Q4 2022 Great-West Lifeco Inc Earnings Call
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I would now like to turn the conference over to Mr. Paul Man, especially doesn't CEO , Greg most of my school. Please go ahead Sir.
Thank you Carl and good afternoon, and welcome to Great West Life goes fourth quarter 2022 conference call. Joining me today on 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 question.
<unk> R. David Harney, President and C O O Europe .
Actual Jamal President and group head strategy investments reinsurance Geoff.
Jeff Macdonald, President and C O, Canada, Ed Murphy, President and CEO of empower and Bob Reynolds, President and CEO Putnam investments.
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 the presentation materials, Please turn to slide four.
Great West Lifeco delivered a solid performance in 2022 with full year base earnings of $3 $2 billion in base EPS of $3.46. These study results were achieved against the backdrop of economic and market uncertainty and driven by the strength and diversification of our businesses we closed out.
Here with a strong fourth quarter with base EPS of <unk>, 96 cents, which Garry and I will cover in our comments.
The company's fundamentals remains strong and we continue to reduce our post acquisition leverage ratios and build up cash and capital yesterday, we announced a 6% increase in the common share dividend. This announcement and our long track record of raising the dividend highlight the strong capital generation of the life co portfolio and our confidence.
In the future the.
The strength of the company its market, leading franchises provide stable growth and earnings and liquidity to support our investments in future growth in the last few years, we've deployed significant resources on three transformative acquisitions to accelerate growth at empower.
We've made strong progress in 'twenty, 'twenty, two adding new capabilities and welcoming millions of new customers to the empower platform. We completed the mass mutual integration in December achieving our cost synergy target of U S $160 million and exceeding our objective for clients and asset and revenue retention.
We're using the same disciplined approach with Prudential and will start migrating its 4 million participants to the empower platform in March the acquired Prudential business is performing in line with our expectations run rate cost synergies of U S. $43 million has been achieved to date and the business has contributed 171 million.
Canadian to the life co base earnings since we closed the transaction in April .
Together, the mass mutual credential in personal capital acquisitions position in power with the tools capabilities and customer relationships required to build a wealth management growth engine, along alongside its market leading defined contribution retirement business.
To this end, we launched empower personal wealth in January of this year integrating empowers IRA business and personal capital's hybrid digital wealth business. We will begin reporting the D. C business results and the personal wealth results businesses separately starting in Q1.
Given this change we're planning an investor education session to introduce this new reporting approach ahead of our Q1 results reporting.
There's a lot going on at empower. So later in the presentation I will provide some color on 20th twenty-three growth that management is targeting for the empower business.
Key drivers behind this target.
This of course is the last quarter, which we'll report under our fresh for before transitioning to our for our 17 and our IR for <unk> nine in Q1 were nearing the finish line of our preparations and are well positioned for the transition. We have provided a condensed opening balance sheet as of January one 2022 in our disclosures today.
And updated the expected impacts we shared with the market in June which remain largely in line with previous disclosures.
In addition to moving forward with our business priorities and getting ready for our first 17, we're also advancing our corporate purpose and social impact agenda over the last 18 months, we've taken action in three areas of focus introducing a commitment to net zero carbon establishing enterprise diversity goals and deepening our commitment to.
A reconciliation we've aligned the organization and our board around these three focus areas and look forward to sharing more on this with you at our annual meeting in May.
Please turn to slide five.
This slide shows our medium term financial objectives, 8% to 10% base EPS growth.
The base ROE of 14% to 15% and a target dividend payout ratio of 45% to 55% of base earnings.
Notwithstanding the headwinds that held back 2022 performance, we're tracking to our base EPS growth objective with five year growth of just under 9% Mis.
This reflects solid organic growth and strong contributions from acquisitions. It also reflects our operational discipline, including how we manage our investment portfolio underwrite and price new business and manage expenses.
With these same 'twenty to 'twenty two headwinds, while they had a dampening impact.
Impact on base or are we we remain confident in meeting this objective over the medium term.
With respect to our dividend payout ratio. This is a medium term target and our goal is to work into this range over the next few years.
Please turn to slide six our.
Our fourth quarter saw strong overall results with base earnings of $892 million and base EPS of 96 cents up 8% year over year.
Net earnings were over $1 billion or $1 10 per quarter up 34% year over year, Gary will cover the financial drivers in more detail. Please.
Please turn to slide seven.
Our Canadian business saw an improving trend in insurance and wealth sales to close out the year well group insurance sales were lower year over year due to fewer large case sales persistency was strong in Canada life led the market in sales in the fourth quarter.
Strong individual insurance sales results were driven by participating lifestyles.
Group retirement sales had strong sequential growth with gains in our core defined contribution and next step asset rollover businesses on the individual wealth side sales also improved sequentially and were in line with industry trends.
These results were supported by Canada, life's continuing improvement in technology enabled customer and advisor experience.
Please turn to slide eight.
In Europe business performance was steady as economic conditions improved and the political environment in the UK stabilized.
Insurance sales were down from a year ago, while individual annuity sales increased sequentially.
And while U K bulk annuity the U K bulk annuity market demand remains strong we did not write any large cases as we maintained strong pricing discipline.
We resumed selling equity release mortgages in December and are seeing solid traction in an overall market that has somewhat lower new business activity due to higher interest rates.
Well Europe , well Europe , while sales were down from a year ago Q4 sales were up sequentially with positive net cash flows in both individual and group.
The stability in these European results reflects business model is focused on financial necessities like pension savings retirement income solutions and group protection.
Please turn to slide nine Putnam.
Putnam AUM was impacted by market declines and ended the quarter at $165 billion U S.
Net outflows of $1 5 billion U S showed continued improvement compared to the last three quarters and we're primarily in Putnam as lower fee fixed income products, notably power Putnam delivered positive equity flows in 2022 in a period when equity sales across the market declined by over 10%.
Year over year.
These flows are supported by Putnam's excellence in investment performance for clients with 40 funds rated four or five stars by Morningstar, 96% of equity assets with four or five star Morningstar ratings, and 83% of total assets with four or five star Morningstar ratings.
These ratings reflect putnam's track record of strong performance over five and 10 years. Please.
Please turn to slide 10.
Empowers D. C business continues to experience strong momentum with sales up 8% year over year and client retention at 97%. This.
This is a testament to the excellence in service our empower colleagues have continued to deliver to clients. Despite the heavy integration activities over the past year.
As noted the mass mutual integration is now complete.
Target had pretax cost synergies of $160 million U S were achieved and asset participant and revenue retention outperformed our original expectations.
They produce the Prudential integration is on track.
U S $43 million of realized pretax cost synergies are unchanged from last quarter. As we noted with mass mutual cost synergies are typically front and backend loaded and credentials case, we expect the remaining U S $137 million of annualized cost synergies to be realized when client conversions are complete and.
