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Great-West Lifeco Inc
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Good afternoon, and welcome to the Great-West Lifeco's First Quarter 2018 Results Conference Call. I would now like to turn the call over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead, Mr. Mahon.
Thank you very much, Michael. Good afternoon, and welcome to Great-West Lifeco's First Quarter 2018 Conference Call. Joining me on the call today, are Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, President, Chief Operating Officer, Canada; Bob Reynolds, President and Chief Executive Officer of Great-West Lifeco U.S.; and Arshil Jamal, President and Chief Operating Officer, Europe.Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to today's discussion as well as the presentation materials.I will provide an overview of Lifeco's first quarter results, including headlines for our Canadian, U.S. and European businesses, and Garry will then provide a more detailed financial review. After our prepared remarks, we will open the line for questions.The company delivered strong results in the first quarter, with healthy sales growth and disciplined expense management contributing to a 24% increase in net earnings year-over-year. On an adjusted basis, excluding restructuring charges in Q1 2017, earnings were up 18%. We are very pleased with these results.The Canadian segment had a solid quarter with strong group customer performance, higher fee income and net earnings growth of 24% year-over-year. The transformation, which began in late 2016, is on track and having a positive impact on expense growth, while supporting investments in technology and innovation. The launch of a new digital lab in Toronto is an example of one of these investments. This lab and others planned in the future will focus on redefining and digitizing products and processes with an overall goal of improving customer experience.Moving to the U.S. Empower Retirement continued to show strong momentum, delivering higher sales, fee income, assets and participants versus last year while keeping expenses flat. Results also benefited from the lower U.S. tax rate. Empower made some exciting announcements in the quarter, including the launch of My Total Retirement, a retirement management platform which will integrate into Empower's online participant experience. We have invested significantly to create an exceptional participant experience and efficient back-office infrastructure at Empower. And we've built a platform that facilitates the integration of acquired businesses, positioning Empower as a consolidator in the DC recordkeeping space.Turning to Putnam. Core results in U.S. dollars were approximately breakeven in the first quarter comparable to last year. Putnam's saw improvements in retail, traditional institutional and defined contribution flows. These were offset by outflows in quant institutional funds due to client rebalancing following high year-end 2017 equity market levels. While investment performance continues to be strong at Putnam, scale remains an issue, and we continue to explore M&A opportunities.In Europe, we saw solid operating performances across regions and businesses in the quarter with double-digit earnings growth in the U.K. and reinsurance. In Ireland, results were down from a strong quarter last year, which included a gain on the sale of an investment holding at Irish Life. Currency movement also benefited the segment's Canadian dollar earnings.The company continued to execute on its growth strategy, completing several tuck-in acquisitions since the beginning of the year. On January 2, we closed the Retirement Advantage acquisition in the U.K., which brings new revenue opportunities with new products, including equity release mortgages. In Canada, GWL Realty Advisors acquired Colorado-based EverWest Real Estate Partners, giving us a real estate platform in the U.S. and opening up a broader array of investment opportunities for our clients. EverWest adds $2 billion of office, industrial and multiresidential assets in key U.S. markets to Great-West Realty Advisor's $12 billion portfolio.The company also continued to build on its growth strategy in the managing general agency market in Canada with the acquisition of ABEX Central by Financial Horizons Group. Subsequent to the quarter-end, Irish Life announced it would acquire a strategic stake in Invesco Ireland Limited. Invesco is a leading independent financial consultancy that manages corporate pension plans and provides private wealth management and is a natural adjunct to the group pensions business at Irish Life.The first quarter also saw the Canadian life insurance industry transition to a new regulatory capital regime. Lifeco maintained its strong capital position and financial flexibility under LICAT.So now please turn to Slide 5. Net earnings this quarter were $731 million, up 24% year-over-year. Earnings were up 18% on an adjusted basis, excluding restructuring charges, in the first quarter last year and were up 15% on an adjusted constant currency basis. Great-West Life's LICAT ratio was 130% at March 31, 2018, above the company's internal target range of 110% to 120%. Garry will elaborate on the company's LICAT results later in the presentation. The RBC ratio for Great-West Life and Annuity Insurance Company