Q3 2021 Great-West Lifeco Inc Earnings Call
Mhm.
Thank you for standing by this is the conference operator, welcome to the Great West Life Co third quarter 2021 results Conference call I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great West Life go. Please go ahead.
Thank you Eric Good morning, and welcome to Great West Life, <unk> third quarter 2021 conference call. We hope that you and your families are safe and healthy.
Joining me on today's call is Garry Mr. Nicholas Executive Vice President and Chief Financial Officer, and together will deliver today's formal presentation also joining us on the call and available to answer your questions are David Harney, President and C O Europe partial Jamal President and group head strategy investments reinsurance <unk>.
Corporate development Jeff.
Jeff Mccowan, President and Chief Operating Officer, Canada, Ed Murphy, President and Chief Executive Officer of empower retirement, and Bob Reynolds, President and Chief Executive Officer of Putnam investments before we start I'll draw your attention to our cautionary notes regarding forward looking information and non <unk> financial measures and that's on slide two.
These apply to today's discussion and presentation materials, Please turn to slide four.
We're very pleased with our third quarter performance and that's highlighted by solid underlying business results across all businesses and strong continuing momentum.
Before we get into a review of the third quarter results I'd like to take a moment to address our changing world.
There's a range of important issues that are reshaping, both national and global priorities that includes the ongoing COVID-19 pandemic and plans towards recovery stubborn and persistent challenges that we see regarding racial and social injustice.
Rising inflation and disruptions to the global supply chain and also the urgent need for collective action on climate and the reality is these are real issues and we are engaged in the important discourse that's happening globally to resolve them. We fundamentally believe that to effectively address these issues. It will take collaboration between government business.
It is and civil Society, and I can assure you that great West Lifeco is deeply committed to being an active participant in defining and implementing solutions driven by our values and our purpose.
A great example is our purpose at Canada life here in Canada, which is to improve the financial physical and mental well being of Canadians.
This mindset helped shape our role in addressing environmental diversity equity and inclusion and sustainability challenges in the context of our own ESG programs and our values inform similar work in the United States and across the European markets.
We look forward to sharing more on this in the coming weeks and months.
Amid all of this challenge and change great West Lifeco is well positioned to continue creating value for stakeholders across our businesses. Our performance is supported by our values, our resilient and diversified business model, our disciplined approach to capital deployment, and our deep risk sensitive experience and expertise.
Looking to our value creation priorities and medium term financial objectives, we're very pleased with our progress this quarter, including strong financial results I'll provide some insights into how we're advancing our business strategies when we get to our segment discussion shortly.
These include launching solutions that marry our expertise with customers values of needs like responsible investing digital experiences that are personalized and advice that guides customers as they move towards their financial wellness goals. We've been very active in M&A over the last year with a focus on three customer focused priorities.
Advice digital delivery and workplace extensions letting.
Let me pause now around the fourth priority risks and investment expertise last month, we announced a strategic partnership with regard holdings. This fall there was another transaction, we did a year ago with Mackenzie to acquire a strategic stake in north leaf.
These actions and other steps, we've taken across the portfolio broaden our access to alternative investment capabilities.
This is a key area of focus as we work to strengthen the products and service for our customers and increase returns for shareholders.
By focusing on our values and investing in our priorities. We are confident in our ability to achieve our medium term financial objectives.
Gary will elaborate on the drivers in his prepared remarks, the bottom of this slide illustrates our performance this quarter relative to our stated objectives.
Please turn to slide five.
Our third quarter saw a strong very strong overall results supported by consistent performance across businesses results reflected solid operating fundamentals and the benefits of disciplined capital deployment.
Well, our capital and risk solutions segments set up provisions for catastrophe losses and experience U S mortality issues related to Covid expected profit growth was strong.
Overall base earnings in the quarter were $870 million and net earnings were $872 million.
Base EPS of <unk> 93 was up 27% year over year. This strong year over year growth in EPS reflects higher market levels, the mass neutral business coming on stream, including synergies and excellent expected profit growth in all segments.
Net earnings of 94 cents per share were up 6% year over year, mainly due to higher base earnings with positive actuarial basis changes and market related impacts offsetting acquisition related costs, you'll recall that in Q3 2020, there was a gain on the sale of Etsy in Ireland that moderates the year over year growth rate.
Turning to Canada results on slide six we're pleased to see solid momentum in insurance sales and strong wealth sales in quarter for both group and individual customer.
We're advancing our Canadian wealth management strategy strategy with the launch of New Canada life sustainable portfolios in September the new portfolio has provided investors with access to responsible investing strategies that are diversified across both asset classes and regions.
Our strategic partnership with the guard will broaden our access to alternative assets for both wealth management and balance sheet solutions. We're also extending our group offering through the acquisition of claim secure which closed on September one.
