Q2 2022 Great-West Lifeco Inc Earnings Call
Record keeping growth and expansion of its retail business.
Later in my remarks, I will provide more color on empowers performance and outlook.
Please turn to slide five.
This slide shows our medium term financial objectives, 8% to 10% base EPS growth.
Base Roe of 14% to 15% and a target dividend payout ratio of 45% to 55% of base earnings.
While year to date base EPS growth is below our 8% to 10% objective. These are medium term objectives and our confidence in meeting meeting them over the medium term has not changed.
Please turn to slide six.
Our Canadian business demonstrated top line stability in the quarter with group and individual insurance sales in line with last year.
In wealth group sales increased year over year with strong growth in our next step asset rollover program.
Similar to empower Canada life has been investing in this offering including a more digitally enabled retail customer experience for our participants when they are leaving workplace retirement and savings plans.
Similar to the industry individuals' segue fund and mutual fund sales slowed reflecting market uncertainty and volatility.
This decline was partially offset by an increase in sales of guaranteed interest options in payout annuities.
In our group insurance business, we can continue to make good progress with our claim secured business plan.
Since the close of the acquisition in Q3 last year. The integration is going well with quota quote activity building and planned retention strong we closed our first significant joint sale between Canada life in claim secure in quarter and had several secure pack sales.
<unk> is a new bundled offering we launched last quarter, combining Canada life insurance benefits.
And claimed secures modern claims processing capabilities.
Canada Life also announced a dividend scale interest rate increase in participating life insurance products in the quarter.
Please turn to slide seven.
In Europe sales were strong with year over year increases in all insurance and annuity offerings, including a large bulk annuity transaction and good momentum in equity release mortgages.
Individual wealth sales saw a solid growth year over year, while group wealth was steady with the prior year, but down sequentially due to a large corporate pension sale in Q1.
Europe saw a strong performance overall, including growth in base earnings, which Gary will cover shortly.
This performance reflects the resiliency of our European businesses, which focus on financial necessities like pension savings retirement income solutions and group protection, where demand is less affected by the macro environment.
Turn to slide eight.
Putnam's AUM was impacted by the sharp market declines and ended the quarter at U S 167 billion.
Net outflows of $4 4 billion were primarily in putnam's lower fee fixed income products.
<unk> investment performance remains strong as demonstrated by four or five star Morningstar ratings on 23 funds and just under 80% of fund assets performing at levels above the Lipper median on a five year basis.
Please turn to slide nine at.
At empower this quarter's sales results did not include any mega plan wins, and fewer large case wins than last quarter or last year.
Volatility in large and Mega sales is quite normal and the new business pipeline remains strong.
Retail wealth management continued to see strong growth with empower IRA sales up 37% and personal capital sales up 14% year over year.
And Power's overall assets were just under one three trillion at the end of the quarter with 321 billion acquired from Prudential on April one.
I would note that the value of Prudential assets was 284 billion on June 30, reflecting equity market declines in quarter.
You'll note we've added details on the invested assets, we acquired through the transaction in the appendix of the deck.
While the Prudential business came with a high quality invested asset portfolio folio. It was a little less conservative than life goes with a higher percentage of triple B and below investment grade.
We are comfortable with the overall asset mix, which is in line with our U S competitors.
Please turn to slide 10.
While Gary will cover empowers in quarter financial results in his comments I would like to provide some insight into how the business is performing opposite our value creation objectives, especially in relation to the three acquisitions noted on this page.
Starting with mass mutual we're very pleased with our progress against our three near term term objectives client retention client migrations and expense synergies.
We laid out the mass mutual integration plan, we set an ambitious goal of approximately 82% of client revenue retention, which would be industry, leading if achieved I'm.
Im pleased to share that we are on track to exceed this goal with most terminations flowing through the last three quarters and a smaller percentage to come through the balance of this year.
This strong performance was driven by retaining the right talent for mass mutual in building early.
Chips with clients.
And notwithstanding our keen focus on integrations empower is organically grown participants by approximately 5% over the last 12 months overcoming the impact of mass mutual client attrition.
This growth is more than twice the overall market growth and excludes the benefit of the over $4 million Prudential participants added at April one of this year.
We have an expert team that is seasoned and disciplined and they've completed six of eight waves of client migrations.
We're on track to complete the last two waves in Q4.
Our ability to retain clients and move them to the empower platform drives our expense synergy capture we remain confident on meeting our $160 million U S. Pre tax objective by the end of 2022.
The playbook for Prudential as similar to the one we used for mass mutual our early focus was on retaining Prudential talent that strengthens our team and can play an important role in transitioning relationships to empower and client migration work.
We've set similar client revenue retention goals for Prudential and remain confident in achieving our U S $180 million pre tax synergy goal with $25 billion achieved to date.
The fourth goal in these acquisitions is to accelerate empowers retail wealth management strategy by embedding personal capital's hybrid digital wealth management capabilities into the empower environment.
This includes creating a new digital experience for participants while in plan and deploying personal capital's tools and advice model to grow empowers retail wealth management business with a focus on rollover and roll in of assets.
Mind, you that across the empower platform. There is approximately $80 billion of money in motion each year, representing a significant opportunity to serve participants retail wealth management needs.
To sum up we remain confident in meeting our value creation objectives, including strong client retention and achieving expense synergy targets.
We're actively driving forward our strategy to build a significant retail wealth management business leveraging the capabilities of personal capital across empowers over 17 million plan participants.
Please turn to slide 11.
Expected profit and capital and risk solutions for several quarters now as a better measure of growth in volumes.
We introduced this expanded view of <unk> releases and other margins and fees in Q1 to provide more color into the movement period to period.
