Great-West Lifeco Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 11 speakers on the call.

Operator

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

Operator

Please go ahead.

Speaker 1

Thank you, Ashia. Good morning, and welcome to Great West Lifeco's Q3 2023 conference call. Joining me on today's call is Gary McNicholas, 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 Adherney, President and COO, Europe Arshil Jamal, President and Group Head, Strategy Investments, Reinsurance and Corporate Development Jeff Macoun, President and COO of 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 Lifeco in September.

Speaker 1

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. Our companies have 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 2.

Speaker 1

These cautionary notes apply to the information we will discuss during the call. Please turn to Slide 4. The company delivered excellent financial performance in the Q3 of 2023 with base earnings per share of $1.02 up 17% from last year. This represents a record quarter for base earnings, base EPS and the first time Lifeco reported base earnings above $1 per share. These results reflect solid contributions across all segments and continue the company's strong earnings growth trajectory this year.

Speaker 1

We remain focused on disciplined capital allocation and execution of our growth strategies. 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 IFRS 17 and are by disciplined expense management as we focus on efficiency and effectiveness. During the quarter, we continue to advance our wealth focused strategies. In Canada, we completed the acquisition of Value Partners and are on track to complete the acquisition of IPC by the end of the year.

Speaker 1

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, 1,400,000 Prudential clients and $100,000,000,000 of assets were successfully migrated to the Empower platform in our largest integration wave to date. Net earnings per share from continuing operations were $1.01 Unlike last quarter, there was no significant difference between base and net EPS. Given IFRS 17 dynamics and current economic conditions, Market experience relative to expectations was positive with some offsetting reduction in UK real estate asset valuations.

Speaker 1

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 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 in our real estate portfolio and it remains resilient to stresses in property markets. Our exposure to direct office properties is relatively low and these holdings remain high quality. Gary will unpack these and other items excluded from base, including changes and assumptions later in his remarks.

Speaker 1

On a year to date basis, the company performed strongly against our medium term financial objectives. Base EPS exceeded our target and base ROE and dividend payout ratios were within our target ranges. Finally, our LICAT ratio remains strong, Growing to 128 percent on the back of strong earnings in the quarter and up 2 points relative to last quarter. Please turn to Slide 5. In Canada, our workplace businesses remain on an area of particular strength.

Speaker 1

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 healthcare plan. We've enrolled over 1,680,000 of the 1,700,000 individuals covered under this public sector health plan, and a large majority are 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 relates to the public sector's 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, we're working hard to resolve the remaining challenges for these important customers.

Speaker 1

We're working with the government to make excellent progress towards our target service levels. Moving on to group retirement, we saw solid growth over last year with some softness in sales this quarter. We remain focused on strategies to enable capital growth, including continued improvement in planned member rollover asset retention. In our individual wealth business, Mutual fund net flows were positive, but we continue to see continued to experience seg 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.

Speaker 1

As noted, we completed the Value Partners acquisition in the quarter and 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 advisors in Canada. Finally, our CSM in Canada declined year over year, largely due to amortization of insurance experience. As we previously noted, we continue to approach non participating insurance with a focus on customer value based balanced with pricing discipline. CSM is not a key growth metric at Lifeco.

Speaker 1

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 6. Across Europe, our businesses maintained solid momentum in the quarter despite economic uncertainty. As 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 employment and wage inflation.

Speaker 1

In 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 in Ireland under the Unio brand. We're also advancing our focused joint venture with Allied Irish Bank. This includes the November 1st portfolio transfer of seg funds with a carrying value of almost €2,000,000,000 from Irish Life into that business.

Speaker 1

We expect to recognize a gain related to this Transaction in the Q4 of 2023. Within insurance and risk solutions, we saw strong bulk and individual annuity sales in the UK Conference Call. Supported by higher interest rates. These sales helped drive growth in CSM in Europe. While recognized in sales in the prior quarter, Irish Life completed the onboarding of a €133,000,000 bulk annuity transaction, the largest bulk annuity deal to take Place in the Irish market so far this year.

Speaker 1

Please turn to Slide 7. Empower delivered another strong quarter as we advanced our strategy focused on workplace retirement and personal wealth. In workplace solutions, we achieved strong organic growth with DC plan participants up 4% year over year and DC assets under administration up 14%. In quarter net outflows reflect seasonality as well as and a modest impact from Prudential deconversions. Empower's execution of the Prudential integration program is going well with client retention ahead of target and annualized run rate synergies of US66 $1,000,000 achieved to date.

