Q2 2020 Great-West Lifeco Inc Earnings Call
Over Q2 2019.
This can be attributed to lower bulk and individual annuity sales in the UK. In contrast, Ireland saw higher fund management sales compared to Q2 2019.
Please turn to slide 10.
Overall, lifecell fees were down 7% year over year or 5%, excluding those Q2 2019 fees related to the sold us individual markets business.
In Canada the decline in fee income was largely due to reduction in esso fees relating to.
Lower claims volumes.
Although average Canadian AUM was down year over year due to market levels. It was muted by positive net cash flows given our resilient business model.
Turning to the us fees remained flat year over year than power, while Putnam saw a reduction in fees due to lower average AUM.
In Europe fees were lower due to the sale of the Scottish friendly business in the UK and a new reinsurance treaty in Ireland.
Next on Slide 11, we'll look at expenses.
Life core operating expenses were up 3% year over year, reflecting expense discipline companywide as well as strong business growth and transaction costs in reinsurance.
Strategic investments continue in Canada and across Europe, while travel and training expenses were lower due to covert 19, Lockdowns now I'll turn the call over to Gary to review financial highlights Gary.
Thank you Paul.
Starting with slide 13 base EPS was 76 cents up 13% year over year, driven by strong base earnings growth in all four segments.
Net earnings per share with 93 cents with the additional contribution from actuarial assumption changes and other market related impacts on liability.
Last year's results included a loss recorded on the sale of the us individual markets business and excluding that net earnings per share were up 33%.
In Canada base earnings improved 8% from last year with solid business results continued strong trading gains and a lower effective tax rate this quarter.
In the us after excluding 30 million from in Q2 2019 from the sold individual markets business base earnings were up 16% year over year underlying business growth was solid at empowered with participant growth of 5% improvement in Putnam's results was due to unrealized capital gains.
Reversing most of the mark to market losses seen in Q1 and also from Putnam's continued focus on operating expense discipline.
In Europe base earnings were up 15% as investment results improved considerably from last year, when the UK had experienced sizable retail property losses.
Insurance experience in Europe, including morbidity also improved from last year.
Capital on risk solutions again saw very strong year over year growth, particularly in longevity reinsurance solutions.
Base earnings were up 63%, reflecting the contribution of significant.
Longevity, new business written over the past year, plus new business gains of 4 million recorded this quarter compared to new business strain of 36 million last year.
Overall base earnings have been very resilient notwithstanding the covert banking environment with good underlying operating performance, including strong investment result expense disciplines and growth in all segments, particularly reinsurance.
Turning to slide 14, the table on this side is a reconciliation of base to net earnings we have shown both Q1 and Q2 the highlights some of the market impacts across the two quarters.
Base earnings have improved since Q1, largely due to seek capital gains lower new business strained and strong investment results.
I'd also like to highlight a couple of points on the excluded items on actuarial assumption changes, we saw a full reversal of the Q1 equity market based assumptions in Canadian individual insurance, along with other experience related assumption updates, which I'll cover shortly.
For other market related impacts those that are tied more closely to the quarter end market level. These mostly reversed where certain items like the impact of hedging effectiveness or UK property value declines in Q1 did not reverse.
Please turn to slide 15. This table shows the segment and total life code net earnings results from a source of earnings perspective.
Adjustments to get base earnings are footnoted, and the answer we categories above the line are shown pre tax.
Expect expected profit with level year over year as a reminder, we reset expected profit at the beginning of each quarter, we starting market levels being one of the key inputs.
We began Q2 at a fairly low market point, which dampens expected profit, but then we recorded experience gains in fee income as markets recovered sharply during the quarter.
I'd also note Q2 2019 included $23 million of expected profit from the sold us individual markets business.
New business strain was typical of recent years averages.
Experience gains and losses and the assumption changes contributed positively in the quarter and I'll cover both in more detail on the next slide.
Earnings on surplus contributed $102 million on the strength of seed capital gains in Canada, and platinum totaling 45 million and realized gains on the trading of assets backing surplus of 55 million.
The effective tax rate on shareholder earnings was 9% this quarter generally reflecting jurisdictional mix of income as well as changes in certain income tax estimates in Canada.
Please turn to slide 16.
These tables expand on the experience results as well as the management actions and changes in assumptions to highlight various items in the quarter again on a pre tax basis.
Starting with experienced results yield enhancement continued to contribute positively.
The widening spreads referenced on the Q1 call provided attractive opportunities, particularly early in the quarter and equity release mortgages continue to contribute.
The market related impact on liabilities includes the impact of market recoveries on the value of segregated fund and variable annuity guarantees net of related hedges.
And includes the legacy blocks in average life and reinsurance. This is largely result of remeasuring the liabilities using the market level and interest rates at the end of the quarter.
Experience losses also includes some hedge ineffectiveness on our GMWB products this quarter, but these were at much lower levels than had been seen in Q1.
I noted the Q as the fee income experience gained earlier as the market recovery lifted a UN I'd also call out that there were a non material combined net impact of mortality longevity and morbidity.
In many cases, it's difficult to determine what this coverage related versus other various factors, but we do benefit from a diversified book of business.
As Paul noted the sharp reduction in certain plane types, such as routine dental does have a knock on impact on processing fees and expense recoveries, particularly for administered administrative services only contracts.
Credit related impacts were modest this quarter, primarily arising from bond downgrades and mainly in Europe.
Looking at the actuarial assumption changes on the ranked I'll call out the Canada equity assumption, which was a positive 134 million pre tax this quarter fully reversing the negative in Q1.
Also in Canada. This quarter, we lowered our future real estate growth assumptions, which was a negative impact of 45 million pretax.
You can also see the net positive results of other experience updates recognized in the period with the impact of assumption changes for longevity, partially offset by those for disability.
Please turn to slide 17.
The Q2 book value per share of $21.98 was up 5% year over year, but down 2% from Q1.