Crs expected profit was steady year over year and up 6% sequentially overall.
Overall business growth was strong with new longevity contracts in the UK structured transactions in the us and in other reinsurance transaction in Israel.
The new business pipeline room pipeline remains healthy in both structured and longevity reinsurance portfolios.
We've continued to focus 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 results Gary.
Thank you Paul Please turn to slide 13.
Overall as Paul noted life co produced solid financial results this quarter the benefits of diversification really shone through especially given the challenges of declining stock market and elevated volatility.
Base EPS of <unk>, 89, tenths with steady year over year, but there were several notable moving parts.
Not surprisingly equity market declines were a headwind, particularly in the U S segment, where a significant portion of the revenue is asset based fees.
In addition currency impacted EPS by about 3% compared to last year, reflecting a stronger Canadian dollar against Euro and Sterling.
However, these pressures were offset by very strong insurance risk results plus. The addition of the acquired Prudential retirement business overall, a very solid result in a difficult environment.
Looking at net earnings per share. It was 79 down 6% from Q2 2021, primarily due to transaction and restructuring costs related to Prudential retirement acquisition as well as the currency impact noted above.
Our segment results, starting with Canada base earnings were $296 million up 1% from Q2 last year.
Insurance experience overall was a positive this quarter, particularly in group as long term disability results showed a strong turnaround and health results continued positive.
This was partly offset by unfavorable individual policyholder behavior experience.
Canada also benefited from another solid contribution from yield enhancement activity supported by widening spreads and continuing volumes of equity release mortgages.
In the U S empower base earnings of U S $133 million, including U F $35 million from the addition of Prudential retirement business, excluding Prudential empower as base earnings of <unk> $98 million was down from U S $147 million in Q2 last year.
The decline can be attributed to three factors the drop in U S equity markets the impact of expected acquisition related mass mutual client attrition and higher expenses.
As a reminder, over 60% of the net revenues at empower our asset base. These fees were negatively impacted by the decline in U S markets in the quarter, which led to a 139 billion or 12, 5% reduction in assets under administration, excluding credential.
Relative to expectations coming into the quarter empower fees were down almost 20 million U S pre tax in Q2.
As Paul has said we are on track to exceed our original 82% client revenue retention target on the mass future integration.
However, when looking at period to period comparisons during integration. It is important to recognize that there is a lag between deal closure and client terminations given that it takes time for clients to go to market with Rfps.
Most of the impact of the expected attrition would be felt in 2022 and very little had been experienced by Q2 last year.
While there will be some further attrition in advance of final conversions. This is expected to be very modest the large majority of the attrition is behind us.
Often acquisition related revenue attrition is offset by market growth and new cash flows and this occurred during 2021, however, with the sharp market declines this year. The revenue attrition is more noticeable in year over year comparisons.
Expenses were up year over year in line with the steady organic growth in DC plan participants higher compensation expenses and also the impact of our recently announced industry regulatory change, which led to additional printing and mailing costs, which are noticed noticeable with over 17 million plan participants.
We are working to address the change and reduce those costs, but it will take a number of quarters.
Retail wealth costs are also up significantly year over year, reflecting the accelerated build out of the retail wealth strategy. This includes the additional sales hires that we noted in Q1 2022, along with the necessary support staff investments, which are 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 $8 5 million plan participants now having access to the enhanced user experience.
Mass mutual expense synergies are at $88 million on an annualized run rate basis and are on track to deliver the $160 million target. Once integration is completed later this year it.
It is worth calling out integrating savings tend to be more pronounced at the start and end of the program.
Early savings come from eliminating duplicate overhead costs, while later savings arise as prior admin system and service agreements or discontinued post conversion to the empower platform. We expect to see the same pattern for Prudential with early savings noted this quarter and most cost synergies coming towards the end of integration.
Putnam earnings were down from Q2 last year impacted by lower asset based fees plus mark to market losses on seed capital this quarter compared to seed capital gains recorded in Q2 2021.
The Europe segment had another very strong quarter in Q2 with base earnings up 13% year over year or 23% in constant currency, allowing for the significant appreciation of Canadian dollar against Euro and Sterling.
UK base earnings were up 91% year over year, partly benefiting from strong yield enhancement gains, but also due to last year, including a significant one time tax charge.
Ireland base earnings Rose, 9% over Q2 last year, notwithstanding currency impacts largely driven by strong insurance experience gains and the addition of archive our closed block acquired late last year.
Base earnings in Germany were down 44%, primarily due to last year again, including a onetime positive tax matter at this time as well as the impact of currency.
And capital and risk solutions, the reinsurance business continues to perform well with base earnings up 16% year over year and growth in the structured portfolio driving increased expected profit.
Experienced gains were seen in both the longevity book and the mortality book, which is somewhat unusual.
It was particularly encouraging to see the continued improvement in U S life reinsurance mortality claims experience and recording a mortality gain in this line for the first time since the pandemic began.
Turning to slide 14.
Here, we can see the impact of various excluded items, which are minus $95 million. Overall. This quarter. These are predominantly acquisition related including transaction and restructuring costs for the Prudential retirement business, plus ongoing integration costs, including personal capital and mass mutual as well.
There were also modest impacts from actuarial assumption updates and market related impacts on liabilities in period.
Turning to slide 15 and 16.
These next two slides highlight the source of earnings first from our base earnings perspective, and then in net earnings.
I'll focus comments on slide 16, the net earnings.
So with the reminder, the amounts above the line are pre tax.
Expected profit was 8% up year over year.
The increase includes the addition of Prudential, which accounted for about 6% with a similar impact in the quarter over quarter comparison.
