Q3 2023 Great-West Lifeco Inc Earnings Call

Thank you for standing by this is the conference operator, welcome to the Great West Lifeco third quarter 2023 results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation, there will be an opportunity for analysts to ask questions.

To join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.

I would now like I would now like to turn the conference over to Mr. Paul men, President and CEO of Great West Lifeco. Please go ahead.

Thank you <unk> good morning, and welcome to Great West Life's Kohl's third quarter 2023 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 COO Europe partial Jamal President and group head strategy investments reinsurance and corporate development.

Okay, Dillon, President and COO, Canada, Ed Murphy, President and CEO of empower and Bob Reynolds, President and CEO Putnam investments.

I'd also like to take this opportunity to formally introduce John Nielsen, who joined Black coal in September.

John was appointed CFO designate and will assume the CFO role when Gary retires next year welcome John.

Before we turn to the business of the day I want to acknowledge the terrible loss of life and hardship related to current geopolitical conflicts are companies that made a donation for humanitarian aid and our hearts go out to all of the people families and communities impacted.

I'll now draw your attention to our cautionary notes regarding forward looking information and non-GAAP financial measures and ratios on slide two these cautionary note supply to the information we will discuss during the call.

Please turn to slide four.

The company delivered an excellent financial performance in the third quarter of 2023 with base earnings per share of $1 <unk> up 17% from last year.

This represents a record quarter for base earnings base EPS in the first time, a life co reported base earnings above $1 per share.

These results reflect solid contributions across all segments and continue the companys strong earnings growth trajectory this year.

We remain focused on disciplined capital allocation and execution of our growth strategies are.

Our earnings reflect the benefits of recent strategic transactions as well as operational improvements across our businesses.

These results also reflect the smooth transition to <unk> 17, and are supported by disciplined expense management as we focus on efficiency and effectiveness.

During the quarter, we continued to advance our well focus strategies in Canada. We completed the acquisition of value partners and are on track to complete the acquisition of IPC, but at the end of the year.

In the U S. We're on track to complete the sale of Putnam and we continue to unlock value from the Prudential integration.

In late October 1.4 million Prudential clients.

<unk> 100 billion of assets were.

Fully migrated to the empower platform and our largest integration wave to date.

Net earnings per share from the <unk> from continuing operations were $1.01.

Unlike last quarter, there was no significant difference between base and that EPS.

Given <unk> 17 dynamics and current economic conditions market experience relative to expectations was positive with some offsetting reduction in UK real estate asset valuations.

We've expanded our disclosures on property related investments in the appendix to include greater detail on our exposure to office and UK mortgages, given the heightened interest in these asset classes.

These disclosures highlight the diversified and high quality nature of our portfolio.

We've taken steps to reduce risk over the past few years, and our real estate portfolio and it remains resilient the stresses in property markets.

Our exposure to direct office properties is relatively low and these holdings remained high quality.

Gary will unpack.

These and other items excluded from base, including changes in assumptions later in his remarks.

On a year to date basis. The company performed strongly against our medium term financial objectives base EPS exceeded our target and base, our OEM dividend payout ratios were within our target ranges.

Finally, our life <unk> ratio remains strong growing to 128% on the back of strong earnings in the quarter and up two points relative to last quarter.

Please turn to slide five.

In Canada, our workplace businesses remain on an area of particular strength.

Group life and health premiums were up by 23% year over year due to strong new sales organic growth in the existing book and the addition of the public service Health care plan.

We've enrolled over 1.68 million of the $1 7 million individuals' covered under this public sector health plan.

A large majority of accessing their benefits without issue.

That being said you may have seen reports about others who've experienced challenges receiving timely service.

The underlying cause of these service disruptions related to the public sector is a requirement that each member re enroll as well as changes they made to benefits coverage for their plan members.

Regardless of the cause of these disruptions were working hard to resolve the remaining challenges for these important customers. We're working with the government to make excellent progress towards our target service levels.

Moving onto group retirement, we saw solid growth over last year with some softness in sales. This quarter, we remain focused on strategies to enable a capital light growth, including continued improvement in plan member rollover asset retention.

And our individual wealth business mutual fund net flows were positive, but we continue to see continued to experience second fund outflows. While this is consistent with industry experience. We believe that disciplined execution of our recently communicated wealth strategy will position these businesses for stronger growth and performance going forward.

Word.

As noted we completed the value partners acquisition in the quarter and the IPC is on track to close before the end of the year.

These two strategic transactions are advancing our goal to be the leading full service wealth and insurance platform for independent advisers in Canada.

Finally, our CSM and Canada declined year over year, largely due to amortization of insurance experience.

We previously noted we can we continue to approach Nonparticipating insurance with a focus on customer value based a balanced with pricing discipline.

P S M.

This is not a key growth metric that lifestyle.

Capital generation from our in force business is a better indicator and we plan to share more on these measures in future quarters.

Please turn to slide six.

Across Europe, our businesses maintained maintained solid momentum in the quarter, despite economic uncertainty as well.

I've noted in the past much of our business in Europe is tied to financial necessities like benefits and retirement savings.

These products have actually seen a lift in revenue driven by strong unemployment and wage inflation.

And workplace, we experienced strong organic growth in group life and health in both UK and Ireland and strong pension sales at Irish life.

We achieved steady growth in wealth, which is reflected in positive net flows for the quarter. This is in part driven by the successful execution of our wealth strategy and Ireland under the <unk> brand.