The improved contribution from retained earnings this quarter was more than offset by currency translation and pension plan Remeasurements both recorded in OCI.
So I can't ratio at CAD life remained steady down 1% from Q1 with strong retained earnings offset by new business requirements, particularly in reinsurance and currency translation.
Given the line Cat design the market impacts were again very modest.
We have added new line cat sensitivities into our Mdna this quarter to help in estimating these impacts going forward.
Plateau cash rose to 1.7 billion with additional dividends in the us from Paula a great West life and annuity our US insurance company plus a 600 million 10 year debenture issued in may in anticipation of refinancing an upcoming maturity this month.
Note that needed to 500 million August maturity, nor the additional 500 million of 30 year debentures issued in July are included in this number.
Overall, we remain well positioned from a capital and cash standpoint.
That concludes my formal remarks back Q, Paul Thanks, Gary.
I'll now ask you to turn to slide 18, where we will briefly review our GLC asset management limited transaction announced yesterday.
So as you know lifetime reached an agreement to sell our Canadian asset management subsidiary Gene also you asset management group limited to Mckenzie financial.
This deal Leverages common ownership, an already strong collaboration between our organizations, while advancing our efforts to improve and accelerated cannibalized swells offerings and business as background. We believe successful wealth managers need to control their product shelf and customer solutions, but they also need access to asset managers with.
Consistent high performance upscale mandates and product innovation and RUPS by combining GLC with Mckenzie Cannibalized will have access to an asset manager with these strengths and we'll we'll be able to focus efforts on delivering high quality, well solutions to individual and group customers and distribution channels.
Yes.
Let's go received net cash consideration of Canadian $145 million and will assume fund management responsibility for the cards. This group of funds for this reason cannibalize was currently in the process of establishing a new fund management company.
We expect the transaction to close on the New Fund management company to begin operations in Q4, twentytwenty subject to regulatory approval.
Under Canada Life's New Fund management company will have greater control of products than pricing, while leveraging Mckenzie is asset management and fund administration capabilities.
Our goal is to strengthen our overall wealth offering for our customers going forward.
Finally, I'd note that earnings impacts will be different between lets call NRG because of synergies another accounting considerations.
Let's go expects to record a gain on sale upon closing.
Ongoing earnings impact Alesco is expected to be a decrease in the single digits dollar millions range.
Moving to slide 19 will briefly review empowers acquisition of personal capital as noted on our June analyst call unveiling the steel the acquisition of personal capital aligns with our strategic growth objectives from power.
Im power has grown to become the second largest defined contribution record keeper in the us with $667 billion of assets under administration and 9.7 million participants.
As you recall, we've also been building out our IR raised business.
Together these highly complementary businesses supports our long term growth objectives in the U.S on its own personal capital is a compelling hybrid wealth management model that can create shareholder value.
Working with some power. We believe the addition of personal capital will accelerate our IRA rollovers business and increase our capture of participants out upon ourselves.
In summary of the transaction will possession and power with the new Standalone high growth platform. It will accelerate empowers growth plans in defined contribution focused retail advice and wealth management and that will enhance empowers already successful DC recordkeeping business.
The acquisition includes upfront consideration of US 825 million and the deferred consideration of up to 175 million new us subject to achievement of target net new asset growth objectives.
Beyond this transaction and power continues to be well positioned to participate and consolidation of the US do you see record keeping space.
Finally on slide 20, we'll take a look at what's ahead.
Before we open the line your questions I'd like to note does well some countries' economies has begun to reopen we recognize there is uncertainty ahead as the pandemic is evolving do today.
For that reason, we continue to put the safety and security of our employees advisors and customers first as jurisdictions change or an act new pandemic measures.
This through our intense focus on leveraging digital tools and technology that we can continue to support an improved customer and business outcomes, even while employees work from home.
Our digital footprint will continue to grow and adopt not just to fit our customers changing needs, but the changing times that we live in.
We remain laser focused on advancing our strategic priorities in Canada, the us and Europe as I mentioned earlier, while the Cobas Nineteena environment presents challenges. This can also present attractive acquisition opportunities as such we remain actively engaged in assessing opportunities to scale and extend our businesses.
In closing local remains well positioned to fuel business growth and shareholder value creation through differentiation and disciplined deployment of capital while responding to the challenges presented by the pandemic.
With that I'll ask the operator to please go ahead and open the lines for questions.
Thank you.
We'll now begin the question and answer session.
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Our first question.
Thomas from Steve barrels of eight capital. Please go ahead.
Thanks very much.
For starters I was on ask a question on Canada in the materials, you talked about premium reduction being phased out July.
So just on deferrals, how smoothly has that gone when you talk about to any trends in the Lapsation and is there any.
Was there deferrals into August and beyond like how much to what extent there's been a potential.
Yes.
Thanks, Steve and actually turn that went over to Jeff Macallan to respond just.
Great. Thanks, Paul Thank you for the question Steve.
A couple of things in there how has it gone as as Paul indicated the deferrals.
Stock in June and there will continue to monitor the situation, but we do see dental offices pair medical services opening up and so we'll continue to monitor as we move through the fall here if things change of course, we will.
React and proactive that it's gone very well with customers and working with advisors across Canada.
Surprisingly we've seen very.
Very little a reduction in terms of participants across Canada with plan members and the termination so with clients have been left a lot less than we expected. So overall, it's gone well and we'll continue to monitor the situation.
Okay and then.
The one asked a question on Europe as well can you just give a little bit a detail around the elevated strain in Europe.
The outlook for the second half meaning.
Put some measures in place to moderate screen.
I have two or is it going to talk a little bit longer because that means the environment.
Ill first refer that went on to Gary because as you know Steve sometimes the stream. We take on is because there is a great business opportunity that as a bit of strained early on in the transaction, but is obviously ultimately going to create.
Value long term. So there is so we need to differentiate between.
