Q3 2022 Great-West Lifeco Inc Earnings Call
[music].
Thank you for standing by this is the conference operator, welcome to the Great West Life Co third quarter 2022 results Conference call I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great West Lifeco. Please go ahead.
Thank you Ariel good morning, and welcome to Great West Life goes third quarter 2022 Conference call. Joining me on today's call is Garry Nicholas 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 Chief operating Officer, Europe , partial Jamal President and group head strategy investments in reinsurance.
Jeff Macoun, President and Chief Operating Officer, Canada, Ed Murphy, President and Chief Executive Officer of empower and Andre Bulletin Executive Vice President and Chief Financial Officer, Great West Lifeco U S. Andre will be filling in for Bob Reynolds, who is unable to be on today's call.
Before we 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 and presentation materials.
Please turn to slide four great.
Great West Lifeco delivered a solid performance in the third quarter, despite a still challenging and volatile macro environment like.
The second quarter weakness in equity and fixed income markets negatively impacted asset levels and reduced fee income in our wealth and asset management businesses.
Currency movements particular, particularly the notable strengthening of the Canadian dollar against the Sterling and Euro also had a negative impact on results.
These earnings per share of <unk> 74 cents included a reinsurance claims provision of $128 million Canadian or <unk> 14 per share related to hurricane Dorian, which we announced on October 19.
Our thoughts remain with the families businesses and communities impacted by the devastation caused by Ian.
Through our partners our reinsurance business supports people at times like this and helping rebuild their lives.
Excluding the reinsurance provision D. C. P. S of idiot fence was comparable to last quarter and down 5% year over year, a solid quarter, considering the headwinds of weaker markets and weaker European currencies. The quarter included a solid contribution from Prudential, a sequential improvement and empowers underlying earnings excluding.
Credential steady results in our life and health insurance businesses and excellent investments and credit performance.
This resiliency in earnings reflects our strength and diversification across business types and geographies Cup.
Coupled with discipline and a conservative management philosophy. It supports the company's steady performance in volatile times, we will highlight some examples of the benefits of diversification as we go through todays presentation.
We made strong progress against our strategic priorities in the quarter I am pleased to share that we completed the transition of mass mutual clients to the empower platform just in the last few days.
This final wave migrating over 900000 participants from mass mutual is an important milestone for empower.
We're set to meet our cost synergy targets by the end of the fourth quarter and as we close up the Smiths mutual acquisition I'm pleased to share that empowers achieved participant retention of 92% retention of 89% and revenue retention of 87% well ahead of our original expectations were.
<unk> the same disciplined approach with the Prudential integration planning is well underway. The teams are working closely with this important customer base and client migrations are set to begin in the first quarter of 2023.
In addition to the strategic benefits of scale and synergies. These acquisitions have strengthened empowers value proposition for new clients momentum in the defined contribution business is strong with a request for proposal activity higher than the last year than in any previous year across all planned types.
And empower we're confident in the strength and resilience of our businesses and strategies in the current environment.
All major economies grapple with the challenges of inflation interest rates and the potential for recession, we will continue to operate with discipline.
This discipline. This includes disciplined in managing our high quality investment portfolio underwriting and deploying capital on new business and managing expenses.
Please turn to slide five.
This slide shows our medium term financial objectives, 8% to 10% base EPS growth a base Roe of 14% to 15% and a target dividend payout ratio of 45% to 55% of base earnings.
Well year to date basis EPS growth is below our 10% objective. These are medium term objectives and looking ahead, we're confident in meeting them over the medium term.
Please turn to slide six our Canadian business saw stable insurance sales in the quarter with individual broadly in line with last year and group growing 15%, partly due to the addition of claims secure.
And wealth group sales saw a modest growth year over year and positive net cash flows with strong momentum in our next step asset rollover program.
Individuals well sales declined on lower segregated fund and mutual fund sales in line with industry results.
The sales results in Canada. This quarter highlight the benefits of our diversification with softer individual well sales offset by stronger group insurance and group while sales.
Given the inflationary environment, Canada life is positioning the business through strong expense discipline, we're managing expenses through a sharp focus on priorities and productivity improvement supported by the ongoing modernization of our technology platform.
Please turn to slide seven.
In Europe business performance was steady with last year, despite the economic headwinds and turmoil in the U K financial markets towards the end of the quarter.
Insurance and annuity sales were solid, but lower compared to last year, when the U K, but booked a $1 3 billion dollar bulk annuity sale.
Strong momentum continued in equity release mortgage sales until we temporarily suspended new originations in late September in response to heightened market volatility.
E. R. M is an important business for us as it adds breadth through our retirement income solutions for our clients and this is an attractive asset backing long term liabilities, we remain committed to the our end market and expect to resume in originations as the U U K interest rate environment stabilizes exclude.
Excluding currency impacts Europe had a steady performance, including a well including in wealth, where sales declined to a modest 3% year over year in constant currency base earnings were also resilient, which Gary will discuss shortly.
This reflects the diversified nature of our European businesses, including a product set focused on financial necessities like pension savings retirement income solutions and group protection.
Please turn to slide eight.
Putnam Z O M was impacted by market declines and ended the quarter at U S $158 billion.
Net outflows of $2 billion improved considerably from the prior quarter and were primarily in Putnam as lower fee fixed income products flows in higher higher fee equity products were positive year to date.
Putnam's investment performance remains strong as demonstrated by four or five star Morningstar ratings on 30 funds and just under 80% of fund assets performing at levels above the Lipper median on a three year basis.
Additionally, 80% of assets across all asset classes, and 96% of all assets in equity or in Morningstar, four or five star rated funds.
Please turn to slide nine and empower sales increased 37% year over year with D. C sales up 42% driven by a large $5 billion government plan themselves.