We're also advancing our wealth focused joint venture with Allied Irish Bank.

This includes the November 1st portfolio transfer of <unk> funds with a carrying value of almost 2 billion euro from Irish life into that business.

We expect to recognize a gain related to this transaction in the fourth quarter of 2023.

Within insurance and risk solutions, we saw strong bulk and individual annuity sales in the U K supported by higher interest rates.

These sales helped drive growth in CSM in Europe.

Well recognized in sales in the prior quarter Irish life completed the Onboarding of a 133 million euro bulk annuity transactions the largest bulk annuity deal to take place in the Irish market. So far this year.

Please turn to slide seven.

Empower delivered another strong quarter as we advanced our strategy focused on workplace retirement and personal wealth.

And workplace solutions, we achieved strong organic growth with D. C plan participants up 4% year over year and D C assets under administration up 14%.

In quarter net outflows reflect seasonality as well as a modest impact from prudential be conversions.

Powers execution of the credential integration program is going well with client retention ahead of target and annualized run rate synergies of EUR 66 million achieved to date.

In the quarter net outflows were reflecting fewer large plan sales rollover of assets to empower retail normalcy and normal seasonality as well as a modest impact from Prudential D conversions.

I would also note that on a year to date basis. The DC business has achieved net inflows.

Powers execution of the Prudential integration program is growing well with client retention ahead of target and the annualized run rate synergies of USD $66 million achieved to date.

Empower personal wealth is also maintaining excellent momentum with <unk>.

30% year over year supported by strong growth in sales and higher markets sales effectiveness and a powerful digital dashboard of generating money in motion opportunities and the increased new asset inflows from the D C business by over 50% relative to last year.

Lastly, with the previously announced sale of Putnam investments to Franklin resources. The results of Putnam investments are now.

Classified as discontinued operations as I mentioned earlier this transaction remains on track to close by the end of the year.

Please turn to slide eight.

Our capital and risk solutions business continues to play an important role in diversification of risk across the portfolio, while also delivering growth and cash generation.

Earnings on short term business increased 23% year over year, reflecting growth in structured business.

Note. This businesses is accounted for on the P. A a basis, which does not involve C. S M.

Sales on longer term business were relatively soft this quarter, reflecting the bespoke nature of these transactions and our disciplined approach to underwriting and pricing.

While the third quarter as seasonally lower slower Crs continues to see solid new business momentum and we'll maintain discipline as we leverage our strong capabilities for the remainder of the year.

With that I'll now turn the call over to Gary to review the financial results.

Thank you Paul Please turn to slide 10.

Base earnings per share of $1.02 was up 17% from Q3 2022, driven by strong performance across all segments, particularly the U S, which was up over 20%.

As shown by the top two rows in the chart on the right. This balanced performance across segments was a continuation of what we saw in Q2.

Quarter over quarter. The base earnings increase was 3% primarily a result of more favorable insurance experience, partially offset by lower trading activity contribution in the investment results.

The comparative period from 2022 had a number of larger items, both positive and negative in Canada, Europe, and capital and risk solutions, which makes the year over year comparisons by segment in a bit more challenging.

In Canada base earnings of 296 million were down 13%, primarily due to beneficial tax impacts that occurred in Q3 2022.

Base earnings before tax actually showed an increase of 3% as a result of higher earnings on surplus driven by higher interest rates and continued growth within the group life and health business.

Including favorable mortality and morbidity experience.

In the U S based earnings of $262 million were up $48 million or 22%, primarily due to strong organic growth at empower on the revenue side. There was growth in asset based fee income from higher average equity markets and increases in other participant and transaction based fee income based on growth and <unk>.

Liam.

On the expense side results now include the full masks to our synergies and we remain on track to deliver the targeted synergies on the Prudential business by the end of Q1 2020 for.

This strong expense discipline and effective execution of our massive reach on Prudential acquisition has allowed us to strategically invest in the business to continue empower strong organic growth trajectory.

In Europe base earnings were comparable to last year, although down 9% in constant currency.

Improvements in insurance experience and the benefits from FX, which are largely offset by lower trading gains than the prior year Q.

Q3, 2022 benefited from above average trading gains in the investment results, whereas this quarter newly sourced spread assets were deployed against strong individual and bulk annuity sales.

This new business contributes to CSM growth in Europe, which Paul noted earlier and the CSM growth is amortized into earnings over time, rather than an earnings gain in quarter.

The capital and risk solutions segment had another strong quarter.

Year over year growth is distorted by a charge related to hurricane claims in Q3 2022.

Excluding this base earnings are still up a strong 8% due to organic business growth, particularly in the structured reinsurance portfolio.

Overall looking at this on a net earnings basis, the net EPS from continuing operations was $1.01 almost the same as the base earnings per share.

Net EPS was down 5% last year as higher base earnings were offset by the year over year change in items excuse me different base, which I'll cover on the next slide.

So turning to slide 11. This table shows the reconciliation from base to net earnings.

Net earnings from continuing operations were 936 million or a dollar and <unk> 10, a share while overall the excluded items have a small impact this quarter. There are two items I'd like to highlight.

The first is market experience.

As noted on our Q2 2023 call. These are typically items that we would expect to oscillate around zero over longer periods, although they will vary quarter to quarter.

This quarter the positive market experiencing primarily driven by increases in interest rates in Canada, partially offset by lower non fixed income returns, primarily lower real estate valuations in the U K property portfolio.