Sometimes on were taken on business of that nature, Gary maybe you can respond to that end up you might referred on to David earnings after that.
Sure.
I wondered when it comes to Europe I did note a couple of things first off as Paul is mentioning.
Fair chunk of the strain in Europe, I would come from.
But some of the businesses that Irish like where they're more investment context on so you you can't defer the upfront acquisition expenses the weekend on some of the insurance contracts. So those like Adam how are those tend to have a bit screen associated with them and thats, what we call good strain because obviously we're pricing.
Great and good business there.
And then the other thing I'd note is that.
That often in the past we have had.
New business gains from bulk annuities picky, UK bulk annuities and that we didnt have that whereas this quarter last year, we actually had quite significant new business gains in the UK and in this quarter been just weren't any so there was theres not an offset and often in according to have an offset that may be white looked a little high.
This quarter, but nothing really unusual.
Yes, Steve.
We have almost characterized.
We are giving an echo there.
I would characterize that as kind of negative string when you book an upfront gain on that so what you're saying here is the lack of that negative strain offsetting just the natural flow of the business.
Okay and club a bulk annuity sales that were.
Get lumpy. So the downside this quarter's theres no that was continued to be indication sort of normal fashion. There is no. There's no sort of indication that the bulk annuity sales will be sustainably low through through the pandemic anything like that.
No as now I'll turn that one to the David Harding, who can speak to sort of the activity. We're seeing the bulk annuity space in Europe and UK in particular, David.
Yes, the deposit slowed down a departure.
All right because we have seen activity picks backup and just over the summer. So we expect the second half the year.
Today to be at more normalized good pipeline business and.
Okay, we actually was a dark quarter to withdraw it causes the virus and Thats come back and we want that chance guests, we expect still assessing the second half. The that's such a good example, the market is taking back up again.
That's very helpful. So just sorry, just to finish up are you able to size the beginning from the GLC sale.
Gary I'll, let me respond to that one.
Sure.
Yes in terms of.
Again, we haven't finalized the accounting at this stage, but I'd expect to gain in the in the ballpark of 100 million could be a little more.
That the after tax.
Yes.
Okay. Thank you so much.
Our next question comes from Meny Grauman of Scotia Bank. Please go ahead.
Hi, good afternoon.
Q1, you.
This closed at the Covidien impact on base earnings of 65 million after tax I'm wondering.
The equivalent would be this quarter. If you have then.
Yes.
I'll turn that to Gary as I think he was saying when you look at some of the mortality it's hard to unpack how much of a you know shifting changes in mortality is directly related to covert Gary perhaps that's one example of words to get precise has not.
Easy, but Gary I'll, let you respond to that sure I might just refer back to slide 14, when I was going through the presentation. What we tried to do hear it. It is as as time goes on in Q1. It was fairly at a point very directly to the market fallout from Covidien in March at risk.
Very clear as the quarter unfolded as the next quarter on hold the you've got all sorts of.
Factors that are driving results summer covidien related is the market recovery cobot are not cobot. It's those types of what we did instead, we just trying to when we did the earnings reconciliation. We just tried to show here is Q1 in Q2 broke into base a non base just call. It some of the things that move between them. So Youre. An example would be.
We had seed capital.
You'll losses recorded in Q1, I think is in the order of.
30 million today at Putnam and these few 80% reversed in Q2, so you could call that cobot related but we didnt do at tally up and have a cobot fine for that because it was just not possible to really accurately separate the two out going forward.
Yes, I guess I'd add to that Gary the analog away just because of the market recovery.
Other aspects of Cowen related so you know challenger for instance, we referred to the bond portfolio of 18 million, we referred to it a little bit of invested property.
Charles those things were frankly.
A lot it was broadly offset by the market recovery, but it was really kind of taking back some of the equity markets.
Losses also mark to market losses that we had occurred as that incurred in Q1, and so it's hard to measure, it's really kind of getting a sense of.
The momentum here and the momentum because of the the the strong equity market returns has really been a dampening of any implicit cold weather impacting quarter.
Fair enough I guess, that's I'm trying to get injured terms to understand part how the impact of covert.
Laying out relative to your expectations and I guess it would seem that is playing a better side just wanted to confirm that and then just see if there any aspects in the business that are actually having the harder time than what you expected.
Yes. So if you go back to the slides that we laid out on on.
Earlier in the presentation I think of seven and eight.
I guess the way I would characterize that slide 678 is that.
At this stage I wouldn't say the impacts have been a bit more.
More moderate than we would've expected.
And to larger sense again that we saw them good recovery in equity markets I think what we've found for the most part is that our business model is very resilient and if you're kind of go to thinking about what's the what's happening was the business we started off with.
Strong them conservatively managed.
Our balance sheet, when you think about our invested assets portfolio and I guess, our expectation has always been with the diversification. We have got with the conservatism. We've got there is obviously going to be downside related to economic impacts, but we always believed building monitored moderated because we're kind of our risk assets there.
Secondarily I think across the businesses.
And as we've outlined we're starting to see adult reasonable recoveries and sales activities.
In markets, where.
Some of the so the limitations.
On physical distancing November listed so we like the we'd like to see under an underlying kind of trajectory of the businesses, but we can't really estimate or what will happen in the external environment right now today external environment, we've seen the moderating impact of equity markets coming back.
But we do you can't project, what will happen with equity markets into future quarters, but I would say overall, we're seeing strength of our resilient business model strengths of a conservative invested asset portfolio.
And that's in part has kind of moderate as the the downside for us to date, but your test you don't know what will happen with the economy going forward.
Thank you very much.
Our next question comes from Gabrielle Duchaine of National Bank Financial. Please go ahead.
Hi.
Good morning, just a quick afternoon sorry.
Quick one on the a premium refunds and in group is that the part of the.
Non market a negative experience in.
On the.
First is running flooded the 42 million after taxes or something else.