Redundant systems.
In services, our decommissioned after Q1 'twenty 'twenty four.
We're excited about the prospects for continued growth in empower personal wealth with our enhanced customer experience now available across the combined empower and mass mutual participant base. We're seeing good early momentum with sales growth up 15% over Q3.
Please turn to slide 11.
Capital and risk solutions expected profit increased 7% year over year.
Other margins and fees were up 20% with growth in structured in longevity reinsurance and improved pricing in the P&C business more than offsetting slightly lower actuarial pizza releases.
The new business pipeline remains healthy in both structured and longevity reinsurance portfolios.
We remain focused on our core businesses in the U S and Europe , and we continue to pursue expansion across <unk>.
Expansion opportunities in select new markets and with that I'll now turn the call over to Gary to review the financial results Gary. Thank you Paul base.
Base EPS of <unk> 96 cents was up 8% from Q4, 2021 notwithstanding the lower market levels. This quarter compared to Q4 last year. All four segments contributed to the strong performance, which also included the acquired Prudential retirement business that was not in last year's results.
Net EPS of a dollar in 10 cents is up 34% from last year, reflecting the higher base earnings as well as favorable excluded items, which were primary primarily actuarial and tax related.
In Canada base earnings of $295 million were down 7% from a strong Q4 last year, primarily due to market related fee income pressure and lower yield enhancement contributions, partially offset by strong group life and health insurance results.
In the U S empower base earnings of U S $155 million, including U S $47 million from the addition of Prudential retirement business.
Excluding potential the results are down 8% in U S. Dollar terms year over year, due primarily to market impacts on fees and the anticipated integration shock loss in the mass mutual block, partly offset by strong organic growth in the business and improved spreads in the general account.
Recall over 50% of net revenues at empower our asset based and so the impact of lower markets on asset based fee revenues continues to be a headwind, especially against the market levels in Q4 2021.
This comparative period markets issue is expected to continue into Q1 2023 based on market performance. So far this quarter.
That said business fundamentals, such as top line organic growth.
Customer retention and retail expansion remained strong.
As noted on the last call in Q4, we completed the final conversions for the mass mutual business through.
Through the integration, we have met our expense synergy targets of U S $160 million on an annualized run rate basis, and we have exceeded the original customer and revenue retention targets excellent achievements by the U S team.
A similar integration revenue loss pattern is expected on the Prudential business.
While there has been very little revenue attrition to date. Some is expected in 2023 as part of the integration process and that will begin to impact year over year comparisons as we progress through 2023.
We remain confident in hitting the customer and revenue retention targets, we set out critics transaction.
We also expect the benefit of full expense synergies U S 180 million annualized to emerge once the integration is complete early in 2024.
While we have achieved run rate synergies of USD 43 million to date, we do not expect to see much additional synergy benefit to a rise until 2024.
Turning to Putnam earnings were down from Q4 last year largely impacted by two factors first lower asset based fees as expected given the sharply lower average market levels for both equity and fixed income this year compared to last second there was a negative swing of U S $33 million from one time.
<unk> items of negative $16 million this quarter opposite a positive $17 million in Q4 2021.
The Europe segment posted a particularly strong quarter with solid business fundamentals and results across Ireland, Germany, and the U K.
In addition to our elevated yield enhancement benefits in the U K and favorable tax impacts.
The capital and risk solutions segment, which is primarily the reinsurance business unit. So our earnings continue to benefit from steady new business success.
Also U S life claims experience continues to improve from the elevated COVID-19 related claims experienced at the height of the pandemic.
Turning to slide 14.
This table shows the reconciliation from base to net earnings.
Earnings were over $1 billion. This quarter. In addition to the strong base earnings across the segments. There were positive actuarial assumption changes management actions and market related impacts on liabilities.
The previously announced tax increase on Canadian financial institutions with substantially enacted this quarter, while the additional 1.5% tax will modestly impact future earnings the revaluation of deferred tax attributes, resulting in a one time positive impact this quarter.
The remaining items are predominantly acquisition and integration related costs.
Turning to slides 15 and 16. These next two slides highlight the source of earnings first time of base earnings perspective, and then net earnings.
I'll focus my comments on slide 15, the base earnings Soe with a reminder of the amounts above the line are pretax.
Expected profit was up 2% year over year. The increase is primarily due to the additional prudential plus business growth in capital and risk solutions and improved margins in both Canada group customer and the empower general account.
This was largely offset by lower expected fee income due to the sharp market downturns experienced during 2022 in each of the regions.
Experience gains of the other notable item I'd call out largely driven by yield enhancement in the U K mentioned earlier the improvement from last quarters experience loss needs to be viewed in the context of the 130 million impact of Hurricane Ian provisions taken in Q3.
Earnings on surplus of minus $24 million improved $12 million from last year with the benefit of higher interest rates, partly offset by the impact of additional financing costs related to the Prudential business acquisition.
The effective tax rate on base earnings this quarter was 11%, reflecting the jurisdictional mix of earnings and certain non taxable investment income.
Skipping ahead to slide 17 these.
These tables expand on the experience results as well as dimension actions based on changes in assumptions.
Highlight various items in the quarter, most of which we've touched on already.
Shown in the chart on the left you have enhancement continued to contribute positively primarily in the U K. This quarter. The elevated UK gains were in part due to having secured attractive assets earlier in the year that could either be used to support new business or enforced liabilities given the absence of large bulk annuity deals recently the assets.
Or allocated to the enforced block, resulting in a yield enhancement pickup rather than new business gains that we've seen in the past.
The net impact of mortality longevity and morbidity was neutral this quarter with simplest as a minuses across a diversified book of insurance risks.
Credit was a small positive gain relative to expected credit loss impacts as our high quality investment portfolio continues to perform well.
The table on the right highlights modest basis change impacts this quarter plus the actuarial portion of the corporate tax rate change there are only a few smaller yearend assumption updates and refinements as the bulk of the actuarial reviews were completed in Q3.
Moving to slide 18. This slide highlights the operating expenses by segment expenses are up year over year, but that was to be expected given the increase in business and the addition of the Prudential business.
Adjusting for Prudential and currency movements expenses overall were up 3% demonstrating strong expense discipline.
Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future. This is an area. We will monitor closely and will look to achieve productivity gains in our operations and adjust pricing if appropriate.
The overall message here consistent across the segments as we continue to manage our expenses closely balanced against the need to continue to invest for future growth.
Let's turn to slide 19.
The Q4 book value per share of $26 60.
It was up 8% year over year about three quarters of that or 6% growth was driven by strong retained earnings over the past four quarters. In addition currency translation was a positive this year led by a stronger U S dollar.