The positive earnings impact from interest rates helped offset pressure unlike cat capital that comes from higher rates.

The offset is.

Since given our a L M approach.

The second item relates to assumption changes the annual review of actuarial assumptions led to an overall positive impact to the balance sheet and like cat ratio as a result of updating mortality and longevity assumptions to begin to recognize pandemic impacts.

There is an important presentation I'll point to note within <unk> 17 as basis change impacts appear in two places.

The impact on the CSM is calculated at original locked in discount rates. This is the amount that's being amortized into earnings in future periods.

But given that rates have risen so much since the opening balance sheet transition on January one 2022, the CSM amounts are larger than the current fair value of the basis change. The difference goes into earnings in the period when the changes made and that was a negative this period, even though the assumption change overall is a favorable impact.

Also recall that certain basis changes, our financial assumptions or where there is no CSM go straight into earnings positive or negative.

Given the CSM and earnings impacts are both included in like that capital the presentation protest.

In fact, we still get the positive impact on land and on future earnings.

The remaining items excluded from base are predominantly related to integration costs, which will continue for a few more quarters and the amortization of acquisition related finite life intangibles, which will continue over a longer period.

Turning to slide 12 as.

As noted on our Q2 2023 call we improved the drivers of earnings view of earnings to improve the articulation of our results and align us with our peers. One change was to provide a clearer view of the insurance result by differentiating between expected versus experience impacts.

Do you expect it provides insight into the underlying growth of the business, whereas we would typically see period to period swings and the experience results.

In the top of the table you can see the expected insurance earnings of $732 million up 8% year over year due to business growth, particularly in the shorter duration renewable contracts like group insurance.

Plus some currency tailwind in Europe.

The overall insurance result of $786 million was up 26% year over year, driven by the non recurrence of the charge related to Hurricane claims in Q3, 2022, which was the driver of last year's experience loss.

This quarter, we had favorable insurance experience driven mostly by mortality and morbidity earnings in Canada, which contributed to this overall result.

The net investment result of $222 million was up 6% year over year.

This was mainly driven by higher earnings on surplus due to increases in interest rates, partially offset by lower trading activity impacts, particularly in Europe. This is an area, where we plan to expand disclosure further in future periods similar to insurance this would benefit from separating the expected investment earnings as the label says.

From the in period investment experience.

Net fee and spread income related to our non insurance businesses were up 13% year over year. Most of this result is driven by our empower business as noted earlier, we benefited from our asset based and transaction based fees.

<unk> streams for this business, while also benefiting from the realization of acquisition related synergies through strong expense management.

Non directly attributable and other expenses were up 5% relative to prior year due to business growth and the currency impacts in Europe.

The effective tax rate this quarter was 13% on base shareholder earnings, reflecting the jurisdictional mix of earnings, including the growing U S contribution and the limited impact of one time tax items.

Overall, we record.

We had a record base earnings of $950 million, a reflection of the strong results across all the segments.

Turning to slide 13.

The book value like Cat ratio return on equity and financial leverage members who've shown an iron for 17 basis, unless specifically stated otherwise.

Q3, 2023 book value per share is back above $24. At 20 401. This was up 5% year over year and 3% from last quarter driven by the growth in retained earnings plus currency translation gains in other comprehensive income.

It is worth noting that the book value per share is well underway to reaching the $24.71 level pre transition triumph 17, and at the same time, our ROE has risen from the mid 14% in 2021 to 16, 4% currently betting pitting from higher base earnings that we are now.

<unk>.

So a lot of cat ratio of 128% with comparable to the prior year and up from the prior quarter results. The two the two point increase from Q2 2023. It was primarily driven by lower capital requirements and as a reminder, the.

I T C transaction that is expected to closing in Q4 as Paul mentioned, we will reduce the ratio by about three points.

The base return on equity figures shown on this slide are all I have for a 17 basis.

The result for Q1 2023 as shown rather than Q3 last year. Since this is a rolling four quarter average and we did not have all the information for Q3 2022 on an after at 17 basis.

The base or are we began the year at around 16%, but has improved to 16, 4% this quarter, reflecting the strong earnings results recently.

Financial leverage remained at 31%, we made 100 million U S. A U S. Dollar 100 million repayment on the short term debt and used as part of Prudential funding, which leaves a remaining balance on this debt facility about 100 million U S, which we expect to pay down in Q4, which should lower the leverage to about 30%.

And with that I'll turn the call basketball, Thanks, Gary I will now turn the call back to Ashish who.

Who will get us set up for the Q&A portion of the call.

Thank you we will now begin the analyst question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.

Using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.

The first question comes from many got Grumman with Scotiabank. Please go ahead.

Hi, Good morning, Gary and Q2, you talked about are evaluating improvements around our metrics tied to capital generation and I'm wondering if there's anything you can update us on on that or is that coming.

In Q4.

Gary you want to speak to that yes. We are we are still working on the capital generation May metrics, you want to make sure we get that right I would make a couple of notes.

First off the base earnings are a good proxy for 75% of our business that haven't really been materially impacted by high for 17, and then obviously for the remaining 25% the introduction CSM does introduce some complexity there.

So we are looking to get this out whether it'll be it'll be in the in the first part of 2024, whether its with our Q4 results for our Q1 results is not yet finalized, but it'll be a one or the other where we're definitely keen to get that out, but let's say the base earnings I think are at you know a high percentage of those base earnings would be a good proxy.

Period, while you're waiting.

