Q2 2024 Great-West Lifeco Inc Earnings Call
Operator: Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco second quarter 2024 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded.
Speaker Change: Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco 2nd Quarter 2024 Results Conference Call.
Speaker Change: 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.
Chuba Khan: Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Mr. Chuba Khan, Senior Vice President and Head of Investor Relations at Great-West Life Co. Please go ahead. Thank you. Thank you.
Unknown Executive: After the presentation, there will be an opportunity for analysts to ask questions. Thank you, Operator. Hello, everyone, and thank you for joining the call to discuss our second quarter financial results. As many of you already know, this is my first time hosting Great-West Lifeco's quarterly results call since I joined the company earlier this summer. It's a pleasure to welcome many familiar faces on today's call, and I look forward to working with you all. Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at greatwestlifeco.com under the Investor Relations tab. Please turn to slide four.
Chuba Khan: Thank you, Operator. Hello, everyone, and thank you for joining the call to discuss our second quarter financial results.
Chuba Khan: As many of you already know, this is my first time hosting Great-West Lifeco's quarterly results call since I joined the company earlier this summer. It's a pleasure to welcome many familiar faces on today's call, and I look forward to working with you all.
Chuba Khan: Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at greatwestlifeco.com under the Investor Relations tab.
Chuba Khan: Please turn to slide three. I'd like to draw your attention to the cautionary language regarding the use of forward-looking statements, which form part of today's remarks. And please refer to the appendix for a note on the use of non- GAAP financial measures and important notes on adjustments, terms, and definitions used in this presentation.
Chuba Khan: Please turn to slide four.
Chuba Khan: To discuss our results on today's call, we have our President and CEO , Paul Mahon, our Group CFO , Jon Nielsen.
Unknown Executive: David Harney, President and COO, Europe and Capital and Risk Solutions, Fabrice Morin, President and COO, Canada, Ed Murphy, President and CEO, Empower, Linda Kerrigan, Senior Vice President and Appointed Actory, Jeff Poulin, Executive Vice President, Reinsurance, and Raman Srivastava, Executive Vice President and Chief Investment Officer. We will begin with prepared remarks, followed by Q&A. With that, I'll turn the call over to Paul.
Speaker Change: Ed Murphy, President and CEO Empower, Linda Kerrigan, Senior Vice President and Appointed Actory, Jeff Poulin, Executive Vice President, Reinsurance, and Raman Shrivastava, Executive Vice President and Chief Investment Officer.
Speaker Change: We will begin with prepared remarks, followed by Q&A. With that, I'll turn the call over to Paul.
Paul: Please turn to slide 6. I'm very pleased to report strong results for the second quarter, which builds on our performance over the last 12 months. This positive momentum is backed by clear strategies, disciplined decisions, and focused execution from our teams across Lifeco. We're executing against our ambitions in the U.S. with focused investments to deliver scale and build new capabilities, which are fueling an engine for sustainable growth. In line with the target we provided in early 2024, Empower continues to report double-digit earnings growth, driving a nearly 200 basis point increase in the U.S. segment ROE in just the past 12 months.
Paul Mahon: Thanks, Shuba, and it's great to have you here.
Speaker Change: As we work to strengthen our business and deliver for our customers, we continue to create sustainable, profitable growth for our shareholders with a fourth consecutive quarter of record base earnings. In the second quarter, both base and net earnings exceeded $1 billion for the first time.
Speaker Change: This positive momentum is backed by clear strategies, disciplined decisions, and focused execution from our teams across Lifeco.
Speaker Change: These results have been supported by equity market tailwinds, partially offset by headwinds facing many of our businesses, including regulatory and policy changes, an inflationary environment, and shifting interest rates.
Speaker Change: We're executing against our ambitions in the U.S. with focused investments to deliver scale and build new capabilities, which are fueling an engine for sustainable growth.
Speaker Change: In line with the target we provided in early 2024, Empower continues to report double-digit earnings growth, driving a nearly 200 basis point increase in the U.S. segment ROE in just the past 12 months.
Paul: Overall, the portfolio continues to create value for shareholders. We're operating at the top end of the range of our medium-term objective for base ROE, despite the full impact of the newly implemented global minimum tax. And in our insurance business, we run a well-matched book, removing a lot of the sensitivity to market movement. We also remain in a position of financial strength with building regulatory capital levels. This provides additional downside protection, as well as substantial flexibility to take advantage of future opportunities as they arise. We are well-equipped to navigate the current market environment. Please turn to slide 7.
Paul: Base earnings of $1 billion and base EPS of $1.11 both increased 13% over the prior year. In Canada, we remain committed to driving growth and unlocking value for our customers. Net flows have improved despite the overall industry tending to outflow in segregated funds. Excluding these shock lapses, the business had modest net outflows due to higher withdrawals by D.C. plan members, principally as a result of higher balances they have achieved over the past years from strong equity markets.
Speaker Change: Base ROE increased to 17.2%, up over a full percentage point from the prior year, and book value per share also increased 9%.
Speaker Change: We've maintained a comfortable leverage ratio and our regulatory capital position has strengthened, with our LICAT ratio increasing one point over last quarter. Please turn to slide 8. In Canada, we remain committed to driving growth and unlocking value for our customers.
Speaker Change: Net flows have improved despite the overall industry tend to outflows in segregated funds.
Speaker Change: This approach will help us capture an increasing share of investable assets as they move from segregated funds to other wealth products. Further, we've remained focused on strengthening our seg fund value proposition and reinforcing the unique benefits of these products have for customers.
Speaker Change: The negative net cash change in book premiums for the quarter is the result of a single termination of a large administrative services-only plan.