Speaker 1

In quarter net outflows reflect fewer large planned sales, rollover of assets to empower retail and normal seasonality as well as a modest impact from Prudential deconversions. I would also note that on a year to date basis, the DC business has achieved net inflows. Empower's execution of the Prudential integration program is going well with Personal wealth is also maintaining excellent momentum with AUA up 30% year over year supported by strong growth in sales and higher markets. Sales effectiveness and a powerful digital dashboard are generating money in motion opportunities and increased new asset inflows from the DC business by over 50% relative to last year. Lastly, with the previously announced sale of Putnam Investments to Franklin Resources, Results.

Speaker 1

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 8. Our Capital and Risk Solutions business continues to play an important role in diversification of 23% year over year reflecting growth in structured business. Note this business is accounted for on the PAA basis, which does not involve CSM.

Speaker 1

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 Q3 is seasonally slower, CRS continues to see solid new business momentum and will 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.

Speaker 2

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 is 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.

Speaker 2

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 Rest Solutions, which makes the year over year comparisons by segment a bit more challenging. In Canada, base earnings of $296,000,000 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.

Speaker 2

S, base earnings of $262,000,000 were up $48,000,000 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 and increases in other participant and transaction based fee income based on growth and volume. On the expense side, Results now include the full mass mutual synergies and we remain on track to deliver the targeted synergies on the Prudential business by the end of Q1 twenty Q4. The strong expense discipline and effective execution of our MassMutual and Prudential acquisitions has allowed us to strategically invest in the business to continue Empower's strong organic growth trajectory. In Europe, base earnings were comparable to last year, although down 9% in constant currency.

Speaker 2

Improvements in insurance experience and the benefits from FX were largely offset by lower trading gains than the prior year. 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 growth is distorted by a charge related to hurricane claims in Q3 2022. However, 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.

Speaker 2

Net EPS was down 5% last year as higher base earnings were offset by the year over year change in items excluding from 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 930 $6,000,000 or $1.01 a share. While overall excluded items have a small impact this quarter, there are 2 items I'd like to highlight. The first is market experience.

Speaker 2

As noted on our Q2 2023 call, these are typically items that we would expect to oscillate around 0 over longer periods, although they will vary quarter to quarter. This quarter, the Positive market experience was primarily driven by increases in interest rates in Canada, partially offset by lower non fixed income returns, primarily lower real estate valuations in the UK property portfolio. The positive earnings impact from interest rates Helped offset pressure on LICAT capital that comes from higher rates. This offset is given our ALM approach. The second item relates to assumption changes.

Speaker 2

The annual review of actuarial assumptions led to an overall positive impact to the balance sheet and LICAT ratio as a result of updating mortality and longevity assumptions to begin to recognize pandemic impacts. There is an important presentational point to note within IFRS 17 as basis change impacts appear in 2 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 1, 2022, the CSM amounts are larger than the current fair value of the basis change.

Speaker 2

The difference goes into earnings in the period when the change is made and that was a negative this period even though the assumption change overall is a favorable impact. Also recall that certain basis changes for 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 LICAT Capital, the presentational approach has a little impact. We still get the positive impact on LICAT 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.

Speaker 2

Turning to Slide 12. 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 clear view of the insurance results by differentiating between expected versus experienced impacts. The expected provides insight into the underlying growth of the business, whereas we typically see period to period swings in the experienced results. In the top row of the table, you can see the expected insurance earnings of $732,000,000 or 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.

Speaker 2

The overall insurance result of $786,000,000 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 gains in Canada, which contributed to this overall result. The net investment result of $222,000,000 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.

Speaker 2

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 fee 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.

Speaker 2

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. Call. Overall, we record we had record base earnings of $950,000,000 a reflection of the strong results across all the segments.

Speaker 2

Turning to Slide 13. The book value LICAT ratio, return on equity and financial leverage numbers are shown on IFRS 17 basis unless specifically stated otherwise. The Q3 2023 book value per share is back above $24 at $24.01 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 on the way to reaching the $24.71 level pre transition to IFRS 17 and at the same time ROE has risen from the mid-fourteen percent in 2021 to 16.4% currently, bedding from higher base earnings that we are now reporting. The LICAT ratio of 128% which comparable to the prior year and up from the prior quarter results.