was 502% at December 31, 2017. Lifeco cash was approximately $800 million at the end of the first quarter, and it is not included in the LICAT ratio.Moving to Slide 6. Sales for Lifeco increased 7% year-over-year or 9% on a constant currency basis. Canadian sales were up 4% with higher group sales and lower individual sales compared to the first quarter last year. The decline in Individual Insurance sales primarily reflects the new business surge we experienced in the back half of 2016 and Q1 2017 due to changes in life insurance policy taxation. U.S. sales were up 3% or 7% in constant currency. Empower sales increased 21% year-over-year in local currency driven by higher core market sales. At Putnam, higher mutual fund sales were offset by lower institutional sales.Turning to Europe. Sales increased 30% or 19% in constant currency driven by higher fund management sales in Ireland. The addition of Retirement Advantage equity release mortgage sales in the U.K. was offset by lower bulk annuity sales.Turning to Slide 7. Fee income for Lifeco increased 6% year-over-year. Canada's fee income was up 8% due to higher average assets and higher other income, which now includes Financial Horizons Group. In the U.S., fee income was up 2% or 7% in constant currency due to the growth in participants at Empower and asset growth at both Putnam and Empower. In Europe, fee income increased 12% or 3% in constant currency due to business growth in Ireland and Germany.Referring to Slide 8. Adjusted expenses for Lifeco increased 3% year-over-year. As a reminder, we define adjusted as excluding restructuring charges. While Lifeco incurred no restructuring charges in the current quarter, it did in prior quarters, and the growth rates are calculated based on the adjusted numbers.In Canada, expenses were up 3%, reflecting the inclusion of Financial Horizons Group. We achieved $137 million of pretax annualized expense reductions as of quarter-end and are on track to achieve $200 million of annualized reductions by the end of Q1 2019. In the U.S., adjusted expenses were up 1% in constant currency, reflecting expense discipline at both Empower and Putnam. In Europe, adjusted expenses increased 11% in constant currency mainly due to the inclusion of Retirement Advantage and overall business growth.Now I will turn the call over to Garry MacNicholas. Garry?
Thank you, Paul. Starting with Slide 10. Net earnings in the first quarter were $731 million, equating to $0.74 per share, an increase of 24% year-over-year. On an adjusted basis, excluding restructuring charges in Q1 2017, earnings and earnings per share were up 18% with improved results across all business segments.In Canada, earnings increased 24%. In addition to steady yield enhancement gains, continuing expense discipline and a beneficial tax settlement, we experienced more favorable group disability and mortality results.In the U.S., adjusted earnings increased 12% year-over-year, 17% in constant currency, including the benefit of the lower U.S. corporate tax rate. Empower results were strong with earnings of USD 35 million compared to USD 24 million last year. At Putnam, net earnings were unchanged as higher fees were offset by lower net investment income and higher onetime expenses.Europe's adjusted earnings were 12% from Q1 -- up 12% from Q1 last year, 6% in constant currency. Higher U.K. and reinsurance earnings primarily driven by longevity assumption changes were partly offset by lower earnings in Ireland where we had a onetime gain in Q1 2017.Turning to Slide 11. This table shows the segment and total Lifeco results from a source of earnings perspective. And as a reminder, the source of earnings categories above the line are shown pretax. Overall, compared to Q1 last year, it was a healthy increase in expected profit and steady experience gains in the first quarter with largely offsetting variances in new business strains and basis changes.In Canada, expected profit increased 15% or $40 million, primarily due to higher group customer long-term disability and health margins resulting from repricing actions taken over the course of last year. Higher fee income and transformation expense savings also contributed to higher expected profits. The experience gains of $58 million in Canada primarily reflected trading gains. Earnings on surplus of $31 million in Canada were $19 million higher year-over-year due mostly to real estate mark-to-market gains.Turning to the U.S. Expected profit grew 20% or $20 million compared to last year, reflecting higher fee income at Empower and Putnam and a continued focus on expenses. The impact of new business was in line with prior periods and mostly represents nondeferrable acquisition expenses on sales of investment contracts at Empower and Putnam. The offsetting benefit of this is lower DAC to be amortized in future periods. As noted earlier, the effective tax rate benefited from the decrease in U.S. federal corporate tax rates from 35% to 21%.And finally, in Europe, expected profit grew 18% or 45 million, reflecting a higher expected release of margins for mortality improvement in U.K. paid annuities business as well as steady business growth and the benefit of favorable currency movements. New business strain was higher than usual this period due in part to a large longevity swap transaction reinsurance that is