Thanks for that and then just wanted to talk about your expanded our disclosure on your real estate exposures. It. Thanks for that specifically slide 23 in the appendix the office mortgage exposure by maturity just wanted to better understand how to interpret.

This particular slide it looks like if you look out to next year to 2020 for it there is a little bit of an increase in our office a maturity and so just wondering is that something.

We should be concerned about just broadly how to interpret this particular disclosure.

So many I'll turn that one over to Robin in a moment, but just suffice it to say we've been very disciplined with this portfolio.

Ben I'm.

Looking at the overall exposure, reducing where it made sense, but I think as we kind of go into a period of some volatility here, we're feeling pretty confident about the portfolio, but I'll, let rob.

Robin will speak to the 'twenty three 'twenty four maturities Robin yes, thanks, Paul and thanks for the question.

So what we do try and provide a lot more detail and disclosure in the appendix on the real estate portfolio page 24, the at the point of this in the details here to give you a sense of that the balance we have across the upcoming years. So in other words, there's no. One particular area that stands out as a big risk in terms of rollover. This is a gradually.

Shoring portfolio.

While there is going to ebb and flow, but you can see the bigger bars. There in 2026, 27, and then out to 2030 and beyond so the purpose of this patent just to give you a sense of the strength, we have in Ltvs to high debt service coverage ratios and the fact that we're not particularly exposed to any one year in terms of rollover risk.

Yes so.

Maybe I'd just follow on what Robin was saying is that we're not particularly concerned about 2024 in particular, although we are in a volatile time volatile time, but youll see that theres strong debt service coverage there we've got.

You know what we've structured these mortgages in a way that we've got good confidence, but you know we we.

You need conservatism, if you Wanna, whether in a more difficult times like this.

Thanks, Paul.

Yeah.

The next question comes from Gabriel <unk> with <unk>.

National Bank financial please go ahead.

I'd like to keep going on the CRE topic.

They don't have a detailed disclosure on makeup I just wanted to make sure I'm getting this right.

If I look at office in particular.

60% of it is allocated to power account so from a mark to market standpoint, there's no real.

Concern I guess for.

D holders.

Gave that would be correct okay.

You did mention there were some oh adjustments without the UK portfolio can you quantify that.

But I'll, let robin speak to that.

I think that you are you referring to the fact that we've been managing the portfolio and the overall exposure I just wanted to clarify your question, but I don't know that we've covered before I just wanted to get the number. If there was any are you now a negative mark mark to market adjustment on that particular portfolio this quarter.

I think Gary can take that one yeah yeah.

Yeah.

The returns were down about 3% in the quarter in terms of markdown.

Again, a lot of it is just reflecting the higher interest rates. So we're getting the benefit of the higher interest rates and other places in our in our results and obviously you saw that in the overall market impacts, but it does it is bringing the valuations down.

They were marked down about 3%.

Which is.

And then you can see the size of the portfolio that gives you an idea and that's we often are excluded items. We are doing the the amount relative to our expectations. So we would expect in a given quarter that.

You might have.

Growth in.

In the order of 1%.

Modest growth during the year, so each quarter that so I think the gap from expectations was it was about 4% in the quarter.

How about and apply that to the entire portfolio or just office.

That implies that the that was for the entire U K portfolio. Okay got it it was less in Canada alright perfect.

Speaking of the higher rate stuff.

A drill down a little tiny bit in the empower or the U S. Rather it looks like the almost the entirety of the growth of earnings in the U S. It was rate related I mean, there's a little bit from synergies but.

I mean, a big increase in earnings on surplus and then the.

The fee income can.

Can you.

To the extent it was earnings on surplus related are we at a run rate now where there's not that much more upside to be.

Theme from that but that line item in the U S.

I'm going to let Garry take that one Gary.

I think that's where I think most of the portfolio. So there are some longer bonds that would not have matured, but most of the portfolio has has turned over so youre seeing the impact of the of the current rates.

We had some some smaller contribution some good results in some of our alternative investments, but it would be single digits. So I think it's a it's a reasonable ah indication.

And then just for <unk>.

I don't I know you probably won't want to give me specifics I get that but just from a.

You know ballpark standpoint, what would be the duration of your of your surplus portfolio, how much would be and you know short term cash and then how much would be the.

The rest of you about two to three year duration Ah maybe you can shed some light on that.

Gary do you have that.

Color on that sure yeah.

Just at a high level a lot of the portfolio is quite short.

It started in Canada, and you might recall, we shortened the portfolio in Q2, we are we had in OCI.

The reclassification recycling into the P&L.

We took some older long term assets and move them short term steps, that's actually helped in Europe the spirit.

So yeah, Europe would probably be good to UK is probably in that one to two years the U S.

As.

It's a slightly longer duration, probably more in the three to three to five year range and then candidates actually quite short probably closer to a year.

Okay, great. Thanks for that and then.

Lastly on the group business last quarter, the message was that the incidence.

Incident rate and claims trends overall had been.

Re gained.

Gained I guess.

Pre pandemic pattern.

And here, we have a quarter where experience gains are quite positive that's great I'm just wondering was that.

Against your expectations, the C or the seasonality factor and things are still expected to be relatively.

Relatively modest from a from an experience standpoint going forward.

I guess, many I'll start off pardon me Gabe I'll start off and I'll hand, it to Jeff to provide a bit of context, but the reality is we we run. This this particular business with a ton of discipline in terms of our pricing and our underwriting.