Yes in terms of geography of that Gabrielle.
Gary made reference to ask so fees.
Yeah.
So bottom line is.
Wow.
We the way you know the winter we received fees on that as based on actual transaction. So we have a number of dental transactions and old people weren't going to the that's US there was no transaction Sanofis I'm, sorry to give a drag on that becoming a bit of a drag on your overhead as well because that obviously covers the cost to overhead. So thats the jobs live that anything I've missed on that Gary.
No I think as is the premium refunds weren't part of that line Thats more of the other factors here.
So that's the group by them and you talk about it in MDM and it also saying that.
Starting the that'll be much much lower.
All things being above all else equal going forward.
Yes, I think the volumes the transaction volumes are picking up so we'd expect the fees will pick up with the volumes yes.
Okay.
Finally, the morbidity and maybe group experienced with Gordon.
Perhaps Gary you can start off with a qualification and then.
When we go to just provide some insight into.
The action plan there on group Ltd.
Yeah, well, where we're getting other people talk about it maybe not just what happened in the quarter, but in the.
Mdna, you're talking about physical distancing itself isolation requirements that are the.
Sounds like mental health, so the way, our Rita and that's a something that you're assessing on how to price. So for on renewals of has experienced the merger new yeah, what happened in the quarter do what the outlook is for that particular issue.
Okay.
Dairy why do you start off with the quantification then Jeff can speak to what we're doing from an operational perspectives.
Sure so the.
The overall.
Of the overall morbidity and longevity and mortality, which as we noted earlier largely a net sent the Canada morbidity so across all the various.
Lines of business that was with modest I think is minus 14.
Okay and and so.
Quite modest as a contributor to that.
Pluses and minus within them.
Got you.
Joe you want to speak to the the actions, we're taking and there's a bit of insight into.
Of the way we're.
Whether it's on the pricing or on the claims management.
Perfect Yes.
Thank you Paul so as you're aware that this this is a one year renewable business. So.
We took action in January a a rate adjustment that is flowing through the system and in this business. It takes about a year to to get through the system. So we're halfway through there and and a bulk of our renewals will be the started here. So we're very pleased with that so that will start to see some dividends. There we took some further action.
In the mid part of the year in June on additional pricing actions to get at to get out. There. So that will also begin to flow through the other action that we took from a management perspective is that we've increased our disability management complements significantly we began doing that so early in the year. So while we are at full complement now and.
And we've added some extra specializations again as you referenced on the mental health side. So those are two two key issues that that we've been dealing with them. We feel very comfortable will help us to get ahead of the disability situation.
My last one is on the management action, Let's say you go 65 million close tax.
Reserve release from updated equity in real estate return assumption in Canada. So the real quick return assumptions were lowered and $33 million.
Strengthening.
But the $90 million release from equity.
Miraculous return assumptions and I'm, just reading them DNA and that's it sounds like an in quarter in quarter equity market recoveries.
And.
I saw that happened in your release reserves.
I look at reserve releases or assumption changes, but those are for long term.
Assumption, that's something I would have happened in the quarter that would have spurred by.
From El Salto.
It's Gary Paul Jami pick that one.
Yes.
Now I'll take that so yes in terms of the Youre right. We did both so the the 90 million to best we think it as a reversal of what occurred in Q1, where our assumptions were also impacted by the the maxims under the Canadian to accurately standard.
So you've got the interacted the standards with our assumptions as well, which is why he went to it went down sharply in Q1, and then back up sharply in Q2 as to what was happening on the equity side, whereas the real estate time was just a.
A lower growth assumption going forward.
So you're going to reserve assumptions.
An assumption thing just on one quarter the equity market will grant the big ones, but.
Hi, just seems at odds with how I understood. It work.
Yes, typically typically there is a as a potential for buffering in that you over the last number of you've had a bit event, which is really moderated down but as you run up against the.
The threshold in the actuarial standards you tend to get more of.
A straight to the bottom line to the assumptions both ways op end down.
You don't have as on suffering.
We ended up on that one thanks, Okay sure.
Our next question comes from Doug Young update Chardan. Please go ahead.
Hi, Good afternoon, Gary just maybe kind of sticking with you in on that topic had been named I think was 98 million. That's was release related equity markets and management actions and assumption changes because I was at the view that you did kind of the corridor approach and so you always had a buffer and see didnt mark to market nicely. Mrs for equities that are backing long term liability.
But it doesn't seem like you have that buffer anymore. So is this just essentially a mark to market in that portfolio as we would see with somebody other insurers and is that what we should expect.
Going forward.
Oh, Gary you might as well get right about that one yet artist to say, it's a follow on and Thats really was trying to provide earlier it is.
It is very similar to that core to our approach to that some abuse. However, when you get up against the actuarial a threshold you don't have room in your cortical quarter anymore and so it is more of a mark to market do you don't have that buffering and thats. The situation. We found ourselves in Q1 in Q2, so really I think going forward to the extent to continue.
Recoveries, then that will likely be buffered.
And.
But it was really that very sharp drop in Q1 and the sharp recovery.
With me to move more like a mark to market. That's a good description.
So you kind of reset the corridor, but you chose not to his side just because you you like why wouldn't you have reset the core door and reset the buffer or is that not the way it works.
That's that's not the way we've gone about it in the past wouldn't have been consistent with how we've gone about it in the past that we.
We stayed with that it's just the way we hadn't in the past bumped up against the actuarial threshold for the same way.
Okay, and then just do that on the credit side you quote in slide 16, 14 million, an after tax impact, but when I look at the end DNA on page 14, you talk about 27 million after tax impact from credit. So I'm just wondering what the difference.
Is between the two numbers like what's the 14 during the 27.
The.
You want me to the carrier of Apple hopefully this.
Yes.
The the twice I think it will depend on what we what we put in in which category between the two.
In terms of.