<unk> enhanced Canada, life's workplace benefits capabilities and extend our presence in a growing market for tpa and Tpa services.
Moving to slide seven empower a strong growth trajectory continued this quarter with large plan sales driving a year over year increase combined with strong growth in the government nonprofit and retail wealth management segments.
Notably empower IRA assets in personal capital assets were both up over 50% compared to last year as I noted last quarter empower IRA growth has been achieved using our existing model before leveraging personal capital capabilities. We're pleased to have recently launched the first phase of a new personalized.
Digital platform that combines the experience and technology of empower in personal capital for the first time.
This enhanced customer experience will continue to rollout across and power segments over 2022.
And importantly, the mass mutual in personal capital integrations are progressing well.
To date, we've achieved U S $60 million in annual pre tax run rate synergies related to mass mutual we're on track to reach our U S $160 million target in 2022.
And finally, we continue to track to our Q1 2022 closing for the Prudential transaction.
Moving to slide eight Putnam has continued to deliver strong investment performance for customers with 28 funds rated four or five stars by Morningstar.
This performance underpins, our ability to sustain and grow our assets under management, which increased by USD $18 billion year over year to just under U S 200 billion.
This growth was supported by strong equity markets and solid asset retention across equity and longer duration fixed income solutions with net outflows of one U S $1 6 billion, primarily from lower fee fixed income products.
Moving to slide nine sales in Europe continued to rebound from Covid impacts with a $1 3 billion U K annuity deal in quarter. Additionally, we've seen strength in equity release mortgage sales alongside higher wealth sales.
Europe also saw overall positive flows in both wealth management and investment only solutions.
In Ireland, we closed the Ark life acquisition on November one.
Bringing 150000 policies and $2 1 billion euro in assets to Irish life.
As a reminder, this is a very straightforward integration as we already as we were already administering the business on the Irish life platform as an outsource service provider.
Moving to slide 10 capital and risk solutions saw strong expected profit growth of 8% year over year the pipeline for new business remains very strong in both structured life and longevity and we competed we completed a reinsurance agreement covering a significant block of life policies in Japan.
Japan is a new market for us and this is the second transaction. We've done there this year, a testament to our strong reputation and recognized expertise.
Though not covered on this slide there were two reinsurance headwinds in quarter that impacted base earnings. These were a P&C cat losses claims related to flooding and elevated U S. Traditional life reinsurance claims related to Covid.
While Gary will cover these matters in his comments, we remain comfortable with our overall reinsurance risk profile and confident with our growth prospects with that I'll now turn the call over to Gary to review the financial highlights Gary. Thank.
Thank you Paul Please turn to slide 12.
Overall as Paul noted we were very pleased with the financial results. This quarter. In addition to highlighting the strong momentum we see across the businesses. The results also reflect the strategic deployment of capital in the past year.
Compared to the prior year base EPS of <unk>, 93 was up 27% and closer to 30% in constant currency the.
The increase was due to a number of factors broad base business growth higher stock market levels and the significant acquisitions in the last year.
Notwithstanding adverse claims experience in the capital and risk solutions reinsurance business unit the strength in base earnings was evident across the segments. While there were a number of larger items impacting our results. This quarter. They were generally offsetting with the strength in base earnings, reflecting very solid underlying business fundamentals.
Starting with Canada base earnings were $312 million up 16% from Q3 last year business performance was good with expected profit up 6% and the insurance experience life health and disability producing a solid gain.
Canada also saw a steady contribution from yield enhancement activity in the quarter.
In the U S base earnings were up significantly from Q3 2020, the acquired mass mutual business continued to perform well, adding 68 million Canadian dollars or 54 million U S dollars.
Base earnings, including some early expense synergy gains and strong fee income.
This includes financing costs and amortization of intangibles on the mass mutual business.
On a run rate basis, 60 million U S of the targeted $160 million pre tax expense synergies have been achieved thus far.
Customer retention to date has also been excellent and integration activity is on track.
Personal capital continues to invest in new customer acquisition to fuel growth and profitability and it narrowed the base loss this quarter to 4 million U S dollars.
As the in force book of business continues to grow and generate profits.
The rollout of personal capital digital capabilities to the broader empower client base is successfully underway with an initial pilot group with further rollout scheduled for later this year and into Q1.
Looking at empower excluding mass Vtsiom personal capital base earnings were up sharply year over year as a result of strong organic growth higher markets and the continued growth trajectory of the empower IRA rollover business with assets under administration growing 54% year over year in that book.
Empower also benefited from investment gains in the surplus account this quarter and a one time tax gain of 6 million Canadian.
