Q1 2022 Great-West Lifeco Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Great West Life Co first quarter 2022 results conference call I would now like to turn the conference over to Mr. Paul Mann, President and CEO of Great West Lifeco. Please go ahead.
Thanks, Ariel good afternoon, and welcome to Great West Life goes first quarter 2022 conference call. Joining me on today's call is Garry Michalis Executive Vice President and Chief Financial Officer, and together, we 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 O Europe partial Jamal President group head strategy investments and corporate development, Jeff Macdonald, President and CEO of Canada.
Ed Murphy, President and CEO of empower and Bob Reynolds, President and CEO of Putnam.
Before I start I'll draw your attention to our cautionary notes regarding forward looking information and non-GAAP financial measures.
And ratios on slide two.
These apply to today's discussion as well as the presentation materials.
Please turn to slide four great.
Great West Lifeco continued its positive momentum in the first quarter delivering solid results against a challenging macro or macro economic backdrop, which saw central banks raising rates inflation, reaching multi year highs and heightened volatility in global markets.
As conditions have in part been driven by the senseless invasion of Ukraine, which is causing such tragic human dislocation in loss. Our hearts go out to those impacted including so many families that have been separated our companies and stuff have responded with more than $500000 in financial support and are actively engaged in refugee reset.
And support efforts.
Despite the macro challenges we have delivered very solid first quarter results base earnings and base EPS were up 9% year over year, reflecting the strength resiliency and diversification in our business performance across segments was good although earnings were impacted by equity market volatility our business benefited from strong yield enhancer.
Games as we continue to source attractive investment opportunities we.
Also advanced our value creation priorities across lifeboat and empower the integrations of mass mutual in personal capital are progressing well and on track. We've successfully completed five of eight waves of client migration for mass mutual while fees are somewhat down from Q4 2021 due to market volatility and the timing of it.
Expected client attrition, we're pleased with our momentum including cost synergies and client retention both tracking in line with our original expectations Gary will cover this more in more detail during his remarks.
With the closing of the Prudential transaction on April 1st empowers participant base increases to over 17 million Americans well, we're focused on serving the D. C retirement planning needs of these customers, we see significant opportunity to serve their broader wealth management needs in a few minutes I'll share how we are accelerating the build out of empower.
Retail wealth management strategy, including leveraging personal capitals digital advice capabilities.
Wealth is a core strategic focus for our group not only at empower but in Canada, and Europe as well our progress is evidenced by strong sales and positive net flows across our wealth businesses notwithstanding the market volatility experienced in the quarter.
Please turn to slide five this slide shows our medium term financial objectives and performance over various time periods. We're pleased with life goes continued strong performance as we execute on our value creation strategies.
As previously noted Locos base earnings and base EPS were up 9% year over year, and we continue to track positively against other objectives.
Please turn to slide six kind of life continued with strong momentum in group sales. Excluding a couple of large cases last year growth was very strong in both life and health and wealth sales, particularly in the small and mid market segments.
Both group and individual wealth delivered positive net cash flows new product launches such as the Canada life sustainable portfolios and good fund performance or attracting new client inflows wealth management as a strategic focus for us in Canada as we continue to enhance our products services and support for advisers.
Subsequent to the quarter end, Canada life and claim secure launched secure pack.
This new bundled offering includes Canada life's.
<unk> benefits and claims secures modern claims processing services. We expect this will be the first of many collaborations and we see significant opportunity to extend our offering to plant sponsors via claims secure.
I'm also pleased to share that brand finance rated candidly the force fourth most valuable brand in Canada, where the first insurance company ever to make it to the top five this recognition reflects the success of our rebranding efforts falling to the amalgamation of our three insurance companies in 2020, I would like to congratulate Jeff Macau and his team.
This remarkable achievement and for making Canada life, such a trusted and valued brand in the eyes of Canadians. Please turn to slide seven in Europe insurance and annuity sales were strong in the quarter equity release mortgage sales more than doubled year over year with continued growth supported by an aging U K population and rising property values.
Healthy momentum in bulk annuities with sustained with three deals totaling over $400 million.
Following sales of $320 million last quarter.
We've also been growing our wealth management presence across Europe in recent years, we've acquired several smaller brokers and advisors in Ireland to extend our service offering and we continue to expand distribution partnerships in the U K for our onshore and offshore wealth bonds.
In addition, our technology investments are positioning us to grow share through new market segments in Germany. For example, we're using a digital platform to access to small group pension market building on our success in the retail pension savings space.
Please turn to slide eight Putnam Z O M was consistent with prior year at $192 billion net outflows of $2 4 billion were primarily due to continued outflows in lower fee fixed income products. Putnam is investment performance remains strong as demonstrated by four and five star Morningstar ratings.
On 25 funds and over 80% of funds performing at levels above the Lipper median on both a three and five year basis. Please turn to slide nine empower continued to experience strong business momentum in the quarter. We've split empower sales between defined contribution and individual retirement accounts known as iras.
And this is to highlight the topline performance for each.
This view will be increasingly important as we continue to grow the retail wealth management business at empower.
Do you see sales were strong this quarter at U F $35 billion. This included a mega sale of $15 billion in the quarter compared to last year, where we had a large sale of $49 billion.
Retail wealth management, which combines empower our IR rate and personal capital experienced strong growth driven by positive cash flows and asset levels increased 30% year over year I will cover this more in detail on the following page.
Empowers the overall assets reached 1.1 trillion dollars at the end of the quarter. This number grows to $1 four trillion dollars, including Prudential as noted earlier, our mass mutual in personal capital integration programs are progressing well and on track we remain on track to achieve our cost synergy targets and are pleased.
With performance on all key metrics, including EUA and participant growth retail asset growth and client retention.
The close of the Prudential acquisition last month marked another milestone for empower as it represents represented the latest three transformative acquisitions in the past two years. These transactions are pivotal to our longer term strategy for empower both as a leader in D. C retirement and is a growing retail wealth manager.
Please turn to slide 10.
As noted I will now take a few moments to update you on the buildup of our retail wealth management strategy at empower.