Speaker Change: In insurance and annuities, CSM declined largely due to insurance experience losses. As a reminder, given our focus on growing our wealth platform and extending our leadership in the workplace, we do not consider CSM to be a key growth metric in Canada.
Speaker Change: We have maintained discipline in our approach to risk selection and pricing within the more capital-intensive insurance and annuities businesses.
Speaker Change: At Empower, we delivered another strong quarter across both workplace and personal wealth. In workplace, average AUA was up 14% over last year due to sales and U.S. equity market performance.
Speaker Change: Excluding these shock lapses, the business had modest net outflows due to higher withdrawals by DC plan members, principally as a result of higher balances they have achieved over the past years from strong equity markets.
Speaker Change: While this is weighing on flows in the near term, Empower remains well positioned to meet growing market demands for retirement solutions over time.
Paul: We continue to believe that we are well-positioned from a scale perspective to drive long-term growth in the DC business at Empower by gaining market share through differentiated customer experiences while maintaining our cost advantage. These results are supported by a set of targeted strategies and focused actions to strengthen our positions in Ireland, the UK, and Germany. CSM remained relatively stable as we continued to approach our other re-insurance businesses with pricing discipline. And with that, I'll now turn the call over to Jon to review the financial results. Jon?
Speaker Change: The need for cost competitiveness and differentiated customer experience will drive more consolidation in the DC market, which we are uniquely positioned to benefit from.
Speaker Change: Looking ahead, Empower remains focused on driving profitable growth and building on its recent success, and is well-positioned to continue this performance over the medium term.
Speaker Change: Please turn to slide 10.
Speaker Change: In insurance and annuities, growth in the individual and bulk annuities in the UK helped drive CSM up 13% year over year.
Speaker Change: Please turn to slide 11.
Speaker Change: Capital and Risk Solutions provided a consistent contribution to base earnings and remains an important source of diversification to the overall portfolio.
Speaker Change: Run rate reinsurance earnings were up slightly over last year, as our short-term structured businesses continue to drive growth. These results are pre-tax and better reflect the underlying trend, as they do not include the impact of global minimum tax.
Jon Nielsen: And with that, I'll now turn the call over to Jon to review the financial results. Jon? Thank you, Paul. Please turn to slide 13. We continue to see strength in global asset markets in the second quarter, and macro factors continue to benefit our financial results.
Jon: Thank you, Paul. Please turn to slide 13. We continue to see strength in global asset markets in the second quarter, and macro factors continue to benefit our financial results, primarily as a result of higher interest rates in equity markets. In Canada, base earnings increased 14% driven by strong insurance experience, particularly in group life and health, and growth in fee income, reflecting the contributions from the ITC and value partners acquisition. In the U.S.
Jon Nielsen: primarily as a result of higher interest rates in equity markets.
Jon Nielsen: Equity market performance supported growth and assets under administration within our wealth and retirement businesses.
Jon Nielsen: from our Workplace Savings Plan, a dynamic we've seen play out at Empower, as Paul just noted.
Jon Nielsen: Turning to slide 14.
Speaker Change: Both base and net earnings surpassed $1 billion in the second half. The results were driven by strong business growth in all segments, partially offset by the impact of the Global Minimum Tax, or GMT.
Speaker Change: Excluding the impact of the GMT, base earnings grew 14% in constant currency in the quarter and 18% for the first six months of 2024.
Speaker Change: Our base return on equity for the quarter is slightly above the upper end of our medium-term objective of 16 to 17 percent, reflecting strong growth in base earnings and the continued focus we have on growing our capital life businesses.
Speaker Change: In Canada, base earnings increased 14%, driven by strong insurance experience, particularly in group life and health, growth in fee income, reflecting the contributions from the ITC and Value Partners acquisitions.
Speaker Change: A more representative run rate for this line would be the average of the four quarters in 2023, with modest growth due to inflation and business volume. This aligns with the expense run rate that we are targeting for Lifeco overall.
Speaker Change: In the U.S.
Speaker Change: Empower, maintain strong momentum, with base earnings up 19% year-over-year in constant currency.
Speaker Change: Partially offsetting the strong earnings growth were impairments on two U.S. commercial mortgage loans totaling $40 million.
Jon: Nevertheless, underlying earnings growth remains well within our 15 to 20 percent target for 2024. As a result, the ROE for this business has increased by nearly 200 basis points in the past 12 months alone and remains on track to reach our medium-term objective of 16 to 17 percent. In Europe, base earnings increased 12% year over year in constant currency, driven by growth in net fee income, improved insurance experience, and higher expected insurance earnings from a growing annuity book. Within capital and risk solutions, results were adversely impacted by the GMT, as we expected.
Speaker Change: Nevertheless, underlying earnings growth remains well within our 15 to 20 percent target for 2024.
Speaker Change: As a result, the ROE for this business has increased by nearly 200 basis points in the past 12 months alone, and remains on track to reach our medium-term objective of 16 to 17 percent.
Speaker Change: In Europe , base earnings increased 12% year over year in constant currency, driven by growth in net fee income, improved insurance experience, and higher expected insurance earnings from a growing annuity book.
Speaker Change: Within capital and risk solutions, results were adversely impacted by the GMT, as we expected. Excluding this impact, base earnings growth was solid at 3% year-over-year in constant currency, with continued strength in our structured business.
Jon: Excluding this impact, base earnings growth was solid at 3% year-over-year in constant currency, with continued strength in our structured business, which is approximately 10% of CRS earnings. Our exposure is primarily to natural catastrophe activity, which can be volatile from year to year. However, we've taken action over the last two years to significantly limit our risk. For example, it would now take a $160 billion CAD event in Florida for our business to incur the same $130 million loss that we saw for Hurricane Ian in 2022.
