptions regarding you can't do it can longevity Canadian critical illness, and credit related assumptions, partially offset by the impact of the actuarial standards change.
Turning to slide 14, our book value per share was $21.02 down 1% from last year, reflecting the impact of the substantial issuer bid currency translation rate changes and the impact of lower interest rates.
Our light cat ratio was 139% up from 136% last quarter.
Positive in quarter net earnings and the fair value impact of lower interest rate increased total capital resources, partially offset by higher capital requirements related to investment trading activity.
As a reminder, return on equity is based on a rolling four quarters and adjusted returning excess return on equity this quarter was 13.4% and we continue to target a longer term, our we have at least 15%.
Reported our we have 12.4% includes 199 million loss recorded on the sale of the U.S. life and annuity business in Q2 2019.
Turning to slide 15 assets under administration were 1.6 trillion up 156 billion or 11% year over year, reflecting higher markets and business growth. This is up sharply from year end given the market recovery so far in 2019.
That concludes my formal remarks, thank you Paul Thank you Gary.
Laurie we will now open the line for analyst questions.
Thank you we will now take questions from the telephone line.
If you have a question and you are using speakerphone. Please with the handset senior selection. If you have a question. Please press star one on your telephone keypad. If at any time you wish to cancel your question. Please press the pound fine. Please press star one at this time if you have a question there will be a brief thoughts all the participants register for questions. Thank you for your patience.
And the first question is from Steve period from eight capital. Please go ahead.
Hi, Thanks.
Thanks very much.
A couple of questions first maybe you talked a bit about experienced gains made management actions and assumption changes in the quarter. When we look at the first three quarters of the year.
Looks like it's running about half the level of the last five years. So we talk about this from time to time and maybe we can revisit is there is there anything you're seeing are aware of that suggests.
This contribution will be meaningfully lower over time, and maybe to help us understand a bit better can you can you talk about the year to date drivers a that have driven that in 2019, so far.
Steve I will turn that over to Gary, but I would note. If you look to this quarter I'm one of the things I would note is that we had a number of negative experience gains that are.
Essentially just some claims issues that we're dealing with through through increased pricing processes and stuff. So.
I don't really view that as this is systemic issue in any way that was a interesting sort of quarterly phenomenon, but I'll, let gary speak to the little bit more sure.
Yes, certainly in the year to date wanting to remember courses in Q2, we did have the UK retail property items that would have showed up as experienced losses. So thats I was fairly large relative to our typical variations so I think that.
Probably dominating the year to date to figure also.
You may recall back in Q1, we had some.
Issues and Irish like health operation and we've addressed those through repricing and we're starting to see improvements in.
This quarter.
It was just higher claims in an LTV lot of these.
Claims, but she's actually happened in Europe as it comes out.
Usually we get some pluses or minuses and this time, we this quarter, we haven't had mortality longevity.
The mortality through the reinsurance longevity through.
Through the UK and the reinsurance.
The LTV in the Irish operation all all just slightly negative, but they all went to same direction. So I don't see anything systemic there a lot of our gains are driven by yield enhancement, which has remained steady throughout the period. So it's really some of these other factors. This year that are have made the year to date lowered and you're right to the NOPAT.
And there is nothing season seasonality wise for Q4 is there on on the sprint.
Not particularly no yeah, Okay, and then on Putnam you mentioned I think Gary seed capital gain I didnt see that in needed.
Buys that for us and and maybe we could you could comment on your view on the sustainability of a pre tax margin.
Close close to 10% per pound in this quarter.
Ill start off with.
Thinking about so looking ahead, a pre tax margin.
We're feeling good about where we've got two so far in terms of pre tax margin, but we're continuing to look for opportunities for for improved.
Relative cost performance and opportunities for greater efficiencies that Putnam. So we're continuing to work we don't view that as a end of gain we'd like to see it to be strong stronger than that and I know Bob and his team are working hard on that but I think Gary can speak to sort of the more the in period.
Seed capital the seed capital imperative and probably in Cogs. It very modest I think it was 2 million.
It's a very small in this quarter.
Positive.
Okay and last thing for me, we've seen a lot written about.
There's been some issues with UK property in past quarters than we've seen a lot written over the last couple of months on we work and the possible followed in UK property any exposure for you there thinking ahead.
Yes.
Thanks, Steve we continue to as a as we've generally just said in our comments there and we've said each quarter, we stay on top of our property, we like the solidity of the portfolio and.
It's stable and strong, but we've certainly like everyone else would have done a deep dive in understanding you know any exposure. We have done we work and I'll actually just turn that went over to Rome, and the mix. Some brief comments on that.
Thanks, a lot so.
Yes.
Next question.
Relation to we work we have obviously look Additionally gives us for.