We've made significant progress in the last two and a half years, a recall sharing on the second quarter call in 2019 that empower IRA raise assets and reached $10 billion. Since then we've seen strong growth both organically and through personal capital and today retail wealth assets are $48 billion and growing.
Personal capital sales grew by 31% compared to Q1 last year with assets under management up by 30% over the same period.
Empower IRA sales are up 53% over Q1 last year and assets under administration increased by 30% over 2021 and this growth has come before we were able to leverage personal capital's technology and tools over.
Over the last few months, we've started to roll out our new digital participant experience at empower leveraging personal capital's capabilities. The new experience is now available to $3 5 million plan participants going to $8 million by the end of May to.
To support this retail growth opportunity, we've accelerated hiring including over 250 sales and service staff with half of those just in the past quarter.
While increasing our costs in the short term will come we are confident these investments will lead to strong IRA and retail growth as we work to fulfill the ever growing need for advice and guidance from the millions of customers. We serve please.
Please turn to slide 11.
Capital and risk solutions base earnings increased 17% year over year, a strong result, driven in part by new business growth, including U S health transactions and an innovative Israeli reinsurance transaction.
Traditional life reinsurance results improved and while still impacted by COVID-19 were in line with industry experience.
Coppola in risk solutions has produced solid quarterly results, reflecting its well diversified reinsurance portfolio. The new business pipeline is strong in both structured and longevity reinsurance portfolios. We remain focused on our core U S and European markets as we pursue expansion opportunities in new markets, such as Japan and Israel.
And with that I'll now turn the call over to Gary to review the financial highlights Gary.
Paul Please turn to slide 13 overall.
Overall as Paul noted life co produced solid financial results. This quarter. In addition to the underlying momentum we see across the business.
The results also reflect the mix of challenges and opportunities the current environment presents.
Rising rates and widening spreads.
Roundwood trends in stock markets with increased volatility elevated inflation and continuing COVID-19 impacts.
Compared to the prior year base EPS of <unk> 87, tenths was up 9% and 12% in constant currency, reflecting a stronger Canadian dollar against European currencies.
The EPS increase was due to several factors, including higher stock market levels year over year broad based business growth and attractive yield enhancement opportunities.
Experienced pressures in certain businesses or offset by positive outcomes in others delivering a solid overall result across a diversified book of business.
At the light called level net EPS of <unk> 83 cents grew 9% from Q1 2021 primarily due to the increase in base earnings as excluded items were a similar impact in both periods.
Starting with Canada base earnings were $272 million down 9% from Q1 last year.
Insurance experience was a headwind this quarter with lower group long term disability results after several favorable quarters and an increase in individual life claims.
New business gain in policyholder behavior was lower this quarter. However, in Canada benefited from another strong contribution from yield enhancement.
Supported by widening spreads and continuing volumes of equity release mortgages.
In the U S base earnings were up 15% year over year led by strong organic growth at empower including the mass mutual business. We have combined these businesses for reporting in 2022 as they become increasingly more tightly integrated well.
We will continue to report on integration costs and synergies until the program closer to that later this year.
The Prudential business, which comes on board starting in Q2 will be shown separately for 2022 and will include separate reporting of the synergies and associated integration costs.
Empower base earnings of U S $117 million were up 23% year over year unchanged from the prior quarter.
As a reminder, about two thirds of the fees that empower our asset based these fees benefited from the growth in markets year over year. However, they were negatively impacted by the decline in U S markets in Q1 this year.
Fees were also impacted by expected client attrition and repricing in the acquired Massmutual portfolio, which was more concentrated at year end given the January one renewal dates.
I would note that client asset and revenue retention is going very well, so far running a little better than our acquisition modeling.
Expenses were up year over year in line with the steady organic growth in D. C plan participants and down from the elevated Q4 expenses as anticipated.
Also as Paul noted earlier, we have accelerated the build out of the retail wealth strategy with additional sales hires in Q1 2022, along with the necessary support staff and this is expected to drive revenue growth in future quarters.
On the integration front, the rollout of personal capital digital capabilities to the broader empower client base continues at pace with over $3 5 million participants now having access and over 4 million more coming on board in May.
I'm asking you to expense synergies remain at $80 million on an annualized run rate basis and are on track to deliver the $160 million target. Once the integration is completed later this year.
It is worth calling out that integration savings tend to be more pronounced at the start and at the end of a program with early savings from eliminating duplicate overhead costs and then later savings arising as the prior admin systems and service agreements are discontinued post conversion to empower platform.
Putnam earnings were similar to Q1 last year impacted by lower AUM based fees plus seed capital losses due to market declines in quarter as.
As we have seen in prior years Q1 is a seasonally lower quarter for Putnam and Q4s are typically seasonally higher.
The Europe segment had a very strong quarter in Q1 with base earnings up 22% year over year or 29% in constant currency, allowing for the appreciation of the Canadian dollar against Euro and Sterling.
U K base earnings were up 15% year over year benefiting from strong yield enhancement gains driven by the successful renegotiation of two large leases and good group mortality experience.
Ireland base earnings increased 60% over a softer Q1 last year.
Largely driven by a turnaround in insurance experience.
The results. This year also included $6 million of earnings from our life. Our closed block acquired late last year.
This earnings in Germany were up 5% year over year in line with continued growth, particularly in the retail pensions business.
In capital and risk solutions, the reinsurance business continues to perform well with growth in the structured portfolio experienced gains in the longevity book and continued improvement in U S life reinsurance mortality claims experience.
For several quarters now we have highlighted expected profit trends in Crs as a better measure of growth in volume since sales and AUM are not as meaningful we are presenting an expanded view of Crs expected profit this quarter as part of the source of earnings additional details in order to provide more color into the movement period.
The period and I'll come back to that shortly.
Turning to slide 14.
We can see here the impact of the various excluded items, which net to minus 39 million. Overall. These are predominantly acquisition related including personal capital mass mutual as well as recent smaller Irish acquisitions in the wealth space.