Speaker Change: While we continue to see unfavorable claims experience in our U.S. traditional life portfolio, experience has improved meaningfully on a year-to-date basis.
Speaker Change: We are strategically allocating capital to opportunities with strong returns and diversification with our other segments. In addition to life and non-life structured business, this includes property and casualty retrofession.
Speaker Change: which is approximately 10% of CRS earnings.
Speaker Change: Our exposure is primarily to natural catastrophe activity, which can be volatile from year to year. However, we've taken action over the last two years to significantly limit our risk.
Speaker Change: For example, it would now take $160 billion CAD event in Florida for our business to incur the same $130 million loss.
Jon: And Hurricane Ian cost the industry about $70 to $80 billion. This is precisely why we do not expect to incur any losses related to the recent Hurricanes Beryl or Debbie and have yet to experience a loss-triggering event this summer.
Jon: Overall, we remain very comfortable with our risk exposures within NCRS and see plenty of opportunity to continue generating attractive risk-adjusted returns. Turning to slide 17, underlying business growth, and the one-time fee adjustment from Prudential. To withdraw your question, please press star then choose
Speaker Change: Overall, we remain very comfortable with our risk exposures with NCRS and see plenty of opportunity to continue generating attractive risk-adjusted returns in this business.
Speaker Change: Turning to slide 16, insurance service results were up year over year, reflecting favorable group experience in Canada as well as Europe .
Speaker Change: As well as higher expected insurance earnings due to growth in our group businesses and structured business at CRS.
Speaker Change: The net investment result declined year over year as the benefits to earnings on surplus from higher interest rates and the addition of Franklin Templeton dividends were more than offset by the credit experience losses in the U.S. and lower trading gains in Europe .
Speaker Change: Turning to slide 17.
Speaker Change: Net fee and spread income was up both year-over-year and sequentially, primarily to growth at Empower, reflecting higher equity markets, synergies from the prudential acquisition,
Speaker Change: Underlying Business Growth and the One-Time Fee Adjustment from Prudential.
Speaker Change: Non-directly attributable expenses at 318 were largely in line with the expected quarterly run rate we communicated last quarter, but included the one-time items in Canada that I previously mentioned.
Speaker Change: Positive market experience was primarily driven by higher interest rates and credit spreads in Canada and the UK, partially offset by lower than expected returns in both our Canada and UK property portfolios.
Speaker Change: The positive impact of $39 million from Assumption Changes and Management Actions was mostly related to the finalization of the Longevity Reinsurance Transaction that we completed in 2023, and you may recall from one of our previous calls.
Speaker Change: As Paul noted earlier, our business is well-diversified and the insurance book is well-matched, limiting our sensitivity to market movement.
Speaker Change: In the appendix to this presentation, we've included a table showing the immediate impacts of adverse movements and market indicators.
Speaker Change: I would note that both net earnings and balance sheet sensitivities have broadly declined over the past six months, and our balance sheet resiliency remains strong.
Speaker Change: Our cash balance also grew. Its strong earnings and capital generation within our businesses allowed for a flow of cash up to Lifeco.
Speaker Change: Overall, we're extremely pleased with the results of this quarter and for the first half of 2024. With that, I'll turn the call back over to you, Paul. Thanks very much, Jon. Please turn to slide 20.
Paul Mahon: We've had a strong first half of the year with base earnings growth above our medium-term objective of 8-10%. For the full year, we remain confident the portfolio will deliver at or near the high end of this range.
Speaker Change: As we look beyond this year and into 2025, we're closely monitoring a number of externalities and potential headwinds, including evolving geopolitical trends, equity market volatility, and changes in interest rates.
Speaker Change: Operator, we are ready to take questions right now.
Speaker Change: If you're using a speakerphone, please pick up your headset before pressing any key.
Speaker Change: The first question comes from John Aiken from Jeffreys, please go ahead.
Analyst: Good morning, thank you very much. A couple questions on Empowered to Find Contribution, if I may. It looks like the participants have flatlined over the last several quarters. Does this relate to the terminations from PREW?
John Aiken: Good morning. Thank you very much. A couple questions on Empowered to Find Contribution, if I may. It looks like the participants have flatlined over the last several quarters. Does this relate to the terminations from PREW? If not, what's going on there and when can we expect...
Analyst: If not, what's going on there, and when can we expect growth to resume within the number of participants? Thanks, Ed. And that leads into my second question. Obviously, with the strength in your LICAT ratio, the leverage ratio coming down, everything else like that, you've got a lot of dry powder, and you talked about, sorry, at the top of the house, you talked about strategic objectives, but of course, Empower has been part of the consolidation in the industry.
Speaker Change: growth to resume within the number of participants, please.
Speaker Change: Thanks, Jon. I'm going to turn that one over to Ed to talk about participant dynamics and our anticipation in growing that.
Ed: And the market, as we've discussed before, is consolidating. So if you look at the movement that's occurring when customers move from one provider to another, the top three to four players are capturing close to 70%.
Analyst: Is the dislocation of these plans or these numbers on an organic basis enough, or do you still expect to be able to pursue opportunities for additional acquisitions, be it today, tomorrow, or somewhere down the line? On the inorganic side, of course, adjusting for the one.
Ed: Ed, you're on a roll, Ed. You take that one.
Ed: So, our ability to capture our fair share of the plans that are in motion.
Ed: We're going to continue to see solid organic growth. We'll continue to grow the business organically at a rate faster than the market. I'm convinced of that. We have a superior value proposition. We have a scale. We have a cost advantage.
Ed: On the inorganic side...
Ed: There will always be...
Speaker Change: All right. Thanks, everybody.