As noted the D. C business has experienced strong experiencing strong momentum. We're also pleased with the momentum we're seeing in retail where I raise sales grew 10% year over year retail wealth management is a significant long term opportunity for us as we work to serve the broader financial wellness needs of empowers D. C plan participants.
To this end, we're leveraging personal capital's hybrid digital advice capabilities in the empower environment and as of the end of the third quarter. The new experience was made available to <unk> 11 million of the empower participants.
Turning to our integration programs Massmutual is now complete with the final wave of the planned conversions happening earlier. This week. It was our largest conversion with 900000 participants migrating I would like to thank the integration teams for their hard work and resilience throughout the massmutual migration journey.
We have achieved 101 million U S of pretax cost synergies and are on track to reach our $160 million target by year end.
As noted earlier asset participant in revenue retention of outperformed our original expectations.
The Prudential integration is on track with 43 million U S of the 180 million U S pretax cost synergy target realized and client migration is set to begin in the first quarter of 2023.
Please turn to slide 10.
We are S expected profit was down 4% year over year.
Strong overall growth, mostly offset lower actuarial P fed releases, well other margins and fees were up 18%, reflecting growth in structured reinsurance and improved margins for the P&C business.
The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on the core U S business in the U S and Europe as we continue to pursue expansion in new markets.
While the reinsurance claims provision in the quarter is included in experience gains and losses, and thus not referenced on the slide I would like to touch on the benefits to life go of participating in the P&C retrocession business well.
Well, we're exposed to losses during major catastrophic events like hurricane and we liked the diversification in the non correlated risk exposure. It provides with the strong returns that generates through the cycle.
We're a disciplined underwriter with annually renewable contracts and the business is governed by strict exposure limits and return targets and with that I'll now turn the call over to Gary to review the financial results Gary.
Paul Please turn to slide 12 pace.
Base and net earnings per share of about 74 cents. This quarter, which includes the previously announced hurricane provision representing 14 cents per share before this provision base EPS of <unk> 88 tenths, we generally in line with Q2, and similarly delivered against a challenging economic and market backdrop.
The results are 5% below last year, which primarily reflects lower asset based fee revenues and European currency translation headwinds, partially offset by the addition of earnings from the acquired Prudential retirement business overall, a solid result in a difficult environment.
In Canada base earnings of $283 million were down 9% from last year due to market related fee income pressure and lower yield enhancement contributions along with lower gains from mortality and disability. This quarter. This was partially offset by a $20 million tax settlement gain.
In the U S empower base earnings of 171 million U S dollars.
Included U S $47 million from the addition of the Prudential retirement business and that included a 6 million U S catch up from the initial reporting for Peru last quarter.
As a reminder, over 50% of net revenues at empower our asset base the impacts of lower markets on asset based fee revenues continues to be a headwind, although business fundamentals such as topline sales customer retention and retail expansion remained strong.
As noted earlier, we have recently completed the last wave of conversions for the mass mutual business, which is an important milestone in great accomplishment by the team and through the integration as Paul noted we have exceeded the original customer revenue retention targets.
When looking at period to period comparisons during integration there is a lag between deal closing and the impact of any client terminations given that it takes time for clients to go to market. So most of the impact of the expected attrition on mass mutual has actually been felt in 2022 very little.
In the comparative quarters last year.
Somewhat offsetting this we are on track to meet our original run rate synergy target of $160 million by the end of Q4 and the benefits of those synergies will fully emerge in the Q1 2023 results.
A similar pattern as expected on the Prudential business. There has been very little attrition to date, which is good.
However, some attrition is expected in 2023 as part of the acquisition process and that will impact year over year comparisons in 2023 on the positive side the benefit of full expense synergies will begin to emerge once the integration is complete early in 2024.
Expense synergies tend to be more pronounced at the start and at the end of the program early savings come from eliminating duplicate overhead costs, while labor savings arise when prior admin systems and service agreements or discontinued post conversion to empower platform.
We are seeing this play out on mass retail with the final conversions completing earlier this week and we expect to see a similar pattern for Prudential with early savings noted this quarter and most cost synergies coming towards the end of integration.
Turning to Putnam earnings were down from Q3 last year, largely impacted by lower asset based fees as expected given the assets under administration declined plus mark to market losses on seed capital as of September 30th.
The Europe segment posted another very strong quarter in Q3 currency was clearly a headwind with both euro and Sterling down over 11% from last year in.
In constant currency based earnings were down just 1% from Q3 2021, which as a reminder was an outsized result for Europe last year. Since it included a large pension settlement gain in Ireland.
Strong yield enhanced results in the U K were a key contributor this quarter.
The capital and risk solutions segment, which is primarily the reinsurance business unit saw earning significantly impacted by hurricane in.
While there have been some larger experience in new business gain items in recent quarters, both positive and negative.
Trend of steady transaction success in reinsurance continues to underpin base earnings growth.
Aside from the Hurricane impact life mortality results improved considerably from a very challenging Q3 2021. This.
This was partly offset by a decline in longevity experience.
Based on the results of the last two quarters, though mortality results and longevity appear to be normalizing following a two year period of pandemic related impacts.
Turning to slide 13.
This table shows the impact of various items excluded from base earnings there were a number of larger items this quarter, but in total there was no overall impact to net earnings were the same.
The actuarial assumption updates were a net positive and I'll cover these on a later slide.
Market related impacts and liabilities were partly where are negative and that's partly due to hedge ineffectiveness given continued market volatility and partly a tempering of future growth expectations for U K real estate assets backing liabilities.
The remaining items are predominantly acquisition related including transaction and restructuring costs plus ongoing integration cost with respect to personal capital and the retirement businesses acquired from Massmutual and Prudential.
Transaction costs were actually a net positive due to the release of the contingent consideration provision for personal capital given the impact markets have had on the ability to achieve asset base.
Based growth targets.
Note the release of the 54 million pretax is largely a non taxable item, which added to some of the tax rate distortion. This period.