There were also impacts on actuarial liabilities pardon me from minor assumption updates and partly market related impacts in the period.
Turning to slides 15 and 16.
These next two slides highlight the source of earnings first from a base earnings perspective, and then in net earnings view.
I'll focus comments on slide 16, the net earnings Soe with a reminder, the amounts above the line are pretax.
Expected profit was up 6% year over year notwithstanding.
I don't know.
Yeah.
Okay.
Right.
The increase reflects higher fee income on higher markets, partially offset by higher expenses.
Expected profit was down 4% versus the prior quarter.
Due to seasonality and performance fees and compensation expenses at Putnam and higher expected expenses in Canada.
Moving to business impacts.
Training, Canada was higher than last year due to pricing pressures on term business and lower large case sales offset by new business gains in reinsurance.
Ference gains contributed positively in the quarter and I'll cover these in more detail in the next slide.
Earnings on surplus of minus $41 million is down from minus $31 million last year, primarily due to seed capital losses in Canada and higher financing costs.
The effective tax rate this quarter was 10% on base shareholder earnings and 9% of net earnings primarily this reflects the jurisdictional mix of earnings this period.
The effective tax rate on base earnings in Q1, 2021 was also 10%.
Turning to slide 17 these.
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 you have enhancement continued to contribute positively, particularly in Canada and the U K this quarter with several large lease extensions in the U K and a continuing steady volume of new academic leased barges to back liabilities in both the U K and Canada.
The net impact of mortality longevity and morbidity was positive this period as we continued to benefit from diversification across risk types and geography.
Our nutrient mortality in Crs in Canada was favorable.
We're all morbidity experience was positive with higher disability claims in Canada more than offset by the combined impact of positive disability experience in Ireland and positive health experience in both Canada and Ireland overall mortality was in line with expectations.
Credit related impacts were broadly neutral actually slightly positive this quarter as our high quality investment portfolio continues to perform well.
The expense variance generally reflects strategic project costs and investments in growth now review expenses more detail next slide.
The table on the right highlights that there are no material basis changes this quarter and the acquisition related transaction costs are just contingent consideration provisions related to recent acquisitions in Ireland.
Moving to slide 18.
As I mentioned earlier here, we've broken out the expected profit for the capital and risk solutions group into two components first the fees and margins on reinsurance business, such as structured life and P&C catastrophe, which have been increasing as a result in growth in these lines of business.
The second component is the release of actuarial margins known as <unk>, our provisions for adverse deviation.
Which predominantly applies to long tail liabilities, such as life reinsurance and annuities.
As can be seen in the chart, we made changes to our balance sheet that have reduced the <unk> coming into 2022.
At a high level, we released actuarial margins on the longevity businesses and strengthened our best estimate liabilities and traditional like reinsurance all else being equal this produces lower P. Fad releases in expected profit, but better experience gains.
Interestingly as we move to Iron for 17, you will see more of this type of split with the reporting for fees and other margins largely unchanged. The P. Fads being replaced by risk adjustment and of course, our contractual service margin release will be on top of that.
We are not yet in a position to share actual figures that will come in 2023, but conceptually. This is how it would play out.
Moving to slide 19, and this slide highlights the operating expenses by segment expenses are up year over year as expected given the increase in business, both organically and through M&A.
As is the case with many businesses, we are experiencing some modest inflationary pressure in labor and other costs. This is an area. We will monitor closely increasing the focus on achieving productivity gains in our operations.
In Canada expenses were up 4% year over year, reflecting the acquisition of claim secure and growth in sub advisory fees.
In the U S.
Expenses were up 6% year over year, which primarily reflects the organic growth in D. C plan participants and the investments in the retail wealth strategy at empower that Paul noted earlier.
In Europe expenses were steady year over year, but as noted earlier for earnings currency movement had an impact with expenses up 8% in constant currency. The increase was mainly due to acquisition related costs in Ireland, including the Arclight closed block and organic business growth across the segment.
And capital and risk solutions expense growth is off a very small base and is aligned with growth in the business, including the continued expansion into newer markets.
Please turn to slide 20 the.
Q4 book value per share of $24, 57% was up 5% year over year, primarily driven by strong retained earnings given the solid results in each of the last four quarters.
Currency translation and OCI has been a headwind to this year with the strengthening Canadian dollar. However, the rise in interest rates has produced a largely offsetting gain in pension OCI.
July cat ratio of Canada life remains strong at 119% within our target range of 110% to 120%.
The ratio was down five points compared to last quarter, driven by interest rate increases, particularly in longer term rates in line with our sensitive sensitivity disclosures in the MD&A.
We would describe the decline is a formulaic issue rather than economic sense in general our business benefits from higher interest rates.
As a reminder, underlie cat a portion of the available capital is calculated at fair value, which declined this quarter as interest rates rose. However, the required capital is largely calculated at fixed rates as defined biopsy and so did not move in the same manner.
In addition, I'd note that we switch like cat scenarios last quarter and scenario changes are smoothed in underlying cat and the remaining smoothing is expected to lead to an increase of one point per quarter for the next four quarters.
Lastly life co cash, which is not included in like Cat ratio ended the quarter at <unk> 7 billion, a modest increase from last quarter and this would convert to about three points on Canada life like cat ratio back to you Paul Thanks, Gary Please turn to slide 21.
We are pleased with the momentum across life co in the first quarter and remain focused on delivering on our medium term financial objectives as we work to successfully integrate acquired businesses and execute on our strategy.
Core to our strategy for value, creating priorities that represent areas of strength advice digital capabilities workplace relationships and risk and investment expertise. We believe execution against these priorities will create greater value for shareholders and other stakeholders. This will include continued discipline and deployment of capital.
It'll and advancing our commitment to making a positive impact in the world around us, especially related to the environment diversity equity and inclusion and sustainability.
With this mindset that we introduced three areas of focus for life goes corporate purpose and social impact journey at our annual meeting this morning.
These focus areas are truth, and reconciliation building inclusive communities thrive and investing in solutions that enable a more sustainable future.