Currency was a positive in the U S, but a headwind in Europe as noted earlier.
Moving to new business impacts the results were pretty steady year over year in Canada, Europe and reinsurance.
U S. Strained is actually here non deferrable upfront sales costs on investment contracts, which is higher than last year largely due to the addition of Prudential along with continued organic business growth higher some higher expenses and some currency impacts.
Experience gains contributed positively again this quarter and I'll cover these in more detail on the next slide.
Earnings on surplus of minus $39 million is similar to last quarter and down from a positive $21 million last year.
Merrily due to seed capital losses at Putnam and in Canada compared to gains recorded in the prior year plus the impact of higher financing costs as a result of the Prudential business acquisition.
The effective tax rate this quarter was 10% on base shareholder earnings and 7% on net earnings primarily reflecting the jurisdictional mix of earnings the effective tax rate on base earnings in Q2 2021 was 9%.
Turning to slide 17 these.
These tables expand on the experience results as well as management actions and changes 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 primarily in Canada and the UK this quarter with wider spreads and a continuing steady volume of new equity release mortgages, which were originated in the UK, but allocated to back liabilities in both the UK and Canada.
The net impact of mortality longevity morbidity was strongly positive this period as we saw experienced gains across most insurance risk categories and most geographies.
Group insurance results in Canada, and Ireland were particularly strong.
We typically see more offsetting pluses and minuses given the diversification of product portfolio, but this was a particularly strong quarter.
Credit related impacts were also a positive this quarter driven by upgrades in the bond and mortgage portfolios as our high quality investment portfolio continues to perform well.
The expense and fees variance is best looked at in two pieces.
A little under half of the impact relates reflects lower asset based fee revenues than expected at the start of the quarter given the market declines experienced in Q2 and as noted earlier most of this was felt in the U S.
The remainder of the variance is related to expenses not included in expected profits. This includes costs for <unk> 17, additional strategy spend in Europe , and higher mailing costs and onetime expenses noted in the U S.
The table on the right highlights there were no material basis changes this quarter and the acquisition related transaction costs were related to.
Credential transaction.
Moving to slide 18, 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.
Excluding prudential lifestyle expenses were up 4% year over year.
As is the case with many businesses, we are experiencing some modest inflationary pressures in labor and other costs. This is an area. We will monitor closely increasing the focus on achieving productivity gains in our operations and adjusting pricing if appropriate.
In Canada expenses relatively flat up 1% year over year, including the acquisition of claim secure but also reflecting some one time expenses in Q2 2021.
In the U S expenses were up 39% year over year.
Excluding Prudential expenses were up 11% with a modest decline in Putnam and 13% growth at empower which primarily reflects as noted earlier the organic growth in DC plan participants and the recent investments in the retail strategy build out along with higher labor and those mailing cost mentioned.
In Europe expenses were down but as noted earlier for earnings currency movement had an impact with expenses actually up in constant currency the.
The increase was mainly due to acquisition related costs in Ireland, including the archive closed book and organic business growth across the segment and in capital and risk solutions. The expense growth is off a very small base and is line with growth in the business, including the continued expansion into newer markets.
Please turn to slide 19.
The Q2 book value per share of $25 was up 5% year over year, primarily driven by strong retained earnings given the solid results in each of the past four quarters, although currency translation in OCI has been a headwind this year with the weaker European currencies.
The rise in interest rates lowered fair values on <unk> Securities. However, there is largely offsetting gain in pension OCI.
As disclosed at our recent information session, we expect shareholder equity to be reduced in the range of 10% to 15% upon transition to <unk> 17, primarily due to the creation of the contractual service margin viability.
The light cat ratio on the right hand side, the light cat ratio at CAD life remains strong with 117% within our target range of 110% to 120% the ratio was down two points compared to last quarter driven by interest rate increases partly offset by the continued smoothing in of the <unk> scenario switch benefit.
As noted in Q1, we would describe the decline is more of a formulaic issue rather than an economic one since in general our business benefits from higher interest rates.
As a reminder, underlying cat a portion of available capital is calculated at fair value, which declined again this quarter as interest rates rose further.
However, the required capital is largely calculated at fixed rates as defined biography and so did not move in the same manner.
<unk> released its 2023, <unk> guideline post quarter and setting out the adjustments to accommodate the transition to our <unk> 17.
The first line cat ratio under the new guidelines will.
We will be reported as part of the Q1 2023 results and we would expect a positive impact on transition.
As an indication of the impact we have estimated that pro forma line cat ratio for June 30, which would be in the mid 100 <unk>.
Note the actual impact on transition will be dependent on market conditions at the time, including the level of interest rates given the different sensitivities between <unk> 17.
And lastly, LIFO cash, which is not included in lifeboat like cat ratio ended the quarter at <unk> 8 billion, a modest increase from last quarter and this would convert to about three points on cadillacs like cap ratio back.
To you Paul Thank you, Gary and please turn to slide 20.
We're pleased with <unk> results in the second quarter, which demonstrated the benefits of diversification and resilience of our business. While we recognize there is still much uncertainty in the macro environment, we are well positioned to withstand future headwinds and take advantage of opportunities given our disciplined approach to managing our diversified portfolio a bit.
<unk>.
As such we remain focused on delivering on our medium term financial objectives, as we work to advance our business strategies, including successfully integrating acquired businesses.
That concludes my formal remarks Ariel please open the line for questions.
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 will hear a tone acknowledging your request.
We're using a speakerphone please pick up your handset before pressing any Keith to withdraw your question. Please press Star then Q we.
We will pause for a moment as callers join the queue.
Our first question comes from many Grumman of Scotiabank. Please go ahead.