expected to generate good margins going forward. Also, in Q1 2018, we sold less annuity business which tends to produce new business gains. There were no bulk annuity deals in the period whereas we had large deals in both Q1 and Q4 2017. Spot sales can be lumpy period-to-period. Experience gains of $32 million this quarter included longevity gains as well as gains at Irish Life Health and positive group long-term disability results in Ireland and the U.K.Management actions and changes in assumptions had a benefit of $124 million in Europe, predominantly a release of margins for mortality improvement in the U.K. annuities business. I would note this work was largely completed before the recent release of a study of U.K. population longevity experience which we will analyze more fully in the coming quarters along with the experience from our own book of business.Earnings on surplus were $28 million lower compared to the first quarter last year, which included a gain on the sale of Irish Life's holding in Allianz Ireland. All this comes together in adjusted net income before tax, shown on the middle of the page, of $852 million, which is up 13% year-over-year on an adjusted basis.Turning to Slide 12. Lifeco's uncommitted cash position remained strong at $800 million. And note, this is not included in the Great-West Life Assurance Company LICAT ratio but would be equivalent to an additional 4% on that ratio. Our book value per share was $21.01, up 5% year-over-year.As a reminder, return on equity is based on a rolling 4 quarters. Adjusted return on equity was 13.8% or 14.7%, excluding the catastrophe reinsurance losses in the third quarter of 2017. We continue to target a long-term ROE of 15%. Reported ROE of 11.4% reflects restructuring charges last year, the previously noted reinsurance losses as well as the charge for U.S. tax reform and net charge on the disposal of Nissay Asset Management investment last quarter.Turning to Slide 13. Assets under administration were $1.4 trillion, up $96 billion or 7% year-over-year driven by market performance and overall business growth.And turning to Slide 14. The Canadian life insurance industry transitioned to a new regulatory capital regime, the Life Insurance Capital Adequacy Test, known as LICAT, effective January 1, 2018. And this quarter represents the first disclosure of Great-West Life's results under the new regime. Great-West Life's consolidated LICAT ratio at March 31, 2018, was 130%. A summary calculation is presented here with more detailed disclosure included on Page 12 of the supplemental information package. This is in line with the disclosure that [ Avsu ] make available on its website in a few months.Although the company has benefited related to MCCSR in terms of supervisory capital requirements, which reflect its risk profile, this has been largely offset as the new regime excludes any credit for intangibles within the calculation of available capital. For reference, the allowable inclusion of intangibles for Great-West Life within MCCSR at Q4 2017 was just over $1.4 billion.The company has established an internal target range for LICAT of 110% to 120% and intends to operate towards the high end of that range. Importantly, the company's level of capital above the internal range is comparable to that under the MCCSR regime, approximately $2 billion. The changeover has not impacted the company's appetite or capacity to fund future growth either organically or via acquisitions. Also, as we noted in our communications in the lead up to the new regime, the company does not expect any significant changes to product mix, investment strategy, risk appetite or product pricing as a result of the LICAT implementation.That concludes my formal remarks. Paul, back to you.
Thanks, Garry. With that, operator, we will now open up the line for analyst questions.
[Operator Instructions] And the first question is from Gabriel Dechaine at National Bank Financial.
So first question, on the payout annuity business and the bulk annuity business in Europe. I was interested by your comment on having released the mortality reserves this quarter. Presumably that's longevity that's gotten shorter. So -- that's good for your annuity business, first of all?
I'll refer that one to Garry at a high level. And if there's more detail, I'm sure Arshil can jump in.
Yes, you're correct. That is in respect to the payout annuity, so it is the longevity improvement assumptions and it was a release of margins on that assumption for future [ uncertainties ] that the trend has been a little less longevity -- a little slower rate of longevity improvement than we had previously anticipated.
What were you implying by saying that this was an internal study before the broader industry study that came out, but there's additional upside that we could see? Is that it?
Back to you, Garry.
Yes. In terms of the -- a number of people have noted there was a -- there is a population study produced most years in the U.K. And the study for 2017, which we experienced up to 2016, that had come out very recently. And so that did, in the population data, show a continued slowing of the rates of improvement. However, we've not done our analysis on how that would affect our particular book of business. So we will be doing that over the next couple of quarters along with our own experience studies.