So you know over the long term, we see this as a differentiator as a positive contributor and I think youre just seeing the benefits of that discipline I'll, let Jeff speak to the particulars for the quarter, though Jeff.

Gabriel I I mean, just to build on Paul's point, it's it it it has been and continues to be a continued strength of our offering on the workplace in the group life and health and I think as we've mentioned in the past we spend a lot of time on our pricing and looking at trends in the marketplace. So we're we believe we're well ahead on an ongoing basis.

Much of the actions you would have seen in quarter and they're flowing out or actions, we would've taken a year year and a half ago in terms of looking at the future. So it is a continued.

Area of strength for us within the organization.

And I would say that you know, we're we're not surprised on the results in quarter and it continues to be a strong differentiator in the marketplace in terms of our value to customers and members in the market.

I might just finish by saying that I think with really good pricing and underwriting discipline.

We would kind of expect some modest experience gains over time, just by having that same disciplined staying on top of it and obviously, we're going to go through cycles over time, we go through economic cycles, but if you stay on pricing and you stay on your underwriting disciplines.

We would we would be seeking don't perform modestly overtime.

Alright, thank you.

The next question comes from Doug again, Doug Young Desjardins capital markets. Please go ahead.

Hi, Good morning, just maybe continuing on with the insurance experience against the top of Paris. It was 56 million I guess I assume that most of that $47 million in cana that relates to the to the group.

<unk> that we just talked about and become clarified, but I guess and in Europe.

There's 28 million positive can you kind of delve into what drove that and then obviously there are some negatives elsewhere, maybe you can flush that out a little bit.

Yeah, yeah. Thanks.

Thanks, Doug for sure that in Canada. The majority is that that group performance and I'll, let Gary speak to what we're seeing in Europe Gary.

Yeah I think.

In Europe, we had a.

Favorable favorable mortality and a and a bit on that.

The morbidity was actually a bit weaker what was improved from from prior periods.

That is helping with that.

And then we do have some expense fluctuation to go through this line. So in Canada, there were actually a bit behind on the expenses I was a bit of a Indian.

Any period drag, whereas Europe is actually a bit ahead, so those or are those some of the trends would be seen.

Okay.

And then there was a big decline in expected investment earnings Yeah, it's mostly out of Europe.

Don't think that was the trading gains going down, but maybe I'm wrong can.

Can you can you flush that out a little bit.

Yeah, Gary overdue, Yeah, sure and I think right up front that you're just acknowledged that the label for the line that you're looking at.

<unk> investment earnings did not really clear because this includes both the normal our run rate expected earnings as well as any in period investment.

Investment experience and that's really there's really two types of investment experience and that's there you'd see here regularly which is trading activity impacts the <unk>.

Countries, creating activity and then you'd also see credit our credit impacts go through this line as well so if.

If we look at compared to the prior year. The majority of the decline was really a it was really around the trading activity and that that was quite elevated in the U K in both Q3 and Q4 last year.

And last year, we had low individual and bulk annuity sales and so the spread assets were allocated to the enforced portfolio, but this quarter with the strong sales growth.

With the spread assets went more towards supporting new business and those so that value.

We've seen the CSM, which obviously will come into earnings over time. So it really is a year over year, it's mostly the trading activity quarter over quarter.

Two thirds is the lower benefits of trading activity and about a third of it is a little more again modest credit impacts, but there were really none in Q2 and there is a small credit impacts in Q3.

So those are the numbers that are driving.

And you walked in my next question is credit and so I know credit goes through that line item, but yeah, we don't have great visibility.

Kent can you talk a bit about.

The ECL on the OCI assets, but also you know what the credit can you quantify what the credit move, whereas elsewhere in and what you're seeing from a credit perspective, and how we should think engaged from the outside looking in.

Yeah, the credit impacts them.

The fixed income portfolio.

Gary why don't you start with that and then you could pass on to Robyn Yeah. So I mean overall the credit impacts your overall very modest this quarter I think probably in the $20 million range pre tax so it's a it's modest.

The ECL it really would only come up on the U K mortgages held at amortized cost it would be single digits impact. So it wasn't material to actually it actually is a bit of doubling up on the account of the ratings downgrade. So.

It is I think where our enrolment could comment that I think where we saw the ratings downgrades.

Just a couple of the UK commercial mortgage holdings.

That's right. So the impact was from the UK commercial mortgages it was modest.

I think on the bond side, what you what you should expect.

We expect as you know it's been a actually more upgrades and downgrades in general over the past few quarters say if the economy turns.

That could shift I just point you back to the fact that we have a high quality portfolio, 99% of our book is investment grade and the vast majority of that single a or better. So if we do get into a credit cycle that turns.

Impacts from Bermuda at the higher rating levels. So that's just something to keep in mind.

And then the radian upgrade downgrade and how you kind of flow that through credit you'd look at that every single quarter. That's not an annual review that is something that you you dig into each and every quarter and so there wouldn't be a true up at the end of the year or anything like that is that.

Correct.

That is an ongoing process ongoing discipline, we have quarter to quarter.

Perfect. Okay. Thank you very much.

Thank you.

Once again, if you have a question. Please press Star then one.

Next question comes from Tom Mackinnon with BMO capital markets. Please go ahead.

Yeah, Thanks, and good morning, and thanks for taking my question just continuing on Ducks thread here I.

I guess the.