Speaker 2

The 2 point increase from Q2 2023 is primarily driven by lower capital requirements. And as a reminder, the IPC transaction that's expected to close in Q4, as Paul mentioned, will reduce the ratio by about 3 points. The base return on equity figures shown on this slide are all IFRS 17 basis. The result for Q1 2023 is shown rather than Q3 last year since this is a rolling 4th quarter average and we did not have all the information for Q3 2022 on an IFRS 17 basis. The base ROE began the year at around 16%, but has improved to 16.4% this quarter, reflecting the strong earnings results recently.

Speaker 2

Financial leverage remained at 31%. We made US100 $1,000,000 repayment on the short term debt used as part of financial funding, which leaves a remaining balance on this debt facility of US100 $1,000,000 which we expect to pay down in Q4, which should lower the leverage to about 30%. And with that, I'll turn the call back to Paul.

Speaker 1

Thanks, Gary. We'll now turn the call back to Ashia, who will get us set up for the Q and A portion of the call.

Operator

Thank you. We will now begin the analyst question and answer session. And 1 on your telephone keypad. You will hear a tone acknowledging your request. The first question comes from Meny Grauman with Scotiabank.

Operator

Please go ahead.

Speaker 3

Hi, good morning. Gary, in Q2, you talked about evaluating improvements around Metrics tied to capital generation. And I'm wondering if there's anything you can update us on that? Or is that coming In Q4?

Speaker 1

Yes. Gary, you wanted to speak to that?

Speaker 2

Yes. We are still working on the Capital Generation Metrics, I 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 IFRS 17. And then obviously for the remaining 25%, the introduction of CSM does introduce some complexity there.

Speaker 2

So we are looking to get this out, whether it will be in the 1st part of 2024, whether it's with our Q4 results or our Q1 results It's not yet finalized, but it will be one or the other. We're definitely keen to get that out. But as I say, the base earnings, I think, are A high percentage of those base earnings would be a good proxy in the period while you're waiting.

Speaker 3

Thanks for that. And then just wanted to talk about Your expanded disclosure on your real estate exposure. So 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 2024, there is a little bit of an increase in office maturity.

Speaker 3

So just wondering is that something We should be concerned about just broadly how to interpret this particular disclosure.

Speaker 1

So, Meny, I'll turn that one over to Raman in a moment. But just suffice it to say, we've been very disciplined with this portfolio. We've been looking at the overall exposure reducing where it made sense. But I think as we kind of go into a period Some volatility here. We're feeling pretty confident about the portfolio, but I'll let Raman speak to the 2024 maturities.

Speaker 1

Raman?

Speaker 4

Yes. Thanks, Paul, and thanks Meny 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 point of this and the details here are to give you a sense of the balance we have across the upcoming years. So in other words, there's no one particular year that stands out as a big Risk in terms of rollover.

Speaker 4

This is a gradually maturing portfolio. While there is it's going to ebb and flow, but you can The bigger bars there in 2026, 2027 and then out 2030 and beyond. So the purpose of this page is just to give you a sense of The strength we have in the LTVs, the high debt service coverage ratios and the fact that we're not particularly exposed to any one year, in terms of rollover risk.

Speaker 1

Yes. So I guess, Meny, I'd just follow on what Raman was saying is that we're not particularly concerned about 2024 in particular, although we are in a Volatile time, but you'll see that there's strong debt service coverage there. We've got we've structured these mortgages in a way that we've got good confidence, but You need conservatism if you want to weather in a more difficult times like this.

Speaker 3

Thanks, Paul.

Operator

The next question comes from Gabriel Dechaine with National Bank Financial. Please go ahead.

Speaker 5

I'd like to keep going on that CRE topic, the detailed disclosure on makeup. I just want 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 the equity holders?

Speaker 1

Gabe, that would be correct.

Speaker 5

Okay. And you did mention there were some adjustments to that UK portfolio. Could you quantify that?

Speaker 1

I'll let Raman speak to that. I think that should are you referring to the That we've been managing the portfolio and the overall exposure, I just want to clarify your question.

Speaker 5

No, no, no. That we've covered before. I just want to get the number if there was any Negative mark to market adjustment on that particular portfolio this quarter?

Speaker 1

I think Gary can take that one.

Speaker 2

Yes. The returns were down about 3% in the quarter in terms of mark to our Again, a lot of this is just reflecting the higher interest rates. So we're getting the benefit of the higher interest rates in other places in our results. And obviously, We saw that in the overall market impacts, but it does it is bringing the valuations down. So they were marked down about 3%, which is And you can see the size of the portfolio, so that gives you an idea.