Putnam's results also improved year over year fee revenues were up due to the growth in AUM and also the growth in equity mandates relative to short duration fixed income and improving mix from a revenue perspective.
While seed capital results were largely breakeven in period compared to a strong gain in Q3 2020 Putnam did benefit this quarter from a onetime tax gain of 14 million Canadian.
In Europe base earnings increased 27% helped by a one time pension expense gained in Ireland, although somewhat offset by FX rates on the euro.
Good underlying performances in the U K, Ireland, and Germany were driven by the continued recovery in sales favorable insurance experience and increased fee revenue from net flows and market growth.
The UK landed at $1 3 billion dollar bulk annuity sales this quarter.
New business gains have not been recognized to date as the banking assets are still being finalized.
Capital risk solutions had a more mixed quarter. The business itself continues to grow nicely, including the expansion into newer markets with strong new business gains in quarter. However in period, there were significant adverse claims experience in the P&C catastrophe line and in the U S life reinsurance line.
The P&C experience impacted earnings by $61 million.
Resulting from provisions for potential losses on Hurricane Ida and the extraordinarily severe German flooding.
The higher U S life claims impacted earnings by $71 million, which includes a provision for additional excess claims in the near term.
These are primarily COVID-19 related claims as the current wave has resulted in elevated infections and mortality rates in the U S.
However, compared to the U S mortality rates have been less impacted recently in the U K and Netherlands and as a result, we did not see the offsets in the longevity business this quarter.
Coming back up to the life co level and looking at net earnings. The overall impact of excluded items is immaterial at $2 million and net EPS of <unk> 94 mirrors the strength in base EPS.
Net earnings were up 6% from Q3 2020.
Which included a 94 million gain on the sale of virus Progressive services unit Ipsi.
Turning to slide 13 here, we can see the impact of the various excluded items, which netted to $2 million overall actuarial basis changes and management actions were a positive $69 million and that incorporates a includes a negative impact of $33 million from the actuarial standards change effective this quarter.
<unk>.
In addition, greater clarity on property valuations in the U K led to the recognition of market value gains on UK property holdings, particularly the industrial sector and this is reflected in the actuarial liabilities.
The remaining excluded items this quarter were primarily transaction and integration costs related to last year's U S acquisitions as well as the legacy cleanup item in the corporate segment.
I would highlight the personal capital transaction costs recall, an element to the purchase price was a contingent consideration payable in December this year and next provided certain targets are achieved based on the strong performance of personal capital to date, we have increased the provision for this contingent consideration.
Turning to slides 14 and 15. These next two slides highlight the source of earnings first from a base earnings perspective, and then a net earnings one.
I'll focus my comments on slide 15, the net earnings perspective source of earnings with a reminder, that the amounts above the line are pretax.
Expected profit was up 23% year over year, notwithstanding some currency pressure from U S dollars and euros.
Mass feature on personal capital, we're not in Q3, 2020, but added $84 million this quarter.
Even without that boost we are seeing a 47% increase in the U S and a 12% expected profit increase overall generally coming from organic business growth and fee income benefits from higher market levels cannon.
Canada, Europe and capital risk solutions were all up between six and 8% year over year.
Moving to new business capital and risk solutions recorded an outsized new business gain this quarter, primarily on larger asset based transactions, which similar to bulk annuities recognize a portion of the investment gains upfront as we develop good visibility on the assets to back the portfolio we realized.
<unk> this quarter, including some catch up on transactions written earlier this year.
Notwithstanding the adverse claims experienced in reinsurance overall experienced gains contributed positively in the quarter and I'll cover these in actuarial basis changes on the next slide.
Note that the UK property related gains reflected in liabilities are excluded from base earnings which accounts for the difference in experienced gains between the base and net source of earnings displays.
Earnings on surplus of minus $18 million is down from $8 million last year, primarily due to lower seed capital results at Putnam and increased financing costs and a reclassification in Canada.
The effective tax rate on base shareholder earnings was nine 5% and on net earnings was 8%, primarily reflecting the jurisdictional mix of earnings and also at 26 million benefit from the release of certain tax provisions, including $20 million between Putnam and empower and $6 million in corporate.
Before the release of those provisions.
Effective tax rate on base earnings was 12%.
Turning 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 some of which we've touched on already.
As shown in the chart on the left yield enhancement continued to contribute positively, particularly in Canada and the UK this quarter.
We continue to originate a steady volume of equity release mortgages in the UK on an improving residential property backdrop.
The net impact of mortality longevity, and morbidity was market modestly negative this period due to the combination of the Covid related claims in U S life reinsurance noted earlier and generally positive experience in the other areas again, reflecting the benefits of our diversified book of business.
Credit related impacts were a positive this quarter as our high quality investment portfolio continues to perform well with minor ratings changes on a recovery in previously impaired assets, leading to an experienced gain.