The light cat ratio of Cat life remained strong improving two points to 120%.
Earnings net of dividends and the continued smoothing in of the scenario switch benefit drove the increase <unk>.
<unk> co cash, which is not included in the like cat ratio ended the quarter at $1 billion the.
From last quarter, primarily reflects the 500 million euro debt raised in Q4 in advance of a 500 million euro maturity in April .
Osophy released its 2023 like cat guideline in Q3 setting out the adjustments to accommodate the transition to <unk> 17.
The first line cat ratio under the new guidelines will be reported as part of the Q1 2023 results and we are currently estimating a positive impact of approximately 10 point Tom transition.
Note the actual impact will be dependent on market conditions at the time, including the level of interest rates given different sensitivities between <unk> and <unk> 17.
Turning to slide 20.
This slide provides an updated view of the anticipated impacts as we move time for 17 and much and is very much in line with the information we provided last June .
Note two in the year and consolidated financial statements contained summarized opening balance sheet information on the transition to <unk> 17, Andi for <unk> nine.
As expected there was a reduction to shareholders' equity, which we had flagged in June as being in the 10% to 15% range. This is a result of a net reduction to retained earnings driven primarily by the creation and dry and fresh 17 of a new deferred profit liability the contractual service margin, which basically represents.
And expected future profits.
The resulting reduction is 12% for shareholders' equity and 14% for book value per share in line with our original estimates.
The contractual service margin is included in regulatory capital and as noted earlier, we are expecting approximately 10 points improvement in the like cat ratio on transition based on current estimates and conditions.
I should note we have only recently begun to work on the iron for 17, comparative Q4 results as we wrapped up Q4 reporting this week.
Also we are still analyzing the comparative results from previous quarters, particularly in relation to investment results given the large equity and interest rate movements during 2022.
We will be looking to share information on comparative 2022 earnings on dry for 17 to nine after Q1 call in May.
We continue to expect modest base earnings impact overall, although of course that will vary by segment given the different business mixes.
And we continue to target, 8% to 10% base EPS growth over the medium term so back to you Paul Thanks, Gary Please turn to slide 21, as Gary outlined we remain confident in delivering on life goes objective of 8% to 10% basic EPS growth per annum over the medium term for 2023, we expect low single.
A low single digit offset to this growth as a result of the transition Diouf Rose 17.
As a reminder, this is an accounting change that impacts the timing of earnings not the economics of the business.
We will report our Q1 financial results in May under the new <unk> 17, and <unk> nine standards, including results for the comparative quarters and 2022.
As part of our new reporting will be providing more insight into empower financial results by splitting out empowers core D. C business from empower personal wealth previously referred to as retail.
Planning and education session for analysts and investors in the spring, where we will outline our new reporting for empower in advance of that given the multiple empower transactions over the last two years and with much of the Prudential integration still to come we wanted to broad more detailed perspective on the drivers and part of our power performance as we move into 2020.
Three.
Management is targeting annual base earnings growth between 15, and 20% from 'twenty to 'twenty two to 'twenty to 'twenty three for empower.
This growth assumes long term average equity market growth.
And stable interest rates wrote 23 at.
It includes pru expense synergies of USD $43 million already captured but does not include the remaining targeted synergies of USD $137 million with the majority of those coming in early 'twenty 'twenty four when client conversions are complete and redundant systems and services are retired.
It also reflects expected pru revenue losses associated with clients not retained to date, we have retained approximately 94% improved revenues and are targeting ultimate revenue retention in the low to mid 80% range.
Expect to see most of these terminations and associated revenue losses.
In the latter parts of twenty-three or early parts of 24.
Finally, it reflects the continuing growth of our empower personal wealth business, which is beginning to see solid traction following the integration of personal capital capabilities into the empower participant and IRA rollover experience.
As I noted we are providing this additional information from power because of the multiple acquisitions impacting empowers financial results year over year, we do not plan to provide this type of information for our other segments, where we will be focusing on providing insights into the impacts of <unk> 17 for 2023 and with that I would like to turn the call back.
Back to the operator to open the line for questions.
Thank you.
We will now begin the analyst question and answer session.
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Our first question comes from many Goldman at Scotia Bank. Please go ahead.
Hi, Good afternoon, I just wanted to follow up Paul you were talking about our retention rate assumptions are for Prudential.
If my notes are correct.
Mass mutual retention was over 85% when all is said and done so want to make sure I have that right and then compare it to the guidance of low to mid 80% and the question is just.
Why do you think that the retention rate for Prudential will come in lower than for mass mutual and whats driving that assumption.
Uh huh.
Thanks for the question, maybe I'll start off but I'm going to turn it over to Ed who can provide a bit more color. The reality is we had set a.
Low to mid Eighty's target for <unk>.
For mass mutual in wheel.
And if you actually look at precedent transactions in the market that was a kind of a market.
Our market leading level of performance.
The strong performance was one.
Proud of but maybe Ed can provide more color on the target.
The targets, we've set for Prudential Ed.
Sure. Thanks, Paul.
Youre correct.
The performance on mass mutual was 85% actually a little north of 85%.
And.
There's always obviously a lot of moving parts.
With these transitions Prudential has about 3000 clients mass mutual had 26000 clients.
A level of complexity with the Prudential clients is far greater.
That said, we feel very confident that we will will come in.
Well within that range that we that we shared with you.
On mass mutual as Paul referenced we had a target in the.
82% to 83% range.
And we feel we feel very confident we'll hit that range if not exceeded.
Thanks, and then just a question on the dividend just wondering you know we haven't seen a dividend increase since amid a 'twenty. One I'm wondering if you could just help us understand the expected cadence of dividend increases from here and.
With the move that was announced today.
Is it a reflection of something.
In the outlook that's changed.
Or is it just a function of the payout ratio.
So I'm just curious about that.
So many taking you back to last year, we actually increased our dividend in Q4 last year and we kind of did a two part increase.
And the overall increase was actually 12% last year that was after having stepped away from dividend increases for a year during.
Covid, but if you actually look at the track record we've kind of been focused on Q4 increases if you go back and look at it historically generally it has been in and around the 6% range and this would be a continuation of that and I would say, it's reflective of our view on the strength of the business.
Our liquidity and it's about trajectory, having said that we've outlined that obviously there'll be a bit of softening in our EPS growth because of the onetime impact of our first 17 transaction trends that transition, but we do view this dividend as indicative of our view as we think about.
Our our medium term growth and where we we like our we like our prospects for medium term growth.
The next question comes from Gabrielle Duchaine of National Bank Financial. Please go ahead.
Hey, good afternoon.
The after tax yield in <unk>.
The $135 million.
Which is a good number but quite a bit higher than the run rate and I got the explanation on all islands.