We recognize our role and responsibility to help address societal challenges and that by doing so we become more inclusive and reflective of the communities, where we live and work that concludes my formal remarks, operator. Please open the line for questions.
Thank you.
Now begin the question and answer session.
Join the question queue, you May Press Star then one on your telephone keypad.
Tony acknowledging your request.
You are using a speakerphone please pick up your handset before pressing any Keith Kelly's.
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Our first question comes from many Grumman of Scotiabank. Please go ahead.
Hi, good afternoon.
You had a strong results in Europe , this past quarter, but if we overlay expectations. Most economists expect Europe to be in recession. This year. So I'm wondering as you see it what are the implications for your European business given.
Given the stronger economic outlook, and if you focus on countries or products or both.
Where are you more vulnerable than where you're less vulnerable.
Yeah. Thanks, Manny, it's Paul I'll start off and then I'll hand, it off to David Harney Who's responsible for that business segment I'd start out by saying that I would referred to our businesses in Europe that was very focused on needs based financial services. So you know we do provide a lot of pension savings support were involved.
In payout annuities and those types of products and a savings vehicles are really products that people will continue to act on and transact on and.
And a lot of ways, regardless of the environment. Obviously, you know market levels, we will have some sort of an impact but you know rising interest rates also make many of those products more attractive things like payout annuities and then things like bulk annuities are.
Or institutional transactions, where there are going to be organizations that are going to be looking to sort of offload that liability and we're well positioned to handle those so as I think about our businesses and I'll, let David get into it in more detail I view, our business is pretty resilient and strong notwithstanding financial cycles, but I'll, let David go into a bit more.
More detail David.
Yeah. Thanks, Paul.
Okay.
And I suppose maybe just share some sentiment and from Europe .
There are recessionary concerns.
Seniors in Europe that are different than anywhere else in the rest of ours at the moment, it's like obviously, there's general concerns around inflation and rising interest rates.
I wanted to touch on any particular concerns.
The segments compared to other segments around the world and.
We've had a strong quarter again this quarter, obviously, it's a nature by yield enhancement metastasize. We've had good results again this quarter.
Okay.
The state of our earning side of the trade markets.
Almost 50% and the U K, Turkey percentage of Ireland 20 presents in Germany, that's supposed to pay to watch the more aged anywhere at Baxter fashion or Navy products AMC to UK, Ukraine's would it be mostly in Germany, but there and that's probably our agent in Europe , that's growing the strongest and he's a very good position in dairy channel.
Market there I just saw their occupation of Kmart, because I'm a growing market share there. So even if Germany, Australia is a bit more we still expect that business to perform strongly over the next over the next period and then we have more mature positions in.
Paul talked about some of the project mix that we had in the UK, which may announcements that will achieve Mr. Why are some recessionary pressures.
In Europe , our niches.
A very fast growing.
Demand needs to alcohol, but Argentina is one of the few economies within Europe .
Showed growth.
So hopefully that gives some color.
Yeah. Thanks for that and then maybe just switching gears if I heard you correctly. There was some discussion earlier in the presentation about accelerating investments in U S retail well, so I wanted to make sure I heard that correctly and and so is that it sounds like a change are in and the pace of investment there in <unk>.
And so I'm just wondering what what drove that change why why is it being accelerated now thanks.
Yeah. So let me I'll start off with that I would characterize that when we looked at the the personal capital and the various the mass mutual in Prudential acquisitions, we'd always had a vision towards building.
Building out a retail wealth business and that goes beyond thinking about the IRA rollover business, its a broader opportunity and when we talk about accelerate.
Our focus has always been that once we started to actually integrate the personal capital capabilities into the system, we were going to be far better position to actually now reach out into connect with clients and to offer. These additional services and it's a timing issue. So I'll, let Ed give you some context around you know why now and why this timing mix.
Relative to the work we've done with personal capital Ed.
Sure. Thank you Paul.
Yeah, I think if you look at the opportunity that we have we have somewhere between $70 billion to $85 billion of money. That's in motion every year coming off of our platform due to early retirement job changes.
Other life events, and so theres, a real opportunity for us to work with many of those participants.
And guide them through the process around whether those actually sustained plan roll to a third party role to us. So we have a very needs based approach to do that so as we've scaled the business, particularly over the last 18 months and we're adding millions of participants on the platform. It's important that we continue to build out.
Those capabilities. So that we can serve customers not just while they are in and plan participant but.
Out of plan. We also have a number of those customers that are in plan participants.
That have an understanding of our capabilities, particularly after the personal capital acquisition, where we can help them and work with them in other areas. Other goal areas other objectives, whether it's call it savings, whether it's emergency savings and so that creates a real opportunity for us. So just just to really.
Significant demand and appetite for advice for guidance for a holistic approach.
That's been emerging over the last few years and so I think what you're what you've seen here over the last year and particularly in the last quarter.
Youre going to continue to see more investment and more growth in the business, we will be adding more talent to support the demand.
And just to be clear. So are you responding to any change out there in the market.
Any sort of competitive change or any sort of regulatory change that's pushing you to move faster here.
No I think it's just I think it's just the fact that over 70% of Americans today don't have a financial plan. They don't have a retirement plan.
All the surveys, including our customer surveys suggest that theres, just an insatiable appetite for guidance and advice.
People arent clear on what to do and they typically want to talk to somebody and so what we're doing is obviously building out of state of the art digitally enabled capabilities sales and service, but also incorporating the human dynamics. So the ability to work with a with a human advisor and someone that can help them.
And guide them through this process.
Thank you Manny maybe I might just add one thing when we actually positioned the two acquisitions.
<unk> of <unk>.
Mutual improve in both instances, we've talked about the expense synergies and we also talked about revenue synergies. The revenue synergies there were more broadly the traditional IRA rollover capture opportunity what Ed was talking about here is it stepping well beyond that and I think that had been part of the vision, we talked about but the real value unlock for us.
Fred Fred and his team is the deployment of this personal capital hybrid digital advice, but if we're actually going to have it out there we're going to have potentially well potentially 17 17 million Americans, reaching out for help we actually have to have people to actually support that hybrid digital experience. So the timing is now.