The chart on the right details the major basis changes with a positive impact from changes in the economic assumptions used in liability modeling being partly offset by the actuarial standards change and an update to policyholder behavior assumptions in Canada.
Moving to slide 17. This slide highlights operating expenses by segment expenses are up year over year as expected given the increase in business, both organically and through M&A.
There were a number of adjustments to consider overall expense growth is well below the growth in expected profit as the company continues to apply a disciplined expense management and benefits from leverage and market related fee income.
Please turn to slide 18.
The Q3 book value per share of $24 40 was up 8% year over year, driven almost entirely by increased retained earnings given the solid results in each of the past four quarters.
Currency movements in OCI has been a headwind with a strengthening Canadian dollar, but this has been largely offset by a pickup in pension OCI given the increase in interest rates this year.
The light cat ratio at Canada life remained strong although lower by three points compared to last quarter, primarily due to increased new business requirements on the large asset based transactions noted earlier. In addition, as noted in recent quarters. This also includes the continued phase in of the new most adverse <unk>.
Cat scenario, which impacted the ratio by one point.
LIFO cash ended the quarter at <unk>.
<unk> 6 billion, which is down from <unk> 9 billion at Q2 as a result of repaying the $500 million short term debt component of the mass mutual financing plan.
And that was within nine months of the closed slightly ahead of schedule given the strong results to date and just a reminder, LIFO cash balance is not included in the light cat ratio.
Back to you Paul Thank you Gary.
Please turn to slide 19.
Outlined in my opening remarks amidst the many challenges that are shaping aspects of our world. We believe great West life, <unk> is well positioned to adapt respond and create value for stakeholders.
We delivered a strong quarter with continuing momentum supported by solid operating fundamentals and the benefits of disciplined capital deployment. Looking ahead, we're confident in delivering on the financial expectations. We have set for ourselves and we will do this by focusing on and investing in our four priorities to drive value creation, while being in.
Active participant in defining and implementing a sustainable path forward for all stakeholders in the markets, where we operate and with that that concludes my formal remarks and Ariel. Please open the line for questions. Thank.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
For a moment as callers join the queue.
Our first question comes from many Raman of Scotiabank. Please go ahead.
Yes.
Hi, Good afternoon, just wanted to talk about our excess.
Excess capital and potential capital deployment, Paul just if you could update your thoughts on the dividend and then also if you have.
What did you see as the capacity in terms of <unk> capital potentially for buybacks and your view on buybacks at this stage given credential and everything that you've done.
Yeah.
Okay.
That's a fulsome question. So I'll start off with the first question about our views on on excess capital and you know actually I'll sort of start off at the top and say that we have deployed a significant amount of capital over the last 18 months and I think we've deployed it quite effectively you can see that in our strong results and I would say that if you think about in the.
The U S with empower we've got our plate pretty full with the integrations over the coming quarters. So we will be remained very laser focused on that having said that we.
We are not shy to continue looking at opportunities to strengthen the portfolio. So you know the reality is for the right opportunities, we're going to find ways to finance those so that's that's our mindset as we think about growth going forward.
At this stage as I think about dividends are clearly, where we have to wait and see what happens with the communication thats going to presumably flow. This afternoon.
With the communication from us.
But with that in mind, we've always had a progressive dividend policy and we would anticipate moving back to that but I think we have to actually.
Wait and see what the what the lay of the lenders as we hear from us and our intent would be as I said to get back into a progressive dividend policy and at this stage, we're very focused on thinking about how to create value through M&A and through extending our businesses and that would always be a priority from our <unk>.
Spec versus buybacks.
Got you.
<unk> been active.
In CIB should we read anything into that.
Just on your comments not so much but I'm just wondering about that.
No I don't think you should read anything into that anything you would add here.
No.
In place.
Largely.
At a minimum we would look to be removed and the dilution from from granted share options than we've typically used it for that purpose and then obviously it gives us flexibility in other in other circumstances arise, but certainly wouldn't read anything into us just keeping that open.
Sounds good thank you very much.
Yes.
Our next question comes from Gabriel <unk> of National Bank Financial. Please go ahead.
Hi, good.
Good morning.
Got the cut off here before noon, so I can still say that.
First question is on your yield enhancement gain a year to date, just under 200 million pretax very simple question.
Does that number look the same under ifr 17 or is it lower I'm I'm I'm I'm still not quite sure have gone back and forth with a few companies. It sounds to me like it might be lower because it's no longer upfront recognized upfront and then amortized but.
Curious to hear what Youre, saying.
Okay, I'm going to turn that thank you very much for the question Gabriel and I will turn it out one right over to Gary sure.
I would expect all else being equal Gabriel will be somewhat lower.