Speaker 2

And that's we often in our excluded items, we are doing The amount relative to our expectations, so we would expect in a given quarter that you might have Growth of in the order of 1%, modest growth during the year to each quarter that so I think the gap from expectations It was about 4% in the quarter.

Speaker 5

And that imply that to the tire portfolio or just office?

Speaker 2

That implies That was for the entire U. K. Portfolio. Okay, got it. It was less in Canada.

Speaker 5

All right, perfect. Well, speaking of the higher rate stuff, just want to drill down a little tiny bit in the Empower or the U. S. Rather. Looks like the almost the entirety of the growth of earnings in the U.

Speaker 5

S. 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 fee income. Can you To the extent it was earnings on surplus related, are we at a run rate now, like where there's not that much more upside to be Seen from that line item in the U.

Speaker 1

S? I'm going to let Gary take that one, Gary. Yes.

Speaker 2

I think that's right. I think most of the portfolio there are some longer bonds that would not have matured, but most of the portfolio has Pastor Dorer, so you're seeing the impact of the current rates and we had some smaller contributions, some good results in So our alternative investments, but it'd be single digit. So I think it's a reasonable indication.

Speaker 5

Okay. And then just for I don't you probably won't Want to give me specifics, I get that. But just from a ballpark standpoint, What would be the duration of your surplus portfolio? How much would be in short term cash? And then How much would be the rest be about 2, 3 year duration?

Speaker 5

Maybe you can shed some light on that.

Speaker 1

Gary, do you have a bit of color on that?

Speaker 2

Sure. Yes. Just at a high level, a lot of the portfolio is quite short. We've in Canada and you might recall, we shortened the portfolio in Q2. We had an OCI The reclassification, recycling into the P and L, as we took some older long term assets and moved them short term steps.

Speaker 2

That's actually helped in Europe this period. So yes, Europe would probably be the UK is probably in that 1 to 2 years. The U. S. It's a slightly longer duration, probably more in the 3 to 5 year range.

Speaker 2

And then Canada is actually quite short, Probably closer to a year.

Speaker 5

Okay, great. Thanks for that. And then lastly on the group business, last quarter The message was that incidence rates and claims trends overall had been they Experience gains are quite positive. It's great. I'm just wondering was that against your expectations or is it a seasonal factor and things are still I expect it to be relatively modest from an experienced endpoint going forward.

Speaker 1

I guess, 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 run this particular business with a ton of discipline in terms of our pricing and our underwriting. And so over the long term, we see this as a differentiator, as a positive contributor, and I think you're just seeing the benefits of that discipline. I'll let Jeff speak to the particulars of the quarter though. Jeff?

Speaker 1

Yes, Gabriel, I mean just to build on Paul's point, It has been and continues to be a continued strength of our offering on the workplace and 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. So much of the actions you would have seen in quarter and they're flowing out our actions we would have 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.

Speaker 1

And I would say that 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. Yes. 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 discipline staying on top of it. And obviously, we're going to go through cycles over time. We go through economic cycles.

Speaker 1

But if you stay on pricing and you stay on your underwriting disciplines, We would be seeking to outperform modestly over time.

Speaker 5

All right. Thank you.

Operator

The next question comes from Doug Young with Desjardins Capital Markets. Please go ahead.

Speaker 6

Hi, good morning. Just maybe continuing on with the insurance experience, I guess, the top of house, it was $56,000,000 I guess, I assume that Most of that $47,000,000 in Canada relates to the group experience that we just talked Both and Bea can clarify. But I guess in Europe, there's $28,000,000 positive. Can you kind of delve into what drove that? And then obviously there's some negatives elsewhere.

Speaker 6

Maybe you can flush that out a little bit.

Speaker 1

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

Speaker 2

Yes. I think in Europe, again, we had Favorable mortality and a bit on the morbidity was actually a bit weaker, what was improved from prior periods. So that's That's helpful with that. And then we do have some expense fluctuations that go through this line. So in Canada, they were actually a bit behind on the expenses.

Speaker 2

So that was a bit of in the period drag, whereas Europe is actually a bit ahead. So those are some of the trends we'd be seeing.

Speaker 6

And then there is a big decline in expected investment earnings. It's mostly out of Europe. I don't think

Speaker 3

that was the trading gains

Speaker 6

going down, but maybe I'm wrong. Can you flush that out a little bit?

Speaker 1

Gary, over to you. Yes, sure.