What we put into one thing I would note about and it's probably I don't know if it's all the different but I imagine it's a it's a majority differences we do assume a certain amount of.
Credit activity in our expected profit in other words, we assume some downgrade for example in our expected profit and so in the experience gains we're talking about credit impacts above and beyond what we've already quote unquote, putting expected profit and so whereas the mdna I believe is talking about the absolute quantity in the quarter.
Thats going to be a different there.
Okay. Okay that makes sense. Because then you had the release of your eight asset default prevention and then the net impact would go through like your best estimate would go through.
Your P. pad would go through expected profit and your best estimate would go through experience is that right.
Yeah, Okay. It's along those lines in other words, you anticipate some downgrades are already baked into your expected profit.
If you don't get any you have a gain and if you have exactly the amount it's neutral and if you have more downgrade then the extra downgrades or what is in the experience loss line.
Yeah, I think I think I get that and then just lastly on the light cat I just want to make sure I understand that thank you very much for given the sensitivities.
Lets equity markets and interest rate, but you also talked about the shift in the rate scenario and then I think that says that shift in that scenario would have impacted the ratio by 5.5 point.
But that's actually going to be phased in I think over in six quarters is that's the way. So there's that smoothing mechanism coming in so if it was an immediate impact would be five point by point, but those that smoothing mechanism that point, that's going to put that true unless the rate scenario goes back to what it was before I do I have about roughly right.
I'd just point out one thing we didnt actually have any shift in this scenario this quarter so business.
Flagging and I believe a summer major appears to have also flank. The same issue where they can arise we'd like can't where you can get a bit of a discontinuity.
I ask you recognize that this year and is putting this moving and ER and so we're just saying that if it didn't happen to US then that would be the impact and it would be smoothed out with a six quarters.
Okay, great. Thank you very much.
Thanks, Doug.
Our next question comes from Paul Wogan CBC. Please go ahead.
Thank you.
You made a few comments regarding.
Credit risk in your prepared remarks, which were helpful.
However, when I look at credit rating agencies or number of downgrades as well.
Got it right.
The factors point of view that credit risk if anything.
Yeah in your prepared remarks were relatively costs and again.
No one.
But just wondering are you seeing anything in particular and credit trends that concerns you are.
By the cautious tone.
Well.
I think you're saying that I was being maybe.
We have about it as opposed to cautious.
Our views are that we do believe that were.
We're in the middle of this credit cycle, and there's more to come and we recognize that I would say my you know my my more positive status would be the fact that we do have a high quality of books credit book in terms of invested assets.
You know a significant quality of significant percentage, a raise it or stronger but that said.
We can't predict or project, how long the credit how long the credit cycle will play out.
So I would say that we remain.
You know diligence on ensuring that we manage our credit.
But at the same time, where we're comfortable and confident that we've done the necessary de risking and taken actions to limit our exposures the raman anything you'd like to add to that.
Sure Yeah, I'd, just add I guess, you you're right. The market has recovered quite a bit spreads are in public equity has done well I think part of the reason we're cautious if you look at the agencies by and large most sectors remain on negative watch. So we do expect more downgrades and as Paul said you know there is uncertainty as fiscal stimulus comes off as to what the risk.
Sponsors will be in the market. So we know we tend justice to view it cautiously as if you look at our exposure as Paul was mentioning.
At work begins to bite on the downgrade side is when you cross into high yield and given that we have very little in below investment grade and also very little in a triple b minus category that should buffer, but those are the reason to be cautious just that the amount of sectors on negative watch and uncertainty as fiscal stimulus phase yeah.
Paul I guess.
Moving to put it another way.
[music].
You saw what we experienced in quarter relative to our current invested assets book and it was relatively modest we don't see any anything startling on the horizon, but we cannot speak to what the future old. So I think we remain cautious, but we also remain reasonably optimistic because we have a.
Very conservatively invested asset portfolio. So it's kind of I think were better to remain cautious and make sure that were vigilant and managing and monitoring at a very close and very close what.
Okay. That's helpful.
Good question is also related to.
But there may be on your.
Real estate and mortgage.
So we provide excuse for details on payment deferrals, but just wondering how you're thinking about potential for revaluation risk on to see update your return assumptions in the quarter.
Generally real estate portfolios are getting mark down like how are you.
Categorizes impairment or simply revaluation risk.
Oh, let's all let robin speak to that because that's obviously you know something that we're thinking about in particular it'll be aware that you know when you look at our.
Our real estate funds in Canada, we've we've put a stop on any cash flows in or out of those are with us very purpose, because it's hard to lock down on volumes at this point in time, but Raman maybe you can quite a bit more color on our perspectives there.
Sure I guess, maybe acting a little bit of the same themes that we were mentioning around credit. It is early and we've seen stability in certain sectors of the property market I think cross regionally. If you look at some of the detail in the back of.
Of the slides that we put in what we have seen as more stability say for example in industrial space or in the office space for multifamily.
Versus retail.
But we do recognize that it's early and like I said before a stimulus comes off we have to be cognizant of the risks there.
And I guess the other thing I'd say is within retail obviously, it's not all the same. So if you look at some of that detail again, we have in the very very back which breaks out or retail exposure in more detail, we've definitely seen more stability in some areas like distribution warehouses or grocery anchored retail versus department stores or shopping.
So.
So we take some comfort and the fact that our exposure in department stores and shopping malls is lower in particularly in the mortgage side in the pre financial crisis, we've highlighted that in the past that's where we've had some.
Some issues in the past that's down to about 99 million today that exposure so.
Again, just cautious on the uncertainty that exists in the space going forward.
But again, given where we're starting from we think the rest are manageable.
Hi, Thanks, Robin I might put a is that where we're cautious on the external environment, because we don't know exactly what how this will play out but we feel confident in the steps we've taken to de risk the portfolio since the last since the 2008 financial crisis, including shifting to things like where hopes.