It doesn't disappear, but it will be somewhat lower than that that will ultimately depend.
Proceeds from the various accounting policies all of the different blocks of business, but so there will be a it would be a little lower in the short term obviously you get the benefit the economic benefit from yield enhancement will show up.
Some of the cases it will be it will be feathered into earnings are amortized into earnings over time.
Some will continue ends up being upfront through the discount rate mechanism and <unk> 17, so a bit of a mix.
Yep.
Alright.
You go ahead.
Just trying to.
Get a sense here is that does that number affected like on a pro forma on the IRS nine days.
Sorry basis.
Based on the duration of that so you take cash and put it into a riskier asset if it's a five year.
I said or a 10 year asset you divide instead of present valuing it in your <unk>.
One you would spread that gain over a five or 10 year period that type of concept is that how it would work.
I think I think this might be wanted to be worth follow up we do plan to have obviously 17 approaches a lot more discussion about how the various mechanisms will work. So I was just the high level answer is that there'll be some adjustment to the yield enhancement, but there's a lot of moving parts with the with the CSM.
A lot to be considered so I wouldnt want to draw conclusion, just looking at one component I think that's fair.
The transition over.
Okay, and Paula you were I cut you off.
I would just wanted to say underlying this is Gary you said the economics of the business we're in very active.
Sure.
We like the way, we're strengthening of the business through yield enhancement through considering alternative assets through leveraging things like our equity release mortgages and we still have all of that ultimately driving our value creation, there's going to be obviously, some timing differences there, but we don't see it as being a significant impact, but I do think the key is to unlock <unk> out of it.
Through some education sessions.
Right.
Another.
The thing that might arrive in 2023 is the global minimum tax I asked about it last quarter.
I got to ask if you have any additional thoughts on the impact I see you know year to date and again this quarter sub 10% tax rate I looked over the past five years 13 out of 20 quarters, where your tax rate is below 15%.
Is this something that becoming maybe.
Maybe a more pressing issue as far as how you are and you are.
It struck me in your business.
I guess I'd start off by saying that we don't have full clarity and insight into what the global minimum tax will look like and so I think it's too early in the process to start drawing direct conclusions I would say, though that if you were to look at our normalized tax rate this quarter I think Gary quoted that.
It was in the low teens.
And that's a function of our mix of business and obviously in any quarter. We're gonna have various provisions that occur that would move that up and down as we think about the business going forward, though the reality is we're seeing high growth in our business and some higher tax jurisdictions like in empower business. For example, so as we think about the overall impact of the.
This.
It's not something that's really concerning us and more importantly, as we look out ahead, we don't see it having an impact on the guidance we provided regarding our our EPS growth expectations. So we kind of look at it from that context, and recognizing the growth where we're going to see in the U S. In particular.
Okay. So you don't see that affecting the 8% to 10% target.
Thank you for that.
Our next question comes from Doug Young of data <unk> capital. Please go ahead.
I'll be the first to say good afternoon.
So we mentioned that the Crs division or was mentioned the Trs Division had adverse mortality claims experienced in the quarter was 71 million I assume that's after tax and I, hoping maybe you can flush that out a little bit I know you've talked a little bit about flexing that business in times when pricing is attract.
And contract when it's not just want to get a sense of first off what are you seeing so far in Q4 should we expect that to kind of continue to linger in the Covid death claims and how you're thinking about this business and I have a follow up on that.
Okay. So it's Paul I'm going to start off just talking at a high level about Crs.
As we look at that business, we like its diversification across a range of different risk classes and I think it fits really well within our portfolio. There is significant expertise we draw on the same expertise that our all of our customer base draws on.
So we recognized that there can be some volatility in things like P&C claims.
Claims.
But those will occur over longer cycles, and we do view that business as ultimately profitable and the other thing we like about that aspect of it is the risks are actually uncorrelated with life broader lifestyle risk. So overall, we're comfortable with the risk profile and we are actually comfortable with viewing it as a continuing.
Element of our growth strategy across lifestyle, but I'll, let I'll, let <unk> comment on the specifics of <unk>.
Thinking about it looking at it going forward Arsenal, so before digging into the numbers in quarter I. Just wanted to give you a little bit of perspective sort of looking through 2020 and across 2021. So within the Crs segment, we have both longevity exposures, primarily in UK and in the Netherlands, and then the mortality exposure, which is largely in the U S.
And cumulatively over the two years the favorable impact of excess deaths on the longevity book continues to be a little bit higher than the cumulative impact on the mortality block, but we did not see that offset this quarter as we noted.
We're very comfortable with the overall portfolio and the diversification between longevity and mortality in quarter. You noted the $71 million after tax of variance Canadian dollars and that was $90 $90 million pre tax of $90 million pretax $71 million after tax and within that provision is in a lot.