I was wondering if you can tell me what that number would look like if it happened in Q1 of next year on her Iff's 17.
I will.
Gabe Thanks for the question that I'm going to turn that one over to Gary Gary.
Yes.
I think we.
We will be doing our Q4 comparative work.
As I as I mentioned will that will be coming up and we'll be sharing the comparative quarters are when we get to the Q1 reporting so we might have an opportunity to discuss what it looks like between the two different regimes are then if if we're in at that level of detail I just make a couple of comments.
I think and we've noted in the past that.
Some of the yield enhancements will will fade away and drive for 17 and others, we'll stay there's different mechanisms.
They'll stay and impacting our results in the base earnings and I just wanted to point out that all of that's been factored into our when we say a lower margin.
Single digit impact, it's all factored into that on a pro forma basis. So any one quarter. It's it is a bit up and down but we just looked across the year and said, what's a typical year.
Well, that's what I, that's why I might I figure it.
Provide a ballpark of at.
Low single digits the earnings impact would have factored that in as you say so is there any way you can ballpark it.
No I wouldn't want it.
Or you know annually, let's say you're running it around.
50, $200 million of yield enhancement gains on or after us for what's the comparative.
Under 17.
Yeah I think.
The things I'd point out is when you're looking at a specific quarter, even just a year happens the impact on our switching from one to the other will depend on the nature and the location, which portfolios yield enhancement in and the nature of what drives the yield enhancement.
In terms of a quarter like this it's probably more 50 50.
But it's.
It really does vary quarter to quarter.
Gabe as Gary said rough estimate this quarter 50, 50, but if the jurisdiction of earnings.
And another quarter to be a different way.
Okay.
That's good enough and Oh.
UK I guess.
I was expecting to see some you know.
Action on the real estate front there we're seeing other companies are.
Getting their appraisal holes in marking down there their real estate holdings.
You've got a different portfolio than the other companies and went through an experience in the post Brexit period, but maybe maybe you adjust the portfolio a little bit I'm wondering what your outlook is there for you know valuation on the on the Oh broader real estate portfolio. The 7 billion in the third of that that's familiar.
Okay.
Yeah. Thanks, Gabe I'll start off with a high level and then I will pass it to Raman Srivastava.
The reality is we've been staying totally on top of appraisals. The discipline. We've always had I will say that if you think about the the you know the journey from financial crisis to now we've been very very disciplined in terms of managing our real estate portfolio staying on top of it staying up with valuations quality in the.
So we come into what you could say as you know some market dislocation with a strong portfolio, but I'll, let robin speak to what we saw in quarter and actually what flowed through the income statement in quarter from them.
Thanks, Thanks, Paul and then Gabe you're right. It was a challenging quarter for sure for real estate in the U K and other areas.
Don't think we didn't come through unscathed. If you looked at the details that are embedded within the Soe market related impacts on page 17 embedded within that Theres, roughly a pretax number of about minus $30 million associated with the D. M.
Over a quarter, but what I'd say is you know it comes through on the property side, but ours is skewed more to industrial than it is to office or retail. So that's one thing and then you know we've talked in the past about the mortgage book and there's a lot of detail on the back as well.
Analysts slides on page 38, and you would have seen some deterioration. So like if you look at it the Ltvs for example, a year ago versus today say that its 54% a year ago. They were at 51. So there has been some deterioration in the credit quality, but I'd say the starting point is still.
Strong we think of this weakness in the property sector continues there may be some headwinds for us, but they're manageable give.
Given our starting point and then diversified nature of the portfolio.
And just a I mean, it's been a while since where you talk about U K property last time in 2016 the portfolio just under 3 billion today, it's a little over two I guess you you have been shrinking for the past several years have I didn't notice I apologize but.
Maybe you can walk us through that a little bit.
Yeah, I mean, we're continuing to reposition I think we've been you.
We haven't been adding a lot to the U K property over the past number of years, we've been judicially disposing of assets, where it made sense for the values.
Sense.
You know our mortgage book, we had talked about before some of the impacts of years ago, where in the pre financial crisis mortgages.
Thats the window Downs, just a few hundred million now so it is quite a different composition now on that side than it was say four five years ago. So there has been some some gradual you wouldn't have noticed any one quarter, but gradual transition.
Robyn.
But I would say.
And Rami.
Robin probably doesn't want to discern but.
The reality is he and his team have worked really hard at.
You know managing down the risk and if you thought of as we went into the financial crisis, what was the shape and nature of the investment invested asset portfolio in particular, posting both in the U K versus where we're at today and it has a very very different shape.
And as you'll recall, we got through the crisis period.
With relatively little damage. So at this stage, we will we like everyone else, we'll we'll see some challenges along the way, but our starting point is strong.
Have a good evening.
Thanks very much.
The next question comes from Doug Young with Desjardin capital markets.
Go ahead.
Hi, Good afternoon, just wanted to go back to empower and I guess my question is what is the ROE.
This business and where should we be in and how quickly can.
Can you get there and you've talked a bit about synergy is an early termination pressures and market pressures.
Bigger picture and just kind of taken a step back like what is the are we where where should it be how quickly can you get there because I think of as businesses, having a low capital requirements low margin, but higher Roe.
For those that have scale I think you've got scale. So I'm, just trying to understand that side of it.
Yes.
I guess I'll start I'll start off at the high level, Doug ill turn it to Gary but if you think in terms of the empower business, we actually deployed capital to acquire that business and obviously our model and our view was that these were accretive strong transactions with lots of expense and revenue synergy potential and.
<unk> to be and growth from you know once fully synergize would have a good solid ROE and then forward business would be very very capital light or limited capital applied to it so very high ROE growth beyond you know post transaction post getting the synergies in place. So that's kind of the construct Gary maybe you can speak.
To where we're at in that process Yeah I.
We do actually have the the roe's in the AR in the MD&A.
And so you'll see that the U S financial services basically the empower business is in the.
The low double digits right now and again that reflects making all the the capital investments all the E, but without yet getting the are fully synergize. So.
As the our picks up and then the organic growth as Paul mentioned the organic growth is very capital light. So you should be seeing these are we said we would expect these are we used to be going into the upper teens.
Yes.
As the business develops in the coming years.
So I thought that financial service would include pipe.
Is that incorrect.
Now we have a we have the U S financial services, which is the empower business and then we have the U S asset management, which is we break out both in the row.
Okay. So the ideas like 11, 10, 11% getting to the upper teens, how long does that take is that a two year journey five year journey just curious.
You know I would say getting ourselves into the mid teens is going to be a function of booking the remaining synergies client retention and then you're kind of into <unk>.
Getting out where our targeted rates are right now in the preorder for 17 and then after that it's all about organic growth and it's capital light organic growth and that's both you know, adding D. C record keeping clients thing and I'll just remind you that we've been.