Yes. So just to clarify that. So we did our experience study prior to that, and population was -- it was suggested there's a continuing trend there, but we're not -- this release was not due to that trend. This is due to our book. And we'll have a closer look at it.
That's what I understood. What I was wondering was whether your implying that your studies may be not fully capturing what the study implied so that there could be more...
That's what we're going to learn through additional study in the coming quarters.
All right, great. Then on the group business in Canada, and just -- hopefully, we can just put some numbers around this because I like to talk generically about improving morbidity and morbidity experience in the group business and you've repriced it and all, but can you help frame that a little bit for me because we had some of that experience, positive experience, come out again this quarter? What was the experience gain in group in 2017? How much of that migrated, I guess, to expected profit? What did we see this quarter?
Okay. Well, just let me -- I'll start out by framing this. We went through repricing over the last kind of 24 months. But when you do repricing in group, generally, what happens is the pricing carves in over time as you renew contracts. So you set a new pricing standard, you'll use it for new business. But as you renew business, your pricing on that new, using -- considering those new rates. So it's a somewhat slow carve in over a period of time, so we're experiencing part of that. But perhaps Garry can give you some context for the impact in 2017 relative to what we're seeing now.
Yes. I think the place I would start there is in terms of the actual experience gains also through 2017, don't have that right to hand. What I could advise, though, is up to $40 million increase in expected profit that we saw in Canada, approximately half of that, about $20 million, is due to the group changes. So that gives you a year-over-year sense of what the expected profit change was. But I don't have any experience gain and loss for every quarter last year though.
No, no, no. That alone is pretty helpful. And then, my last one, I suppose on the M&A in Putnam, twofold. Does the treatment of intangibles that's more conservative under LICAT change anything for you as -- maybe it does. I don't think it does really.
I don't think -- Gabriel, I don't think it does. The way I think about Putnam is we've got a -- what we have right now is actually a very well-performing investment manager. We're actually seeing some positive indications of flows on some of the retail and some of the DC products. And an acquisition at Putnam, we may be able to augment capabilities, but one of the core areas we'll have is leverage in terms of scale. And intangibles, a different treatment of intangibles wouldn't change our view to that. Garry, anything you'd add?
Yes. I'd just note just to clarify that Putnam is not held under Great-West Life Assurance Company, it's off to the side. So the treatment of intangibles in LICAT wouldn't have any impact.
The next question is from Steve Theriault at Eight Capital.
A couple of questions. So going back to strain for a second, it was quite a bit higher driven by Canada and Europe. Garry, I think you walked us through it. But a follow-up on your -- or you walked us through Europe, and you mentioned the longevity swap. And I'm wondering is that a onetime impact in the strain line? Or does that -- is that persistent? Does it structurally change the run rate of strain? And then if you could give us a little detail on Canada as well where strain was going in the opposite direction as to what we're used to.
Garry will take that one. Thanks.
Sure. So first, starting with Europe. You're correct, the longevity swap is a onetime. And again, that was, I think, just over 20 million, to give you a ballpark. That was a -- that would be onetime. Obviously, if we wrote to everyone -- each one of those is bespoke so it depends on the actual transaction. As I say, we've written out the target margins just the -- due to the structure it has an upfront strain and good margins going forward, we would hope. In Canada, I think two things, the Canada strain number is right around 0, not unusual for Canada. Last year though, I think we had a positive. But recall, and I think it was referenced earlier, that we had very high new business volume. So we had more capacity to cover upfront expense. So some of that did result in some new business gain in Canada last year, but that was on much higher volumes and a different mix of business than we would have seen this year. So I think back down, variable strain, plus or minus, in Canada is not that unusual.
Okay, that's helpful. And then a bit of a different question. I was looking just through the disclosures on your bond portfolio. And I noticed that you're weighting of, for example, BBB bonds in Canada is up about 400 basis points from a year ago. It looks like a couple of hundred basis points on the overall portfolio, but with currency it's difficult to draw any conclusion. So I'm wondering, is this yield enhancement at work in how it's migrating into some lower-grade bonds? Or is this a conscious effort to move into -- low grade the portfolio a little bit due to relative value or spreads or some other reason? Some color there would be great.