Speaker Change: We have a lot of entities that are looking to exit the business, and I think as Paul and I have shared with you in the past, we'll be opportunistic there. I mean, we definitely see opportunities.
Paul Mahon: And what typically we're looking for is obviously scale benefits, but also capabilities that allow us to extend our reach, to append to our existing offerings.
Speaker Change: And then, of course, the human capital dimension. We've acquired some great talent through these acquisitions. So the short answer is, you know, I think we're going to be thoughtful and smart and strategic and opportunistic as these situations present themselves.
Speaker Change: Thank you all. I'll recue.
Speaker Change: Good morning. Can I have you stick with the U.S.? The net fee and spread income this quarter is $462 million. Now, I appreciate that there's $30 million or $40 million in there for...
Speaker Change: the fees from Prue. But that improvement from one quarter to the next, I know it's net, so it reflects not just the revenue side, but expense savings. But perhaps you could help me understand that delta from Q1 to Q2, that significant increase.
Speaker Change: The extent to which it was driven by the top line, or perhaps it was mostly driven by expense savings at proof. Just help me understand that, Delta, please.
Jon Nielsen: Thanks, Mario. I'm going to ask Jon to take that one.
Jon Nielsen: Yeah, Mario, thanks for the question. Obviously, the one-time fee adjustment from PREW, I think, is well-articulated in the material, so that's part of it.
Speaker Change: The other thing is, as you call out, fairly flat expense levels with the synergies coming through. We're now on track that the full $180 million of synergies that we called out on the acquisition have been delivered.
Speaker Change: There's a small piece that didn't come through as we finished the integration in the middle of the quarter that you'll see come through further in the third quarter.
Speaker Change: So that has an element of effectively, you know, growing, you know, being a driver in terms of that growth and fee and spread income level.
Speaker Change: And, you know, growth in overall assets under management. As Ed said, we've had a strong pipeline of planned sales.
Speaker Change: Small amount of net outflows that were.
Ed: Call it unrelated to the Prudential Acquisition and Priced In.
Doug: True. That 462 adjusted for that is a reasonable run. And then my second question, I think you addressed this in your opening comments about the non-attributable expenses in Canada. How about a look at the average for 2009. Yeah, it varies by segment, and this is something that we're always optimizing, in particular, as we look forward to some upcoming changes in terms of LICAD, something that we're always going to look to optimize. So it varies by country or by segment.
Speaker Change: of course adjusting for the one-time payment from Pru. That $4.62 adjusted for that is a reasonable run rate for this company and assuming, you know, I appreciate that markets and rates will have their say, but assuming those are stable this looks appropriate as a run rate for the company.
Speaker Change: My second question is, I think you addressed this in your opening comments about the non-attributable expenses in Canada being somewhat elevated. What was your point there? I think the point you made is that you'd have us look at the average of 2023 as a better run rate.
Speaker Change: Yeah, Jon, why don't you start, and then you can pass it over to Fabrice.
Jon Nielsen: Yeah, yeah, that's what I would say is, you know, we're looking at...
Jon Nielsen: you know, overall being fairly...
Jon Nielsen: neutral in that line item, or flat year-over-year, maybe some modest inflation, both at Canada and Lifeco. Let me have Fabrice give you a little color on what came through, or the quarter in Canada.
Fabrice: Thanks, Mario.
Speaker Change: The next question comes from Doug Young with Desjardins Capital Markets. Please go ahead.
Doug Young: Hi, good morning, and I do appreciate that you've given some sensitivities to the market movement.
Speaker Change: I'm just curious if you can kind of walk through and help me understand how we should be thinking about the impact from lower rates on your base earnings.
Speaker Change: If you get a steeping yield curve, that's one outcome, but if it's a flat and parallel move, that's another. I'm just trying to kind of visualize this.
Speaker Change: Hey, Jon, do you want to take that? Yeah, thanks, Doug. Obviously, we've given you the sensitivity to race.
Speaker Change: Not just surplus earnings, the spread earnings, but also to a certain degree, there is some impact in our group insurance experience as it relates to our long-term disability business where there's some duration in terms of claims.
Speaker Change: Also, net fee and spread income in terms of, if you think of our wealth and retirement businesses
Speaker Change: If you think of the portfolio, our clients have a diversified portfolio, so think of that portfolio being about 30% in fixed income.
Speaker Change: So, a rate decline obviously then, you know, impacts our PE income as well. If you aggregate those impacts in terms of, give you a sensitivity to base earnings that we would expect in a year, about 50 basis point decrease in rates.
Speaker Change: call it about 1% impact on our base earnings from a negative, negatively. So we're, you know, all those movements provide some offsetting and you can think of it about 1% of our base earnings for 50 basis points.
Speaker Change: Yeah, it varies by segment and this is something that we're always optimizing in particular as we look forward to
Speaker Change: to the
Speaker Change: Like had something that we're always going to look to optimize so it varies by
Doug: You can think of it as around half of that earnings sensitivity that I shared with you comes from the surplus piece, and the other impacts, positive and negatives, are the residual, and I would call it kind of a two- to three-year duration, on average, across, not equal in each segment, because we manage ALM by business unit, but you can think of it in those types of terms. Thanks, Doug. Okay, that's helpful. I'll leave it there. Thanks.
Speaker Change: by country or by segment. You can think of it as, you know, around half of that earning sensitivity that I shared with you comes from the surplus piece and the other impacts, positive and negatives,
Speaker Change: are the residual, and I would call it, you know, kind of a two to three year duration on average across, not equal in each segment, because we manage ALM by business unit, but you can think of it in those types of terms.
Linda Kerrigan: I'm going to actually ask Linda Kerrigan to take that one, Linda. Yes, the longevity was really across the overall LifeCo CSM insurance experience. So, you did see negative experience on the insurance experience across LifeCo and longevity was in a large part the driver of that.