The number of quarters, and we that opportunities for space.
Or other service.
Service office exposures.
Both in Europe , and U.S. and in Canada for that matter, we have very limited exposure directly to we were.
And even into space as a whole weve really limited our exposure to to the sector of the market, whether it'd be a drag property or mortgages or.
So we have very minimal exposure is not as we were.
Space in general.
Okay. Thank you.
Thanks, Steve.
Thank you. So next question is from Gabriel decision from National Bank Financial. Please go ahead.
Good morning, I want to ask about empower and the you mentioned the excluding a basic change earnings were up 16% I'm, just wondering what kind of basis change with the.
Placement business that more of it like I wouldn't think there would be much because of the record keeping business.
Thanks, Joe Bill, but I'll, let Gary handle that one.
There was a.
Modest basis changes this.
Mpower as part of their offering has a general portfolio fund. So you do have some general account exposure to it it's a source of our margins and profitability as well.
Any within that the actuarial standards change did have a modest impact so the overall, we recalibrate we use.
The caustic modeling.
And actuarial technique for setting their reserves and so part of the standards change or change in that the calibration. Those models. So when we put that in the net impact to that update was was 6 million. So you're right. It's typically doesnt have a loss in the way basis changes, but it can have some.
So that the.
Annuity product from Sir.
So it's really a fixed income solution that employers would provide for sort of stable longer return returns as part of an overall in our retirement solution portfolio and its general account off generally as a general account offering and.
Other companies might you stable value and solutions like that but it's futures.
Features actually.
As of standards, a lot of insurance companies would provide as part of therefore, one k. offerings and new us.
Okay, and just the I mean, even with by them.
Assuming the Canadian dollar growth figure therefore, the U.S. the growth would be a bit lower.
And that color.
Is it.
Sorry, just to clarify that through as a a 6 million us was the Ohio.
Our earnings I believe were 44, so that's how we get up 14% year over year increase okay.
Moving on your new to the quoted there on the actuarial or the management action.
Let me expand them, but but new with.
Helpful and you did talk a bit about the though the last issue in the.
In the up in that study and I'm, just wondering or is there something more substantial but the Q3 review great west because as I recall that you kind of make these big adjustments there were some adjustments and management actions every quarter. There anything that's part of a ongoing process, where Q3 the bigger bigger item.
I'll, let Gary speak to that one I sure.
We do we do review our basis on an ongoing ongoing process through the year, but that said a lot of the experienced studies do get done in the.
In the second quarter and then your results are ready and you're ready to finalizing the third quarter. So they're typically has been over the years. If you look back more activity in the third quarter than the other quarters, but we do keep an eye on ibcs throughout the year, where there is.
Just the natural cycle and some of the studies and just to the prioritizing actuarial work a lot of another quarter up the reality is good real that a lot of activities spent on planning and budgeting and forecasting for for one three and five year plans in Q4.
So is that due to Q3 activity and that's.
Why we tend to see more activity that sort of.
Comes through in Q3.
Thanks, and that the 200 and from a million from policyholder behavior. The lion's share that how much of that would be tied to the term.
Canadian term business.
That is the lion share about 90% of that structure and then last quickie here.
The clarify the.
Periods, while the claims trends in Ireland, it wasn't related to the critical illness products to it because of the you mentioned long term visibility of the driver.
Yes, let Marshall speak to that one partial so there are two issues in the in the European mortality morbidity line, we've seen an elevated level of claims in the traditional west we insurance business. That's comes with the mortality line and then in Ireland earlier in the year, we had weakness in I wish Mike how somewhere.
Pricing there, we're not getting our target margins and there was a small experience loss period. It was a bigger experience loss related to long term disability. So we're seeing slightly higher incidence suites in Ireland and then the falling interest rates also means that present value of our claims costs increased and we offer to.
Oh wait guarantees there. So it takes a couple of years to recover on the pricing site for those interest rate Pauls along with that modest increase in incidence rate. So that's really about driving the European side of that mortality morbidity number.
We've talked about this in the context of our Canadian Group player helped book and its you characterize it in the same way started up some falling interest rates are you see some changes in claims patterns and what you do as you start to put through pricing and we're very active on the front you started in December I believe yes, we did okay.
Thank you.
Thanks.
Thank you next question is from Doug Young from Deutsche Bank Capital. Please go ahead.
Hi, Good morning, just on slide four I guess related to the cap at all.
And just wondering if there was any fines move data be you asked in up into the Canadian Opco I mean, you're you're like cat was quite strong.
In the quarter and I guess you within the same thing there was I think 500 million freed up from the U.S. transaction.
But anything any mention of that I don't know if that was moved up or if that if it's still 1.6 billion that that's sitting down in the U.S. company from that transaction.
Gary.