Turning to slides 14, and 15 sources of earnings displays.
These next two slides slides highlight the source of earnings first of all on base earnings perspective, and then net earnings and I'll focus comments on slide 15, the net earnings perspective, with a reminder, that the amounts above the line are pretax.
Expected profit was down 7% year over year. The increase is primarily sorry. The decrease is primarily attributable to lower expected fee income given the decline in assets due to market downturns in each of the regions as well as currency headwinds, particularly the impact of Europe .
The decrease was partially offset by the addition of prudential's business and improve margins in Canada group business in the empower general account business.
Moving to new business impacts the results were more typical this quarter than Q3, 2021, which had included a large gain on an asset based reinsurance transaction.
The majority of impact is that U S. New business strain, which represents non deferrable upfront sales costs, our investment contracts and it was higher than last year largely due to the addition of Prudential along with continued strong organic business growth at empower.
Experienced gains contributed positively again this quarter and I'll cover these in more detail in the next slide.
Earnings on surplus of minus 8 million improved $10 million from last year with the benefit of higher interest rates, partially offset by the impact of additional financing costs as a result of the Prudential acquisition.
The effective tax rate this quarter was six 5% on base shareholder earnings while the tax rate reflects the jurisdictional mix of earnings and certain non taxable investment income. This quarter. There were also settlement of outstanding tax matters in Canada, and the U S and the tax pick up on the inflation linked U K gilts.
Combined lowered the tax rate by about 5%.
The net earnings tax rate of minus 3% benefited from those same items, but in addition was affected by the jurisdictional mix of basis change actuarial basis changes as well as the non taxable personal capital contingent consideration release noted earlier.
Turning to slide 16.
These tables expand on the experience results as well as management actions and basis changes to highlight various items in the quarter some of which we've touched on already.
And the chart on the left yield enhancement continued to contribute to contribute positively primarily in the U K this quarter.
The net impact of mortality longevity and morbidity was a modest modest negative this period for only the second time since the pandemic began although perhaps this balances out against the strong experience gains we saw last quarter across most insurance risk categories and geographies.
Life mortality and disability results in the U K and annuitant longevity results in reinsurance were the main contributors to the overall experience result, this quarter.
Credit related impacts were positive again this quarter.
Driven by upgrades in the bond and mortgage portfolios as our high quality investment portfolio continues to perform well.
The table on the right highlights there were a number of larger basis changes this quarter policyholder behavior experience is influenced by a variety of factors, including interest rates underwriting product designs and the availability of competing products based on the trends we've been seeing in our block and the results of a wider industry experience study, we reviewed and strengthened the assumptions.
For our Canadian Universal life business.
Other notable assumption change this quarter was a positive contribution from updates to U K annuitant longevity assumptions based on the more recent pre pre COVID-19 trends.
This is not picking up the distortions during the pandemic and we will continue to monitor emerging experience and research regarding the potential longer term impacts of COVID-19 on the new attempt mortality.
There were also smaller positive contributions from assumption updates in refining this quarter.
Moving to slide 17.
This slide highlights operating expenses by segment expenses are up year over year as expected given the increase in business, both organically and through M&A excluding.
Excluding prudential and the onetime Irish pension gain last year.
<unk> expenses were up 4% year over year, recognizing there will likely be some inflationary pressures in labor and other cards cost emerging in the future. This is an area. We will monitor closely increasing our focus on achieving productivity gains in our operations and adjusting pricing if appropriate.
Looking at the segments in Canada expenses were relatively flat up 2% year over year and that includes the acquisition of claims secure.
In the U S expenses were up 28% year over year on a constant currency basis.
At empower excluding Prudential expenses were up 3%.
Again in U S dollars with a similar increase at Putnam empower D. C business was up just 1%, which primarily reflects the 5% organic growth in D. C for plan participants largely offset by the synergies realized from the Massey to integration.
The overall, 3% increase reflects recent investments in retail wealth strategy Buildout.
In Europe , the headline expense growth is being heavily impacted by the Irish pension settlement gain last year.
Currency movements and the impact of the <unk> acquisition within.
Within Europe , the local business units are striving for low single digit expense growth outside of any unusual items given the pressure on revenues from lower market.
And capital and risk solutions. The expense growth is off a very small base and is aligned with the growth in the business, including the continued expansion into newer markets.
Please turn to slide 18.
The Q2 book that Sherri Q3 book value per share of $25 61, which was up 5% year over year, primarily driven by strong retained earnings given the solid results over the last four quarters.
Currency translation in other comprehensive income was a positive this quarter as the stronger U S dollar more than offset the weaker European currencies. The rise in interest rates. This year has lowered fair values on available for sale Securities. However, theres, a partially off setting gain in pension OCI.
As disclosed at our information session in June we expect shareholder equity to be reduced in the range of 10% to 15% upon transition to our first 17, primarily due to the creation of the contractual service margin liability.
The light cat ratio of Canada life remained strong at 118% at the upper end of our target range of 110 to 120.
The ratio was up one point compared to last quarter.
Earnings net of dividends and the continuing continued smoothing in of the scenario switch benefit were partially offset by the increase in interest rates, particularly U K gilt rates.
As noted in prior quarters. This year, we have described the negative impact on logcap from higher interest rates.
More as a formulaic issue rather than an economic one since in general our business benefits from higher interest rates as a reminder, underlie cap portion of the available capital is calculated at fair value, which declined again this quarter as interest rates rose further.
So apparently the required capital however is largely calculated at fixed rates as defined biopsy and so it does not move in the same manner.
I'll see released its 2023 like cat guideline in Q3 setting out the adjustments to accommodate the transition time for 17, the first like cat ratio under the new guidelines are reported as part of the Q1 2023 results and we expect a positive impact on transition as an indication of the impact we have estimated.