Linda Kerrigan: We do take a very disciplined approach to our longevity risk both in terms of underwriting, pricing new risks, and we do have good diversification or proponion between immortality and longevity risk, but you can just get a volatile clean quarter and that's really what we're seeing this quarter in terms of the longevity experience.
Linda Kerrigan: The next question comes from Paul Holden with CIBC, please go ahead.
Speaker Change: And, you know, the actions we took.
Speaker Change: Translate that into the bottom line earnings growth that we're seeing this quarter. So, like I say, overall, this quarter is probably a good indication of Europe going forward.
Speaker Change: You know, the expense actions we've taken have helped translate the wealth and retirement top-line growth into earnings growth, and then...
Speaker Change: fund re-insurance and capital requirements, the actions that we've taken there, and the position that Brallachine have pretty well going forward. So, like, overall, good quarter for Europe and pretty good indication, I think, of potential going forward.
Speaker Change: position geore pretty well.
Speaker Change: It's all about good education, upkept going forward. Yeah, the way to think about it, Paul, would be that we're not taking a major cost initiative in, you know, over a short period of time. There's plans over a number of quarters to come. And it's really just to sort of.
Paul: you're seeing, give us a sense of how competitors are reacting, as I said, in any particular product lines where competitive intensity has increased.
Paul: Good question. I'll start off at a high level. I think that was, to a large extent, a general statement in the fact that
Speaker Change: We look at products through a very disciplined lens when we see, for example, if I think about
Speaker Change: you know.
Speaker Change: We have, over the past several quarters, changed some of our product structures in Canada to limit the risk that we have, some of the long-term risk that we have into these products.
Speaker Change: The next question comes from Meny Grauman with Kosher Bank. Please go ahead.
Meny Grauman: Hi, good morning. I just wanted to ask about insurance experience.
Speaker Change: It's always hard to forecast the self-favorable experience in Canada, not so much in the U.S. traditional life. I'm just wondering if you could...
Speaker Change: Give us a little sense of where to expect insurance experience to go from here and then in terms of the specific dynamics in terms of what's happening in Canada specifically and how persistent you see that.
Paul: Yeah. So, Manny, I think you actually make a good point with your question about the fact that we've got a diversified book of insurance risks. So, you see what we have going on with traditional life in the U.S., you see the strength of LTD in Canada, and that's the benefits of diversification. At any given point in time, we're going to see different dynamics in different segments, different markets, and we're seeing a net benefit.
Speaker Change: Yeah, so, Manny, I think you actually...
Manny: Make a good point with your question is the fact that we've got a diversified book of insurance risk So we you know, you see what we have going on with traditional life in the US. You see the strength of LTD in Canada and that's the benefits of diversification at any given point in time We're going to see different dynamics in different segments
Manny: Different markets.
Paul: But I go back to the fact that we focus on discipline in pricing, discipline in claims management, and that, if you maintain that focus, then it can be a contributor to recognizing that you're going to have cycles and volatility. So, I'll turn it over to Fabrice, maybe, to get into a bit of the Canadian dynamic.
Manny: And we're seeing a net benefit. But I go back to the fact that we focus on discipline in pricing, discipline in claims management, and that, if you maintain that focus,
Manny: Then, you know, it can be a contributor recognizing that you're going to have cycles and volatility. So, I'll turn it over to Fabrice maybe to get into a bit of the Canadian dynamic.
Fabrice Morin: Thank you, Paul, and thank you, Manny, for your question. We're very pleased with the insurance experience this quarter. It's a good quarter for us. The insurance experience is mainly driven by our workplace long-term disability, but it is also driven in part by our workplace health experience and also a significant improvement in individual mortality experience, which has been a drag in some of the past years since COVID. As I think of long-term disability, typically, these cycles are more than one quarter long in nature. They can be long periods.
Fabrice: That's a good quarter for us.
Fabrice: As I think of long-term disability, typically these cycles are more than one quarter long in nature.
Fabrice Morin: We see this experience at the industry level. It's driven in part by the external market environment for disability, as John was mentioning earlier. And I'd reiterate the point that Paul made.
Fabrice Morin: We believe we have a very strong franchise in the workplace, especially as it relates to our disability operation. It's about underwriting, first of all, making sure we choose our risks carefully, and we price our risks carefully. Then it's about doing what's right to support these individuals facing disability situations and help them overcome these situations and get back to work.
Fabrice: We believe we have a very strong franchise in the workplace, especially as it relates to our disability operation. It's about the underwriting, first of all, making sure we choose our risks carefully, we price our risks carefully, then it's about doing what's right to support these individuals facing disability situations and help them overcome these situations and get back to work, and that's what our business is focused on and we have.
Fabrice Morin: And that's where our business is focused. And we have, over the years, been able to achieve good results. We're careful in how we bake these results into our expected profit. We grow our expected profit relatively in line with the growth of our insured book growth. So I think we're conservative with the way we're approaching that. Yeah, thanks. Good morning, everyone.
Fabrice: Over the years, we've been able to achieve good results. We're careful in how we bake these results into our expected profit. We grow our expected profit relatively in line with the growth of our insured book growth.
Fabrice: I think we're conservative with the way we're approaching that.
Manny: Thanks, Manny.
Manny: The next question comes from Tom MacKinnon with BMO. Please go ahead.
Analyst: The first question is just with respect to empowered defined contribution net flows. See, you know, am I reading that correctly here? Is it a function of planned demographics?
Speaker Change: Even excluding the impact of shock lapses.
Speaker Change: We're still in net outflows here. And you talk about one of the reasons is because just higher account balances here.