Yes, I'll take that one. I think what you're seeing there is some opportunistic yield enhancement as opposed to a systemic shift. Clearly, if you look at sort of where we are in the cycle, you have to think about opportunities. And in this instance, I think it was, as I said, opportunistic. We will always be focused on appropriate risk return across the portfolio, obviously, when we consider any particular investment. So -- I don't view this is -- as systemic shift, more -- where we found opportunities this particular quarter.
And maybe I can link that to when we look at experience gains -- I look at experience gains in addition to management actions and assumption changes. The impact through source of earnings, it was relatively high at 26% of pretax earnings in Q1. And I guess in 2017 for the full year, it was 24%. In 2018, it was 23%. The long-term average is 21%. Have we seen a -- like is there any sort of structural increase in how we should think of that? I know it bounces around a lot, but is -- can I link that to the yield enhancement and you guys being opportunistic as driving maybe that higher in the near term? Any guidance you can give us on that one would be useful.
Yes, I think there's a lot of moving parts there. I wouldn't link it to that, but I think Garry can provide a bit of color there.
Yes, I think you're right. The yield enhancements, I mean we've had steady contributions from that over a long period, and I don't think there's anything unusual happening there. I think in terms -- you hit it on the head that the change assumption management, [ actually ], that can move around quite a bit from period to period, and we have had a number of favorable improvements in our results from the slowing of longevity improvements in the U.K. over, I think, the last couple of years. And so that's probably contributed slightly higher, but I wouldn't be leaping to conclusions about what it might be going forward. But it has been hot the last couple of years, it has been a bit higher.
Yes. And the reality is we enter into these businesses taking on fairly conservative assumptions. And as there's a shift or an improvement like something like that, then the reality is conservatism actually comes out of that.
Yes.
The next question is from Paul Holden at CIBC.
So Paul, as part of your opening remarks, you were talking about investments in the business in Canada, like digital strategy. So you specifically cited a new digital lab. I mean, just in hearing a little bit more about that in 2 regards, one is how we should think about the net benefit of expense reductions in Canada balanced off against those incremental investments. And then, two, how long will those incremental investments go on for? And when they will sort of normalize and plateau?
Yes. So I'll frame this, and then I get to turn it over to Stefan Kristjanson to provide a little more color. First of all, I'll frame that as we think about digital investments, there's really 3 core benefits that can come from that. One will be a better customer experience. A second one can actually be operating efficiencies. And the third one can actually be delivering a differentiated or a new product, in other words, we open up a new market to ourselves. As we're looking at these digital labs, an example of, the first one that we're working on right now, it has core benefits that will kind of equally go to driving out efficiencies that are going to benefit a quicker turnaround for customers. But, there's going to be cost benefits associated with that, plus experiential benefits for customers and advisers. So I wouldn't characterize spend on digital as something that's going to be at odds with expense improvement, it's going to help. This is all about automation, whether it's using artificial an intelligence or anything like that. So that's sort of a bit of a backdrop. As we think about investing in the business, part of it there's going to be slightly higher incremental spending over the next 3 years on technologies. But the offset to that is how do we drive down our -- drive out efficiencies in processing costs. And when we're talking about the digital lab experience, these tend to be labs where these are not 1-year projects. These are 16-week sprints where we're trying to drive out new deliverables in 16 weeks, so very often within your investment and the beginnings of in your payback. So I'm going to turn it over to Stefan to provide a little bit more color on that.
Thank you, Paul, and I think you did a good job of providing sort of quite a bit of detail on that because fundamentally, these investments, as Paul captured, is about improving the value proposition for our customers and experience and to the advisers. And you well captured at the same time driving down our expenses. And there may be some short-term expense strain associated with some of them, but these are often -- these are not big bang solutions. These are smaller in nature that allow us to improve the value to our customers and the advisers. So -- and we will scale these up. We've got the first one running here in Toronto with an expectation we will continue to roll out more and more of them to improve the value that we offer to our customers.
Second question is with respect to all the dry powder you have, roughly $2.8 billion by my calculation. And you've been at that level for quite a while now. So I'm wondering if there are some overarching impediments to deploying that capital, like if you come across asking prices for deals that are just too high or maybe you haven't found the right fit? Paul, maybe you can comment a little bit on that.