Hi, Good afternoon first question on empower the expenses there.
You highlighted the mailing costs due to regulatory change I'm just wanted to clarify is that a one time mailing or this is something that's ongoing.
Thanks, Rami its Paul I'm going to actually pass that one over to Ed who can describe what it is it's not one time, it's a new requirement regulatory requirement, but it's something that we can actually take a management action onto address so Ed why don't you take that question.
Yes, the bottom one timer however.
Because of the regulatory requirement that took effect in January of this year.
By the Cana around us informing customers of their statements there.
All statements being posted on.
On the accounts and so.
In order to do so we have to capture email addresses for all of our for all of our customers. So we have a very large percentage today.
We're continuing to.
To drive towards a 100% of email capture.
And how material it does reflect how material is that expense.
If you could quantify it.
I'll, let Gary Gary.
Sure Yes.
<unk> expenses.
$6 million range $6 million to $8 million range.
Okay, and then just as a follow up.
As you mentioned Theres management actions you can take related to this are the are there any other cost cutting measures that you are considering at empower.
Anything.
That you'd highlight.
Yes.
You'd be thinking about right now.
Yes.
Ill start off at a high level, there and the one thing I noted in my opening comments there is that.
Notwithstanding the fact that we're deep into integrations right now we are actually growing.
At a high pace.
At empower both on the record keeping side. So we referenced the fact growing growing at 5% kind of twice the market, but also accelerating growth on the retail side. So if you take those two levels of expense the growth in expenses in terms of new clients coming on site and building the retail business, we view that as very.
Productive expense so.
We would not wanting to be pulling back on those having said that ill, let ed speak to the way he thinks about managing expenses at empower.
<unk> in there.
Well I'd say, yes, I'd say, we look at it.
Two ways.
As we've got.
Active.
The investments that we're making in the platform to automate more.
More of our transaction activity and that will lower our cost per participant per locomotive cost per participant.
A number of things that we don't short term I think in the aggregate, we probably have one of the lowest unit cost in the business today.
And then I'd say secondly, we are moving forward on a pretty aggressive plan none of.
It's multi year.
That.
I think could represent meaningful savings for us so looking at the <unk>.
It's very much around the cost side of it you have to focus on that as a team and we're doing that.
Paul mentioned, we're growing we're investing in distribution, we hired a number of salespeople in 2021 retail side, we are ramping up in 2022 on the retail side.
You can see the dividends good results.
Hi.
So.
Gross sales proceeds.
And the opportunity is defensible.
Thanks for that and then just on the like Cat ratio you quantified.
The impact on transition I'm, just wondering if you like a target range changes under <unk> 17, I am not sure if you mentioned.
In June , but I, just wanted to clarify that.
Yes.
There's no intention to change the target range.
We remain that and as Gary said, that's the transition pro forma June 30, the actual impact on transition will depend on the economics.
End of Q1.
Thank you.
Okay.
Our next question comes from Tom Mackinnon of BMO capital. Please go ahead.
Yes, thanks, and good afternoon.
When you brought on the Peru acquisition as opposed to the mass mutual acquisition.
Can you talk a little bit about the differences in the makeup of the business.
I think my understanding is that the crew has versus the mass mutual has a lower percentage of fee income and a higher percentage of spread income then.
Mass mutual.
How does that play out.
Yeah.
In a rising or declining interest rate environment are there guarantees and it also has a higher Sag fund.
Business and how does that play out with respect to a volatile equity market.
Yes.
Help us understand that that'd be great. Thanks.
So thanks, Tom I'm going to turn that one to Ed to provide a bit of context around the profile of the business and then maybe you can turn it back to Gary for any other nuances Ed over to you.
Yes, I think first a couple of things Tom.
There is a little over 3000 clients in totality versus 26000.
With mass mutual and the composition of the plans are very different the prudential plans tend to be larger in terms of assets and participant count they tend to bring a level of complexity to them.
Relative to the mass mutual.
But in terms of if you look at the underlying assets.
Hansford over.
I would say, it's a good mix of traditional 40 Act mutual fund product.
And general account.
Products as well so not too dissimilar from what we saw with mass mutual.
There are floors.
Just as a world with mass mutual.
But I wouldn't I wouldn't I wouldn't say that it's dramatically different.
Okay.
Okay.
Sure Yes.
Maybe I'll just add a couple of points that Tom Youre asking on the general economy. The general account was.
Over $40 billion towards a large general count is about the size of our existing combined empower massmutual General account. So it was a good addition to the general account is that was noting.
And as you've correctly.
Correctly assume the general account.
Offering is less sensitive to.
So the market moves its more sensitive to interest rates and in fact over time, one would expect as as rates rise there could be greater certainly the you'd be more clear of any interest rate floors, we're particularly concerned given the asset mix. It came with prove on the interest rate for us they were fairly modest.
But obviously the rising rates does give an opportunity to.
Turing earn spread on that so that if anything.
They would benefit a bit in this environment as we go forward.
And then and less sensitive to equity market moves.
Okay, that's great and then just as a follow up.
I jumped on the call late but the base earnings and empower you may have addressed this were down.
10% year over year, but you had a 14% increase in assets in at 38% increase in participants all be most of that increase happened.
On April 4th.
So.
I mean, what's driving this drop is it just strictly higher opex.
What are the things would have been a contributing to that because you started the quarter off with.
Higher assets to begin with.
Thanks, Tom I'm going to turn that one to Gary Gary in a minute.
Fundamentally if you think about the.
Shape of the business.
About 60% of empowers earnings are market sensitive and reserves, we saw a sharp decline in equity markets. So you actually have the fee income impact going on there one of the things we've shared.