Speaker 2

And I think right upfront, I should just acknowledge that the label for the line that you're looking at, Expected investment earnings is not really clear because this includes both the normal or run rate expected earnings as well as any in period Investment Experience. And that's really there's really 2 types of investment experience and that's that you'd see here regularly, which is trading activity impacts, The contribution for trading activity and then you'd also see credit impacts go through this line as well. So if we look at compared to the prior year, the majority of the decline was really around the trading activity. And that was quite elevated in the UK in both Q3 and Q4 last year. And last year, we had low individual and bulk annuity sales.

Speaker 2

And so the spread assets were allocated to the in force portfolio. But this quarter with the strong sales growth, with the spread assets went more towards supporting new business. And those, so that value goes into the CSM, which obviously will come into earnings over time. So it really is Year over year, it's mostly the trading activity. Quarter over quarter, it's probably 2 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 impact in Q3.

Speaker 7

So those are the numbers

Speaker 2

that you're driving.

Speaker 6

And you walk to my next question is credit. And so I know credit goes through that line item, but we don't have great visibility. Call. Can you talk a bit about the ECL on the AOCI assets, but also What the credit can you quantify what the credit move was elsewhere and what you're seeing from a credit perspective and how we should think engage from the outside looking The credit impacts for your fixed income portfolio.

Speaker 1

Gary, why don't you start with that and then you could pass on to Raman.

Speaker 6

Yes.

Speaker 2

So I mean, overall, the credit impacts are overall very modest this quarter. I think probably in the $20,000,000 range pretax. So it's modest. There's the ECL that really would only come up on the UK mortgages held at amortized costs. That would be a single digit impact.

Speaker 2

So it wasn't much there. And actually, it actually is a bit of doubling up on the ratings downgrade. So It is I think where and Raman could comment, I think where we saw the ratings downgrade was on the just a couple of the UK commercial mortgage holdings.

Speaker 4

Yes, that's right. So the impact was from the UK commercial mortgages, it was modest. I think on the bond side, What you should expect is it's been actually more upgrades than downgrades in general over the past few quarters. 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 layer are better.

Speaker 4

So if we do get into a credit cycle that turns, the impacts are more muted at the higher rating levels. So that's just something to keep in mind.

Speaker 6

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

Speaker 1

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

Speaker 6

Perfect. Great. Thank you very much.

Speaker 1

Thank you.

Operator

The next question comes from Tom MacKinnon with BMO Capital Markets. Please go ahead.

Speaker 8

Yes, thanks. Good morning and thanks for taking my question. Just continuing on Doug's thread here. I guess the what you were trying to maybe explain was These trading gains are these 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 or 1 year ago?

Speaker 1

Yes. Gary, you can take that one.

Speaker 2

Yes, sure. I mean this quarter, I think the number again pretax was mainly $13,000,000 So it's very modest. Last quarter, we had something that was around $50,000,000 I think last year it was in the it's around the $75,000,000 range. These are all pre tax numbers just for presentation. So it gives you an idea that's what that driver is year over year.

Speaker 2

Yes. And just

Speaker 1

To bring that back, Tom, you recall last year, those flowed through, they were applied against the in force book. You saw the benefit of that. We've actually leveraged the quality assets we had in new business opportunities here. So We're building strength in the CSM, which will flow into earnings in future.

Speaker 8

Yes. Okay. And I guess the normal run rate or the what you get in that line other than yield enhancements would be your kind of normal run rate less any of your finance costs. And the normal run rate, Yes, obviously on the bonds, it's easy. On the mortgages, they're all amortized costs.

Speaker 8

What about on your equity release mortgages? Don't those kind of fluctuate around with interest rates? And would that have any impact as a result of interest rates going up.

Speaker 1

Gary, do you want to start that one?

Speaker 2

Yes, sure. Most I mean, a couple of things. One is the Financing charges aren't going through this line. They don't go through this line here. What you will see here is The allowance for credit just comes through the expected like just the regular allowance for credit that would just run off the liabilities.

Speaker 2

You get a little bit of an uplift here from the non fixed income relative to the liability rates. So we have a long term assumption on non fixed income of that long term returns. But that's really been a it's actually quite a small contribution there now because rates of liability rates have written. So That's probably less than 5% of our base earnings. So that's not much of a contribution coming from that, but there is some there.

Speaker 2

Yes. Those are the main drivers. It's really just the additional rates there. Because again, most of like something like equity release mortgages, those are backing liabilities. So it's all in the discount rates.

Speaker 2

You don't see it here.

Speaker 8

Okay. Anything else, Ted?

Speaker 1

Go ahead, Tom.