Tom Mackinnon: Am I reading that correctly here, is it a function of planned demographics? Maybe you can help us understand that, thanks.
Unknown Executive: Help us understand that. And Cerulli, an independent third-party research company, estimates it's going to grow to a million by 2028. So you're going to have 300,000 new plans. So we see a lot of opportunity to drive flow. And as we referenced earlier, we have the scale and the competitive pricing and the product capabilities to be able to take advantage of that. Uh, this quarter they came down.
Speaker Change: Tom, I'll start off, you know, maybe at a high level and then Ed can get into the dynamics that we saw this quarter and, you know, our perspectives on the fact that we actually still view this, notwithstanding all of those movements and dynamics, to be a potential growth engine for us.
Ed: The wealth that someone who's nearing retirement has versus a new plan number entering early on in their career.
Ed: The money that someone's contributing based on their paycheck early in their career would be different. So you've got that dynamic, but that's frankly one of the reasons why we love the consolidation opportunity we have in this market. It's a market that has that dynamic, and if you have scale,
Ed: So I'll turn it over to Ed maybe to talk about the dynamic we saw this particular quarter, Ed.
Ed: I think there's two elements, Tom, in terms of the way to think about this. There's plan-level flows, which were positive.
Ed: You have 18 million participants and there's a large subset of those that are continuing to contribute.
Ed: And Cerulli, an independent third-party research company, estimates it's going to grow to a million by 2028. So you're going to have 300,000 new plans.
Ed: And we have a product to address that opportunity in the marketplace. There's 40 million Americans today that work for small companies.
Ed: that are not covered by workplace savings.
Ed: So,
Speaker Change: The factor of higher balances due to market growth, and in some cases, the distributions that they're taking are higher. Instead of taking a third of the account, they might take a half of the account or two-thirds of the account.
Speaker Change: Follow-up questions with respect to operating expenses at Empower DSB.
Speaker Change: Generally, they've gone up kind of quarter over quarter.
Speaker Change: I'd assume that, or did some of these synergies from the Prue thing come in?
Unknown Executive: Operating expenses, So even if you adjust for that in the workplace side, the expense growth year over year is pretty benign. The real investment that we're making isn't in the power of personal wealth, but we're making pretty meaningful investments in technology, distribution, and product capability. You know, we have a lot of benefits. Good morning.
Speaker Change: Yeah, well we had 20...
Analyst: A question on those commercial mortgage impairments, not trying to make a mountain out of a molehill here, the two of them and the numbers overall weren't that big in the context of your portfolio. My question, though, is just how to kind of see these things coming, which sounds silly, but if I look at your Q4, your Q1 slide deck, I see no mortgages, commercial mortgages, and interiors. So I'm wondering what the disconnect might be there or if I'm misinterpreting something.
Analyst: And then related to that, you know, you might not have stuff on the interiors or whatever, but do you maintain a watch list? And if so, how is that fluctuating, and, you know, where might it be fluctuating?
Speaker Change: Okay. Thanks.
Speaker Change: Turn that one over to remind him he can speak to that yeah. Thanks, Dave and thanks for not making a mountain out of it.
Speaker Change: So I guess a couple of comments to answer your question. So just on a particular quarter.
Speaker Change: John mentioned this is driven by two mortgages one ways.
Speaker Change: Compared to Q4 of 23, and we just got the final terms and that related to a.
Speaker Change: Further impact and that was one of our largest long SKU. If you might recall on the second one is a more videos.
Speaker Change: Chronic eventually into a second mortgage and I think just to your question.
Speaker Change: That's how you would think about these things going forward they tend to be tenant related one off idiosyncratic events that affect that particular mortgage.
Speaker Change: Mind, you if you think about our book you know we benefit from geographic diversification. The fact that we have and I'll give you pushing across the book good debt service coverage ratios et cetera, So it would be.
Unknown Executive: Good debt service coverage ratios, etc. So these, you know, when they do happen, and we don't expect we'll be immune, but, you know, we have pretty good visibility that we expect impacts to be modest over the balance of this year. And that relates to your question about a watch list, you know, so we think about that, you know. We do think, you know, for the foreseeable future, over the course of this year, we expect impacts to be modest. Headwinds still exist.
Speaker Change: When they do happen and we don't expect will be immune but.
Speaker Change: You know we have this ability that we expect the impact to be modest over the balance of this year.
Speaker Change: And that relates to your question about the watch list you know what do we think about that you know, we do think there, but a foreseeable future over the course of this year, we expect impacts to be to be modest.
Unknown Executive: You know, just don't forget there are still headwinds in the office sector. But as Jon noted in his opening remarks, if you look at what's priced into the market in terms of ratings, You know, the fact that we have 100 basis points or so priced into the market in terms of rates coming down, that's helpful to the real estate market in general, categorized as in arrears prior to that. I'm just missing the point a little bit here.
Speaker Change: We still exist.
Speaker Change: Just don't forget there's still headwinds in the office sector, but as you.
Speaker Change: John noted in his opening remarks, if you look at whats priced into the market in terms of rates.
John: The fact that we have a 100 basis points or so of pricing to the market in terms of rates coming down.
Speaker Change: That's helpful to that to the real estate market in general.
Speaker Change: Yeah, Okay. So just.
Speaker Change: If I understand you correctly.
Speaker Change: Do have a watch list as I imagine you would but based on that watch list, you're not expecting any significant losses this year.
Speaker Change: Then as.
Speaker Change: As far as the language in or around our rears goes it sounds like one went straight from performing to impaired this quarter. So we didn't even have it.
Speaker Change: Those are in arrears prior to that.
Speaker Change: Just missing the point a little bit here.