In our speaking in our formal speaking notes was the fact that we had set a pretty.
Aggressive goal in terms of client revenue retention for mass mutual in the low <unk> and we actually are out.
Point of where we believe we will outperform that in terms of revenue retention.
But one of the dynamics of that is if you go back to Q1 Q2 last year.
None of the clients that we're ultimately going to leave empower now.
Mass mutual funds that were going to leave empower in other words, the clients that were going to terminate not many of them are terminated them versus over the last couple of quarters, we've seen clients who've gone out to RFP and theyre going to leave so we'll retain the ones we retained but we've seen that drop in revenue and then Gary would have unpacked.
Some additional expenses that have occurred both driven by.
Some unique issues in the business, but also the fact that we continue to grow organically and I think one of the things I would appointed out would be that we actually organically grew participants.
During the during the one year period, and actually that organic growth outstripped. The clients that have been lost through attrition and transitioned from mass mutual in one of the realities is in a market like this.
You will see your actual revenues dropping because of asset levels, but your participants arent dropping so and for the most part your expenses are tied at a persistent participant level and frankly, then as markets come back we will get the lift from assets and we won't see the same lift in expenses. So it's the leverage of the business that has.
That's asset sensitive I'll, let garry add any other color.
Not with Paul I think you summed up well I mean, we've got the the market impact is there you've got the revenue attrition as expected from the mass future. We've notes running ahead of target. It wasn't there in the same period last year and then we do have the expenses increasing for the reasons, we outlined in the speaking notes in terms of.
The participant growth the investments in retail and those those mailing costs.
I think you've covered it well and I was just going to mention Tom Theres Thunder and lightning in the background, we're not in a bowling alley here we are.
<unk> in the background.
Okay, alright, thanks for that.
Thanks, Tom.
Our next question comes from Gabrielle Duchaine of National Bank Financial. Please go ahead.
Hi, good afternoon.
The discussions we've had or insight you can provide.
Capital.
Rating agencies, and how they're going to.
Treat the CSM because.
Dozens of treatable.
Separately I guess.
Pro forma <unk> ratio.
<unk>, 40%.
Let's take the midpoint of the book value impact.
Thanks, Gabe I'll turn that one over to Gary sure, Yes, I mean, theres been a number of conversations with rating agencies, both the industry and just bilaterally.
<unk>.
So first thing I'd note is that the rating agencies have not come out and actually formally said. This is this is what were doing however.
Number of them have come out and stated their intention to incorporate the CSM into their into their metrics Fitch was probably the most clear of them.
You said that they were going to basically avid is after tax as after tax CSM is as an adjustment to equity.
And in the conversations that they would be looking to.
To adjust.
The.
For the CSM, whether they have a calculated <unk> ratio on an adjusted ratio and they put them both in the chart.
In our conversations they haven't decided how to do it but they absolutely recognize the points.
Think a M best.
Already have.
They have in their in their capital models have a treatment for for for.
For <unk> type measures and they would be looking to add both the CSN and the risk adjustment. They were looking to take can handle so I think the rating agencies are on top of this making the appropriate adjustments and they've all been very clear that they understand this is not changing the economics of the business or the financial strength of the company.
Accounting regime change so they they will that.
That will adjust accordingly.
Yes, I saw the fit.
So I was wondering which way the winds are blowing their but sounds like heading in the right direction as far as.
The power business and I just want to go over a couple of months to make sure I got them in the question.
The percentage of.
Right.
The fee levels.
Hey.
Market movements is what again.
I'll turn that under Gary Yes.
It wasn't a percentage of AUR.
The number I quoted and I think it was in our original empower investor day as well.
It was in the neighborhood of 60% of revenues would be would be sensitive to the assets asset levels. Okay alright.
Alright, and Thats inclusive of mass mutual.
We will go down on the Prudential Alright.
Okay.
And then the.
Other issue.
Timing.
There is a lag you expect 20 odd percent of your customers to go away.
How long does it take for that.
Posted group I'm trying to think about.
We might be facing the same situation with Prudential.
Six.
For now for about six to nine months from now.
Maybe.
The timing timing there.
Yes so.
Youre right Gabe so the reality is you closed the transaction one of the things we worked hard to do is retain the key people.
Both Aetna neutral Prudential and loser client relationship people, we worked hard to get out there and market our value proposition.
Clients choose to actually.
To determinate their plan it takes time.
Leave in the first few months so generally it would be in the latter half of your of the of the of the actual planned transition process, but.
But I would go back to that when you look at these types of transactions historically being able to achieve.
80% plus client.
Our retention is very very high.
And thats because clients generally will they'll be testing the market during that period and what they're doing is they're testing the market and the vast majority of your choosing empower. So we've got a very strong value proposition, we're very confident in it and we're very confident in our ability to execute on the <unk> transaction I don't know if theres any other color you can provide on that.
Sure.
No no.
No additional color.
Good.
I don't dispute 80%.
A good number.
I'm, just asking for kind of a.
A timeline for that.
Adjusted My model.
Good analyst would.
Yes.
Credential, well, we're going to start our <unk>.
<unk> and our clients in early 'twenty three.
And I think that.
Thats, where youll start to see some of the attrition I mean, we're at 98% now, but that will that will come down over time.
As we've seen with mass mutual.
There'll be a similar cycle either.
Maybe for you Gary buying around this quarter next year right.
Yes.
Might start to see some there Gary anything you just just a couple of things Scott.
I heard a number of 20% I'm certainly hoping thats similar to match you to we can get somebody in the 15% range.
It would be would be excellent.
That's up Ted and his team I would note a couple of things too.