It was about just over a third of it back for continuing excess claims into Q4.
But I'm not going to comment on our position and internal reporting through October and November were engaged with our clients. Our monitoring all of the population level of data and all of the jurisdictions that we're operating and we're taking pricing action at where it makes sense for us or whatever I'm being very cautious in underwriting new traditional mortality business.
And in the U S and in this environment. So that's really the context that I would provide $71 million after taxes 90 million a pre tax in the quarter.
And it takes me to my follow up Gary on page on Slide 16, you have mortality longevity morbidity.
<unk>.
Hi experience it was negative $22 million post tax. This is obviously the $71 million. So theres, obviously, some big positives that that's on the other side of this negative can you maybe unpack that negative $22 million. So this was a big negative above 71, what were the big positive items.
Gary why don't you picked up share.
Sure I think the.
Just on the positives.
I mentioned earlier, Canada had a gain when you look across the life.
Disability, and and health claims in Canada, and our health and dental and then again you see it in.
Some positives in the other jurisdictions in Europe. So.
Most of that the positives were pretty pretty much split between the two I think there'll be more positives in Canada and again, that's partly good experience on the on the disability book.
Actual positive experience on the life book.
The annuity book.
Again small positives, but they all went positive and then again, we are still seeing some underutilization on the some of the health of.
The dental the chiropractor and those type of claims in Canada similar thing, we're seeing some under utilization on the health.
James in Ireland. This period, so yes, it was pretty much spread across the group and the other areas was positive and Gary I would just add that it speaks to the diversification of the business. So we're diversified by country were diversified across mortality and morbidity and.
The other thing I would note and Gary made reference to that or Arsenal made reference to the fact that we're actively managing this from the standpoint of pricing and underwriting and risk selection.
We take a very I would say disciplined approach when it comes to underwriting and selection of risk managing pricing looking at you've seen us work our way out of past disability group disability issues in Canada. We were active on this and exactly the same way and we'll continue to have those disciplines.
Okay, and then just a quick numbers question Gary did I did I hear you say you had a tax benefit of Putnam of $14 million of 6 million, one and then power and then $26 million at corporate for a total of $46 million is that right.
All of those numbers right.
Gary why don't you.
Just to clarify it was $6 million at corporate and then the 14 in the six that you've noted at Putnam and empower respectively. So $26 million was the total.
Total, Okay, and then a few which is about two 5% on the effective tax rate for base earnings. Thus Atwood takes you from the 95 up to a 12% effective tax rate.
Got it and then lastly, just to clarify on the light cat being down sequentially I was actually surprised but did you move cash out of the opco up to the Holdco or was this purely just a function of business growth and where was that business growth was that related to the annuity.
Business you wrote in Europe.
Yes, Gary.
Sure there was.
In terms of the dividends after that.
I think the difference we're a little bit higher in Q3, I mean, obviously the earnings were also quite strong in Q3, but the dividends were a bit higher but that.
So that might have accounted for a small small portion of it but really was those large on both the.
The asset based transactions in the reinsurance segments that drove the new business gains plus also the bulk annuity in the UK, although as large asset based transactions added to the new business requirements after getting more profitable transactions. So we're quite happy to take the Leichhardt and earn a good return on that.
I'm, sorry, I'm going to throw one quick one in here you've got you said that you did that $1 3 billion bulk annuity, but you didnt finalize the assets and so we shouldn't assume theres going to be a gain coming through when you finalize the assets.
Yeah.
Yeah, So I'll start off with a high level, obviously as we as we lock in these sales were always looking for yield enhancement and improvement in the overall <unk>.
Matching and opportunities.
We're not going to project on that but that is a discipline we ever across our businesses and we'll continue to we'll continue to continue to have that discipline moving forward.
Okay. Thank you.
Our next question comes from Tom Mackinnon of BMO capital. Please go ahead.
Yeah. Thanks, very much good afternoon, just continuing on that $1 3 billion bulk annuity deal I understand you had talked about potential yield enhancements, but my understanding is there's generally a new business gains associated with that so how should we be looking at new business gain associated with that for the fourth quarter.
Yes, Okay, Gary I'll, let you take that one.
Sure. So I think the way I describe it as theirs.
Provided we secure the right assets there is an opportunity for a new business gains in the fourth quarter, but we have to finalize those assets.
Often on the smaller deals we've often got the assets lined up and so youll see.
<unk> in the same period and in this case given the size of the transaction, we wanted better visibility on all of those assets before declaring any any gains that might come so I'd describe it as an opportunity in Q4 for us.
Okay.
Hum.
A question with respect to capital resolution.
And the $85 million impact.