Speaker Change: Well, yes, so I think that the watch list would reflect that we do have a watch list and it reflects our long is that we have concerns and you do have so for example, you might have a tenant that unexpected unexpectedly declares bankruptcy.
Speaker Change: Okay.
Speaker Change: Things happen, but in general if you look at.
Speaker Change: Our outlook for the balance of this year, we expect those impact.
Speaker Change: Honest based on visibility we have.
Speaker Change: This point in time.
Speaker Change: Okay Alright.
Speaker Change: Alright.
Speaker Change: I want to talk about that offline. Thanks have a good one.
Speaker Change: That's good.
Speaker Change: The next question comes from Dotcom only.
Speaker Change: RBC capital markets. Please go ahead.
Speaker Change: Hi, Thank you two really quick questions I just wanted to go back to the answer you provided to many on the experienced gains in Canada.
Speaker Change: What I understood the question.
Speaker Change: The answer.
Speaker Change: Your written materials. It says that there was management actions that helped with experienced I Wonder if you can just touch on that.
Speaker Change: And at what point do these experience gains prove.
Speaker Change: Proved to be <unk>.
Speaker Change: Consistent enough for you to change either the CSM or the risk adjustment.
Speaker Change: I will John do you want to start with that are you going to turn it. Okay. This over to I can take this one so the.
Speaker Change: The experience gains that we see in Canada are mainly related to the to our <unk> business, which would be a business that doesn't have reserves associated with our workplace business in Canada. So in this case management action would refer to a pricing action that we get we cautiously manage our book I mentioned earlier, the fact that.
Speaker Change: Are there is there are some macro factors related to the experience there is a that the.
Speaker Change: Disability in particular is sensitive to rates and so we need to be careful as rate comes down the cost of providing disability into London as rate goes up.
Speaker Change: Bidding visibility goes down so we can see to be very cautious in how we manage our pricing and the volatile rate environment. That's what the management action would refer to.
Speaker Change: Okay. That's very helpful. Thank you.
Speaker Change: Just a follow up question Paul in your opening remarks, you said something that caught my attention you said that you were.
Speaker Change: Looking to strengthen the Sag fund value proposition, others might say that distribution is really the way to sell side funds. So what does it spill.
Speaker Change: Specifically about the <unk> fund.
Speaker Change: That you are targeting.
Speaker Change: With respect to.
Speaker Change: Especially the ones that you are selling.
Speaker Change: Yes, well.
Jeff: Second some unique characteristics that are very helpful and powerful or small business owners and families and when people are looking for a level of protection and I'll, let Jeff speak to the actions, we're taking because we think it's the.
Jeff: Well, we think a diverse diversity of product is really important to me.
Jeff: A range of needs, we think segment.
Jeff: Strong place.
Jeff: Relative to our customer base.
Speaker Change: Yes.
Speaker Change: So fun panel.
Speaker Change: Great vehicles, that's a great technology.
Speaker Change: At used in the right situations at the right price, we believe that it can grow its a very small share of the wealth market in Canada, right now and it has room to grow if it's well positioned.
Paul: Some of these unique characteristics that Paul referred to.
Paul: They come with come with some guarantee variable byproduct.
Alfred: Alfred creditor protection, they'll probably treat confidentiality that stake.
Speaker Change: No other wealth product offer as these characteristics that are very relevant to some Canadians in specific situations that Paul mentioned business owners in particular.
Speaker Change: Many advisers, we work with are well aware of these characteristics and promote these products appropriately and we continue to develop our market relationships to make sure that these products are available to all Canadians who need them Theres, a big opportunity in the Canadian marketplace work not all one advisor it needs to be insurance license to be able to distribute these.
Speaker Change: <unk> not all advisers with access under a platform that he has brought the relevant licenses. So our focus on our wealth strategy is to provide the full range of products not only funded the mutual fund securities.
Speaker Change: Managed portfolios and the acquisitions that we've done last year, and we're committed to bringing this full range of products too.
Speaker Change: Two entrepreneurial advisers in this country.
Speaker Change: And how quickly can can these products being rolled out for you.
Speaker Change: What I would say here, a new you might it might see the outflows that we see in fact bundled many of our peers, especially those that have mature blocks like us with outflows in the current period, we've seen elevated outflows since interest rates went up and that's true across the wealth marketplace, and it's especially true for us.
Speaker Change: Given the makeup of clients that are in to these products. There is cyclicality into that we believe and we've seen some improvement lately in the flow situations for a second one so the comments that I've made earlier relate to the longer term.
Speaker Change: Aspects of actions that we have in the short to medium term and of course, there is volatility into the flows that we see in these products given the market situation and that's what we've been seeing over the past two to three years.
Speaker Change: Okay.
Speaker Change: Okay. Thank you.
Derek: Thanks Derek.
Speaker Change: The next question comes from Matt Jones itself.
Matt Jones: Cause investment research. Please go ahead.
Matt Jones: Good morning. Thank you for taking my question I wanted to circle back to empower I believe you outlined some revenue synergies that you expect to realize by the end of this year just wondering if you could expand on what's.
Speaker Change: What's driving those those revenue synergies and is there potential for more.
Speaker Change: Down the line.
Speaker Change: Yeah.
Nigel: Nigel I'm going to turn that one over to Ed I think what he was referring to there is the continuing rollover opportunity that we see across the empower platform with.
Ed: $91 billion of money in motion each year, but ed over to you.
Ed: Yeah, I was referring to when I made the comment about additional synergies in Q3, I was specifically referring to.
Ed: The Prudential acquisition that there is some follow on synergies that will hit in Q3 of the.
Speaker Change: About $8 million.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay, and then if I could.
Speaker Change: No I was just going to say so yeah, so ed talked about the Q2 synergies detail.