Sure. So a couple of questions. There first or is there wasn't there wasn't any move money moving up from the us into a into like awards and Prime advocate Alco, you're right like how did the Canadian Opco measure so cash moving to like coal from the U.S. wouldn't to factor in any event.
But there was nothing that that moved up and then on the second parts. We've just we've called out the ceding Commission.
There is obviously.
Some of the other is freed up capital just from.
From our operations lower LOE requirements as we've we've divested the individual markets business and so that's that money is still is still there is still in the operating company actually both those amounts are at the moment.
We flagged the ceding Commission and then there is further work to finalize what our target RBC ratios to operate on the U.S. will be going forward and that will determine the final amount that moves up from the that freed up capital. Okay. So no change you are with their positive impact on like at from from the you are chasing there.
I would be but I don't know if you if there was in.
Quantify just because it looked like the interest rate risk in the denominator did come up with that.
Oh no. There's no. There was no you are impact the benefit of like have just from lower in period rates as the fair value on the total capital resources goes up a bit and it goes up.
More than the.
Nominee or the calculation the a and so you end up getting a small that lift from lower rates, which ironically the opposite of MCC us on so yes, there was the way like longer. So there was a small positive impact, but nothing material yet, but it wasn't from the you are just from lower ranges from lower and just lower in period rates yet okay, sorry, okay.
And then heightened.
I know you talk about expense initiatives can you elaborate exactly what you're doing.
I think there's some question about sustainability, but what exactly are you doing to reduce cost said platinum right now I'm going to actually refer that went on to above rentals, Bob you want to speak to though.
Yeah, I think it's been an ongoing process, we embarked over a year ago, but it's also a change in.
Performance fees that we were paying double rent.
For a period of time, and then just expense management across the company.
And.
There there has been some and then challenge I was just about but that hasn't been the made this part of it.
So performance fee double rent you mean in terms of what you're paying out in compensation.
Oh no performance fees on the fund performance has gotten.
Better and that's been an improvement bottom line on mutual funds performance fees can be both positive and negative.
From a.
Dollar amount to the bottom line.
And then we moved.
Headquarters and during the period the build out we are paying around that places. So we knew that was going but that's how certain due to me okay.
Certainly helped.
And.
Doug I would say that part a lot of this is a function of button them strategy to in terms of the commercial offering into the marketplace. As platinum has been looking to drive stronger performance and better outcome for customers. So they've been consolidating certain funds to drive vote, better long term performance and value for clients and further advisors.
And that that resulted in some of the head count reductions also some initiatives that we've looked at on the IP in the automation side. So these are real savings and it's it's a real concerted effort and Bob Bob is doing a great job leading the team here on this.
Okay, and just maybe lastly tax rate I think it was mentioned being allow yeah, I mean, a normal quarter and I know, probably there's no such thing as a normal quarter, but in a normal corridor.
Now or when you're doing your planning the what is the tax rate.
What should the tax rate be.
Yes, I can let me answer the detail, but I will say in a normal quarter is the reason that you can't sort of contemplate a normal quarter is because we have different tax rate for new stores fiction. So the geography of earnings positive given the jogger geography of a basis.
Strengthening can have a real significant impact in terms of moving that tax rate around but I'll, let dairy speak to sort of giving some insight into the tax rate, yes, typically given our.
Yes.
Recent periods a mix of earnings you probably something in the mid teens that's.
Not about indicate it does move around.
I think overall you see somebody in mid may be mid to low teens, yes, but gary to the extent than we have a quarter, where we have.
Let's say of strengthening in the Marriott count on what was slightly higher tax rate in memory of contributions in an area with lower tax rate, you'll get that tax rate movements. So that's why it's hard to describe what normal is but yes, probably better to say sort of what's the typical average as opposed to normal.
Yes, that's what it will move around.
Okay. Thank you very much thank you.
Thank you next question is from Sumit Malhotra from Scotia Bank. Please go ahead.
Thanks, Good morning, I wasn't going to go to putting them, but I just want to pick up on something you guys are saying there too is a doug's question.
I think it was about three years ago that the company took a.
A restructuring charge for a for Putnam and I think that was focused primarily around head count. It seems like it's more recently that we've seen the.
The level of expenses take more of a more of a step down. So is it correct to say that it isn't necessarily any any new type of restructuring charge. That's that's been in acted as much as some of these noncomp expenses like like the real estate you referred to.
I'll, let Gary speak to the way we're approaching it yes, I think I'd also just draw back to a to this time three years ago, we did actually see improvements in the expenses it was any order.
50, 55 million Usfive recall that we've seen and we did see that that improvement coming through.