What you were trying to maybe explain with these trading gains at this normally your yield enhancements that you get so would you be able to quantify the yield enhancements in this quarter and maybe what they were last quarter in your one year ago.

Yeah, Gary you can take that one yeah sure I mean this quarter I think the number again pre taxes, making 13 million. So its very very modest at last quarter. We had something that was around $50 million I think last year was in the I'd say around the $75 million range. These are all pre tax numbers just.

So presentation. So it gives you an idea that's what that driver is a year over year, yes, and just to bring that back to Tom.

Recall last year those flowed through they were applied against the enforce book. So you saw the benefit of that.

We've actually leverage the the quality assets, we had in new business opportunities here. So we're building strength from the CSM, which will flow into earnings in future.

Yeah, Okay and.

Pete.

I guess, the the normal run rate or the.

What you get in that line other than a yield enhancements would be yes.

On a normal run rate less than a year finance costs and the normal run rate you obviously on the bonds.

It's easy on the mortgages are all amortized costs, what about on your equity release mortgages aren't don't those kind of fluctuate around with interest rates.

And would that have any impact as a result of interest rates going up.

Gary do you want to start that one yeah sure. Most I mean, a couple of things one is the financing charges arent going through this line.

They don't go through this fine here.

What you will see here is Sam.

The allowance for credit and just comes through the expected.

The regular allowance for credit.

That would just run off the liabilities.

You get a little bit of an uplift here.

The non fixed income relative to the liability rates.

So we have a long term assumption non fixed income.

Are you on that.

Long term returns.

But that's really been it's actually quite a small contribution there now because rates of our liability rates have risen. So that's that's probably less than 5% of our base earnings. So that's there's not much.

A contribution coming from that so but there is some there.

Yeah. Those are the main drivers is it really just the.

The additional rates there because again most of it.

Something like equity release mortgages backing liabilities. So it's all in the all in the discount rate. So you don't see it here.

Okay.

Good.

Go ahead Tom.

And then I guess the question with respect to empower.

Yeah participants didn't really grow quarter over quarter, and I think I kind of look year over year. They are only up about three.

Three or 4%.

Yeah, how should we be thinking about a run rate here for participant growth and why isn't it Ben.

You know higher than 3% to 4% over the last 12 months.

Well I'm going to turn that one over to Ed do you want to speak to the momentum you see in the business.

And if you're on mute you should take yourself off mute.

Oh, sorry, I was on mute.

Thank you.

Thanks, Thanks for the question Tom Yeah, if you look at organic growth in the business precipitous participant growth year over year, it's up about 5%.

You have to adjust about 1% for Prudential, because we had some.

Terminations on Prudential that are in line with expectation as we've shared with you in the past in terms of the Prudential results. We're running well ahead of our internal plan in terms of.

Participants.

Pension asset retention rather than retention.

But if you look at the market Tom we're growing organically our net participant growth is about <unk> the market.

So the market is going to grow roughly 2%.

We're consistently growing between 4% and 6% a year if you looked at.

The last few years excluding acquisitions.

So.

We're feeling really good about the growth and if you look at the small into the market, which is the under 50 million space will have the best year in the history of the company this year.

Both in terms of the number of plans sold and total assets will exceed $10 billion. This year.

And our pipeline is <unk> two trillion.

So we feel really good about the overall growth trajectory of the business.

Workplace.

To that point.

Theres no doubt that when you when we talked about the Mega in the large case market that can do that.

They tend to be a bit volatile they will happen when they happen not in particular to this quarter, but.

Overall, we tell them, we continue to like the overall momentum of the business I mean, we've got a value proposition, where we're we're winning more than we're losing out in the market and I think that bodes well for looking forward.

Thanks.

Yeah, I would just add on the planned flows.

Just I want to reinforce Paul's point that.

In the large end of the market.

You have the timing issue of large mandates you know these are 912 month mandates that we're pursuing so you'll see you'll see.

Our quarters will you'll have you know large mandates that will hit you'll see some where there'll be a termination. So you'll continue to see that play out over the course of the year.

Because it tends to be a little bit choppy or when you're going after these multibillion dollar mandates.

Thanks, Ed.

Sure.

Once again, if you have a question. Please press Star then one the next question comes from Paul Holden with CIBC. Please go ahead.

Thanks, Good morning.

So first question is just a point of clarification on something Gerry had mentioned and that's related to the equity release mortgages.

So in the past they were used as a yield enhancement via call is that is that still the case is that still how it flows through under <unk> 17 or has that changed.

Mike I'll turn that one to Garry I think we used it as a we have used it historically as an asset to back liabilities.

I think that would be more of the way I would characterize it but I'll, let garry speak to that Gary Yeah. We would have used it in both Canada and the U K than in prior years. So there's a couple of things first off with the rising rates.

What we're seeing is getting a lot of it.

In our individual annuities and in that for people, but we're seeing a lot lower interest in equity release mortgages, new origination so the volumes are down.

Historically, a lot of those would have gone into the while Canada and the UK I think they both had a good shares and so a lot of those yield enhancement gains would have been in Canada from those and we're not going to be seen but always going forward in Canada. We use we have an illiquidity premium so any yield pick up would be offset by an illiquidity premium.

And you Wouldnt see the impact they still had a lot of value when we add them, but you wouldn't see in it.

In periods yield enhancement and then in the U K you could still see that but we just haven't had much volume. So it's really not been a big feature but we would have had a bit yeah.

I might add Paul that you know I like the diversification.