But we need to start ramping up the capabilities. So we can really start to build out and unlock this retail wealth management growth.
Alright, thank you.
Our next question comes from Doug Young of Desjardins Capital markets. Please go ahead.
Hi, good afternoon, just sticking.
Sticking with empower.
Do you have a two pronged question.
Of that 70 to 85 million in annual money in motion.
Much of your cat Chilean today, and sorry $1 billion okay.
And how much do you capturing today and where do you where do you plan to take that and then second question just the annualized run rate cost synergies of $80 million didn't change quarter over quarter and I think in the prepared remarks, you just talked a bit about the front end the end being more impactful just hoping you can flush out what I would've expected a little bit more in terms of annual run rate.
Cost synergies from that.
Massmutual sequentially, but just hoping to get a little color on that and then I've a follow up.
So I think you are well positioned to respond to both of those.
Yeah, well I think the on the second part of your question I would like I would say that look.
Prepared remarks, I think really reflect.
What we're seeing and as.
As we noted we expect to hit our targets.
$160 million.
Tax run rate synergies in.
In 2020 at the end of 2022 or so.
We were we were probably slightly ahead of plan early on.
But we're on target with with what we conveyed to everyone in terms of I.
I think your first question had to do with the capture.
Opportunity.
Yes, as we as we see as we implement better tools better capabilities, particularly through the personal capital acquisition.
We believe we're going to see more efficiency and more effectiveness there I.
I will say that the approach that we take is very much a needs based approach.
99% of our planned sponsors the institutions that we serve have effectively signed off on our service because of the approach that we take and so what we do is we want to understand what the clients' objectives are and sometimes it's it's it's a benefit to them to stay in the plan, even though they've retired when they change jobs.
They could leave the money in the plan and get the benefit of institutional pricing.
Some have an existing relationship and they may roll to an existing relationship and others are not working with an adviser.
And so there is an opportunity for us to help them. So I think what we'll see what we have seen and we will continue to see as higher effectiveness higher efficiency higher capture rates.
Given the given the strength of our of our value proposition.
And maybe just put a finer point on it how much have you talked a bit about have you talked to a disclosed how about you're capturing of that right now and where you think you could take X I know others have and I think 50%, obviously would be higher but I think others are achieving that.
Just wondering where you are.
Well first of all it's.
You know, it's our people do the math differently.
There are as I mentioned, our customers has decided to stay in plan. There is a large percentage of customers that actually cash out.
Pay the penalty they paying the 10% penalty they pay the taxes and the cash out.
It's really you really have to look at what the numerator is I think at this point, we wouldn't disclose.
So those capture rates.
But I would I would submit that their industry, leading at this stage and we believe we can improve upon them.
Okay.
Doug I might.
Okay, Doug I was just going to say, we're not at a point, where we're going to disclose the details of what our current capture rate and exactly where we're going to go but we actually see we're at a point right now where we see a double upside first upside is.
More digital better customer experience is going to result in people being more satisfied and wanting to buy into the opportunity with empower and then the second one is as you grow from 7 million to 12 million to 17 million participants you now have as Ed said $80 billion of of money in motion as opposed to before where.
We had 25 30 billion of money in motion. So therefore, we're investing to grow this business and its up.
It's an opportunity that's before us and one that we think is a significant one.
Okay, and then just second on Canada, I guess two questions first is new business strain was higher which I was a bit surprised given where interest rates went so just hoping to get a better sense of dynamic maybe there is a mix change.
And then the group morbidity side was negative I'm, just trying to get a sense of why it is that group or <unk> experienced long term disability experience negative or was it just less favorable than what youre seeing last year, because I thought it sounded like the message was a bit different than what we heard last quarter.
Yeah, So I'll start off at a high level and Gary May want to talk about new business strain and I know, Jeff will want to share with you his insights into into the group I'll start off on the group one.
No.
We did not lose money on this this is what we saw in the period was.
You know reduced gains because of the nature of claims incidents and claims termination rates, but all of them.
We'd like to remind that we have been in this business for a long time I would argue we are the best at it in Canada, and perhaps maybe one of the top in North America or the world because we actually have the experience the insights and we take action when we see challenges in the business. So we've seen a L. T D volatility many times before we were.
Responded to it and we always get back on track. So we look at this as an in period issue, but I think Jeff could provide a little bit of insight into the end period issue and then maybe Gary could speak to new business strain after that Gary Geoff do you want to speak to the LCD endured.
Yeah, Thanks, Doug and Paul Thank you.
Yeah, I was just reflecting I think it's been gosh at least six quarters in a row of sort of stellar results on the group L. T D.
I'd say this I mean, our fundamentals are still very very much in place.
I think about this business here.
Our renewals are.
This is generally a one year renewable business, we renew the business at or above the targets and we've been doing that so that's in place.
We're very careful on our case selection that's still in place.
The rate adjustments that we place each year each year are at target or above.
We took pricing action.
In 'twenty, one that is now flowing through the system and we also proactively and early 'twenty two with further rate adjustments on this business in managing this and our persistency remained well. So we're very bullish on this business as Paul outlined Doug we did see in quarter, a small spike on incidents.
And our terminations or claims coming off were in line, but they were smaller.
And so when there was a small impact on inflation, but.
We continue to be quite bullish the fundamentals are in place and feel strong about this business.
Yes, Gary do you want to comment on new business strain in quarter, Yeah, I'll, just I'll just make a couple of quick comments there.
First off.
Part of this was due in I think I mentioned in the speaking comments sewers.
There are some pricing pressures in the term market in Canada, and and that had a lower contribution to new business.
And thats not as impacted by interest rates also the interest rates tended to rise towards the back end of the quarter. So it's a it's something I think that the rising interest rates you are correct that this will benefit the.
Strained calculations in future quarters, but there wasn't much of an impact from interest rates in the quarter and then as I think also noted that we didn't have as many of the larger sales that would cover some of the acquisition costs was a little more stranded acquisition cost or that contribute to that new business results. So a little a little worse, but not.