Speaker 8

Yes. And then I guess the question with respect to Empower. Participants didn't really grow quarter over quarter and I think I kind of look year over year, they're only up about 3 3% or 4%. How should we be thinking about a run rate here for participant growth? And why hasn't it Higher than 3% to 4% over the last 12 months.

Speaker 1

I'm going to turn that one over to Ed. Do you want to speak to the momentum you see in the business? Ed, if you're on mute, you should take yourself off mute.

Speaker 7

Sorry, I was on mute. Thank you. Thanks for the question, Tom. Yes, if you look at organic growth in the business, 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.

Speaker 7

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 Participant retention, asset retention, revenue retention. But if you look at the market, Tom, we're growing organically. Our net Participant growth is about 2x the market. So the market is going to grow roughly 2%. We're consistently growing between 4% 6% a year if you look at the last few years, excluding acquisitions.

Speaker 7

So We're feeling really good about the growth. And if you look at the small end of the market, which is the under $50,000,000 space, we'll 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 $10,000,000,000 this year. And our pipeline is $2,000,000,000,000 So we feel really good about the overall growth trajectory of the business, Workplace Business.

Speaker 1

To that point, there's no doubt that when you when we talked about the mega and the large case market, that can be that They tend to be a bit volatile. They will happen when they happen, not in particularly this quarter. But the overall, we Tom, we continue to like the overall momentum of the business. I mean, we've got a value proposition where we're winning more than we're losing out in the market, and I think that bodes well for Looking forward. Thanks.

Speaker 7

Yes. 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. These are 9, 12 month mandates that we're pursuing. So you'll see quarters where you'll have large mandates that will hit.

Speaker 7

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 choppier when you're going after these multibillion dollar mandates.

Operator

Results. The next question comes from Paul Holden with CIBC. Please go ahead.

Speaker 9

Thanks. Good morning. So first question is just a point of clarification on something Gary had mentioned and that's related to the equity release mortgages. I know in the past they were used as a yield enhancement vehicle. Is that still The case, is that still how it flows through under IFRS 17 or is that changed?

Speaker 1

I'll turn that one to Gary. I think we used it as a we have used it historically as an asset to back liabilities. I think that would be more the way I would characterize it, but I'll let Gary speak to that. Gary?

Speaker 2

Yes. We would have used it in both Canada and the UK in prior years. And there's a couple of things I'd note. First off, with the rise in rates, what we're seeing is creating a lot of Interest in individual annuities and in that for people applying, but we're seeing a lot lower interest in equity release mortgages, new originations. So The volumes are down.

Speaker 2

Historically, a lot of those would have gone into the well, Canada and the UK, I think they both had good shares. And And so a lot of those yield enhancement means would have been in Canada from those and we're not going to be seeing those going forward. In Canada, we use we have an illiquidity premium, so any yield pickup would be offset by an illiquidity premium adjustment and you wouldn't see the impact. They still add a lot of value when we add them, but you wouldn't see an in period yield enhancement. And then in the UK, you could still see that, But we just haven't had much volume.

Speaker 2

So it's really not been a big feature, but we would have had

Speaker 1

a bit. Yes. And I might add, Paul, that I I like the diversification of the payout annuity and equity release mortgage book. In a high interest rate environment, we see payout annuities are actually People are looking for that certainty of income. They like the underlying return, and we're really seeing solid momentum there.

Speaker 1

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.

Speaker 5

Got it. Okay.

Speaker 9

That all makes sense. Thanks for that. 2nd question, Going back to the direct real estate holdings in UK and Canada, are you able to give us How much you've changed cap rates in 2023?

Speaker 1

Raman, can you provide some color on that?

Speaker 4

Sure. So they've risen more in the U. K. Than they've risen in Canada. I'd say from the Over the past year, it's been over 100 basis points in the UK in terms of rising cap rates.

Speaker 4

It's probably closer to 70 basis points or 80 basis points year to date. It's different by sectors. You've seen a higher rise in office versus say, industrial. But in general, we've seen over 100 basis Point rise over the past 12 months or so on cap rates.

Speaker 9

Okay. And just to be completely clear and following up on what Gabe asked before, Cap rates change on Canadian property for the most part that doesn't flow through your earnings because that's related to par product.

Speaker 1

Yes. For the assets that are backing par, that is correct. And then there'd be a modest amount of assets backing non par and then you would see some impact there.

Speaker 9

Got it. Yes. Okay. That makes sense. Thanks for that.