And distribution centers more needs based raised to retail as opposed to show you know traditional shopping malls. So we like what we've done internally and we.
We remain cautious cautiously optimistic also.
Not knowing exactly where the external environment will go.
One more quick.
Okay.
The geology.
Management transaction to come on it sounds to me, it's kind of curious on the formation of.
Canada life investment management.
Division, what's kind of.
Ill.
And is that if you're going to sell off.
Yes, I'll provide a bit of context, but I'll turn it over to Jeff.
As we think about assets as we think about wealth management and asset management and how they play together.
You know in the context of wealth management assets can you grow wealth manager to debate intimately engaged with customers and advisors, who need understanding what are their needs one of the product solutions, they need whether its portfolio solutions and the like so that's critically important that we have control.
And then understanding of that.
But then what we need as we need strengths of inputs into those into the wealth management solution. So we want to have no partnerships and relationships with strong sustainable and competitive asset managers wholl provide those inputs. So the creation of a you know a fund management complex positions us.
With all the tools and capabilities to build solutions, the partnership and the relationship and the MAU putting GLC.
Combining jealousy with Mckenzie creates a stronger asset management partner to provide us with inputs you always some higher scale more diversified.
Therefore, no greater opportunities for performance and upscale mandates. So we like the idea of controlling the shelf into solutions for customers, but that's how we're real strong partnership with a highly competitive asset manager that's kind of the backdrop, perhaps just can provide a bit of context as to how this is kind of playing out and what were you know how what the market reaction is.
[music].
Thanks, Paul.
Perhaps a couple of comments, perhaps too on top of what you said first of all I participated in a number of calls are both last night with wholesale and today and the reaction from advisors and our wholesalers has been.
Overwhelmingly positive. This this really speaks to our ability to strengthen our wealth strategy in Canada as Paul.
Mentioned, it really allows us to focus and grow our wealth management business, which is key to our overall strategy in Canada, but but in addition to this I would say it really allows us to sharpen our focus on developing.
Best in class product.
Missions and at the same time it gives us access to.
Industry, leading investment management capabilities, as Paul mentioned and support our strong distribution channel us both on individual and group business. So we're very bullish about this it really gives us best of breed in both areas and allows us to take charge and ownership on products and innovation and pricing in a in a very fast market.
Thank you that's it from me thank you.
Thanks, Paul.
Our next question comes from Tom Mackinnon of BMO capital. Please go ahead.
Well, thanks very much.
When I know.
HM.
And yes.
And then just one quick.
Generally higher.
Okay, well what is that.
The last.
Really happened.
Could you typically term out.
A little bit at all there and.
Well that.
Probably higher than normal.
Order at results.
[noise] movement spread so.
A little bit smaller there could well by saying.
You do that.
How should we be thinking about.
Well.
I'm.
Going forward.
Thanks.
Okay, I'll, let Gary start off on a better context around the the is earnings on surplus than yield and he might turn to.
Rama interboro bit of insight into kind of the geography of assets, but I'll, let Gary start off on that what Gary.
Sure Yeah, maybe I'll start with the the surplus gains they were a little higher this quarter than they have been in a number according to the path and part of that was opportunities arising in response to sharply lower interest rates is creating greater unrealized gains that we were able to realize those gains so.
And part of that opportunity going forward will depend on the direction of industries, but that was what was driving that this quarter in particular and I think the number within the.
I'm into 60, plus range and that is a bit higher than typical.
On the a yield enhancement side of the number or the hunt just over 100 million pre tax number no that unusual in the historical context, I think 80 to 100 is it dipped below it does vary quite a bit by.
Quarter to quarter, depending on the opportunities, but that's not a I wouldn't have said it was an unusual amount most of it was in Canada. This time around it and I.
I think a couple things maybe this will Raman can add color I think we yeah. We had some attractive yields early in the quarter to spreads are quite wide and then we did their notwithstanding some disruption to the origination.
Equity release mortgages.
From our UK offers we were able to human hand timber assets and take advantage of an attractive spreads on equity lease mortgages as well, so maybe that Brahman had something to add to that.
Yeah, I don't even covered it well get into again, that's gonna mentioned the equity release and I guess, the only thing I would add on the on the bond side. If you remember time back.
In the especially early in the quarter, we saw just a tremendous amount of issuance. After they said another central banks came in and provide some comfort to the market and especially at the beginning in those new issues. There was quite a bit a concession in spreads were still quite wide at that time. So we were able to benefit from from some of those assets they came to.
Market and I think that was part of what fuel be thinking has been as well.
Okay. Thanks for that one morning with respect to dry bulk annuity Mark will then you can.
What extended this markets that impacted by mode right.
And.
And how do low rate impact they impact in terms of color in terms of margin.
Look a little color around that thanks.
I think thoughts.
Good question for a David our need to start with.
So first of all laid out a little color us if they would like David.
Yeah, but I think rates nothing no and youre, providing the tests that have come in and it is really does not that much impact because both to the bulk annuity market in sands, it's it's transparent liabilities from pension schemes and those kinds of asking themselves I would be backing go inside indices that with fixed.
Taking two lots as Philip.
Interest rates come down to pension schemes with the assets hockey's on site.
<unk> increased behind those assets that they love using SEC Tobias indices. So it's really the low rates being Tim.
The Americas.
Well they impacted my capital you have to hold again.
And the competition, maybe a little bit higher on but that that class, let's go back into the pricing.
Absolutely I sleep at 10% South part surprise to us.
Maybe that's coming up and that's a bit but perhaps move materially.
Okay. Thanks for that.
Thanks, Tom.
Our next question comes from Mario Mendonca TD Securities. Please go ahead.
Yes, and outside Encyclopedia, we gain the gain on sale of DLC, Gary you referred to hundred million dollar exactly back, but I do track and saying that that will be treated as non earning.
[music].
Correct.
And then.
Industrial I'm talking about it until you are tired.
For our chain you on hard.