The other hand at the same time, we also had some fee pressure so that the net earnings Didnt respond as much as we might have hoped from just the expense reductions what we're seeing here is that the the fees are staying a little more steady. So we're seeing the expense reductions really fall through the bottom line more so than we had the first time around so I think thats, probably the larger changing.
And that illustrate yes, no go ahead.
Just gonna say I mean, the bunch line that we get to here is.
This does business hasn't moved.
Back to the positive side of the ledger over the last couple of quarters and then clearly the.
Expense savings.
A big part D. Plans that are you have the view and I think this is where we were headed before that the this step down in costs that we've seen here are sufficient to keep you in positive territory for for Putnam from an earnings perspective, even with some of the revenue or topline pressure you've described.
Some of those speak to that as Paul.
Yes, so obviously, there's lots of moving parts. There we saw a significant decline in equity markets in Q4 last year. So we can't predict what the world will look like relative to equity markets, but if we assume just sort of the things that are controllable to us which would be driving out really strong performance for custom.
So having good disciplines around investment management and.
Resulting in solid flows and good performance. We're on the then we're right now we're performing very well enough front and second there secondarily, the controllable being expenses inefficiencies and where do you automated and where you outsource all those things.
We're very we're bullish on the disciplines that we have in place and we actually do think theres. Some additional opportunities there, but again, if the whole package on making sure that you maintained strong performance you're keeping your you're very strong.
Core folio managers and teams in place to be able to drive that at the same time that would drive efficiencies and we think this is this is a where the models that now, but we think this additional opportunity looking ahead.
Thanks for that and then secondly is going to be on Canada.
I think the.
The bulk of the.
You are charge went through the Canadian business. So if I try to clean that up it looks like earnings are up.
In the magnitude of 8% year over year, which one of the better results you guys have had in sometime and same same type of improvement was reflected in expected profit Paula I heard you say early on that the expense growth as some of the investment spend is starting to taper off and expense growth in and around 3% is reasonable there was also up.
Comment on.
Margins in that group business, improving just maybe somewhat broader.
I was hoping you can you can give us an update on what the key factors or by this improvement we see in Canada, and whether the sustainability is something that you're of the view that could recur here.
So all Oh, thanks, I'll start off at sort of a high level the frame the way, we think about it whether it's counted or any any other businesses.
But I'll, let Jeff Mccown speak to sort of the details of where he sees building strength.
So starting point, we did launch into some fairly significant investments in the automation and building out a lot of our muscle around digital and that did cost some money and we did see those elevated expense levels that is you actually start to launch capabilities, whether its launching the simple protect and we've talked about an awful lot but.
The reality is if you've got 50% of Europe's.
That go through that going through in one day and that's all automated that means you do not have the same level of people engaged in the process when that starts to have a cost impact and I've talked in the past about adopt it's great to build.
New stuff, but its adoption that really matters and when you get adoption. Then then you start to have a meaningful impact. So I think that's one part of it is the payoff ultimately that will continue to flow on as we digitized and I think the other one that Jeff can speak to will be automating claims. If we can now have every claim that someone can do on there on their smartphone.
Our own or on their desktop then that means that those are not pieces of paper that are coming in the mail and that we're processing and doing all that so those are also sort of a manifest in disciplined and then the other one just generally is really making sure that we've got good solid disciplined in all of our businesses, saying is this going to be productive expense.
And making sure that we have that discipline Bella just speak to sort of his views on kind of where where the strength was coming from in Canada.
Paul.
Yes, we're really pleased with our progress.
On the expense side, perhaps at the Paul's comments.
The actions of our work on automation are starting to pay off significantly our focus on digital which we've talked about on these calls is taking place and without with within the business process improvement. So that's really helping us to moderate our expense, but I also would add on the revenue side Youre seeing a combination of a number of products.
Okay and service enhancements over the last number.
Quarter, so combining that together and we're seeing a good overall resolved.
Thanks for your time, yes. Thank you.
Thank you next question is from Marriott Mendonca from TD Securities. Please go ahead. Good morning, just a quick question D. And this is maybe similar to what someone was asking about a moment ago. It relates to the the improvement in expected profit sequentially. It was 9% from one quarter to the next would you assign that largely.
Lead to the group pensions business Im sorry group benefits business or expenses or maybe just help piece that together.
Gary what you provide a little color, yes that was.
Primarily in the in the group side of the business and Thats going to be a combination of.
I have higher assets in the group well site and it's also going to be a combination of just stronger at both sales by business growth and compare and fully restoring our margins.
On the expected profits are you getting the group is firing on all cylinders and that was the largest driver of the year over year change.
That a little more color on that but.
One of the areas, where we've really been focused on.
Our I'll call. It our workplace businesses is grow feel we've talked a lot about the topline growth and empower and we talked but a lot of the topline growth in Canada in group and that creates two.