Yes. So it's a tale of many different cities, depending on which businesses we're talking about. But I would say that there is no right-fit acquisition that we passed on due to cost. We've done -- we've been doing lots -- of looking, lots of analysis on the M&A side. David McCarthy and his team are very active, as are all of our business unit leaders, assessing and seeking out opportunities. But for context, I don't think -- if I were to look to U.S. asset management, there is nothing that's traded in the U.S. in the last period, as we've been very assertively looking at it, that we would have wanted or that we were seeking out. We're just trying to find the right-fit acquisitions that are going to drive out shareholder value in the way we see the greatest opportunity. So there's -- that's an example there. If I look to the Empower space, one of the realities of what's happening in Empower right now is we are getting very strong organic growth. We are winning cases, bid at a time. If you could actually do an acquisition a case at a time by winning it, that's actually better than paying a premium in the market. Having said that, we do believe that market will consolidate. And the reality is we've got lots of active files there. So there's nothing we've had to pass on. I wouldn't characterize it as a sense of urgency here where we've got to get something done this quarter or next quarter. We've got to find the right-fit acquisition that fits our strategic hypothesis as to where we see growth.
And then just final question, wondering how you're feeling about your U.K. business in general. I mean, most of what I see in the U.K. comes through the media, and it seems like negotiations with the continent aren't progressing all that well and you hear a lot about net migration or potential net migration of both people and capital out of the U.K. So wondering what your latest thoughts are on that market.
So I'll start out, but I'll turn it over to Arshil in a moment. As a starting point, it's always the reminder that we don't use the U.K. as a launching point for our European businesses. So we wouldn't be similar to a bank that has its major trading platforms in the U.K. for all of Europe or rest of world. We have a domestic business that's dealing with, what I would say broadly as, I'll call it, mass or mass affluent market U.K. So we're not talking about the population of people who are investment bankers. The products and services we provide are necessities people have day to day. So we're talking about life and -- group life and income -- pardon me, disability income coverages or retirement savings. So the reality is if we see a bit of a slowdown in that economy, that could be a slowdown in those -- a bit of a slowdown in those businesses, but these are core things. People will still retire day to day. People are still going to do businesses that we insure, are still going to need life insurance and disability coverage. So we don't see a fundamental shift structurally for our business. It's more a function of -- going to be the economic growth that underlines growth in the revenues and in the potential liabilities. Arshil?
So the only little bit that I would add is certainly in the immediate aftermath of the Brexit vote, we saw some material moves in the currency exchange rates relative to the Canadian dollar. So I think that's the impact that we thought sort of most significantly in late 2016 and in early 2017. Since then, the currency markets have stabilized. I absolutely expect that the go-forward growth rate in the U.K. will probably be less than it would have otherwise been, absent the Brexit vote. So pre-Brexit, we were probably been expecting 2.5% to 3% GDP growth. And now we think people are centering in on medium-term growth of between 1.5% and 2%. But on the businesses that we participate in, the retirement income and the employee benefits businesses, the aging population and the increasing numbers of people who are going to be retiring, I think gives us an extra tailwind to support that part of the business. And on the Group Insurance businesses, unemployment levels are still at historic lows. And employment rates, the number of labor -- the number of people in the labor force is at an all-time high. So as long as those trends continue, I think our Group Insurance businesses will continue to perform strongly. So we should be doing a little bit better than the overall market. So that's our expectation going forward.
Thanks, Arshil. And, thanks for reminding me of those currency impacts.
The next question is from Tom MacKinnon at BMO Capital.
Just a question with respect to tax. I think in Canada, you mentioned there was a favorable impact of changes in certain income tax estimates. The tax rate looked a little bit lower than we would have been anticipating, but I'm wondering what that help may have been in Canada. It looks like it could have been as much as $30 million?
Yes, I'll turn that one to Garry.
Yes. With that, most of it -- your calculations are actually quite good. Most of it was due to settling old -- some modest [ mole ] tax years with CRA, I just in the normal course. And we've had I guess fairly cautious, [ but it ends ] up against those. So we released that -- I believe the specific settlement was 24, and there may have been a small beta on top of that. I think year-over-year change is more like 27, but it's in that sort of range, the tax. And that's obviously an after-tax number.