Our pro forma Logcap for September 30 would be in the mid 100 Twenty's.
Note the actual impact on transition, we will be dependent on market conditions at the time, including the level of interest rates given the different sensitivities between <unk> four and our 2017 and lastly, like co cash which is not included in like Cat ratio ended the quarter at 0.3 billion back to you Paul Thanks, Gary.
Please turn to slide 19, we are pleased with <unk> results in the third quarter, where the strength and diversification of our business underpinned. Our resilient performance. Looking ahead, we will continue to advance our business strategies with the same or operational discipline that has served us well in the past in periods of economic volatility. This will include striking.
The appropriate balance between carefully managing our expenses and investing for growth, while maintaining a firm commitment to a conservative risk disciplines and continuing to deliver for our clients in these uncertain times.
That concludes my formal remarks Ariel please open the line for questions.
Thank you we will now begin the question and answer session.
Join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys.
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Yeah.
Okay.
Our first question comes from Tom Mackinnon of BMO capital. Please go ahead.
Yeah. Thanks, very much just on the decision to stop writing the equity release mortgages. I think you are a major player in this marketplace with about a 12% market share.
I'm wondering what you see as an impact in terms of the your U K sales going forward as a result of this.
Decision and are there any other issues with respect to the value that you ascribe to those the equity release.
Mortgages on your balance sheet is.
The fact that you're not writing business does that should that new business given the environment.
Yes that youre going to take a closer look at that.
Asset on your balance sheet and a I ended our being any.
Danger of any potential write down of that asset. Thanks.
Great question, Tom I'm Gonna, it's Paul.
I'll first make a comment that our decision to actually step away from that market was temporary in nature. It was given the very volatile interest rate environment and as interest rate the interest rate environment stabilizes, which we're seeing in the U K, our intention would be to be back in that market, having said that theres kind of two parts one.
The balance sheet impact one is our perspective on that business in the U K market and what it means to US maybe what Alaska is Gerry to comment on the balance sheet side, and then I'm going to turn it over to David maybe to talk about E. R. M. In the context of our perspectives on the UK environment.
You know how it plays out for our business, but also maybe a bit of broadening perspective on the U K environment and the opportunities. There. So why don't you start up Gary Yeah sure.
Just quickly on the on the balance sheet side data. The decision really was not about the enforce the enforce book we feel it's a it's a high quality portfolio of equity release mortgages.
This was entirely a an ability to price effectively given the continual are up and down movement of U K gilt in September so I'm really nothing too we think he's got a high quality portfolio and had nothing to do with the balance sheet.
Okay, and so maybe David you can talk about that product you know what it means to our business there and your perspectives on sort of maybe more broadly on our opportunities for growth in the U K, yes.
Just to repeat slide to withdraw from the market wants to do with the interest rates, while the tendency. It's all like borrowers of this product to have a lifetime sex race and usually when you make the loan offered as a period of time to solid salt so for lenders.
They're just left with some exposure.
After that period, which is dangerous in a very volatile markets. So interest rates have stabilized again.
People are coming back into the markets and we expect to be backend shortly as well.
We still see strong demand for the products.
I think it has to be tempered a little bit because we'll be more expensive as our people tomorrow and I think lenders whether it be careful then on loan to value.
Since last so there wouldn't be an intranet dollar going forward, but still we see strong demand for the product and again just emphasize on the balance sheet onto ABC issues terra to loan to value ratios or no.
Historic borrowers that are on the balance sheet like task all borrow at lower rates that are there at the moment those rates are fixed and.
So I suppose other factors in Demark Santos I just said.
Related to the higher interest rates like I think it's been dampened AD demand and led to debt for equity release mortgages mortgages bus.
Contracted assets both on the SaaS side, we do see higher demand for bulk communities going forward.
Because of the higher interest rates. So look overall, we think basically optimistic as I talk with NDA. Thanks, David.
What was the what percentage of your sales in 2021, where equity release mortgages. I mean these were originally in place and so they probably come in I don't know if they were they like 15 or 20% of your sales in the U K.
Yeah.
Let me check Tom I think someone's tracking that number down but it would be in that lower 10, I think that 10% plus range.
So from the standpoint of materiality, I mean, where we've got a pretty diversified business group is important to us it's.
A good profit engine and we've got a leadership position there.
Annuity market well you know, it's lumpy relative to bulk annuities and we pointed out that we had a you know a large sale in Q3 last year not this year. We think that will feature is continue to feature as a good contributor David to do find that percentage worse. We split it out is on slide seven so we saw at the equity release market's fans against the unusual.
For Q3 last year.
You can see two anti <unk> seven equity release mortgages outside of Tulsa in I'll, just asked two pages, but we had the large bulk annuity sales there in Q3 2022, it's more balanced between equity release mortgages.
So I'll probably.
Can we expect accurately spark stands to be lower in 2023.
And even she tends to be higher so.
10, 15% is probably about right Tom.
But you've got to normalize for the volatility on a bulk annuity sales, which will be more lumpy.
Okay, and if I get one last one in here that the 20 million tax settlement gain.
It was that in the base earnings, but the other $54 million that Gary alluded to them.
I don't believe that that was in place. That's just in the reported earnings is that correct.
That's correct Tom.
Thanks.
Thank you.
Our next question comes from many Grumman of Scotiabank. Please go ahead.
Hi, just a few questions on expenses one I noticed there was a reference in the press release to some back office operations never moved to India and I'm talking about.
<unk> see benefits I'm, just wondering how significant that was.
Are there other sort of initiatives like this right.
Our Canada life across the enterprise I'll start there.
Thanks, Many it's Paul I will begin maybe at a high level and just remind you.
Listeners that we actually do have a pretty meaningful operation in India that has been built out originally in support of the empower operations in the core focus there is the starting point is to provide you know a broader around the clock service and a round the clock ability to Oh.