At a good clip there are sort of twice or more than twice the market and that's relatively capital light growth and then the retail or what we call. The empower personal wealth that will be fundamentally capital light business. That's serving individuals who you know are a rollover individuals' and the like so.
That will kind of build and it'll build from ear to ear to ear.
It becomes a larger part of the portfolio, but I cant kind of say when we would hit you know 18 or 19 or any of those things, but that's the vision and that's the goal.
No that makes a lot of sense.
Moving to the U K it looks like the accident the individual protection market in November just curious why how big was this business like will there be any bumps as a result of that.
And how how quickly does that roll off.
Yes.
Thanks, Doug Good question I'll turn that one over to David Harney to provide context around the scale of that and whether it has really an operational impact in the business David Yeah. I know, it's a small business that's a mark as we entered a few years ago.
You know just from from zero position.
Our protection business in the UK is our group business and we are the leader there. So we have to go with adding on individual protection.
It's a very competitive market as having a stroke in the last number of years. So we've decided to take that out of this I just wanted to 90 meaningful impact on the UK results going forward.
Okay Fair enough and then.
Last quarter, I think you had $300 million of cash at the Holdco This quarter, you've got $1 billion.
I think this was moved up from D.
And I can't lifestyle.
Maybe it came up from the U S. I'm just curious.
Where that cash going from and how much cash would be locked down in the U S. Because I don't think we have the visibility or when do you and you can point me to do something to take a look at that.
Yeah, Garry can speak to that Doug yeah.
It's actually fairly a fairly straightforward. It's the the real jump is the fact that we raised 500 million euros in Q4, so that.
Which we've got sitting at lifestyle and that's in anticipation of a maturity that's coming in April so we derisked the refinancing of that maturity.
Back in following the Q3 results presentation early sort of midway through Q4, so that's what the cashes.
Awesome, Okay. Thank you very much.
The next question comes from Tom Mackinnon of BMO capital. Please go ahead.
Yeah, Thanks, very much good afternoon.
So the question is really are looking at the source of earnings on the bait on the base earnings.
Gains and losses in the U S with $82 million.
But just wondering what those are I think the majority of the experience gains and losses that you had for the entire company.
On a base on base earnings basis.
Yield enhancements what was this 82 in the U S.
Gary is that something we've got visibility into or is that something you want.
Give us one minute here Tom.
Oh, Yeah, I think the one thing I know right off the top was the improvement in interest rates.
It would've been a.
Pick up there.
Would have also had.
Relative to the expectations going into starting started the quarter on the fees. So you would have we would've got a low starting point for market. So I think there was about a 20 million pick up.
On the.
Market related side to be another as I mentioned, the interest rates being up I think that was out of the 30 million pickup.
First of all what we thought going into the quarter.
That would come through on the spreads and then they had.
Our gaming expenses were positive relative to expectations in the quarter I don't remember the details why they were positive but so it's those three categories were really what was the what was driving it.
Tom It kind of reflects our methodology that when we go into the quarter, we set the expectation market levels interest rate levels. The expense levels that are anticipated and to the extent that you know markets kind of outperformed that goes into.
And I think I think the expenses will probably tied to a budget. So as you as you go through that.
Those are lagging and updating that so I think that's.
There was nothing it wasn't a it wasn't a yield enhancement.
I think that's really what you're getting.
Didn't have the yield enhancement there.
Yeah, Matt I mean.
Youll enhances or 90% of the experienced gains and losses on our base Nathan.
Base earnings or more than that more than 100% I think of the $1 48. There is pre tax 161 from yield enhancements for the entire company. So I don't know how.
And there's no market impact our.
Market related impact on liabilities associated with that because this is on them on that this is base earnings and not reported earnings. So I'd be curious to see what this 82 here is but you're suggesting none of it is related to yield enhancements I guess, what I'm looking at if it was this largely in empower I think it was largely on empower.
Thing happened and empower that was better than you would've thought that even drove the numbers to be.
Still weaker than what I think the street was looking for.
So what was it that what's happened in Empire that was better than you thought in the quarter that drove this 82 experience gains.
Yeah, I think it was the three factors I mentioned earlier, but I'm happy to do a follow up right. After this Tom just go through maybe just go through that in a little more detail.
But just sort of thing.
Tom It just frankly, it's three relatively more modest factors that add up to 82, if you think about it market market levels improved a bit. So then we ended up with fee income slightly ahead of what we would have locked it in sort of the expectation interest rates moved a bit. So we would have we would've seen maybe some widening margins.
And then finally Ed.
Ed and his team actually did take some expense actions in quarter and if you add those three things up they add up to 82, but what I suggest is Gary could help you offline on that one.
Okay.
Thanks, so much that that'd be perfect and there theres absolutely nothing with respect to yield enhancements ever associated with this block is that what you're trying to say.
Suggest.
Yes.
Well in terms of.
In terms of this quarter, there were no yield enhanced and I think in the past, we probably had some yield enhancements in the past in the in the U S block, but there aren't any at the moment going through and I don't see this is one where we weren't going to see yield enhancement in this park going forward either under our <unk> 17. So.
I think it's there I'm sure there have been some in the past I can remember some but there aren't a that was not the factor this quarter.
Okay. Thanks.
Thanks, Paul.
Okay.
The next question comes from Paul Holden CIBC. Please go ahead.
Thanks. Good afternoon. So first question is.
Okay.
Pro forma.
Hi, everyone.
It gives you a lot more.
Regulatory capital I'm, just wondering how youre thinking about that.
In terms of how much of that is actually deployable capital and then b.
A portion of it is deployable capital what are your.
Capital deployment priorities.
So there's a that's kind of a two parter Paul So maybe I'll, let Gary walk you through you know where were seeing the the strengthening of like a as we contemplate transition and then I can maybe take the second part as to as we think about deployable capital what are the priorities. So over to you Gary for part one.
Yeah sure I think.
In terms of the 10 point approximately 10 point to rise that we're expecting that's a drip.
Driven by the new Aussie rules, plus just the way I for 17, and a fresh for move differently. During 2022, so that made it a larger jump than we might have anticipated early in 2022.
I'd say over the over the longer term I wouldn't expect us to be holding more capital with typically run in the AR and the 100 twenty's or and are in the lower 100, Twenty's and that's that used to be the top end of our old range. So I don't see us holding more so in that sense I think this oh the fact.
As you know another 10 points over 130%, there's going to be some more deployable capital there, but I think that's the longer term I guess, our sensitivities have reduced a bit interest rate sensitivities, you reduce somewhat a little more and if I sensitivity higher for 17, but I, we're not seeing that are changing our targets.