Speaker 9

And then last question is related to Empower and I think what People are trying to figure out is there's some attrition expected in the business as you roll over the last of the Prudential Control customers, but at the same time you have some additional cost synergies To roll through the earnings. So forget about the changes in asset levels and AUA. But net of those two factors, Is there additional earnings upside related to this business?

Speaker 1

Gary, do you want to start with that and then turn it to Ed?

Speaker 2

Yes. I think I'd just start with the small comment. I think Ed can do the Just on

Speaker 1

the smaller side, just

Speaker 2

on the synergies, we are still, as I mentioned, on track for $180,000,000 and that's U. S. And it's pretax. And we've recorded run rate of 66 to date. So you've got that gap there.

Speaker 2

I should do the math in my head to around 114, I think, if I'm doing it right. But you've got that there and we should be at the at that run rate, the full run rate of those synergies starting in Q2 next year. So there is certainly some upside on the expense, just that small point and maybe over to Ed. Ed, why don't you Talk about your perspectives on earnings growth in that business. And I would say,

Speaker 1

one of the things that I know Ed will Speak to this is that there's kind of 2 businesses we have here. We've got the record keeping workplace business and then we've got the retail business. And one of the dynamics we see is we 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 got to look at it as an overall business and I'll let Ed speak to that. Ed, over to you.

Speaker 7

Sure. Thanks, Paul. Yes, I would say to answer your question specifically on the revenue side, as we bring those clients over to the Empower platform. And as was noted in the presentation, we brought 1,400,000 participants over The 3rd week of October and we have the remaining 2,200,000 participants that will come over in the Q1 and then we'll be done with the Prudential integration. And one of the opportunities for us is to deepen relationships with those existing participants.

Speaker 7

So That comes in the form of other products and services that we offer within Empower that wasn't necessarily offered frankly within the workplace services area, things like managed accounts and other services that participants will adopt over time.

Speaker 1

Yes. Ed, your line is breaking up there. I'm not sure what's going on, but I think you'll have picked up on that, Paul, but I'll just sort of reiterate what Ed was saying is that increasingly, we've improved our technology, our contact Call. Great. And the key for us is that capture of the roughly $80,000,000,000 in flow, the money that's in motion every year rolling out of the DC book and what's our capture rate.

Speaker 1

And I think in my speaking notes, I noted there that our year over year improvement in that is significant. So again, I 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 in the while they're in plan, but it's that opportunity really that's It's at that rollover rate where we can capture those assets and then think about it more from a lifetime value perspective.

Speaker 9

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

Speaker 1

Thank you.

Operator

The next question comes from Mario Mendonca with TD Securities. Please go ahead.

Speaker 6

Good morning. Could we go back to

Speaker 10

the U. S. And Empower specifically. You referred in your I think your opening remarks or in your MD and A to the $6,600,000,000 and Outflows. I think you referred to it as deconversion.

Speaker 10

So maybe just help me understand what That just means that folks that didn't convert to your system on that conversion date, essentially the assets left in the company. Is that what we're looking at?

Speaker 1

Yes. And, deconversion is, we've often talked about in when you do a group acquisition, you're expecting to retain, In the case of Empower, I think we retained well into the mid-80s on the MassMutual and we had similar targets on Pru. We expect at this stage, we're outperforming those targets, but when certain clients choose to go elsewhere, we would call it a deconversion. So we would have a little bit of deconversion in quarter, but the other dynamics in quarter would have been money that was moving out of retirement Accounts and people were either leaving the one at a time leaving the employer or moving into retirement. And our job is to actually capture I'm sure those assets and retain them in our other business, the other pool, which is retail.

Speaker 1

So that would have been a dynamic. And then the other dynamic in quarter would have been some seasonality where you tend to see people a little bit lower growth in participant Account sizes in the Q3 is just a dynamic we see. It's driven by tax planning and things like that. So those are the dynamics. Ed, let's see how your line is, whether you're breaking up and there's anything else you want to add to that.

Speaker 1

Ed?

Speaker 7

Yes. Thank you, Paul. No, 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 are leaving us.

Speaker 7

Either they've gone bankrupt, it's a business failure or they've converted to another provider. And we characterize that as a deconversion. And then the other comments that Paul was making more around planned flows and participant flows, which I think We've spoken to that in terms of what drives that.

Speaker 10

So would it be appropriate to suggest that in the early days because the conversion has just been done. In the early days,

Speaker 2

we could

Speaker 10

see some net outflows maybe for the next couple of quarters before that starts to grow again. Is that a reasonable thing to suggest?