Absent from 3.05% 2021, you share that means that are likely going to see some kinda you are our charge.
And when what 40, you figure walk through that reported.
2021 or in 2000.
Gary perspective on that yes, I mean, we have heard there there are some discussions about.
From a standpoint has the process for Ah.
For deliberating on on you are changes and I have heard that that there are right. There are discussions underway I understand that it does go ahead. It wouldn't be 2021, not 2020 and typically those type of changes are effective on October 15th in that so that the.
They fit in line for year end for both the bank owned insurers and for life insurers and so typically and companies have the ability to adopt movie. So if something came in in 2021, and I think thats again, depending on the the actuarial standards board process than but if it does come in and I I wouldn't I certainly wouldn't that again.
And.
Then I think it would be in Q3 next year's likely when we'd recognize it.
Okay then.
Real quickly on the [laughter] sensitivity to market.
I think you disclose that is 20% declining markets would impact.
$550 million.
After tax that was in line for example, what I'm interested in understanding and this quarter what backup market Hmm.
On or.
About $35 million, so what I'm trying to understand that hundred 63 million.
Is that a good crop or what would be treated as non day or is that the total impact the equity markets on your earnings.
Gary too Yeah, I think I think a lot has the I think a lot of the impacts or go to be in the in the non base. There's there's not much picked up through through that and the disclosure. This MTV. His exposures are the point in time and I think those are almost all non base. The only one I'm hesitating on I'll start my head is the seat count.
No, but other than that.
All the rest would be the typical thing you're seeing going through the non base.
Okay. That's it.
A little bit this quarter, because based on the sensitivity to close you would've expected a much greater beginning in year non top like non days during the quarter because you have to be yes, actually up about 16%. So I guess, what I'm getting at is why the non billing, yes, 35 million so modest given what happened with equity Mark.
I just a I would note that you if you looked at the.
The 35, Youre right, you're not picking up the and updated equity return assumptions are also driven from the market and not so we talked about earlier on the call with the the equity the 98 million.
Equity, that's that's probably different yeah, I didn't see said and then just final question. It looks like the company building up quite a lot of assets at the Holdco level.
After $1.7 billion now I know this is the maturity coming up but there is also another issue coming up so what I'm getting at is now why wouldn't the company building up so much faster at the Holdco level is that is that a defensive posture that offensive.
I'm changing your thinking that's causing you to build up that much cash at the home.
Gary I'll start on that one.
So so if you look at <unk>.
Our posture in quarter.
We actually have been proactive on on M&A on repositioning book on strengthening the portfolio. So we announced the you know the acquisition of of personal capital.
Finally, we're doing the GLC transaction will be recovering some capital or all the having a game there.
But suffice it to say.
We like a strong capital position I guess in part because you want to have.
A degree of downside production, but we also remain active looking at opportunities to scale and extend our businesses as we've said in the past you know we've seen great performances Putnam from the standpoint of delivering for customers, we're seeing great discipline without management team in terms of getting that cost.
But we also believe that scaling that business through M&A can unlock a lot of value.
We look to empower no weve.
Bill.
Very strong business is strong and scale business you know, we're gonna couple it with empower and then when we look to the future. When we say we still fundamentally believes that the the portal one record keeping or the do see record keeping market will will ultimately you know, it's going to consolidate and we believe that.
You know mpower should count on should participate consolidation and again, we look to Europe, and we look to do.
No news to deploy capital either by scaling some of those businesses were extending some of those businesses. We've got a great retirement load wealth platform, but you can really benefit from having a you know a stake in our wealth manager in the UK. So we've got a team that is very active looking at opportunities.
Because of the dislocation in the markets.
You know some things slow down, but sometimes opportunities arise as well so I think having lots of capacity on Honda is a wise thing to do in this environment.
And Paul I, just add that a part of it was taking advantage of very attractive conditions for is to write the the 30 year.
Debenture at a very attractive all in coupon just a right around the 3% Mark for 30 year, a senior debt was it was very attractive opportunity to to physician is for.
For these strategies going forward.
Okay.
Hi, good.
Once again, if you have a question. Please press Star then one.
Our next question comes from Darko Mihelic of RBC capital markets. Please go ahead.
Hi, Thank you all my questions relate to the capital risk solutions group.
And I might refer to some of the supplemental slides just to get it right de of what's happening here.
This strong growth that we saw year over year makeup.
A number of references to business growth.
So a couple of questions around that first within the supplemental.
The only place that I can see strong growth is in risk based revenue premiums. So the first question is.
When I look at this case, then yes, I do apologize I don't have that much of a great history with this business I don't I've only got three quarters, a source of earnings so I'm trying to better calibrate my model, especially with the expected profit and the impact of new business. So when I look at Red.
Based revenue premiums and you can you give me an idea of what that trend is there should I be driving where should I be having a follow on impact on the expected profit on enforced for this business segment and the second question is if we have strong business growth.
Why is the impact of new business. So small add was only 4 million positive this quarter and negative two last quarter.
You know that that doesn't necessarily connect so maybe you can educate me a little bit on grain, we were impacted new business up for for.
This business stagnant.
Good question Darko your normal gentlemen, it turned out to.
Gary concern, but I think our shoulder ball can provide some good color on the divert the it's a diverse it's a very diversified business with lots of different self segment. So that the new job a different you know earnings trajectory and province segment driven a lot.
Gary start up maybe at a high level and then urschel can add some color Gary Yeah sure I'll just make a couple of quick comments. One is it's really more on the on the source of earnings side and then our system cover off the business growth at two things that no. One is the new business gain in the quarter is not not particularly the.
Good measure of the the longer term contribution of.
Our other businesses, it's and it's a very much a one quarter point in time, just as you set up the initial a actuarial reserves and where do you got a little bit of again, you're expecting a front or not I, what really drives the business and it's very true in reinsurance is the growth in expected profit.