Just put them to us as we go through so we get the end towards the end integration Thats also youll start to be seeing the run rate synergies come through so you do tend to have that offsetting factor and the other thing I'd just remind us.
This.
Plant nutrition is built into all the numbers that we announced when we announced the transaction. So we factored the attrition.
At that at our targeted into into those announcements.
Alright, Thank you for the rest of your summer.
Thanks Kipp.
Our next question comes from Doug Young of <unk> capital markets. Please go ahead.
Hi, Good afternoon, sorry, another just quick question on in power and Gary in your comments you talked about three factors that cause the base earnings to go down excluding credential can you quantify how much of the year over year decline was a result of drop in equity markets.
Shang Pirates.
Higher expense can you like can you break it down into those three buckets just to frame. This.
Yes.
At a high level and it is a high level because as always.
Depends on the order you do the markets versus the attrition, but if you take a high level and I'll call. It a $40 million I think.
It's a little bit more than that.
In the upper Forty's, but about half of that would be due to the.
The markets in the <unk> design, you've probably got another similar amount on on the expenses. So.
They are fairly well balanced, but I'd put a little more on to the to the markets and the attrition and then a smaller portion onto the expenses I don't have exact breakdown of the number right in front of me it depends on the order you do the attrition versus market.
And youre, saying $40 million a year over year decline, excluding credential and then yes.
Yes, okay.
Okay I can go away and then Houston, some math on that and then second just on Canada. There was mentioned individual customer alright individual customer base earnings were down like 41%, you're talking about policyholder behavior being negative in the quarter can you kind of flesh out what that related to.
Yes.
It was more than just a policyholder behavior. There is some tax issues there as well so there is.
There are some components there Gary do you want to take that sure yes.
And I think your question is on the call to abate a little a little more in there you've got a combination of things about about a third of it is just related to the pace at which people are funding deposit into their into their plans.
The premiums that come in and that does tend to fluctuate quarter to quarter. It can be up one quarter and down another quarter. It was negative this quarter.
And then the other factor as it related to to surrenders and again some of that could be on universal life people either keeping their policies are not keeping them policies depending on.
Which.
Which timeframe it is.
Term insurance replacement activity there is a little higher I think we had some.
Really competitive terms, we had some higher replacement activity here, so that that would have impacted their results a bit but term is one that again it ebbs and flows we had we had gains in that area in Q3 and Q4.
We've had some some negatives in Q1 and Q2 so.
I think overall it was in the $20 million range.
But it's.
A number of those pieces each of them fairly small.
Okay. So lapse was part of this but it seems like lapse work.
While people keeping policies and people.
Lapsing them.
It wasn't any particular direction is that.
Yes, and Youre right.
Got it.
And then the third pace like that Theyre in the pace of funding, but I assume that's the well.
You won't policies does that does that as well yes.
Yes.
Policies and what investment options that go into and so on.
And then and just saying.
Hey, Doug I was just going to see.
The other reality on <unk>.
Individuals that also includes our Sugg fund mutual fund business, where as we know markets were down <unk> got.
We've talked about fee income being down in relation to empower the same thing happening in our wealth management businesses.
Canada, and Europe , and Thats actually a meaningful number so these are.
Ken in my mind, Canada performed quite well in some pretty.
Pretty tough environment, it's pretty resilient and diversified book.
Okay, No that's fair.
Perfect and then just lastly in Canada.
Wanted to make sure that I understand group long term disability experience, which has been under pressure across the industry. I don't think you've actually had some pretty good experience for the last year or so.
I just wanted to confirm that that is still positive this quarter not thank.
Thank you, Dan, but better than last year, just trying to get a sense of how that is unfolding and what youre seeing in that book.
Sure I'm going to turn that one over to Jeff <unk>, Jeff.
Yes, thanks for that comment on LCD. So I think we've mentioned a few times that prior to last quarter I believe it was five or six quarters in a row, we had very favorable disability experience and that is really a combination we believe of industry leading.
Renewals of our plan selection of our plans management of our plants in the last quarter. We had one month in the first quarter that we saw.
Less than expected, but that came back very very strong in the second quarter at levels that.
Who are more in line with our expectations overall.
So it was state of off essentially.
It was favorable Doug even in Q1, it was not a negative it was just less favorable than than.
Then we would have expected and I think Jeff as being modest we've got a very strong disability operation all with strong disability management services with discipline around pricing discipline around underwriting. It's a business that will see volatility because you are not in control of what's going on in the outside environment, but Jeff and.
His team do a great job with that business.
You might argue that we do have differential performance there.
Perfect I appreciate the color. Thank you.
Our next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon.
Perhaps or Garo.
Somewhat more difficult to gauge.
Level of gross life's earnings that relate to equity markets one of those for some of your peers.
Because of the way earnings are sub mental.
To give us a hamzah would you what would you referred to would you just refers to the slides in your presentation on the income.
Use that to help gauge the importance of equity market performance tier a bolt on.
Gary over to you.
I think certainly that fee.
The incumbent and I think we do breakout the admin services only fee income, which is which.
As obviously, that's in the group World.
Just transaction based.
And then the.
And that's primarily in Canada, but the rest of the fee income is really driven by by markets.
And I think overall I don't have it right and it does vary by segment, but it's probably in the 60% to 70% maybe two thirds of that it would be equity sensitive.
Maybe 60% equity sensitive now you've got some fixed income sensitivities there. So obviously with rising rates and lower equity market rising rates are lower fair values and equity markets. You had both aspects of fee income being hit by the environment in the last six months, but I'd say, if you look at the fees and then.
Think of that.
The mix of underlying assets.
That'd be one spot and then we do try and describe these market related impacts.