Speaker 7

With respect to the plans that may not choose to come with us, the potential plans that we're referring to?

Speaker 10

If you look at the roll forward of your AUA for Empower defined contribution, this was the Q1 where I saw any meaningful outflows. Admittedly, there's not a lot of data to look at right now. But is this something we can see play out over the next few quarters, some outflows from that asset flows out As we see more and more deconversions or essentially is it done in this quarter?

Speaker 1

Yes. Well,

Speaker 7

As we said earlier, if you look at plan flows, if you look at on a full year basis, we're $8,000,000,000 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 $2,000,000,000 negative in the quarter, dollars 8,000,000,000 positive year to date.

Speaker 1

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 deconversions in Q4 and in Q1, and there will be some. Like we put it this way, Maybe there won't be, but the reality is we'd be well ahead of our target there if that were to occur.

Speaker 1

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 deconversions and we had what we view as a really good story flows moving off of the DC platform into the retirement space. Add it all together, you get a bit of a negative.

Speaker 1

We could see a quarter where if we were to book some large Case sales or mega sales in that quarter, it could overcome the deconversion. So We'll just have to look out, but there will be in our overall flow dynamics in the next two quarters, the remaining, prudent conversion. So that's fair to say, right, Ed? Yes. Yes.

Speaker 10

So looking beyond just the assets and the flows, markets obviously pretty weak. That took a nice chunk out of the asset This is well this quarter, which was different from what we saw in previous quarters. So is it fair to say that this business, the dynamics in this business, So at least in the near term are also impacted by what happens with markets, what happens with rates like declining rates could actually eat into the spread I just want to know, I want a flavor for the dynamics that could drive the margins in this business as we look at markets

Speaker 7

bridge. Well, it is an asset based business. I mean, if you look at our revenue, a large Some 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. Call.

Speaker 7

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

Speaker 10

So some volatility certainly possible in the near term, but your long term outlook for earnings growth in the segment would still be in the sort of double digits. It seems like such a promising business. Yes. Is that appropriate? Yes, absolutely.

Speaker 1

Okay. Yes. Yes. Mario, that was really well said. That's exactly the way we think about it.

Speaker 1

There'll be some volatility with markets, but our long term view is double digit growth.

Operator

Thank you. The next question comes from Tom MacKinnon with BMO Capital Markets. Please go ahead.

Speaker 8

Yes. Thanks for taking my follow-up. I just wondered wondering if you might be able split the $153,000,000 that happened as a result of Mark, on your non fixed income publicly traded stocks And bonds as well that 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 into those 3 buckets, if you could please.

Speaker 1

Gary, you could start. That's a fair bit of detail, Tom. But Gary, why don't you start off and if we need to, we can take that offline as well to get into the Q3. Yes.

Speaker 2

I think we might well do a follow-up, but just for the benefit of all those on the call. I'll use round numbers. Again, these are pretax. The interest rates probably contributed about 300,000,000 And then the non fixed income return. So that's mostly the UK real estate, but also some below expectations on some of the Good evening.

Speaker 2

It's about $150,000,000 going the other way. So that's where you get your $150,000,000 net. So that's round numbers. That's pretty much what's happening. And we can And we can The

Speaker 6

big gain in the

Speaker 2

bond stuff

Speaker 8

is really just because is that because the liabilities Like they are shorter than or no, your assets are much shorter than your liabilities there. Is that what's happened? Is What's driving that much higher than expected interest rate impact?

Speaker 1

Actually, Tom, it's more to do with

Speaker 2

the fact that some of our liabilities are backed by non fixed income. And so when interest rates move, All of the liabilities have a lower discount rate, but not all the assets move at the same time. So you end up with a pickup. So it's not that we were mismatched per se from a It's not a duration in fixed income mismatch. It's more that some of our liabilities are in non fixed income and they aren't moving with the interest rates, Where is the full impact goes through liability.

Speaker 2

So happy to take this offline. Okay. Thanks.

Speaker 1

Thanks, Tom.

Operator

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

Speaker 1

Thank you very much, Ashiya. So to close, I really want to highlight that we remain Conference in the strength and resilience of our businesses to deliver on our medium term financial objectives. And with that, we're kind of pushing into Q4 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 Call and Happy Holiday Season, and we look forward to reconnecting in the New Year when we'll report on our Q4 results.

Speaker 1

Have a great day.

Operator

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

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Earnings Conference Call
Great-West Lifeco Q3 2023
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