Nothing we're overly concerned about.
Okay. Thank you.
Yeah.
Thanks, Doug.
Our next question comes from Tom Mackinnon of BMO capital. Please go ahead.
Yeah. Thanks for taking my question and good afternoon, everyone a.
Question with respect to like catch at 119, and five points down a quarter over quarter on rising interest rates.
<unk> continue to rise here and if we look at the U S 10 year it's.
Our second quarter to date, it's almost isn't up as much as it was in all of the first quarter. So you know conceptually that could be another up to five basis points to hit on your light cat. So.
Im wondering whats your thoughts are with respect to maintain.
Maintaining that light cat within year 110 to 120 preferred range as rates continue to go up.
What kind of levers do you have here other than you know downstream and some money from the Holdco and I've got a follow up thanks.
Okay. Thanks, Tom I'm going to turn that one right over to Gary Gary Yes sure.
So obviously as you pointed out right now were right near the top end of our target range. So there is a there's obviously room within the range comfortably and.
So starting Tonight to position also remind you we do have those four points of scenario smoothing that are going to be adding to the ratio each period. So we look at those as well.
And with higher interest rates that keeps us in that scenario. So those are those four points are looking good.
You mentioned the life co cash that could be downstream I think that wouldn't be our preference in the short term, but as option available to us.
There are three points at quarter end.
So in terms of beyond that.
I think there is.
You'd have you'd be looking at a L. M strategies, but when were doing that we are minded. Our work suggests that <unk> 17 is not as sensitive to.
This has some offsetting sensitivities and so we expect to hear from the Osophy.
From Osophy around the second quarter results were their transition rules are but I think that might also come into play and as like how it unfolds for the rest of this year. So at this point, where we're comfortable where we are we are watching the rates and I think this one other thing I should point out you mentioned U S rates there are sensitivities our largest to the Canadian.
And the Sterling and a little bit on the on the euro so it's the longer rates like 10% to 20 year type rates that we so we have a short term rates bank and putting rates up it's really those longer term rates you've got to be looking at and it's really across those three currencies are the main ones that drive it because this is the.
This is the case.
The fair values on the PFS backing our long liabilities, which is Canada long tail insurance and European patent annuities, primarily.
So with respect to the light cat, it's best to look at it.
Longer rates associated with Canada, and Euro is that because that's where you have some of this excess capital.
That's where we have these these actuarial PFS hits Osophy allows you to count your insurance P. Fads in the available capital, but they are measured at fair value and ours are margins are against our annuity books and against our insurance books. So yes. It is the long term rates for Sterling.
And then as a follow up with respect to empower here.
If I look at our.
Over the last.
Four quarters second third fourth and the first.
And the way it's been relatively flat participants are up but the earnings as a base earnings for empower in U S dollars in the second and the third quarter last year were substantially higher than what they've been in the fourth quarter of last year in the first quarter of this year. So you know I used to think.
That it was driven by a UA and participants but is this trend that we're seeing here with the earnings now kind of flat quarter over quarter at empower and down if we look from second and third quarter last year down at least 15% over those levels is this.
Because you're investing in the business and.
Yeah.
Forward is.
Are there any other seasonality associated with the earnings here at empower.
But that would.
Because now it's poised to look like if they are flat quarter over quarter, they're going to be down substantially year over year.
I'll, let well I will tell you Tom we're actually feeling quite very confident in and the acquisition integrations, where we're capturing the percentage of clients, we expected or better.
We're on track to deliver on the synergies so ultimately driving forward the value creation, we're very confident that we the one thing we can't control is what's happening with the equity market levels. Then because you know theres significant fee income that that features and empower earnings, but I'm gonna, let Gary provide a little bit of context on the relative quarter to quarter.
Performance, Gary Yeah. Thanks, Paul.
So Tom just on the <unk>.
Generally speaking I mean, the AUR and participants as high level metric give you give you some.
Some good trending to keep an eye on obviously the mix in <unk>.
Can you kind of have an impact.
And.
And you have a certain types of businesses certain institutional versus retail, but we see.
Those types of things could have an impact for your specific questions on the until the growth in retail could actually.
Proved to be a benefit going forward.
And in terms of.
Quarters, you've called out specifically in May recall, having discussions on this in the quarters last year, we had some very favorable surplus income gains in both Q2, and Q3 and to a lesser extent Q4 last year.
Again these aren't these are seasonal.
Some of these were some of our alternatives our early investments in some of the alternatives strategies, we're paying off we had some good good realized gains in those two quarters that probably gave you some a little bit higher income in that than just looking at the straight.
And plan participants this quarter, if anything we were a little below what we might typically see in the surplus income. It's it was positive but it was not at the levels in those quarters by any stretch that there was some FX headwinds for example.
Probably drags it down a few million dollars. So the surplus income in the in the back can also have move that around a bit.
And and again.
The synergies obviously, we are picking up.
Synergies as we go through we didn't have any new synergy wins coming in in this period, but there are certainly as we go through the rest of this year, we would expect those synergy gains two to.
Come in and out and again, that's not going to track to.
Our participants that's going to be on top of that growth.
Thanks, Gary that's helpful.
Our next question comes from Gabrielle Duchaine of National Bank Financial. Please go ahead.
Hey, good afternoon can you.
Just give me a little explanation as to a the shift in the makeup of your reinsurance business earnings like.
<unk> earnings on surplus expected profit story.
Going down, but you'll have more experience gained something like that what what happened to the business that are causing this shift.
Shift.
Thanks, Gabe I'm going to turn that one over to Gary Gary sure first of all I'd point out nothing has actually happened to the business. This is I mean, the business has been growing quite well a lot of this is geography, when the source of earnings display and.
That's always important to keep in mind that.
Both the timing of earnings and also the geography of them. So.
I think if you recall, we had yes.
We've seen quite a bit of growth.
Strong growth in our reinsurance business over the last few years and that included significant longevity transactions and then also if you recall going back a number of years ago, we had very size.