Points of of strength, one is leverage on the cost side and we continue to want to grow whether we grow that organically or through M&A and then the other one is the expands the overall platform because each of those plan members. Our participants represents a kind of a midmarket customer who are seeking.
Your advice and support and all of that comes through not only sales, but also retention. So we're very very focused on growing those businesses through strong sales were attention and Jeff you might comment a little bit of on that in Canada, Yes Weve.
In 18, we had a tremendous sales year and that's continued on into 19.
In almost every cell we're exceeding targets.
But better than that we've seen our persistency rates really increase and so it's nice to sell it but it's better to keep the business and we're really excited about that and the third is we are placing though the right level of renewals.
So.
Very important and Thats really a big part of the driver both on the life and health and I might add on the wealth business that were where we're having a good good go away.
New cash flow in the business. So clearly you've had some success there would it be fair to say then that now that you've addressed some of the issues that the expected profit in those businesses. Those group businesses in particular have reached a steady state now and now it would be more volume related that would drive that growth.
It's hard to its hard to forecast I mean, the reality is we're looking to grow the premium which will help to grow the obviously the expected profit.
And then the other one would be to the extent that we're moderating and <unk> moderating expenses through automation and lowering costs than that can drive expected profit. So.
I want to be doing both all the time, what you'd like to do is improve the business model.
Which is going to allow you to maintain or strengthen margins, possibly and then how the business model or be sort of the best value proposition. The markets. So that you are growing and that's really what our core strategy is in these group businesses globally, including empower that's helpful quickly then.
Taxes I have been trying to figure out like disaggregate, how much of that lower tax rate relates specifically to what we called sort of like tax resolutions that are a little less predictable and the extent to wish it relates to just jurisdictional differences. So I've tried to size. What I think is the is the game in the core.
Order.
Perhaps related to resolutions in Canada, and I'm coming up with something in the neighborhood of 40 to 45 million does that sound about right.
Oh, let Gary speak to that.
No actually I would have said.
Our effective tax rate being around seven I would say 2% to the benefits.
Probably from the resolution of the tax matter. So they weren't the largest contributor there's more the a more about the jurisdictional mix that drove the overall this quarter, yes that occurred to me as well. So I went through the tax rates across the jurisdictions and all of them are really low relative to history. So it's it's every jurisdiction.
So if every jurisdiction really looks low relative to history.
Yeah, I struggle with how that really.
Can be explained by by mix of jurisdiction of everything is really low.
Gary Yes sure.
And again, if all the jurisdictions are low than the overall average is going to be low. So I do think that actually works, but I mean, where we'd be happy that to add to take this offline just to help help work through it because it to that but it really is.
It was about two points from the from the tax matters that we resolve those just but it's fair to say the jurisdictional benefits were more in Canada, where rates are a bit higher and some of the other basis. Then the basis train. The what do you think about basis trends in Canada, which was more it was a negative negative net negative in Canada, So really you've got benefits of tough.
Tax benefits and lower relative earnings because of basis change there in Canada. So that brings it down and then you had some strength happening in other jurisdictions with lower tax rate. So.
What I think as if we go if we go a pick up at a one off we can sort of take you through them out yes, yes. If you look in the supplemental information pack. If you look at the reinsurance show you will see the tax there and again, that's reflecting that reinsurance itself operates in several jurisdictions and so where the basis changes happened to fall.
Good morning negative ones, the reinsurance or in the U.S., which has higher tax than some of the positives in Europe , which are lower tax. So you will see it in the Sip say, we can take it offline and stepping through share. One final thing then on page 13, and appreciate this disclosure very often when I see these together.
I start I asked myself, the extent to which change management actions and changes in assumptions will have an effect on experience gains and losses in subsequent quarters. So when I see a pretty strong a pretty material strengthening here related to policyholder behavior.
Would it Dan could I, then interpret that to mean that experience losses.
Related to policyholder behavior could actually declined to zero in the near term because youve strengthen the reserve so much I'll, let gary speak to that.
So first off.
Your your you are right that the extent, we do a basis change and.
That all else being equal that we wouldn't see better experience going forward or worse expressed depending which way the basis change is gone.
And so there is that there is the connection there now that's one of those all else being equal so whether it policyholder behavior goes to zero or not I mean, the Canadian term was certainly a big part of that but there's always theres always some small amounts and always positives and negatives in there. So it's.
You are predicting any one of these like mortality and longevity, we've had longevity changes.
Quite a bit it doesn't necessarily mean youre youre gains are going to be positive or negative in a period. It just means that we different than they would have been had you not done the basis changed so you're right to meet the connection but it's just no.
And all fee equal that Paul sort of behavior. For example, taking the 200 million now will improve future experience, but what that future experience level is just harder to predict I hear that does that help.