To drive the operations and there's also obviously the benefits of efficiencies of being able to operate in different markets.
The key is you know technology.
Being able to leverage that technology to make it happen as we think about overall opportunities across the group for sure some opportunities will be the ability to you know.
Leverage some capabilities like the India capability. The other part though is to make sure that we are focused on increasing automation, you'll you'll see that theme increasing right across the group. It's a continued focus.
And then the other one is to make sure that in periods like this as we look at.
Certainly as we look at you know some compression of fee income that we're making sure that we're we're seeking out all of the process improvements, we can productivity initiatives and so I think youll see that as a theme and a discipline in our operations as we move forward. It's always been a theme, but I would say it'll be a bit of an elevated to be moving forward and we will.
Speak to it about it in future quarters as we harvest our.
Opportunities, but I will turn to Jeff who can maybe speak to the benefits to Canada of this and this is just the starting point for you right, Jeff Yes, Thanks, Paul and thanks for asking that maybe just to build on Paul's comments.
We're seeing some real explosive growth.
Particularly on the group life and health side in Canada.
So this is about a couple of things one enhancing our service.
<unk> 24, 7%. This is a really good move for us.
Second of all to move to $24 seven it also gives us.
An opportunity on our cost structure on unit cost to continue to look at reducing that.
So we are up and running and we will see those numbers increase in 'twenty three as we move along but it's really a couple of things enhanced service getting after unit costs and to deal with our explosive growth that we've got in.
In Canada, particularly on the group life and outside.
Or are there still benefits to this that are likely to flow through into the run rate.
Earnings picture in Canada, like if that's something that we're still going to see.
Come in to earnings over the next few quarters.
You know I'd say over the next few quarters and years, though really because you have to think about it from the standpoint of you know this is the first move it's looking at certain services that group has in Canada. We're actually looking at this more broadly and as I said, it's a combination of things we can do for automation process improvement just on the ground here in Canada and our.
Stick markets, but also leveraging some of those offshore capability and by the way. This is not a you know an outsource capability. This is something that we manage in that we're leveraging and we're seeing great benefits. So yes, you would begin to see some of these things flow through but I think this is a multiyear opportunity for Canada and frankly for other businesses.
And that's a good segue I wanted to follow up just in terms of the U S asset management business and Paul you referenced some of the fee pressure, we can see that in that business, but when I look at the expenses the operating expenses are up.
Year over year in the quarter and year to date, and so I'm wondering how much of an opportunity do you have there to it.
<unk> that are at picture and.
Are there certain sort of expense initiatives in that business that you could highlight trends.
Yeah, So I'll start off with that one many and then I'm going to turn it over to Andre Bolton.
Putnam is actually had good expense discipline over the last number of years and they've done that through a number of things. Both just good discipline around head count, but also things like fund consolidations, which can really create.
Create a lot more efficiency in your systems and.
And when I say systems I mean, the overall business system, whether it's your back office, you know managing managing assets and the like but I'll, let andre speak to sort of actions taken to date and her perspectives on going forward Andre.
Yes, Thank you Paul.
So that's first I would.
Also remind folks that there was a reduction in distribution expenses that is not showing in that number and I think there's a footnote on the page that says it's down 10 million year over year.
But in addition, I think as you highlighted we've done a lot with product consolidation and expense discipline, we're going to continue to focus on that.
And I would say that most of what we're seeing is market driven both on the P&L.
P&L line on the net flows and we would expect that to recover rapidly and as market conditions improve.
So this is something we just continue to forecast focused on with expense discipline and in outerwear.
Where we look at this every day.
Thank you thanks, Andrew.
Thanks Manny.
Our next question comes from Doug Young of Chardan capital. Please go ahead.
Hi, good morning.
Sorry, good afternoon.
Just starting with empower if we if we just do the simple math and we take out the contribution from crew.
Our earnings were down U S dollar basis about 14% year over year can you talk a little bit about how much of that related to the market decline.
Decline year over year, because obviously, you say, 50% of your revenue is market driven and how much of that related to the terminations that kind of a front end loaded.
And I'm just surprised that it wasn't less given some of the expense synergies to come through and so I'm just curious as to when you look forward because you've got the Peru deal coming through like what when should we see a pivot in and from an organic growth perspective.
Okay.
So Doug let me start off at the top.
One of the things that we see and we I think we highlighted in quarter was you know relative expense growth relative to growth in our participant count in our revenues was well in line. If you actually carve out the impact of Pru in quarter. So when I think about the in quarter I think theres been a good expense discipline in quarter, but theres a lot of moving parts as you pull.
It out you've got.
The tail end of any client retention our client trends.
Client losses related to mass mutual at the same time, we're seeing actually very strong growth in pure organic and pure organic terms and I think as we've pointed out before when we have a growth organic growth one of the things that we have the onboarding costs of those customers as we bring them on we don't defer all those costs, so you're always going.
Have those multiple dynamics going on maybe I'll, let Gary provide a little bit of context, and then you can turn it over to Ed provide some context on his view on the forward looking in terms of what the prospects are for empower Gary do you want to go yeah.
I think I'd just comment on a couple of things.
So when we talk about the lower equity markets also have to bear in mind that our fixed income is also well down because of the rising rates.
So those two combined.
The impact on asset based fees.
It was quite a good chunk of that to decline year over year.
And also we haven't spent a lot of time over the last year. We did comment in Q3 last year on very high surplus income gains and empower just the number of.
Some of the alternative investments had to had good returns in Q3 last year. We had good returns this year, but they were they were probably 10 million down from last year as well. So you've got a you've got the fee based pressures that we've talked about the last year had all.
Almost none of the mass mutual attrition in this year had more and on the other hand, we picked up those expense synergies from asking too. So there's some upside there, but I think a lot of it is the market and I'd just call out that surplus income drag is another factor, but I think the business is really well positioned great expense control maybe.