So I think we are we will once you've gone through this oh, we're being very measured right now in the near term just given the transition and the macro environment, but I think over time, there's more deployable and maybe Paul can get there we'd like to spend that you actually you stole my words, Gary which would be.
In the near term issue and I would kind of characterize that as we think about the balance of 'twenty three.
We probably not going to be looking to sort of unwind that through deployment in the short term.
Because we will be in transition and we will all be learning and going forward, having said that as Gary said, the new regime for us It does actually reduce some of the sensitivity we would've otherwise had so it's not as though we have to set ourselves up with more.
You know more strength to deal with volatility we're not.
Too concerned about that.
But having said that it's a risky environment, it's in and it's a point of transition. So I think what we'll do is we'll maintain good discipline, but having said that the.
The reality is we're also not taking our eye off the ball in terms of opportunities to.
Grow the organization and to put our capital to work. So you know we're always looking for opportunities in the market and will be if the right opportunity came along we would figure out ways to finance it having said that again empower still has you know.
Hard work ahead on the Prudential integration and that will be a big big focus for us in 2023, but we'll continue to look across some markets for opportunities, where we think we can strengthen the business and as I said with some caution, though given the kind of the risk on environment.
Second question is related to capital and risk solutions I mean, there's a number of.
Positive business drivers.
Articulated.
Be helpful for me to understand.
And sort of.
To what extent each of those drivers sort of matters for the business or if we.
Think about the.
The increase in P&C retrocession rates as an example, how much was actually matter to future growth versus say the growing demand for pension risk transfer versus the <unk>.
Improved mortality trends in life reinsurance I guess.
Getting a better sense of our characterization of how much of each of those drivers sort of.
Matter to future growth might be helpful.
Yeah.
Great Great question, Paul and you actually are sort of helping with the answer and I. Appreciate it because when you think about it it's a very diversified business that we've got and the only factor that we didn't talk about there was structured solutions, where there continued to be you know market participants we were looking for you know capital effective capital solutions.
Our structured solutions. So it really is about diversification, where theres opportunity in each of those categories and maybe Archie can provide a little bit of color on the Herschel.
Thank you for your question, so you've highlighted sort of a three or four areas that we're really focused on so hoping you over the last eight quarters or so we probably achieved something like 7% underlying expected profit growth and that's really the metric that we're focusing on for our reinsurance business and then we have opportunities in <unk>.
All of the business lines.
Slightly different pressures in slightly different outlook. So on the P&C catastrophe, which is where you started our focus there really is on risk reduction as opposed to driving up the margin. So you know pricing in the marketplace has moved quite a bit and we're not focused on increasing our margin, but we're moving further away from the risk. So we're trying to preserve that historic margin that we've made.
Get a little bit further away from the risk, whereas on the asset intensive side and on the longevity side, we see really strong market opportunities and we're being very cautious in an elevated risk on environment, but we're working closely with our investment colleagues and we did those large transactions in Japan, when we can get very low cost to funds and put the money to.
Work and when we see opportunities like that we really try to capitalize on those and so lots of opportunities on the asset intensive and longevity side, and we were talking a little bit about excess capital and using some of that to drive organic growth in Crs and some of our other business lines. This is also a place that we can deploy some capital and then finally, we have our.
Structured solutions business and geographically that business really has sort of its as its core the U S marketplace and beyond the focus that we've had in the U S and continued growth that we're seeing in the U S. We've expanded that into a number of European markets and we have a good position there and now very cautiously we're thinking about other geographies.
And whether we can take some of those structures that we have on capital well leased for client companies and apply them in other regimes and we've had some success doing that in places like Israel, and Australia, and we're thinking about some other markets. So you know very measured I'm always a tradeoff between margins and returns and risk.
And good sort of measured close to whatever and the key metric for us is really that as expected profit growth and we've been delivering sort of that 7% expected growth in in a slightly more stable environment. That's something that we target and then in a riskier environment it might be a little bit less because we put a little bit more focus on risk reduction as opposed to margin fronts, but that's kind of the context.
Crossed the three or four businesses there.
That's helpful. Thank you thank you for that.
We can now one one more.
Paul I appreciate your comments that you address.
Slide five which I think is an interesting one and just sort of as I look at slide five and saw that decline in base earnings this year and then the ROE.
The market impacts are obvious and you highlighted it but I can't help but think are there any areas, where maybe the company identified maybe.
Maybe you could have done better in 2022 is there room for action improvement the Canada segment it might be.
One area that comes to mind for me in terms of getting more sustainable earnings growth there, but Paul interested to hear your thoughts. If there are any kind of areas you've identified where you think the company can do a little bit better.
Yes. It is.
Good question and it's.
Absolutely.
A question that we talk amongst ourselves and talk with our board about because you know, it's not just about M&A and growing capital, it's about growing your businesses organically and making sure you're making the right decisions from a capital deployment perspective, I mean organic capital deployment as we invest in systems and capabilities to participate in markets, where you are.
Really thank you can you know you can get traction and growth.
Having said that if you really look at the <unk>.
The thing that was a drag in your as markets. When you think about the impact of markets, that's sort of the most fundamental drug but having said that we are looking at businesses. So for example, I know Jeff and his team are.
Actively working through opportunities to expand the group business in Canada with our freedom channel among I'll, let him speak to that and when we look at the individual business real discipline around pricing and making sure that we're we've got the right products in the right markets and we're gonna not getting exposed to ones that where we don't feel like there's the right margins.
And then we look to wealth management in Canada, where we think we've got a big opportunity with our affiliated travels so maybe a little bit of color. So so that Canada is one and then all market Some Ireland, where we've launched our you know a lot of digital capabilities in Ireland, we're extending through the Allied Irish bank business that.
We've launched in partnership with the AIB. So we're constantly thinking about how do you actually drive growth and then backing all of those things is efficiency. We do it we're very very minded to efficiency. So maybe just as a bit of color I'll, let Jeff speak to where we're looking for growth and also the way he's thinking about efficiency Jeff.
Thank you Paul and you mentioned some of the fundamentals already but I would just say that we continue to believe that the business fundamentals in Canada very strong if I pointed to some examples of that.
If you look at 'twenty two we're very pleased with our top line growth as an example on <unk> on the life and health side in the quarter. We were number one for sales or retention of business. Our persistency. Our margins are very very strong we're delighted on our growth of our group wealth business.
As you'll recall at this table a couple of years ago, we talked about our investments in that area. So we see good growth in that top line and also net growth and we see an opportunity to grow into two other markets Paul touched on the on the retail wealth side, I think theres an opportunity for us as we look to expand on the area and just on on our membership.
That we have that participants we have.
Close to four 4 million Canadians, we are expanding our freedom experienced which we would call. It so those opportunities to work with Canadians as their plan members, whether it be individual insurance, whether that be next steps, our retirement business et cetera, and we continued to spend dollars wisely.