Upfront section of our MD&A as well sounds a good spot to look.
Paul Dino.
If there is any disclosure in either on the quarterly or the annual where you obligate all your wealth management business, including the retirement services business and give us a look at.
Sort of.
Segment.
Our segmented look at wealth management, where you bring all your wealth management together is there anything like that I don't believe I've seen it.
Yes, Mario we don't we actually don't have that in terms of our disclosures.
Certainly we look at our business in a lot of different ways as we think about it strategically as we think about the resiliency of the portfolio the diversification, but thats not the way we manage the business, we manage the business in country with strong driving our strong leadership positions and that's the way we look at it.
Okay.
One other quick follow up the the empower fee income when.
That declines because of the market effects that we're talking about does that get reflected in the expected profit of that U S segment or somewhere out like experience gains and losses.
Gary sure so.
When we are setting the expected profit going into a quarter. Then we will look at the market levels and that's a run rate of fee income the market levels that drive that at the start of the quarter. So when I referred earlier to.
<unk>.
If the empower fee income being off $20 million from what we expected that was while we expected to start up.
April 1st at the start of Q2, we had a certain expectation for fee income markets fell quite sharply all through Q2, and so that would obviously.
Obviously reduced it so you will see I mean, just mathematically you will see a lower expected profit on fee income as we start Q3, so that does get updated each quarter and instead empower on all of our other fee based businesses in the various countries.
Sure, but that would also mean then the difference between what you expected at the beginning of the quarter and what actually transpired would then go through experience is that right.
Yes, that's the difference.
<unk> million dollars or so I was referring to Empire I think it's more like $50 60 overall is.
It goes through the experience gained loss in the period and then we reset the expected profit for the next quarter.
Okay that makes a lot of sense, if I could just one other thing on personal capital.
It's a compelling argument.
Our thesis you have that personal capital can be brought to bear to.
For our wallet mass in Peru, but.
Is there any evidence so far and perhaps it's too early to ask this question, but is there any evidence so far that.
Personal capital is making progress in that respect.
Yes, I'm going to turn that one over to Ed you can provide some color on the.
The progress there and sort of the timing of where we're at.
Ed.
Yes, Thanks Paul.
So the capital has.
Capabilities that.
Serve the mass affluent and higher net worth customers. So they have some capabilities that.
Prior to the acquisition Werent Werent resident within empower obviously.
We've talked to you about what we're doing from an integration standpoint, and embedding those capabilities into empower and so that will essentially be completed in September of this year.
And there are as we are in kind of this interim phase there are there have been meaningful and substantive.
Referral and sort of cross sell synergies.
Where we've been able to introduce the capabilities of personal capital.
Some of our defined contribution participants who've expressed interest in a more holistic approach.
And I think to your question I would say it's early days. If you note Gary's comment about where we are on incorporating all of those capabilities into the defined contribution experience. We're in the process of rolling that out to the $8 5 million customers.
Our 70 million customers, we've now rolled it out to eight 5 million. So that's going to continue.
And.
As we move into 2023, you'll see a more integrated.
Direct to consumer wealth management business, bringing the best of empowers current capabilities from an IRA rollover perspective.
Along with all the personal capitals.
Wealth management capabilities.
And Gary just one very quick thing I think I've got my notes wrong on that did you say that Peru contributed $362 billion of AUR.
To the organization this quarter.
I think it was 321 was.
The amount that's noted on the slide I think is.
321, 1 billion I would note that 321, the date of close April one.
For one it would've fallen during the quarter to $2 84.
As of June 30.
The value of that of those that <unk> was 284 billion.
Yes, Okay I understand that's helpful. Thank you.
Thank you.
Our next question comes from Nigel D'souza of Veritas investment Research. Please go ahead.
Thank you good afternoon, I wanted to touch on.
And when I look at your disclosure on the core margin puts into flip to negative this quarter, just trying to get a sense of.
In order that I go back to positive is that more dependent on AUM appreciating and moving higher in subsequent quarters.
Orders or are there costs that you could take out equipment.
Move that margin into the positive territory.
Relatively stable.
I'll start off at a high level, there Nigel and then I'll ask Bob.
Rentals to comment so at Putnam.
<unk> maintained really good expense discipline, we've talked about some of the expense initiatives they've had over the last number of years, what you're really seeing there is a sharp decline in.
And our end markets.
Caused a sharp decline in AUM and so a sharp decline in fee income so.
As markets come back we would expect to see a recovery in.
That ratio the other fact is.
As related to seed capital, where the relative seed capital performance a year ago was a positive contributor as opposed to there being a negative in quarter. So overall.
If we took took off seed capital I think it would have been sort of more of a flat the impact of the seed capital would have been more of a flat we would've been more flat in terms of margin, but overall.
We want to focus on performance being the number one issue delivering for the clients. We will continue to look for.
We will continue to look for efficiencies, but at the end of the day.
It has to be about performance and delivering for clients, Bob anything else to that.
The only thing I would add to that Paul I think performance. Obviously is the name of the game.
80% of our assets are now in four and five star funds as rated by Morningstar. So the performance has been.
Sure very good across all asset categories.
That really helps us as we compete for new business for instance year to date. We're in positive flows in equities, which is very beneficial in this type of market.
But we are dependent upon market some markets S&P is down 20%.
At the end of June .
Barclays was down 10%.
That really hurts, but.
Having positive flows, especially.
And the equity sector really helps the firm and we've also been able to.
Do a lot in.
Stable value, which was a big <unk>.
Selling product in the 401Ks space.
Okay. That's helpful. If I could just quickly on your light cat ratio and interest rate sensitivity.