And maybe you can speak about the expense control in the context of organic growth and it's almost trying to strip out a bit of the pru noise and the remaining mass mutual massmutual noise and provide some context around that Ed.
Sure sure. Thanks, Paul Yeah, I don't have much to add with respect to.
The comments that Gary made in where the revenue pressures coming from I think that's pretty obvious, but if you look at what's happening.
Let's just look at the defined contribution business for a moment we had.
If you adjust for mass mutual we had 8% organic growth and organic growth year over year, and our DC business had 1% expense growth. So we actually see pretty good operating leverage we continue to invest.
A lot in distribution and growth both on the defined contribution side and on the retail side of our business. So we're adding people to support the opportunities that we have.
And if you look at it.
If you look at our pipeline right now it's $1 seven trillion on the on the defined contribution side, it's the highest in our history.
And.
We're seeing really strong RFP growth and traction across the business. So.
Again, even if you adjust for the mass mutual participant de conversions that ran through the business you're still looking at net participant growth in the DC side of five 5%.
Is roughly 2% to 225 times the rate of the industry average. So we're basically growing we're taking share away from the competition and we're growing faster than the market two ex the market on the on the defined contribution side and I think the market will continue to consolidate I think the growth opportunities for empower both on the <unk>.
<unk> side and the retail side are our meds. So it's important that we continue to maintain discipline on the expense side, while investing for growth.
Thanks, Ed Thanks, and just just a follow up I guess I understand the participant growth and organic side. It's just looking at how it trickles down to the bottom line and it sounds like this quarter market was the biggest driver of the year over year decline, but we could face some further pressures over the next.
A few quarters now is the tree business terminations flow through and the lag effect from the expense synergies, yeah, obviously, depending on what market conditions do but is that a right way to think about it.
Hi, Doug.
That's the right way to think about it and obviously, we therefore have to be cognizant of that and manage against market conditions, and it's finding that right balance between expense discipline, but making sure that we don't take our eyes off the long term medium to long term pause when for example on the retail side. So we do not want to.
As we've now deployed for example, the new personal capital enabled parts of some new experience, including for managed accounts and you know I or a rollover. We wanted to make sure that we are taking advantage of the capture opportunity and that takes you know a trained and licensed people were able to support clients and we're seeing growth there.
So we're going to actually manage that balance, but we have to make sure that we're cognizant of the market environment and we are very much that way and we will be disciplined.
And it takes me to my second question just on personal capital like it sounds like things are going well.
But you wrote off contingent consideration use $41 million, which tells me it's not it hasn't tracked in.
In line with your expectations, but worse than expected.
And I guess that could be market driven I, just hoping you can maybe in.
In light of this discussion talking a bit about what drove that.
Yeah Yeah.
You captured it Doug and I'm going to turn it over to Ed to provide a little more context, but it's market driven the actual business has done very well from the standpoint of executing serving clients.
Continuing to actually retain clients.
Conversions going reasonably well, but the big challenge is really the significant fall in equity markets and the reality is that contingent consideration was a function of you know our asset base.
Consideration, so I'll turn it over to Ed provide a little bit more color if theres anything I've missed that.
Yeah, I would say again, if you look year to date gross sales are up 10.
10% revenues up 14%.
Where we've seen real momentum is on the client retention side, we're seeing a lot of adds to existing accounts.
The challenge has been at the top of the funnel. So sales have been challenged a little bit. So we continue to invest in growth.
But that's also leading to higher customer acquisition cost, so youre seeing that play out.
Through the P&L.
But definitely fees have been impacted as Paul said by lower markets and lower asset levels.
We've started to temper some of the acquisition spending we started doing that two quarters ago in light of the challenging markets.
But obviously you've got to maintain a sustained presence when you're out there in the marketplace.
But this is also not a time, where youre seeing individual retail customers move relationships.
When you when you experienced this level of market volatility in the downturn we're seeing.
We're seeing.
Slower sales conversions at that.
The top of the funnel.
And I think that's a good call out and Doug I would say that's sort of a consistent theme, we see across retail wealth management Youre, just not seeing money in motion in the same way. There's a lot of people that are are sitting in not moving and you'll see that play out for instance in a retail mutual fund sales here in Canada. So it's a dynamic.
That's a little bit more market driven than I'd say more than our business model driven.
And Paul I, just got one.
I'm not going to have on the retail side I was just going to a retail IRA IRA rollover business I just wanted a comment there that we've seen similar challenges, but if you look at sales.
Sales were up 32% a year.
Year to date revenue is up 78%. So there's just a lot of opportunity here, but with the market conditions. The way they are the top of the funnel.
Conversion around new client new accounts has slowed a bit.
Okay.
Okay, and just quick on Gary cash at the Holdco 300 million was 800 million last quarter. I think can start that you've said you wanted to keep 500 and 700 million did you move cash down to Canada life Opco.
And if so.
How much.
Yeah.
So we did not actually move the cash down it's more that we didn't a dividend as much cash up as we might normally do and again, that's just being mindful of the.
The light cat ratio and any potential volatility you cakes. It has that anomaly in leichhardt, where there was higher U K gilt rates because that there was or backing some of our actual margins account for for capital.
So it was just a.
Being a little a little cautious on that front with like cat ratio. So we kept a little more money at Canada life and didn't dividend up so we do not put any down we just didn't send it out.
I would say, Doug we've got lots of financial flexibility in the system. We're not concerned about that that was frankly as we transitioned through these last two quarters on our on our journey Diouf Route 17, we're managing the non economic aspects of Leichhardt during that period and you know we will have that behind us and frankly when we.
We are a quarter from now when we do parallel reporting of both.
<unk> 17, a matter for us for.
Thank you.
Yeah.
Yes.
Our next question comes from Gabriel <unk> of National Bank Financial. Please go ahead.
Hi, I've got a few numbers questions hopefully.