And invest on the technology side in areas, where we see big growth opportunities. So we're quite bullish on it we have an aggressive plan and we think that theres great growth areas in all of our four key areas. So life individual wealth wealth group wealth and the life and health side.
Thanks, Paul.
Thanks for your question all right. Thanks.
Yeah.
The next question comes from Mario Mendonca at TD Securities.
Go ahead.
Can we just go back to capital and risk solutions, and many onshore might be best positioned to address this.
Looks like this they often think of.
Being helpful from a tax or perspective, a regulatory or a button and then also just theres a good business case for it as well, which is risk reduction when you think of.
Your business in the context of that like tax regulatory and risk reduction do you see any vulnerabilities in the near future related to new business or are there any sort of changes on the horizon that would impact demand for the products.
Yes.
I think our actual is best position, but I think one of I'll just say at a general level. We've got a very expert team that remains very connected with their clients globally.
You know <unk> talked about a solution that you know that we.
Tapped into and in Japan, and then more recently doing things in Israel. There are opportunities that exist really globally, we just need to make sure that we're disciplined in finding the right ones, but I'll, let <unk> speak to that so I would start a little bit just by way of framing a little bit to whatever so.
Is it really tax arbitrage of regulatory arbitrage, there was risk transfer and making sure that the risks ends up into the party, that's best able to absorb that risk and a number of the things that we do in our reinsurance business are very diversified from a lifestyle perspective, including the property catastrophe business. So there were exposed.
We're taking on risk, but we're doing it in a way that doesn't correlate with the rest of our balance sheet doesn't have equity market risk or put at risk its more tied to natural perils and so we're well able to bear that volatility and that's kind of our approach and mindset and then on the longevity and asset intensive side, that's full risk transfer to us we use our investment.
Experts piece, we use our actuarial pricing and underwriting expertise, we make a judgment and assessment and then we'll get long term holders of that risk, but youre absolutely right to note in all of those businesses. Once we decide that we're a good holder of it we try to operate with it in an eight.
On a tax efficient way and in a capital efficient way and fully respecting all of our skis Leichhardt rules and so certainly tax overtime is our potential exposure for us to be managed so I don't think it would threaten the underlying business, but how we conduct our business and how we price our business potentially would be impacted by tax overtime and then.
Finally, we have our structured financial solutions business, where we're typically taking on tail risk exposure for our clients and theyre entering into these arrangements to improve their capital position and effectively paying us the cost of capital and they are very interestingly with higher interest rates and some of the solutions that we have in the cost.
Becomes even more cost competitive relative to raising debt and other forms of capital in a higher interest rate environment.
It's a very balanced portfolio that we have with risk that we're appropriately able to bear on our balance sheet and I wouldn't be describing it as sort of regulatory arbitrage tax arbitrage, but we are absolutely regular at tax and capital efficient in how we try to operate our reinsurance business as our every other reinsurer because that's a key part.
The success that reinsurers have relative to direct countries.
I hope that helps.
Yeah, I think I understand and I appreciate the nuance in the distinct xiaomi.
It doesn't sound like there's anything imminent on the tax and regulatory front that would impact how great West life deal that are our demand for the product. So I appreciate that color.
One other quick question.
Check services margin I am coming to understand that there are some companies in 2023, where we're going to pay a lot of attention to the evolution of the contract service margin and then there are companies and I put great West life. In this camp, where there are plenty of businesses that drive long term earnings growth without having a heart attack Rosemarie.
And attached to it.
With being said.
I want to demonstrate that I understand that distinction.
You think the contract margin for this company evolves over a year.
Fair to say that every year it would grow by a certain percentage or is it conceivable that it could shrink over time.
Al Gary why don't you take that one sure yeah, I think you're right. There are there are businesses, where the contractual service margin will be an important part of the description in the value creation story for our business and we will have some of those.
If I look at say our bulk annuities in the U K would be an example.
The German business is another one that comes right to mind, but if I look at across life co. Overall, I would not say that the contractual service margin and how it develops we'll be a big part of our narrative. So I think for us it will be a more focused on the businesses, where it really helps understand the value creation in that business and the growth.
The trajectory of it and a lot of our businesses and power a lot of the Canadian business, whether it's the wealth side the group businesses, you're not going to have a CSM so to you.
You're just not going to see that we've got some in force.
Yeah. It was just based on.
Mix of business, but where we've been growing in focusing and a lot of our business is you won't see us as.
As much on the CSM, but there will certainly be pockets, where we'll be calling it out where it makes sense.
No no.
Precisely what I was getting at in my preamble that I know that for great West life.
The contract service margin doesn't necessarily play a big role that that was the point I was making but the contract service margin itself or this company will it grow every year or do you think there are years when it could shrink, but I'm thinking of the total company contract service margin.
It will very much depend on the mix of business that we're writing in that year, because that's going to be a big driver of as I say it.
And in the U K bulk annuities is a really good example, a bumper year, that's going to change the growth trajectory in a quiet year it'll go.
It'd be a lot flatter so it really will depend on the mix.
I would say on a relative basis our non.
Contractual service margin businesses, I would expect we'd be growing faster than those that are exposed to the CSM CSM would feature.
Less of a driver of growth in earnings.
As opposed to the other areas, where we see growth.
Yeah, and I appreciate that that's our responsibility.
Analysts and investors to find ways to compare companies, even though they present in a pretty different way. So I appreciate here.
Our guidance in that respect.
Great. Thanks Mario.
The next question comes from Nigel D'souza.
Definitely research. Please go ahead.
Thanks, Catherine and thanks again for taking my questions. Just a quick follow up for you the first one.
Thank you.
On the clarification.
You mentioned the positive impact of like Oh on transition and can it be.
Deep opportune internal target.
When you think about differently.
What's the calculus between the payout ratio and the like that level is the like I come into play.
And you wanted to Hasan.
But based on these catch up or is it purely.
Payout ratio, that's going to drive your decision, making going forward.
<unk>.
I'll, let garry take that one yes. So just just to clarify the the light cat ratio is for Canada life. That's the a b insurance consolidated insurance operations with Canada, Europe , and most of the Crs business.
So that that's what's.
A lot of cat ratio and so though I can't ratio has an impact on the dividend cap life would send up to two lifestyles, but the payout ratio that's measuring life coast common dividends relative to its earnings. So it's not it's not directly impacted by like that other than that our liquidity related comment.
But given the cash generative nature of our businesses the strong <unk> position, it's not really a factor in our dividends or a payout ratio at this stage.
And Nigel I would say broadly as we think about dividends we will use.
Our payout ratio range as a guide as we think about considering what we do in a given quarter.
But the.
The other major consideration is our is our perspective on forward growth.