Not really sure how we really kind of model.
Right.
Well negative.
<unk> thousand 20.
So far in 2021.
Yeah.
Insurance.
Uh huh.
Uh huh.
Uh huh.
Yes.
The impact of new business with respect to capital Resolution's going forward.
Obviously, we're not exactly <unk> 5 million one time.
The increase in that every quarter, but we're going to need some help here and trying to figure out why that happens and how frequently.
Yes.
Historically, we haven't.
Human capital.
Before.
Yes, so Tom I'll start off and then I'll pass it Darko.
To start with.
We have a very disciplined approach to <unk>.
Selecting transactions that we.
Fundamentally we believe will drive value creation now the reality is the profit signature of transactions can be quite different so its not like theres a single way of looking at all of these this particular particular transaction had a profit signature and was of a scale where it have that level of impact. So the reality is we can provide you with some ins.
Sites into this particular transaction, but the reality is some transactions will have a bit of strain upfront and then we will have stronger releases in subsequent periods and so I'll, let our she will give you a bit of context for the partial.
Paul you are absolutely right.
The nature of the businesses that we have in Crs or whatever spend some businesses like the business, but I'm just kind of talk about that generates potentially upfront gave us when we write new business and then we have other businesses from time to time that generate upfront losses, and we really look at sort of the economic position and a return on capital over the life of that product. So you will see.
Fluctuations in the impact of new business positive and negative which is why we incur most of our disclosure around expected profit growth and I think that's a forward looking measure that I encourage you to look look upon the amongst turning to these deals and I think we've highlighted through the discussions and in the MD&A that we've taken on two blocks of Japanese.
Liabilities with upfront premiums and cumulatively, we have just over $4 billion Canadian dollars of Japanese government yen.
<unk> brought into the investment portfolio and we've been working really really hard on the investment side to get into the flow. So that we can get corporate bonds in yen denominated both multinationals that issue in yen and domestic Japanese companies and then alongside that we've also been ramping up our efforts to.
Sterling and U S dollar assets corporate bonds and swap them into yen with the appropriate collateral and cross currency swap arrangements and then finally, we're thinking about introducing in a very modest way some illiquid assets into that portfolio and it's really getting all of those things up and running that's allowed us to have the confidence to book.
This gain on that whole set of transactions. This quarter. So that's really the color around that and if we get opportunities in the future.
On lots of Japanese government bonds or other.
<unk> Securities and then deploy them using our investment management capabilities or whatever then we will see other opportunities to add new business profits <unk> yield enhancement gains, but that's really what happened in this period around that.
Those liabilities in Japan.
And how much of it was a catch up from prior quarters and how much of the 85 actually happened in the quarter.
It's almost impossible now to untangle, because we're managing the two transactions together and looking at our total pool of yen liabilities or whatever so I wouldn't want to get back to whatever the transaction that we did this quarter was about twice the size of the transaction that we did earlier, but then again, we then sort of truing up our building our capabilities and entering up.
All of the assumptions or whatever but rough orders of magnitude sort of two thirds of this quarter and one third from earlier in the year.
Okay.
This is more of an investment.
Why is it classified as a new business.
Was it more of an investment.
On what you are trying to do with al.
Washington currency and whatnot.
It seems to me like it's more of an investment pool.
Am I correct, there or I'm sorry.
Youre absolutely right. It is an investment gain but then we get into a classification issue when we get investment gains on new business within 12 months of writing that contract and certainly within the same calendar year. So it's been our practice to try to reflect some of that is new business gains and you would have seen that on the annuity on the bulk annuity side as well so as Gerry indicated on <unk>.
Some of that smaller bulk annuity transactions, where we already have the assets in place well often reporting new business gain but that's really driven by our investment performance and the difference between the discount rate on the liability side and the assumed rate on the asset portfolio. So it's really hard to split to whatever new business gains and yield enhancement gains, but certainly within the first year.
Our bias is to reflect in call it <unk>.
Okay. Thanks, very much for that.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Thank you. Good afternoon first question is related to <unk>, specifically, the economic assumption updates.
Just wondering if you can give us some color if that's related to a shift in the hottest allocation or if it's just simply a.
That's fair enough.
Gary do you want to pick up.
Sure. This is the.
Economic assumptions, one so as we were.
As part of our work on implementing the new actuarial standards, which included a review of the ultimate reinvestment rate. We also did a review of our overall provisions for reinvestment risks under various scenarios and then we concluded from that review that our existing provisions were more prudent than required to given the continued low interest rate environment or is this an area for <unk>.
<unk> strengthened the balance sheet and that's what led to the release this quarter. So it's really just the broader.
Review of reinvestment risk and provisions within our within our balance sheet, rather than a specific assumption.