When I look at the impact this quarter based on disclosure last quarter.
The basis point parallel shift.
<unk> impact like that by three percentage points.
Rates moved up more than that but the impact.
Interest rates were the scenario.
Only two percentage points I might have missed it but was there another component.
The benefit of like cap this quarter that you mentioned earlier.
Yeah, I'll, let Gary cover that Gary Yes.
Just a.
A couple of points to note. One is that we did I think I called out was speaking is we did have that one point smoothing into the scenario switch so that always and that's not in the sensitivities because it's it's.
It's a different matter altogether.
At one point, certainly helped but I'd say the real driver is that we had very strong earnings in the Canada, Europe and reinsurance of the Crs segment and those are all of the Canada life the <unk>.
<unk>, Canada life those operators are all in the consolidated can life. So that the strong performance in those less obviously dividends up like that that really contributed to the light cat ratio as well.
Obviously.
Had some weakness in U S, but the U S operations Biologics does not form part of <unk>.
The strong earnings and the Canada life side of the house.
We're positive there as well.
Okay.
Sensitivity disclosure this quarter, it's once again three percentage points.
Unfavorable impact for a 50 basis point parallel shift so it's the same as last quarter no.
I understand would be that as interest rates move up.
Notionally the sensitivity to light that would decrease I'm not thinking about that correctly, how does your interest rate sensitivity evolve as the overall rate environment moves higher.
Yes, it doesn't it doesn't change a lot at these rates or at least the niche. These narrow band side there might be some rounding the ratio of <unk>.
A $3 two is now two eight but it still looks like 3%. So there is you are right that as rates rise. There is just with Quebec City, there is a little bit of a shift there.
That's not a large factor of these points and not certainly when you're rounding to the nearest point.
Okay. That's helpful. Thank you.
Thanks Nigel.
Once again, if you have a question. Please press Star then one our next question comes from Paul Holden of CIBC. Please go ahead.
Thanks, Good afternoon, just stick to a couple of questions for interest of time, So first one clearly everyone's.
<unk>.
I'm, just struggling a bit with forecasting empower earnings.
Wondering when we get the switch to IL 17, and you have to move to a true fee based approach I E away from insurance approach for modeling.
Empower earnings will that improve stability at all does anything really change.
Yes, it's Paul I don't think youre going to see a fundamental change in the stability for us disclosures will highlight fee based business a bit more than they do underwrite for us for so there might be slightly different visibility there, but if you think about the underlying business. We've got our core business representative today of empower along with.
The mass mutual business is being integrated tightened.
<unk>.
<unk> we've got.
The underlying fee income, which will rise with markets as markets Raws as Ed said were working on expense initiatives.
Broadened margins there we've got the benefits of rising interest rate environment, which can have some benefits and some of the guaranteed products. We've got the balance of the.
The mass mutual synergies to come on that will be in the later stages of this year as we're finishing integration and then we've got the benefits of Prudential, which will be we've talked about $180 million of pretax synergies, which would be incremental to the sort of the core business that we've got now and then beyond that.
We've got a retail business where is that.
I pointed out we're just in the early stages of launching these capabilities into that but I think you will see us providing more insight into sort of the retail strategy and retail growth as we get into 2023 and beyond so.
Forecasting at this moment in time with lots of volatility in two transactions going on I know, it's complicated but our fundamental view is this is a growth play both on the 401K side driven by our strong organic growth on our synergies and it's a growth play on the refill side, taking advantage of $17 million.
Clients, many of which are seeking more insight and support on their on their wealth management needs and leveraging personal capital's capabilities to do that so we view it as a growth play in.
I think we'll be able to evidence that in the quarters to come.
Okay, and maybe just to help frame that message home I believe you set a target from power in terms of our earning mix, reaching 30%. Once all synergies are realized I'm, assuming that's still the target.
Yes, I would say is that still the target in the same way, we've got a medium term growth objectives.
10%, we've got we've got the target the target was at a point where equity markets were a bit higher I mean, there could be some slight if equity markets never rose again, there might be.
Slight softening of that but our expectation is the world. We will continue to drive forward markets will recover so we're not changing our view on that target, we're not changing our view on our medium term objectives.
Okay, Okay got it.
Last question for me is with respect to Crs.
So a nice uptick in that other margin and fee line, both Q over Q and year over year, we want to make sure. There was nothing sort of onetime in nature. There that those are more reoccurring margins and fees.
I'll turn that one over to Marshall Marshall, Yes, you're absolutely right. There is nothing one time in those numbers that reflects our.
Growing nature of our structured portfolio, where we earn fee margins for <unk>.
Looking out of the money exposures and it also reflects the improvement on the P&C catastrophe side, where we've seen a significant improvement in market margins. Some of which is reflected in that line and some of which is positioning within our own portfolio, where we're moving further away from the risk of whatever so we're taking some opportunity on the strength of that market or whatever to be.
That portfolio, a little bit but.
There's nothing there that's one time in the period or whatever and it's a very favorable trend for us.
Got it okay. That's helpful I'll leave it there thank you.
Thanks, very much Paul.
This concludes the question and answer session I would like to turn the conference back over to Mr. Mann for any closing remarks.
Thank you very much Ariel I would like to thank all of you who listened in on todays call and thank the analysts for their questions and participation. Please refer to our IR team with any follow up inquiries as we can tell despite the macro environment remain bullish on our business and remain laser focused on strategy execution. We look forward to reconnecting with you in early November .
Remember for our Q3 call in the meantime, I hope, you're all able to enjoy some summer weather, maybe not the Thunder storms are today, and some time with family and friends in the months ahead. Thanks again.
Okay.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Okay.