Theres no way you can draw straight line from one of the other but theres some theres some connection.
The connection okay. Thank you again.
Thank you. The next question is from Tom Mackinnon from BMO capital. Please go ahead.
Yes, thanks, very much a just a couple modeling questions and then a follow up.
Just with respect to the big New business game bulk annuity kind of related in Canada.
Is that 25 million has certainly been a lot higher than what we've seen.
In the past so to what extent was it influenced by substantial.
Sales of group wealth products and.
What should we be thinking where should we be looking at something going forward more in line with what it's been over the last several quarters as opposed to this quarter.
Well I'll start out by saying that when we look at things like bulk annuity whether it's a you know writing a single premium group annuity encounter as it would be named or in the UK bulk annuity.
The starting point for us is disciplined.
We look at opportunities as they come to the market if we have.
A good opportunity to achieve the returns that we want Andrew if we're confident that we can source the assets. The tobaccos liabilities, then we'll be active but I think as I said in my speaking notes with lumpy.
We there may be another opportunity next quarter the quarter. After but you don't know you're always working on that and you are but you're working on it with discipline and I'll, let Gary I'm, a little bit more color in terms of the way we would look at it going forward sure Tom side I'd break the a that 25 twice you mean into two wheel camp. So I look at the year over year change.
And it's about two thirds underground customer side, a lot of that was a large single premium group annuity.
But it's just higher margins in general so that was a I was a good result, the other third was actually in the individual customer business.
That's really just lower acquisition expenses, you mentioned expense control, so the lower acquisition costs year over year.
Drove a higher new business result, there so.
Two thirds or group one third for individual okay. That's helpful.
In the U.S.C. you've done this.
A sale the indemnity reinsurance in terms of U.S. individual life in.
Your life insurance annuity business, but now you're still picking up $5 million and earnings on this stuff anything you've retained a portion of this can you elaborate what's going on in terms of what you've retained and how we see I mean, your small but are you expecting like another 20 million each year from this stuff.
Going forward, yes, Gary join US picked up yeah sure we didnt retain theres a couple of small blocks you didn't go as part of the transition one was a.
Primarily a par insurance block and.
Has some associate not participating riders with it but it's primarily a car insurance block and the other was.
Assumed this is like retrocession business that.
Great looks like a new to hit that opinion against the small line.
Five knowing it was good result, this quarter, but thats, how many older awful around I would expect.
Modest we'd hoped to be positive, but it's not going to be a sizable material amount period to period.
So what you gotten this quarter were just Tim to throw that out for each quarter for the next several quarters or is that the way we should be thinking about that little line.
Yes, I don't recall anything unusual Miss lime, we might have had some favorable mortality for you, but it is quite small so yes.
And.
With respect to the commentary around growth and expected profit quarter over quarter and.
It seems to be primarily related to.
Group insurance business group wealth, and then group life and health insurance and I think you had talked about margin restoration.
I assume that's the way you look at this business in terms of group life and health in particular on a margin basis. So my comment here is why not disclose that margin. So we can.
See how that growth and expected profit would be because an SMB for group life and health businesses and as that as a useful as I would say is at a margin would be in that so thats just a comment.
Yes.
[laughter].
Thank you for your comment and then that so I commented, maybe a hint as well.
We've seen a.
Margin disclosure for group life, and health insurance from and.
From another guy that we cover.
And then I guess it wouldn't be a great life, great West life call without asking about what's going on in your hunt for U.S. asset manager or you have.
A record keeper.
Is that still on the front burner can you give us any color there yes. Thanks Tom.
So as it relates to group margins will pick that will take that under advisement.
It relates to M&A for sure front burner.
So we're talking a lot today about you know strength of the core business and the things we're working on whether its automation, but.
Suffices to say that management is still very active on a number of different M&A files.
For sure in the record keeping space, some new us active on up and not just active and not just what I'd say as reactive to you know a banking opportunities brought forward to us, but proactive in terms of trying to connect with decision makers I look for opportunities because we do believe but market will.
We'll consolidate and maybe not as quick as we'd hope, but we think it opportunities are there and we're active on the asset management side, we remain active but again you will see that you know we kind of a two pronged approach with button them. One is to drive vote efficiencies to continue to drive a strong performance. So that we can improve the margin.
As we've got organically, but we still believe that a acquisition to provide some separate from scale will really unlock more value. So we're still out the one that we've got a team actively engaged on it so it's still front burner.
And but what we're not doing is waiting around for acquisition and many of our jurisdictions, what we're doing of trying to strengthen the businesses with the tools, we've got well we look for acquisitions.
Okay. Thanks for that.
Thank you next question is from Paul Holden from Sea Idcs. Please go ahead. Thanks. Good morning, two questions for you and they are both on the same theme and that's.