<unk> of the payout annuity and the equity release mortgage book and a high interest rate environment, we see payout annuities are actually.

I know people are looking for that certainty of income they like the the underlying return and we're really seeing solid momentum. There you see some softening in equity release mortgages and if we get into a different interest rate environment. We've got that nice diversification of product, where we can help people with their retirement needs and it's good for us from an economic perspective.

Got it okay, but that all makes sense. Thanks for that second question.

Back to the direct real estate holdings and you can in Canada.

Are you able to give us how much you've changed our cap rates and 2023.

From and can you provide some color on that.

Alright, so if they have risen more than the U K and they've risen in Canada I take from that.

Over the past year, it's been over 100 basis points in the U K in terms of rising cap rates is probably closer to 70 or 80 basis points year to date.

It's different by sector, so you've seen a higher ryzen office versus say.

Battreal, but in general we've seen that over 100 basis points rise over the past 12 months or so on cap rates.

And just to be completely clear and following up on what Gabe asked before.

GAAP rates change on Canadian property for the most part that doesn't flow through your earnings because thats related to power product.

Yeah.

For the assets that are backing apart that is correct and then there'll be a modest amount of assets back non power and then you would see some impact there.

Got it okay that makes sense. Thanks for that and then last question is related to empower and I think what people are trying to figure out is.

There is some pressure and expected in the business as you roll over at the last of the Prudential customers.

But at the same time, you have some additional cost synergies.

All three of the earnings so forget about the changes in asset levels and in any way, but net net of those two factors is there additional earnings upside related to this business.

Gary do you want to start with that and then turn it to Ed Yeah, I think I'll just start with a smaller car I think that can do the strategic side just on the smaller side just on the synergies we are still as I mentioned on track for.

$180 million in the U S and it's pretax and we've recorded a run rate of 66% to eight so you've got that gap there and just do the math in my head to around one 2014, I think I'm doing it right but.

But you've got that are there and we should be at.

At that run rate so the full run rate of those synergies starting in Q2 next year. So there is certainly some upside on the expense. So just that small point and maybe went to and.

Why don't you talk about your perspectives on the earnings growth in that business and I would say.

Paul one of the things that I I know Ed will speak to this is that there's kind of two businesses. We have here and we've got the recordkeeping workplace business and then we've got the retail business and one of the dynamics. We see is we are retaining more and more of those record keeping assets as they roll to retail and we're seeing growth in retail so you've got to look at it as an overall business.

And I'll, let Ed speak to the Ed over to you.

Sure. Thanks, Paul.

I would say to answer your question specifically on the revenue side as we bring those clients over to the empower platform.

As was noted in the presentation, we brought one 1.4 million participants over.

The third week of October and we have a remaining 2.2 million participants that will come over in the first quarter and then we'll be done with the Prudential integration.

And you know one of the opportunities for us is to deepen relationships with those existing participants so that comes in the form of other products and services that we offer within empower that that wasn't necessarily offered frankly in the legacy Prudential book of business. So if you just look.

From a workplace perspective, the short answer is yes, there are certainly revenue opportunities.

Within the within the within the workplace services area things like managed accounts and other services that participants will adopt over time.

Okay.

Yeah.

Yeah.

Yeah.

Okay.

Yes.

Retirement.

Increasing.

Okay.

Hello.

Okay.

Okay.

Perfect.

Yeah.

Your line is breaking up there I'm not sure what's going on but I think you'll have you'll have picked up on that Paul but I'll just sort of reiterate what Ed was saying is that <unk>.

Increasingly we've improved our technology, our contact great and the key for US is that the capture of the you know roughly 80 billion in inflows the money in motion every year rolling out of the D. C. Our book and what is our capture rate and I think in my speaking notes I noted that our year.

Over a year improvement and that is insignificant so again I'd go back to.

I think there's some good underlying growth and I'll call. It true organic growth as we penetrate that client base more.

Well, they're in plan, but its that opportunity really that's it's that it's that.

That rollover rate, where we can where we can capture those assets and then you know think about it more from a lifetime value perspective.

Understood. Thanks for that I'll I'll leave it there.

Thank you.

The next question comes from Mario Mendonca TD Securities. Please go ahead. Good morning can we go back to the U S and empower specifically.

You referred in your I think your opening remarks or in your MD&A to the $6 $6 billion.

And outflows I think you referred to it as.

Deconversion. So maybe just help me understand what does that mean that just means that folks that didn't convert to your system.

On that conversion date essentially left the company is that is that what we're looking at.

Yes.

Big conversion as we've often talked about and and when you do a group acquisition, you're expecting to retain you know in the case of empower I think we retained well into the mid eighties on on the mass mutual in and we had similar targets on Peru, where expect you know at this stage, we're outperforming those targets, but when certain clients choose to.

Go elsewhere, we would call it a deconversion, so you'd have a little bit of deconversion in quarter, but you know the other dynamics in the quarter would've been money that was moving out of retirement accounts and people were either leaving the one at a time, leaving their employer moving into retirement and our job is to.

I actually capture those assets and retaining them retain them and our other business. The other pool, which is the retail so that would've been a dynamic and then the other dynamic in the quarter would have been some seasonality, where you tend to see people a little bit lower growth in participant.

Account sizes in the third quarter, it's just the dynamic we see.

Driven by tax planning and things like that so those are the dynamics Ed let's see how your line is where you whether you're breaking up when there is anything else you want to.