I see so that's more likely to be a one time type game, that's something that you can continue to drive going forward.
Yes, it would generally be that and then.
Yeah, that's a good way to characterize it.
Okay.
Second question is with respect to like Cat and this interest rate scenario, which is being built.
Being a negative drag on like hot for a number of quarters now.
Is there a way you can level set us to help determine where we might get a interest rate scenario switch back to a less adverse scenario and just obviously asking because bond yields are starting to push higher prospect of central bank tightening so.
Any kind of.
Any kind of sense, you can give us might be helpful.
Oh for sure Gary why don't you ever get to that one yeah sure. So just to again just to level set we've had this this grading in of about a point a quarter for the last five quarters and all else being equal you would see you would see that again in the fourth quarter that said, you're right with the rising rates.
That tends to be beneficial the rates would have to go up still a fair bit congrats I'll have an exact number but there's a fair bit of scope there, but also as a.
Another another way you could see this change as if you were lengthening your portfolio and an improving.
Some of the matching on.
On top of that business, so as companies move towards a <unk> 17, you might see companies Youre looking at the duration of the portfolio given the new IRS 17.
You could need to gain to switching this scenario. So there is a rising rates and in your <unk> strategies are probably the two biggest drivers I'd point to.
Okay are you then suggesting as part of that answer that with the transition of IL 17, great West will be looking to extend.
The duration of its fixed income portfolio.
So I'll start off at a high level and say that as we looked out for our 17, where we're looking broadly across all of our assets and liability pools and thinking about optimizing the business moving forward and so there'll be obviously a series of actions, we'll take in preparation for that and as we transition.
No specific guidance, though on lengthening any particular portfolio backing liabilities, but that's obviously one of the tools that we will be considering those as we transition.
Got it got it okay I'll leave it there thank you.
Once again, if you have a question. Please press Star then one.
Our next question comes from Nigel D'souza of Veritas investment Research. Please go ahead.
Thank you good afternoon.
Quick question on your capital levels here, and we feel like that ratio could you share with us what your internal target range and the reason I asked that is.
To get a sense of what your excess capital is above.
What are your internal targets. So we can get a sense of what's actually available for deployment.
Yes. Thanks.
Thanks, Nigel our current internal target ranges from 110% to 120% like hub and we're currently operating above that level as Gerry noted we've been carving in this this like a scenario switch and well over six quarters. So those are sort of a six point drag this happen there, but we've also been deploying a lot of capital both.
To drive ongoing future value creation, and that's our M&A transactions in the U S and other transactions like you know they are arc light from claims secure transactions. So we've been very active in deploying capital.
And then the other reality is we've been writing business, we've been growing organically and driving growth things like this these Japanese transactions in the bulk annuity transaction so the backdrop too.
The Leichhardt ratio, having coming down is positive in my mind, we've been deploying capital to drive shareholder value creation I'll, let Gary provide any other color you'd like to Gary.
You've pretty much hit it on the head there is all of the target range of 110 to $1 20, and we'd like to operate towards the upper end of that target.
Yeah.
The reality is as the.
As the scenario switch.
Finishes out.
As we transition into 2022, the natural growth in the business is going to drive a natural growth in our light cat ratio and as you know we've provided some insight around our growth expectations. So I think it sort of lends itself to us anticipating the growth in our lockout ratio moving forward.
Great that makes sense and if I could switch to the dividend when I when I from what I understand you don't have explicitly stated a payout ratio that you're targeting for the dividend, but when I look at your historical payout ratio.
It has been as high as 70%, albeit that was doing some repositioning on your U S business. It's currently at 50%, which is at the high end. So how should we think about the dividend going forward is that something that you would consider increasing in the half earnings for intuit or is that.
That ratio you want to see kind of move lower to a lower.
Number before you kind of rightsize that again.
Thanks for that question. So so at a high level, we consider a range of factors as we look at our dividend. We're looking at the expected growth in EPS and growth in the business. We're looking at reinvestment opportunities in the business and the opportunity to grow both organically and Inorganically and fundamentally.
Taking all of those things into account, we've generally had what I'd call a progressive dividend.
Our approach to dividends as we've increased the dividends as the business is growing and as we're growing earnings and that would be the mindset. We would take as we move forward at this stage, we're not in the market.
With a published range. So that's the mindset you should consider as we think about dividends going forward.
Okay I appreciate that thank you.
No.
This concludes the question and answer session I would like to turn the conference back over to Mr. Madden for any closing remarks.
Thank you Ariel and thank you to all who participated in the call for your for listening in and participating.
Please feel free to connect with our team on any follow up questions and I would say that we look forward to reconnecting in February 'twenty, two for our Q4 call and I wish you all a safe healthy and happy holiday season and take care.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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