Speaker Change: Remaining synergies associated with Peru in Q3, and then the long game for US is there's significant opportunity for growth on the wealth side and to a large extent.
Unknown Executive: Thank you. But yeah, I was referring to when I made the comment about additional synergies in Q3, I was specifically referring to the Prudential acquisition, that there's some follow-on synergies that will hit Q3 at about $8 million. No, I was just going to say, Nigel, so yeah, so Ed talked about the Q2 synergies, the tailing remaining synergies associated with Pru and Q3, and then the long game for us is the significant opportunity for growth on the wealth side, and to a large extent, I made a comment in my opening remarks, and Ed did as well, that, you know, as we've grown the client-based 18 million participants, there's significant money in motion, and it's, frankly, a synergy associated with having grown this significant Empower Workplace business, which essentially is a significant opportunity for us to grow the wealth business off the back of that. So, you know, that's the longer game there. Okay, that's helpful and interesting. I'll keep it there.
Speaker Change: Made a comment in my.
Speaker Change: My opening remarks, I noted that as well.
Speaker Change: We've grown the client base stay at 2 million participants, there's significant money in motion and it's.
Speaker Change: Frankly, our synergy associated with having grown the significant empower workplace business, which essentially is a significant opportunity for us to grow the wealth business off the back of that.
Speaker Change: The longer term.
Unknown Executive: That's it for me. Thanks. And it was similar to Mass Mutual, Frank.
Speaker Change: Okay.
Speaker Change: That's helpful and then just and I'll keep it there that's it for me. Thanks.
Greg: Thanks, Greg.
Speaker Change: Once again, if you have a question. Please press Star then one.
Ireland: The next question comes from Ireland.
Speaker Change: TD Securities. Please go ahead.
Ireland: Hi, now are over so I'll be quick.
Speaker Change: On page nine of the presentation.
Speaker Change: You sort of offer sort of definitively that the shock lapses are now complete how do you get confident on something like that considering.
Speaker Change: I don't imagine great West life controls the pace of shock lapses folks lapsed when they lap. So how can you be so declarative in that respect.
Speaker Change: Yeah well.
Greg: So.
Mario: We've actually it Mario I'm going to turn it to talk specifically about the empower book, but when you do an acquisition you'll go out to all your clients you establish the potential clients right. Because you have to actually have to get their commitment there theyre going to change carrier, they're going to move off of the.
Greg: The platform.
Speaker Change: Carrier that they were on and they're either going to come to your platform and they're going to go to another one. So every one of those clients is going to make a commitment one way or another to joined empower or go elsewhere and we saw the same dynamic when we did our roll up in the Canadian market. So to a large extent all of the clients who have made those decisions.
Speaker Change: Is there anything else you could add to that.
Speaker Change: No. That's I think that's the response they've all made the decision they've come over to our platform. So now it just becomes part of our normal operating business and we would just we would just think about attrition. If you will in the context of our normal business, which.
Speaker Change: Our retention rate is in the 97% to 98% range.
Speaker Change: That's correct. Thank you.
Speaker Change: Maybe just to add the notice period on that can be.
12 months plus.
Speaker Change: You have a pretty good.
Speaker Change: We had a pretty good outlook of when these would have.
Mario: And if you step back Mario we priced.
Speaker Change: We priced the transaction at a certain level of retention and Lee we outperform that by by a few percentage points than we think.
Lee: Both the last two transactions ended up at a point.
Speaker Change: Better than other integrations that have occurred in the market. So we're really pleased that we now close the integration of the Prudential business really positively.
Lee: Yes, I mean I'll just.
Lee: Just put a finer point on it I mean, we we budget at 82% revenue retention, we came in north of 86.
Lee: So.
Speaker Change: That's.
Speaker Change: That's a world class in terms of you.
Speaker Change: What we see in the industry.
Speaker Change: And it was similar it was similar to mass mutual frankly.
Speaker Change: Got it thank you.
Brian: Thanks, Brian.
This concludes the question and answer session I would like to turn the conference back over to Mr. Kang for closing remarks.
Speaker Change: Thanks, everyone for joining us today following the call a telephone replay will be available for one month and the webcast will be archived on our website for one year or 2024 third quarter results are scheduled to be released after market close on Wednesday November 6th with the earnings call starting at 10, a M eastern endpoint date.
Brian: Thank you again and this concludes our call for today.
Brian: Yeah.
Speaker Change: This brings to a close today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Mhm.
Brian: [music].
unknown: [Music] Go to https://www.youtube.com or the YouTube channel of your choice. [music] BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 BF-WATCH TV 2021 .. [music] https://www.youtube.com.uk, [music]
Brian: Okay.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yes.
Brian: [music].
Brian: Yes.
Brian: Yes.
Brian: Sure.
Brian: [music].
Brian: Okay.
Brian: [music].
Brian: Okay.
Sure.
[music].
Brian: Okay.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Uh huh.
Brian: [music].
Brian: Sure.
Brian: [music].
Brian: Okay.
Brian: Hum.
Brian: Mhm.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: No.
Brian: [music].
Brian: Okay.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Yes.
Brian: [music].
Brian: Okay.
Brian: [music].
Brian: Uh huh.
Brian: Mhm.
Brian: [music].
Brian: Yeah.
Brian: [music].
Brian: Uh huh.
Brian: Mhm.
Brian: [music].
Brian: Yes.
Brian: [music].
Okay.
Brian: [music].
Brian: Hum.
Brian: [music].
Brian: Yes.
Brian: [music].
Brian: Yes.
Brian: [music].
Brian: Right.
Brian: Right.
Brian: [music].
Yes.
Brian: [music].
Brian: Yes.
Brian: [music].
Brian: Yeah.
Brian: [music].