Yeah. Thank you Paul No I think I think you handled that well if you look at across our defined contribution business, we have about a 97% to 98% plan retention. So invariably every year, there's 2% to 3% of our plan sponsors that R. R.

Leaving US you know either they've gone bankrupt, it's a building's failure or they've converted to another provider and we care, we characterize that as a D conversion and then the other comments that Paul was making more around planned flows in and participant flows which I think we've spoken to that in terms of what drives that so would it be appropriate to suggest.

But in the early days because the conversions just been done.

In the early days.

Some net outflows maybe for the next couple of quarters before that starts to grow again is that a reasonable thing to suggest.

With respect to the the plans that may not choose to come with us the potential plans is that what you're referring to if you look at the roll forward of your for empower defined contribution.

This was the first quarter, where I saw any meaningful outflows admittedly, there's not a lot of data to look at right now.

Is this a is this something we can see play out over the next few quarters. Some outflows from that as it flows out as we see more and more D conversions or is that essentially is it done in this quarter.

Yeah, well as we said or.

As we said earlier if you look at plan flows.

If you look at on a full year basis were 8 billion positive, but in any given quarter based on large plan sales and terminations in that quarter, you can get some volatility and that's what you saw in Q3 on a net basis. It was 2 billion negative in the quarter 8 billion positive year to date.

Yes.

Mario Let me add this.

So I think what Ed is pointing out is the overall dynamic of the book. Your question is whether there will be additional crude <unk> conversions and.

In Q4, and in Q1, and there will be some like put it this way.

There'll be there won't be but the reality is we'd be well ahead of our of our target. There if that were to occur. So we should probably anticipate some of that having said that those will be offset by growth in sales and so this particular quarter. We didn't have any mega sales, we had some de conversions than we had.

What we view as a really good story flows moving off of the <unk> platform into the retirement space.

Added all together, you've got a bit of a negative we could see a quarter, where if we were to book some large large.

Large case sales are mega sales in that quarter, it cutover could over come the.

The deconversion. So it will just have to look out, but there will be in our overall flow dynamics in the next two quarters the remaining.

<unk> version, so that's fair to say radar.

Yes Yep.

Looking beyond just the assets on the flows.

It's obviously pretty weak that took a nice chunk out of the asset base as well this quarter.

Yes, we saw in previous quarters. So is it fair to say that this business the dynamics in that business at least in the near term are also impacted by what happens with market what happens with rates declining rates could actually eat into the spread income a little bit I just want to know I want a flavor for the dynamics that can drive the margins in this business.

We look at markets and rating.

Yeah.

Well it is an asset based business I mean, if you look at our revenue a large percentage of it is asset based and to your point when you see volatility in the market.

You'll see that.

Play out on the revenue line.

And if you look at this quarter on the D. C side, we did we did increase crediting rates at the beginning of the quarter.

And so.

We have to we have to be competitive in the marketplace. So from time to time in a rising interest rate environment, we will raise the crediting rates to our participants.

So some volatility certainly possible in the near term, but your long term outlook for earnings growth. In this segment would still be in the sort of double digits. It seems like such a promising business yes.

Absolutely okay.

Mario.

Yeah, Mario that was really well said that's exactly the way we think about it there's there'll be some volatility with with markets, but our long term view is double digit growth got it. Thank you.

Yeah.

Yeah.

The next question comes from Tom Mackinnon with BMO capital markets. Please go ahead.

Yeah. Thanks for taking my follow up I. Just wanted wondering if you might be able to split the 153 million that happened as a result of our.

Marks on your non fixed income publicly traded stocks and.

And bonds as well that Ah was wasn't in the base earnings I Wonder if you can split that for me between what it was related to interest rate changes and what it was related to changes in stock values and then what it was related to changes in your non fixed income asset values. So.

Those three buckets, if you call them.

Gary you could start that's that's fair bit of detail, Tom, but Gary why don't you start off and that we need to we can take that offline as well.

We might well do a follow up but just for the benefit of all of those on the call.

I'll use round numbers and again these are pre tax the interest rates probably contributed about $300 million and then the non fixed income returns. So that's mostly the U K real estate, but also some are.

Below expectations on some of the equities.

It's about 150 going the other way so that's where you get your 150 net round numbers, that's pretty much what's happening.

We can.

On.

But the gain in the bond stuff, that's really just because is that because the liabilities are.

Like you.

There are shorter than you know your assets are much shorter than your liabilities. There is that what's happened is that what's driving that much.

Much higher than expected interest rate impact.

Actually Tom it's more to do with the back of some of our liabilities are backed by non fixed income.

And so when interest rates move all of our liabilities have a lower discount rate, but not all the assets move at the same time. So you end up with a with a pickup so it's not that we have for mismatch per se from a sort of duration and fixed income mismatch. It's more that some of our liabilities are fixed income and they aren't moving with the interest rates, whereas the.

Full impact goes through liability so happy to take this offline.

Okay. Thanks.

Thanks, Tom.

This concludes the question and answer session I would like to turn the conference back over to Mr. Madden for any closing closing remarks. Please go ahead.

Thank you very much.

So to close I really wanted to highlight that we remain confident in the strength and resilience of our businesses to deliver on our medium term financial objectives.

And with that.

Pushing in the queue for now so I really want to thank you all for your participation for those who participated and listened in and I also want to wish all of you a peaceful and happy holiday season, and we look forward to reconnecting in the new year. When we will report on our fourth quarter results.

Great day.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

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