Sizable longevity reserve releases as we updated our longevity best estimate assumptions and this impacted the U K as well as reinsurance.
In the UK would've had it with your bulk acquisitions in both cases as we made those steps brought on the new business or at least some of them. We held back prudent P. Fads, because we wanted to observe this playing out over a couple of years, but given the trends we've observed in the experience. We've had we've actually reduced these pads in.
Align with the lower risks that we now see and so they would ever come into our earnings last year is as basic changes at the same time given other trends, we're seeing in the U S life mortality segment, and obviously Covid has had some impact here.
The those trends what we did there was a strengthened our best estimate so that gives you greater chance.
Your best estimate greater your chance, you'll have future either gains or lower losses in the future periods. So the.
Changing overall, we didn't see a lot of P&L impact last year, but yeah from a.
Lighter P fats and stronger best estimates and it changes the geography and the source of earnings does that makes sense.
Well, Yeah, I guess you were having consistent longevity gains and then released their earnings are released the excess P funds or maybe front ended some profit essentially.
Last year in the prior year, we would.
Yes, we would have brought those fabs into earnings last year, and so we're not getting them on the on the on the drip each quarter as it goes through got it.
And Gabe one of the things we've talked about was the offsetting.
Movement of the longevity business in the insurance business related to Covid and this kind of plays to the right level.
Hello.
Hello.
But then we were even seeing.
Okay.
We have been lost.
Jeremy can you hear me.
When youre here can you, yes, we can hear you Gabriel can hear you.
Okay, Yeah, I heard it right here.
It must have been a glitch I was saying this plays to the theme we've talked about with Covid with.
Longevity.
You know a challenge challenges, obviously for you know and seeing what's going on with life mortality. So we were essentially following the risk and making sure that we have the right strength in our balance sheet.
Got it okay.
Yeah.
Yeah.
Sure I got a question about the group business now one okay. So I got the explanation about the.
The disability experience this quarter I don't know if you ever you know.
Look at I'm sure you do but I know I'm Canadian earnings call insurance called and we never talk about the benefits ratio, but if I look at the supplement and I you know the.
Claims paid divided by premium.
We're in the low Sixty's last year was in the high Fifty's I guess, so I mean, but if I look at pre COVID-19 levels.
The high Eighty's.
I mean is it.
Reasonable they will be looking at the benefits ratio and think well what were seeing today is maybe some normalization and normalization could actually mean.
More pressure on earnings growth and group down the road if it gets the benefits ratio like we had pre COVID-19.
I would start by saying I think the benefits ratio out at an overall level like there was a pretty blunt instrument you are making.
And that business can be.
Your mix of business can have a significant impact on that so for example, if you are growing.
Your large case business you could be shifting a lot to fee based income as opposed to claims based income your health benefits would have a very different claims ratio than your LTV benefits. So.
I wouldn't want to go to something like that over.
That level to really get in underneath that.
The reality is we're in a competitive market, where every cases renewed with a broker and with a client who is looking for value for the services. They have received and the reality is we're always going to be competing on that on a very you know on the front foot, but making sure that we're providing good value to customers.
Okay, well I have just a hammer looking for now that the number.
Revisit in the future, but thanks for that.
Thanks Gabe.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Thanks, Good afternoon, when I go back to the discussion on regulatory capital.
And I guess my first question I want to make sure there's no light cat impact from closing the Prudential acquisition can you remind us on that.
Yeah, I'll, let Gary speak to the Logcap matters Gary.
There is no like had impact closing prudential.
Okay, perfect and then sort of a follow up question to what was being asked before because your answer was what's interesting clearly there's interest rate sensitivity to light cat ratio and it's fairly.
Significant.
Answer suggesting that.
Do you think with discussions with Aussie.
And potentially simply putting in a L M.
<unk> strategies today, you can kind of bridge the gap between now.
Now and when <unk> 17 is implement that next year and thereby.
Void, having to unnecessarily issue capital like that's what I kind of got fear message I want to make sure I interpret it correctly.
Yeah Yeah.
I'd say broadly Paul you're on track our view is that the.
The movement, we've seen in like that is really not economic it's formulaic.
We've got we're at the top end of our range.
We've got the benefit of the you know the scenario switch that's coming in.
There is actions we can take that makes sense for our invested assets both today and under a <unk> 17, and so as we look at it we've got lots of strength, we're not and we wouldn't be minded to do something.
The cost real money that had a real economic impact on the on our balance sheet or on our income statement. When there is a non economic impact going on so that's probably the way I would think about it for a period of of nine months. It would make no sense to do that so what we're going to do is we're going to manage with the tools. We've got we're going to take advantage of the <unk>.
We've got in the business and we're going to really work towards a smooth transition to a tire for 17.
Okay, I think I understand from your position I guess really the concern I would have does osophy have similar view and maybe you can't speak on behalf of philosophy Budd.
I think I appreciate what youre, saying.
Yes.
Okay.
Can't speak on behalf of obviously, but we actually have a very good interaction with osophy, we've been working with them effectively as have our industry counterparts.
They understand the dynamics of this as well and you know I think.
Sound mines will land in the right place as we transition to <unk> 17.
Got it okay. That's all.
Helpful. Thank you Paul.
And then next question is going back to capital risk solutions and <unk>.
That new disclosure around the that piece adds versus other margin and fees.
<unk> is helpful. I guess my question is.
And maybe this is where our CSM accounting would actually be helpful or where can we kind of expect that P. Fad release draw down too.
A point of equilibrium I E how much based on rough.
Roughly what you would expect for new new new business volumes like does it continue to decline quarter over quarter for a few more quarters to stabilize relative to Q1 and any kind of.
Characterize characterization you can provide us there would be would be helpful.
That's one for Gary for sure Gary sure Yeah.
Yeah, I think really just to get to the heart of the question.
I don't I don't see anything that would have the <unk>.
Drifting up or down over the next few quarters for that.
That business, it's a fairly stable block primarily be.
Annuity in the.
The reinsurance business, there and there is no major plan changes.