And we would use those as the key drivers as Gary said, we have a highly cash generative businesses. So liquidity wouldn't tend to be a constraint. It would be a function of as I said in my previous comments, we're looking to manage down within that.
That range of 45, 55% were been over it now and where our intention is to manage down over the next number of business cycles and and with that in mind, we will we'll be thinking about forward growth as we think about growth in dividends.
Okay. That's helpful and quick follow up question is down yield enhancement follow up just trying to get a sense of if you can extend will drive side, you've had healthy yield enhancement gains this year.
Healthy.
Can I have some gains in 2021 as well so is that driven by a certain set of market conditions that are more comdata too.
Socratic pickup in yields and spreads and how do you think about the run rate going forward irrespective.
The transition.
Gary if you want to speak to the two part of their P&L to.
To partner and.
So on the first of all what what drives the yield enhancement pickup is effectively the additional spreads that we're able to take by creating asset so we'd come out of lower yielding assets a government bonds as an easy example into spread assets and we would capitalize that spread. So 2022, we would have had good success, we had quite a good pipe.
One to be our EMS that were attractive spreads and in general in the market I'm looking at Ramadan, we see him nodding that spreads were a corporate strategy where in general wider in 2022, so that combination game as good opportunities for for yield enhancement.
But it is just capitalizing the.
Spreads net of appropriate.
Credit risk charges asset default charges. So that's really what drives it up the first part and then I think your second part was what's the outlook.
On transit.
Sure on the investment side I think that's a that's really I mean, obviously your credit spreads have narrowed somewhat in the back end.
Of the year, but that that ebbs and flows over time. So I think we will remain actually we've got a very good investment chalk and will remain active in that and as I said earlier under our 2017.
Pending on the portfolios and the nature of the underlying investments you might get it you have a slightly different presentation of it but the underlying value created by trading into attractive assets on a.
Diversified and a high quality portfolio basis that that will still remain regardless of the accounting regime.
Okay. That's it for me.
Okay.
Thanks Nigel.
The next question comes from Darko <unk> of RBC capital markets. Please go ahead.
Hi, Thank you very much for taking my questions I know, it's a little bit late so I really appreciate you taking the time.
I just have two questions. The first is I wanted to just follow up Paul on what you said earlier with respect to empower and when I look at the $710 million of base earnings.
In 2022, and suggesting that that will grow by four you're targeting 15 to 20 in 2023, and that's all well and good I think I have that conceptually in place in my mind, but at the same time in the U S. We saw the corporate.
Go from a loss in 2021.
Earning money in 2022.
Are there any other puts and takes that we should be thinking about in 2023 with the rest of the U S business.
In terms of earnings power.
Also maybe if you can just throw it in the answer to that.
I noticed that you did a large reinsurance or you did at reinsurance and dummy reinsurance at the end of the year does that factor into earnings power any way or shape or form in 2023, and that's my first question.
Okay, what was that.
That's the full question Gary do you want to start out there yeah sure I think the first part of it was just the corporate segment in the U S not that often.
Picks up.
Miscellaneous things could be plus or minus is they're generally not that large and they they do move around they are not directly tied to the underlying businesses. So we wouldnt, we wouldnt have be anticipating that necessarily but obviously things can arrive pause when they get in a year, but that's.
So that's not really a factor in our we were correctly.
Surmise that we were talking about empower and and.
And I'd say the corporate can you just move around a bit but it tends to be just one offs.
And then the second part and I had a great answer the second part I was just trying to remember what the question was the second part the reinsurance.
Oh, they are the reinsurance yes that numerous another was another unusual question. That's good now the reinsurance so in terms of.
This is primarily for us it's primarily focused on capital relief. It was part of our our planning and financing of the Prudential acquisition that we would.
Potentially utilize external reinsurance as part of the support for the RPC really so there is a there is a fee we pay but it's modest in the overall.
Picture this we usually would.
Expect under normal business conditions to keep the economics of the business. So it really is just a a capital relief in some ways similar to the business that we actually provide for others and that's where our Crs business unit.
But this is.
This is one that we've done with an external party.
To just.
Help support the RBC ratios in the U S.
Okay, great understood.
And my second question is similar to.
Marius question with respect to.
<unk> 17 in the contractual service margin.
I'm going to asking a little differently, though.
When I look at the.
Presentation of the balance sheet under Ifr asking opening presentation.
I see that you've established a $6 8 billion contractual service margin.
Surprised me was all of the puts and takes in terms of reclassifying, some insurance contract liabilities to invest in contract liabilities.
Some pretty big movements, there, but at the end of the day net net <unk>.
Your insurance contract liabilities are actually down.
About $10 8 billion and.
And that's about 5% so conceptually I think of that as your long tail insurance businesses.
Being a little having a little bit less earnings power under <unk> 17.
Because before your P pads, apparently look larger than your contractual service margin and your risk adjustment. So can you correct my thinking on that or am I missing something pretty critical in that thought process.
Over to Gary.
Yeah, So I think the.
Probably the one the one piece that would necessarily leap off the page is one of the big.
Contract classification changes with some of our U S businesses within empower while it would've been insurance contracts under the RFS four are actually iff's nine contracts in the new regime, rather Kniferest 17, so that's what's driving a lot of that shift.
So that's the big one that would come to mind and you have a bank you're right the dollar the risk adjustments.
Under Ias 17 are lower than the actuarial provisions for adverse deviation to Pee fads that you have today and that's because the risk adjustment does factor in diversification, whereas the actual people tend to be stand alone margins on each assumption. So there there is a natural a reduction there as you move from.
The pea paths to the risk adjustment. So I think those are the two biggest ones you called out but again, we'd be happy to follow up afterwards, if there's.
A chance to step through more but that was just two things of note right off the top but we can certainly have a follow up call yes.
Yes, I'd love to follow up on the I FRS nine reclassification of empower because I didn't think.
It impacted empowers, earning.
Earnings capability, therefore, I'm still stuck on the on the thought process that overall the embedded earnings powered on your insurance contract liabilities and lower under <unk> 17, but yes, absolutely that's a follow up call that's great.
Yes. It doesn't you are correct that it doesn't impact empowers earnings power that that shift so that's one way or the shift between the two didn't affect the earnings power. So let's have a follow up call that would be super.
Okay. Thanks Darko.
This concludes the question and answer session I would like to turn the conference back over to Mr. Mann for any closing remarks.
Thank you very much.
As we close the call I'd like to thank all of you for attending and I will also thank the analysts for their questions.
Noted, we're planning an education session on empowers new reporting and we will communicate the date when we've locked it down and in the meantime, we wish you a good start to the year and look forward to reconnecting on our next call take care.
Yeah.
This concludes today's conference call you may disconnect your lines. Thank you.
You for participating and have a pleasant day.
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