I'll answer them one.
What is the size of the equity release mortgage portfolio on your balance sheet.
On the Ltvs are associated with that exposure.
And then as far as the catastrophic reinsurance business goes what's a normalized annual earnings contribution from that business.
Okay.
So there's two questions there.
So Gary I'll remind you that as we're thinking about the impact of interest rates on the in force liability of.
Of the equity release mortgages, that's not really an area of concern and focus for us.
The reality is as those were those where mortgages were written at low rates.
And it's not a number that we sort of are worried about but maybe Gary can comment on that and then I'm going to ask our shoulders speak to.
Our perspectives on the P&C cat business the size of that business its profit contribution.
Just for reference a game, where we do show the equity release mortgages I think they're in the in the slides back on page 34, and there also the b in the MD&A as well there are $2 6 billion.
Yes, so it's a relatively small portfolio in the big scheme of things.
Early days for us in that business, but very well managed low LTV, we actually we like that.
On the books right now backing liabilities. It's continues to be you know it'll be a positive contributor continues to be so our actual maybe you can speak to the P&C business and the attractiveness from a diversification.
The ltvs are below 50%.
Type a.
Oh, Yeah, Yeah, I know it would be.
Hello, Felipe tend to be more below 30, Gabriel yeah, yeah, Okay Yep Yep.
Okay do you want to speak to the P&C cut fits into the.
Both of our profit profile and our diversification profile Herschel. So just to remind you that the P&C cap portfolio re prices every year and the market conditions do change based on that experience. So we don't generally break out what the annual profit contribution is but what I would say is over the last five years and over the last 10 years.
Despite the losses, including the loss that we just reported that portfolio has contributed.
That return and meets its.
Its return expectation targets contributes really well from a diversification perspective and as the smallest of our business lines within the reinsurance business unit. So I think that's sort of a historic scene setting and as we look forward into this renewal season, we're expecting significant increases in margin and we're going to see very little of that flow through.
Our bottom line and margins, because we're going to prioritize risk reduction and maintaining our underwriting discipline and so we're going to write the same limits going forward, but we're going to reduce the risk in that portfolio. So that we avoid secondary payrolls and continue to provide very valuable coverage to our clients in the face of very very large.
SAP, including events like Hurricane, Ian but again over a five and over a 10 year period is that.
This is the slide contributes very strongly to our overall profitability is a diversified risk and we expect tap stronger margins going into this renewal season compared to the previous years.
Gabe I would just add that this is something that is always front and center around this time of year as we have discussions with our reinsurance committee of the board and the board and we're kind of all over looking at the profitability over time.
The reality is we've got a very expert team that is well on top of this and the key for US is to think about the way. The way. We think about this is that we have the size to the lumber level where.
Our exposure is capped its annually renewable so we've got a decision we can make each and every year and we focus on making sure that we're playing away first.
Further out on the on the on the risk spectrum relative to when you see things going on in the market that we really only want to be there for clients on the major catastrophic event catastrophic events like Ian and that's what's happened and actually were there for that and the reality is there's customers that now customers.
Of of P&C insurers now have to rebuild their lives and we're a part of that system, helping them rebuild but at the end of the day. It's a good diversified from a risk perspective, but it's also it's also a good profit contributor and we're very comfortable with the business.
Uh huh.
The numbers there.
Not one or the other do you have a bad year wiped out 10 years of thoughtful.
That's pretty much all of those factors.
Thank you.
Thanks, Craig.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Alright, thank you.
Two questions. So first one is relating to earnings on surplus and maybe you can give us a sense of.
How quickly you can turn over that portfolio to capture the benefit of higher yields.
Okay, maybe I'll start off with Rodman, who can provide a bit of perspective on you know.
Our surplus and the.
The opportunities that exist within it.
And the key is <unk>.
<unk> got to be <unk>.
Gotta be.
In those in those steps and in an environment with lots of volatility. So Robin why don't you sort of tick it up maybe we start off at a level at overall, our perspectives on the portfolio and the surplus opportunity.
Yes, sure. So I think well, maybe just starting at a high level, our starting point on the surplus and on the assets in general is one of high quality.
So I think in terms of the ability to rotate as markets move both in rates and spreads.
We will have I think over the coming quarters, a lot of opportunity to rotate into higher not just higher rate, but also higher spread product without sacrificing credit quality. So that's the first point and we're starting from a place that allows us to move.
Our surplus portfolio tends to be shorter so theres, a natural maturity and roll off that occurs with the governments, whether it's U.
<unk> or other governments that we have so there's not a lot of trading per se, because natural maturities and there'll be natural ability for us to reinvest those maturities into higher spread assets. So it tends to be a shorter portfolio and I'd say the market environment should be friendly for us to reinvest bulletin.
Income and some of the non fixed income parts of the market.
Hi, Gary.
Just quickly note that in the earnings on surplus on you also see the debt cost.
Now the good news there is a lot of our debt is actually long term.
So it doesn't rollover as much as there will be some maturities, but a lot of it is very long term, but the debt costs or the other the other side of that.
So just wanted to clarify one part of the answer just to make sure I understand so it sounds like this is the portfolio naturally rolls over he'll be able to take advantage of that but you wont actively sal.
Solid existing fixed income holdings in order to capture higher yield does that is that correct.
Robin I think we can do both but I would say, there's just a natural ability for us to do it without having to sell fixed income. So we have opportunity to do both but there is a lot that rolls over just naturally given that's inside of five years on average so.
So I think I think what Robin is getting at Paul is that we are limited in part by market capacity and market opportunity. So he said the first our first opportunity for deployment will be the natural rollover, if theres more opportunities than that.
Then what that takes then we'll certainly be looking at the balance of the portfolio.
Okay. Thank you.
And then second question is with respect to the pension risk transfer market.
See what transpired in the UK LTI market in Q3 was well covered by the media.