So you could have a bit of stream one quarter, we had them and we've had a you were going to smaller again this quarter and that just really depends on the characteristics of a particular transaction, what we really focused on there.
For that business and a lot of our business is the growth in expected profit and that's been very strong in the in the reinsurance business.
I believe is up 20% year over year, but Arsenal you might have more detailed here in a little more color.
So focusing on that expected profit number this quarter, we had 155 million Canadian dollars of expected profit and in.
For a year ago, you expected profit Blake.
So we see 30 million [laughter] Paul well.
In this segment.
Towards the end of last year, we closed a number of financial solutions transactions, both in the U.S. and in Europe and then since then we've been following the longevity business and all of that is contributing to that [laughter] profit growth.
Already indicated.
The impact of new business is not really I'm good measure of the lifetime profitability. It just for Fluxed about phosphate margins on that transaction period relative to the market that we put into that reserves.
That's a negative like and what a year ago, where we had any business loss and sometimes it's a positive like this quarter, we had a small due to sustain what we're really focused on is driving expected profit pool.
Are you acknowledged that it is difficult because on those two product lines, the longevity swap lighting and on the financial solutions line the premium numbered.
Now.
Represents.
We have very many of our financial solutions transactions, where we get very little premium revenue or Alternatively, we get a very large premium revenue number what's been very small impact on net income. So that is that less useful measure for us. It's included in the formal financial statements. We typically don't comment on that.
In our investor material or in the Angela Slide we focus much more on the expected profit.
And and similarly, then along those same line.
If I look at page 65.
Or supplemental the quarterly information package.
When I look at the actual contract liabilities. They are actually down for a week or so is there any news flow trend analysis that I can use there to help guide me with expected profit as well or is that.
That's too much currency and narrow maybe you can just help me understand why the reserves will be lower on a significantly lower year over year.
Yeah, I get a structured business and longevity business doesn't generate meaningful reserves and those are the businesses that are below eight in the past we've done some longevity transactions with assets and that those transactions are breaking down, but the new business that we're writing the other areas, it's contributing more than expected profit is going.
But the asset balances are falling as those assets based look I mean transactions continue to pay up over their life as expected.
So is it then back within those insurance contract liabilities Youre piece ads are actually growing us proportion of them does that how I should think about that.
Yes, when we process internally on the longevity swaps, we are seeing material increases to our piece that's in there and so we do track internally lifetime profits, we have not disclosed externally either for the reinsurance line well for our other flying.
Pete that movements from period to period. So we can certainly think about back another disclosures that might help you model this business a little bit better.
Yeah, I guess just to wrap up on this whole segment I guess.
We're seeing very strong growth out of it. So the question is.
Any sort of help on on what you're expecting for the back half of this year and into next year from this group would be very helpful.
Just trying to model that is a difficult.
Mind was on had a couple of course is doing it but I'm already sensing that Ah Ah there could be in pretty big swings relative to my expectations.
Yes.
So I wouldn't say this is a business that we we like the business. We licensed diversification you know as you pointed out it's harder to get US profit signature here, there's a business that we do see a lot of growth potential in and what we'll do it will take well take this way and think about what some of the what some supporting information we can provide to make.
End of it easier I think it's a good take away for us.
Great. Thanks, very much appreciate a fair thanks Rocco.
Our next question comes from Scott Chan of Canaccord Genuity. Please go ahead.
Hi, good afternoon.
My question.
I'm sorry.
No.
Uh huh.
Hello.
Net sales growth.
Thanks.
I think five audit that resonates in the quarter over to more market rebound and.
Fund flows.
Yes.
Thanks, Scott I'm going to turn that went over and above or below rental so can provide some context around the the the strong swing in sales and flows Bob.
Yeah, we had a positive flows or.
Channels.
Retail directly.
Well business institutional.
Okay.
Newsham.
So.
It was across the board it was a combination.
Asset classes.
Our as Paul mentioned earlier performance across the board has.
From so we've been able to take advantage of that.
We now have 25, four and 500.
Going to buy more or so it's a good stork Vietnam once we look to go on.
Yeah, well behind it.
Got it.
So sort of started if youre going to this is not sort of a single funds, where we're seeing take off here. This is fairly diversified across.
Travels and products or there's a fair bit of diversification there sorry, I interrupted you go ahead.
I was going to say like.
I think my modeling out.
Bill.
You know anything quarter to date or <unk>.
No problem Dallas.
On the game.
Bye bye.
Yeah. So.
As a degree of.
He always challenge to sort of forecast when you see the level of.
Equity market.
Volatility that we've seen over the last six months. So you know the reality is.
Well go to this but I think we like our momentum.
We like the momentum we see in terms of flows in sales that are happening on the retail side.
We like the momentum that we're seeing on.
On the institutional side, though we have a strong institutional flows quarter after quarter. So you know.
We'd like to momentum, but as you know it's hard to predict what will happen what markets and whether we'll see you know any any further dislocation everything else you Doug on the book.
Yes, I would say when you look at the first half the year, obviously, but with a sell off in the first quarter that.
Her from asset standpoint, but.
Most of the redemptions in short duration ultra short duration income.
Which will happen what did the problem in middle to late March and when the bad stepped up really well.
A lot that asset category.
So.
Again, it's throughout the year, we can add.
Relative.
Are very good flows and except for that one point it was probably predominate one asset class.
Got it.
Very helpful Hospital.
Thank you very much Scott.
This concludes the question and answer session I would like to turn the conference back over to Mr. men for any closing remarks.
Thanks, very much a real I'd like to thank you everyone for joining todays call and as always please feel free to reach out for Investor relations to for any follow up questions and I will wish all of you well as we manage through an unusual summer and hopefully you can get some time with family and I will.
Talk to you a post our Q3 quarter and thank you.
This concludes today's conference call you may disconnect your lines, thanks for participating and have a pleasant day.
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Oh.
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