<unk> seven conversion, so I'm not expecting anything to move there then there'll be currency impacts, obviously, if that moves but.
Because they are in foreign currencies, but no that should be fairly stable.
Understood. Thank you.
And then last question is with respect to individual insurance sales in Canada, They were down 15% year over year. So maybe some commentary there do you think that's due to.
Industry headwinds or is there anything company specific we should be aware of.
That's the question Paul that I will turn it over to Jeff Macau and Jeff do you want to take that.
Sure. Thanks, Paul.
And thanks for asking that question I mean, just in general if I could on sales in the quarter.
Overall I was quite pleased with our sales since then.
We did call out on the group side.
Two one timers that didn't repeat but both of those businesses were up significantly 62% on group GRS and about a 100% on group life and health.
On the individual life Paul.
It's a it's a relatively lumpy business the par business in the high net worth market in quarter.
Term business.
It was up about 13% year over year and I look upon the term business as.
Sort of confidence in the company. So we had high 13% growth in quarter. So I was very pleased with that the power was down.
It's a lumpy business.
You win and lose at times by the Big cases, and some of the big cases did not coming quarter.
And just to finish off the sort of the circle.
I was quite pleased with our retail wealth side, we had good net flows but on the individual life insurance side term was up sales the par didn't meet our expectations it's lumpy.
I'm confident that I'll come back later in the year.
Okay. Thank you for that that's all the questions I had thank you.
Thanks, Paul.
Once again, if you have a question. Please press Star then one.
Our next question comes from Jacko Mihalic of RBC capital markets. Please go ahead.
Alright, Thank you and just just to return one more time back to the capital and risk solutions are expected profit slide.
I just didn't quite understand your answer Gary when you said, it's a stable block okay. It's a stable block, but where are you also suggesting that the P. Fad releases get smaller.
Every subsequent quarter from here on in or did you mean, it stable I E. The 76 million.
That was released this quarter will remain stable at 76 for the next three quarters.
It was the latter.
Is it fairly stable block I mean, if we have new sales, obviously, that's going to add to add to the <unk> had run rates, but.
Typically there is a there is a natural sort of decline in the blocks or your new sales typically just to replace your in force as it runs down through you end up quite quite stable is what I was referring to.
You can't predict the number and you can't predict the currency, but using your example is good.
Okay. Thank you that's very helpful. And then just on just so I understand what youre doing actuarially because it strikes me that sometimes when I hear your language, it's different from others in other words.
I think one of the things you said was in your U S life mortality block you strengthen your best estimate typically when I speak to other insurers they'll say that yes, we strengthened the best estimate and as a result, we increased the piece that as well.
But in your case it sounded it didn't sound that way. So did you actually lower your margin for adverse deviation or why would you not have built ERP fad when you strengthen your best estimate.
Gary that's definitely for you.
So when we and I'll start with the.
Two things to clarify one first on the U S life mortality that was strengthening our best estimate we already had a good healthy margin on top of that and so if it's X percent of the best estimated state is X percent. So you strengthening your best estimate as to move we made there.
And the margins, we already felt were quite sufficient for that so the margins sit on top of the best estimate that's important to remember.
We moved our best estimate in the Martin that sat on top of it was with.
X percent above that and we've kept that the same.
The what I was referring to here, reducing the margins that's where in prior years, we had lowered our best <unk> made our best estimate.
All right.
A more favorable outcome for the future for the longevity business and this was in Europe and that has come over a number of years and for a temporary period offering a number of years we kept.
Higher.
Your margins on top of that best estimate until we saw the trends play out and so last year as we said earlier, we've been watching this for a number of years and obviously we are looking at further how COVID-19 has impacted we're saying, yes, we really feel that those are.
Beyond the higher end of our range and we released some of those so released some margins on the on the <unk>.
<unk> signed so the release of those margins was not directly tied to U S mortality other than obviously, we're looking at the same sort of outlook in a post COVID-19 world for both of them, but it was a it was more.
There are two different decisions on the two different blocks.
Okay understood I think it can make a few other inferences from that as well, but I'll leave it there on the actuarial side and I just wanted to go back again to the Prudential.
Prudential acquisition. So I appreciate there's no impact unlike cat, but it certainly does hit your leverage ratios.
Which would reduce some of your flexibility I think in managing capital can you talk to us about our pro forma leverage.
After the Peru.
Sure.
I'll pass it over to Gary I actually I'll start out by saying, we've used a very efficient financing structure in relation to prove as a starting point.
And we have clear intentions to try and not to try to take down our leverage ratios on a proactive basis, obviously, we will do that.
Very balanced way, but we actually have clear plans, we work with the rating agencies, who have good insight into where we're going and I'll allow gary to sort of speak to that.
Yeah.
No.
You'll recall as part of the financing we have a short term debt that we were that we were adding add to this and this is what caused that.
The leverage to go up in the near term and we didn't end up adding as much as the short term debt.
As we to Ritchie answer I think we'd originally called out.
Mainly in U S and it ended up just over 800 million I think it was 823.
And in the U S. In terms of the short term debt thing so that's something that's.
The business grows and obviously as the U S develops as earnings would be able to pay that down quite promptly.
Our leverage ratio will pop up in the near term I think it will be around in the 36% range.
And then as we pay down that short term, though short term facilities it'll come down into into our targets and we've discussed all of this financing plan with the rating agencies well in advance and you may recall, a large part of the financing that we put in place last year was our R. L. RCN.
The limited recourse capital notes, so and those.
Those are already.
All in all the numbers and obviously and have favorable rating agency treatments. So it really is just a short term sleep.
Okay. Okay. That's very helpful. Thanks, very much Gary.
Thanks Darko.
This concludes the question and answer session I would like to turn the conference back over to Mr. Mann for any closing remarks.
Thanks, Ariel and I'd like to thank everyone for attending our Q1 call.
Please feel free to reach out to our IR team for any follow up questions. You may have we hope that everyone enjoys.
The beginning of spring and a bit of an early summer break and we really look forward to reconnecting at our second quarter call in August 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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