I'm just wondering if there's any kind of implications for great west and that market sort of more on a I want to.
Structural type basis.
Does this change the way you would think about structuring your pension risk transfer business does it change the way your clients think about.
Engaging in that market does it open up more off by Attunity for you does it close down some opportunities for you just trying to wrap my head around all of that.
Yes.
Good question, Paul and it's certainly achieved a lot of angst in the media and obviously a lot of attention and you'll let David Harney start on that one because we don't use some of the L. D ice strategies that have been highlighted in that doesn't feature in the way. We manage this so we'll start off with providing some context around that and whether we think it's going to.
The market in any way so why don't you start on that David Yes, yes. So it's just an LTI like we have a very small portion. So we do run some ease of Ireland.
It's quite you know leverage our product and yes. So most of our product tends to smartphones to pension risk transfer is to bulk annuities and I think what's happened the last few weeks and the impact of that I think.
It doesn't change our team after market unless we supply in but I think is going to change the mindset of clients. Obviously two options to have for managing these liabilities are MDI are you transfer the risk to an insurance company to bulk annuities.
So like I think the outcome of all of this is going to be at.
Pension schemes will lean more to bulk communities rather than an anti isolation and most people are expecting.
Gross into bulk annuity market next year as a result.
Maybe you can speak to your perspectives on the growth that that could emerge into the bulk annuity market why would it happen now.
In.
I suppose one of the issues in the UK as companies and that.
Have add on benefit liabilities to have to start to halls that has a liability on the on their company balance sheets.
Date motivation than for pension schemes to de risk transfer to eat like leather seats to insurance companies and that's not the same in other economies.
So the long term strategy of most companies is to is to exit <unk> at some point.
And we see fair Isaacs.
Strong demand for both communities as a result of Dassault for the next 10 years at least.
Any other questions on that.
No that was that was that that's all for me. Thank you. Thank you very much. Thank you.
Our next question comes from Nigel D'souza of Veritas investment Research. Please go ahead.
Good afternoon, and thanks for taking my question I wanted to follow up on that segment.
On risk based product premiums in the U K.
Look at that year over year quarter over quarter.
Down, but theres a bit of noise there yet the bulk annuity sale last year, you had that currency headwinds. This year, just trying to get a sense of how do you expect what are your expectations for risk based product premiums in the U K going forward.
How should we expect that to trend.
Yes, so Noah I'll go back to sort of from a strategic perspective, we're positioned in product sets in Europe that are very much financial necessity. So we're in pension savings and retirement income you know we're in group risk and obviously, we think about bulk annuities as an.
We view those product sets in a rising rate environment with some of the other risks that emerge as products that will remain resilient or maybe pushing to opportunistic. So if you think about the the bulk annuity space.
David made reference to the equity release mortgages, where we may see a bit of softening in demand there just because of higher rates, but we do think that the market itself.
Our products that sits well in that market and that the return characteristics are attractive, but David I'll, let you add to that.
If you go to slide seven as just shown.
Self insurance related sales.
Like obviously, we don't publish targets or anything like that but I would say in Q3 just level of annuity sales that's fair.
That's a little below what we would expect.
Paul Archer and.
So you might see.
Probably a more reasonable number takes back there is five or $600 million, but it obviously it just depends on the timing of winning those cases and the equity release mortgages satisfied and we do expect to moderate next year, because borrowing costs will be higher for people and I will be presenting at.
Our loan to value ratios the insurance sales there in that segment are like they are lower relative to the other sands and so that's just bulk annuities are to a large single premium <unk> ER and.
And our loans, so I'd say.
The SaaS number there for an insurance group risk properly.
<unk> represents the in park and softer products like it's a much stronger and contribute to our process wise.
The key profit contributors within the U K R. R. D news he sent the group risk.
The group risk bulk, we expect it to perform well like even though during a recessionary pressures in the economy at the premiums there everyday Institute and <unk>.
All I meant on salaries, and we're seeing strong salary growth and employment levels are very high in the U K Our group risk book is performing very well at the moment. Thanks David.
Okay, great. So it sounds like you took that to move higher.
The annuities.
Sure.
On the dividend payout.
Should that you've outlined 45% to 55% you're currently sitting close.
<unk>.
You want to see that payout ratio fall for the midpoint 50 before you consider any weakness just trying to get a sense of the timing.
Is your dividend increases.
Yes.
No.
Well, what I would say Nigel is we made a decision to move forward on a dividend increase in Q3 last year because of the time, Austria lifted the restrictions and we'd been held off from that for well are explicit decision. This quarter was to actually go back to a normal cycle of Q4, when we do our reporting and in early February .
And that's when we will pick up the discussion with the board, but I would say that our view on dividends is not a function of what's happening in a particular quarter. It's really our medium term outlook and we remain confident in our medium term outlook of 8% to 10%.
Both in earnings obviously, we're going to see some you know some some volatility in periods like this but we remain confident in our overall business and we will use that confidence to guide our decision, making our dividend decision, making next quarter it'll be our outlook for longer term growth not any particular quarter, we use that.
Range of 45% to 55% is a bit of a guide around sort of where we would view it over the long term. If you were to measure it on an average over a longer term period not any it's not a guardrail, it's not something where we're trying to get back to.
Get back to the mid point, 50% gets.
Getting to 60% doesn't fuss me in any way, it's more a function of what is our long term outlook and our confidence in that.
Okay. That's helpful. Thank you.
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 Ariel well listen I'd like to thank all participants today for joining us I'd like to thank the analysts for their for their questions. It's always a good exchange and actually we look forward to getting back together with you in the new year as we report our Q4 results I think it'll be early February or maybe a little bit later is that early.
February Gary early February so we'll be back with you then and in the meantime, I hope everybody has a.
Safe fourth quarter holiday season, and look forward to talking in the new year 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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