The important one of driving future earnings growth and Paul you've highlighted two areas of of sustained growth going forward candidate and Mpower.
I want to ask about is what you're doing in Germany, specifically.
You've made a number of investments there and you talked about changing or updating the technology platform. There. So maybe a better sense of growth potential in Germany would be would be helpful. Ill start off at a high level no offering Germany in the context of the way we looked at it relative to other businesses.
Semantically if you look at areas, where we have a strong focus and deep capabilities is really helping people with retirement savings and retirement income and we're trying to really strengthen that and look at the full lifecycle of a customer's need to save.
For retirement, and then help them optimized through retirement or German business is really a place where it's about retirement savings we've got a strong retirement savings.
For him good reach into the market there and what we viewed was that we wanted to actually play a bigger role in Germany, not just in the retail.
Moving space, but also in the group saving space, which is going to burgeoning and in Germany. So as a result, we made a decision to invest meaningfully in systems to allow us to be better at what we did today and to extend the business and it sort of fits into that theme of if you think about where were the western world is going with.
You know.
Rumors on where the wealth is transferring a and the like you want to be playing in this space. It is it is the place to be.
Space to be playing that Michael at Arsenal speak to sort of our views on past growth and growth going forward in Germany. So as Paul mentioned, our real focus in Germany at present is in that broker distributed units linked pension space, where we are quite competitive and providing retirement solutions to individuals who.
Ask procure their individual pension contract through an independent broker and then our technology investments really there are to modernize that platform. So were almost done moving all of our new business activities onto that new platform is installed it up and running we're slowly ramping.
Issuance of new business onto that platform, so going into next year most of our new business will be shut off of that.
Warm and then we'll be focusing on migrating our historic business onto that new platforms in turn that off and then for their products on expense.
And our unit costs and then more importantly, once we have that new platform. In addition to sort of individuals working with brokers, we really want to turn our attention to the broader retirement landscape, there and we think theres a tremendous opportunity in the small case patients arena. So we do you start today.
Hey, I'm, a number of very small five or 10% occupational pension pieces in our German business, but I think once we're on a modern platform that is stable evolve.
On that segment of the business and overtime I think that will be as big as our individual retirement business and we've also broadened product portfolio. There. So historically, we would have focused on some niche protection products to supplement the retirement offering that we had but then we've broadened vast and we have a very modern compelling term insurance.
Operating a modern compelling stability offering along with innovative critical illness and other products that we would have offered in the past to make our reputation in that market and so that business is growing very very strongly and notwithstanding the falls in interest rates and some of the weakness in the overall growth in economy, we are taking share from others in that.
Marketplace, I am very optimistic im not quarter by quarter, but I'm very optimistic that over a three or five year period that we will see a material incremental contribution from our German business, yet and I would just add to that.
So that if you think about a post.
So to two environment.
The product areas that we're playing in this unit linked.
Retirement savings is kind of the future of the German retirement savings regime as people move away from Hite your into products that you can sustain throughput in the solvency two environment. So we happened to be playing in the market that is growing and we have happened to be taking share in the market is growing so it kind of get the double lift and that's why we're act.
Actually pretty bullish on Germany.
Alright, great great. Thanks for that thorough answer and then going back to Canada. One of the product I think about a lot of falling rate environment is participating.
Life, which obviously is important product for you and the sales are being strong, but what I worry about as if we're stuck at much lower for longer for.
Another 510 years, what happens to that participate in product you anticipate demand would fall off or just generally how do you think about that risk and potentially mitigating that risk.
Yes.
Thats a good question I think as a starting point.
People use that product, obviously for the protection benefits, but also for estate planning benefit. So obviously the underlying returns associated with it.
Can be quite relevant we have been working in this lower interest rate environment for a long period of time and when you look at our.
Thats backing those par liabilities, we've been managing through a declining low interest rate environment, what kind of Oh laddered investment strategy. So we've actually kind of manage through that.
One other things we've see is that at some point you do end up a sort of a stable rate.
Hello relative rate of return with a mix of a fixed income equity real estate and the like and part of it. This is good transparency with clients understanding.
Where the values up but it's also a relative value thing clients will be looking about they might be looking up you know.
So, let's say universal life contract that that is reliant on fixed income as well too large extent for lot of products and so on a relative basis, it's still view those an attractive proposition Gary anything else. It out on that I think I think you really company well, let's say it is relative to what's out there for people looking to have protected.
Well in the state planning solutions I think participating insurance will continue to be an important product anything you'd add to that I would I would just add Paul and Gary that we continue to be very bullish on it.
Pfizer's that we work with a look to our organization.
For this offering.
A wonderful and very effective state planning tool.
At advisors use primarily in the business on our market and.
We continue to see good opportunities for.
The one the one comment I'd make Paul as you know obviously, given the fact that we're talking about an insurance contract in the state planning Theres, the inherent tax advantage and using that as a vehicle as opposed to some vehicle that's either.
Non registered.
Just investment vehicle, so that will will sustain and we've gone through the tax regime change as a couple of years ago. So those benefits continue and obviously, we just have to manage through the investment cycles environment. We're in like we would with any of our products, but it's a good question. Okay. Thanks. Thanks for your answers that's only had.
Thank you.
Thank you.
So again, please press star one of your telephone keypad, if you had a question.
The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good morning, maybe just tying Paul's question, just on earnings growth and looking at year end, B, which has been inactive year to date.
Your peers are a lot more aggressive what triggers or whatnot, well would have to happen for you to be more active.
On that front.
I will let Gary speak to the uncertainty.
Sure I think at first point out there. We're in active this year, we did actually do a substantial issuer.
So we did a fair bit of share buyback activity this year.
So that's a that's why the reasons for the BN activity I'd say, we view the heavy as just one of our options for managing capital I as a as Paul indicated earlier were looking to deploy capital.
Organization to fuel growth, but we recognize that at some point if.
Ratios get a little I and we we don't have solutions and one of the tools to help manage overall returns to shareholders is is the buyback approach. So we haven't there's no fundamental change to that but in terms of whether it's our own views or even just use we hear from investors that it so while thats one recognize it's an important.
Capital management tool typically a investors look for you to deploy capital productively, either organically or through M&A onest to fuel growth and then inhabit supplemented by buybacks.
And just a few questions on Putnam, Bob you talked about the at the lower expenses and you talked about performance fee or change the performance fee structure can you kind of comment on that and how that reduces expenses I just can't really tie that together.
Yeah.
Maybe I'll just I'll jump in level, let Bob speak to performance fees up Bob was talking I think Bob was talking more broadly about.
The relative overall earnings performance Putnam, which was a combination of some of the expense disciplines. We've added but also some perform shift in performance is less of a drag or positive contributor. So I think it was he was talking about the combination of those two things contributing to the margin and the margin wasn't just about it.
That was also about the outcome of our really good disciplined and strong investment management, but Bob maybe want to speak to performance fees.
Yes.
In the us in mutual fund side, they have to be focused with these meaning they can go.
As much as they go down.
And it's over a three year time period energy average assets over those three years.
And I know this is somewhat complex, but performance fees obviously if.
Assets are grown year, performing well will be a positive to the bottom line. Yes performance is not up to par and assets are going down they can be a negative number.
And overtime as our performance has improved.
They become a contributor.
And.
Going forward, we think so they will add more we have performance fees on some of our John was not all of them, but so.
As I said they can.
Jim Group.
Yes, I am just lastly, okay. Yes go ahead, Scott Oh, Yeah. Just lastly, just on the institutional sign a platinum I think Paul you called out.
One equity as kind of gross redemptions are pretty large in the quarter realize its lumpy was there any other kind of asset classes that you kind of see that is that was can kind of contributing to that Q3 gross number.
The over to you Bob.
Yes, I would say on institutional side, we have very positive flows and fixed income very positive flows and multi asset.
Equity side, especially on the Quad and this has happened across the industry. One had 10 very good years, which we definitely participated in the last.
Two years have not gone as well when.
They have some.
We've suffered redemption as housing industry I would say our redemptions have been a lot less than our competitors.
We're still feeling the effect of it.
But.
Really is centered there Scott okay. How large is your quanta strategies relative to your overall asset platform is it still art.
Approximately 40 billion and I would say a portion of it is kwan equity in.
Portion of Leds multi asset on the coincide with multi asset. It has positive flows in the corn equity isn't redemption.
But.
His 40 billion in total.
But overall Scott. This is we're talking about a cycle here like we would in any of our if you look at an overall portfolio and diversification as keyed in on our overall client.
Strategy is diversifies, its just happens to be one part of it.
Thank you very much helpful. Thank you.
Thank you My last question is from Mario Mendonca from TD Securities. Please go ahead my questions were asked and answered. Thank you.
Okay. Thank you very much.
Thank you. This is the end of the question and answer session I would now like to turn the meeting over to Mr. Paul.
Thank you very much.
With that I would like to thank you all for joining us for the call today.
As always please contact Investor relations. If you have any follow up questions and we do look forward to speaking do again next quarter and hope you have a great day and I guess, it's a happy Halloween take care.
Thank you for conference is now Enda. Please disconnect your lines at this time, we thank you for your participation.
This conference is no longer being recorded.
No as you put modest single family homes at Delta.
50 for them.
Please note that this conference call has ended please disconnect your lines at this time. Thank you.
Okay opinion.
Okay.
Okay.
Yes.