And the earnings on surplus in Canada were higher. You may have addressed this, but there was some fair value adjustments associated with some of your properties. Is -- was that a little bit higher than normal? And what would that amount have been?
Well, Tom, I would remind you that we've -- if you go back a couple of years, there's been lots -- that can be a bit lumpy with where it's been a strong contributor in past years, there's not been a lot of contribution. But Garry can provide a little more detail to that.
Yes, it does move around, obviously. Year-over-year, I think the pickup there was 10 million. So it's not that large, but that was the difference between the mark-to-market we would have had last year and this year.
And the holdco cash is up to $800 million from $500 million. I think you did issue some debt and you redeemed some. But you -- but the net impact of that was about $300 million. And then you've got a $500 million redemption coming up. Is that going to be paid out of the holdco?
Garry, you can answer that.
Yes. So Tom, we've got a number of options for the -- for that call. And so we'll -- we haven't finalized our plans there yet, so obviously we'll -- let's say, we've got a number of options. We've got the cash there. We've got committed lines. And then there's the possibility of external as well. So we'll just have to finalize those plans over the coming months.
Well, when we think about the excess capital, like how much should take from the holdco because that number can -- you haven't necessarily added $300 million in excess capital just by doing this issuing a redemption with another redemption coming up. Should we just look at some sort of flat holdco cash number to add on?
Yes. So in terms of the cash, obviously, we've added the $300 million cash. It's not actually impacting our capital ratios or anything like that, so it's a -- we've got the potential, as I say, we've got a number of options considering the upcoming call. And I think that would really depend on both the external conditions and our various strategic activities we're undertaking.
The next question is from Doug Young at Desjardins Capital.
Just first question, maybe just a follow-up on Tom's. Was there cash that was moved up from the opco to the holdco in the quarter?
Garry?
Well, there's a movement of cash up from the operating company to a holdco pretty much every quarter as we fund the dividends out of the holdco on various other obligations. But in terms of -- there's nothing unusual. I think that was your question. As was noted by Tom, the cash went from $500 million to $800 million. And that's largely the fact that we had issued new senior debt of $500 million and we redeemed $200 million of senior debt, and that's the $300 million delta in cash.
Okay. And then the uses of -- the acquisitions that have made -- did that come -- the cash come out of the opco level, I would assume?
Garry, you can handle that one.
Yes. The acquisitions, again, the most recent one being Retirement Advantage, you may recall, we've actually prefunded that just before the end of the year. So that had been -- that's why the cash was down. Had the cash had been higher in 2017, it dropped down towards the $500 million from that Retirement Advantage funding at the end of the year. And that's gone back up with this recent raise.
Okay. Just maybe kind of pivoting here. In Canada, I mean, Paul, you talked about digital investment focus has obviously shifted to client experience. How do you track client experience? And how should we track your success on client experience? And where I'm going with this is one of your peers is talking about Net Promoter Scores. And is that something that you track? And if you do, can you talk a bit about how that has shifted over the last little while.
Yes, I'll start, then I'm going to turn it to Stefan. I would say that we've got lots of very traditional measures in terms of response rates, call return times, things like that, that we track on a very detailed basis across our businesses. We've advanced our thinking and our capabilities in terms of NPS and some of those measures. But I would say that it's kind of advancing in pace with a lot of our digital advancement. And so in terms of us having a clear measure that we're going to take into the market and report on quarter-over-quarter, we're not there yet. We're working towards that, and we've got a lot of energy and effort focused on that. But Stefan, perhaps you can give some insight as to where we're going there.
I think you got that right, Paul. And we will, throughout 2018, be building out deeper and deeper capabilities both at a -- an individual's experience with our group of companies as well as on a transactional basis. And we'll be doing that across both of our group customer businesses and individual customers to really shape out the customer experience with us as a company, pivoting away from some of the more traditional measures of, the percentage of calls answered within 30 seconds.
But there's nothing you could share in terms of trends that you've seen in the last year to 2 years?
No. In part because we're -- I would say we're in a process right now where we're evolving that. And so these are net new. And one of the challenges with those is you don't want to pop the champagne if you see a quarter-over-quarter increase as you're just in the early stages of this. But you can see a fair bit of volatility in those things.
Yes. I mean, we are new in some of these measures. But as reflected recently on the group customer side, we were named as the life and health insurer of the year for 2017 largely based on the experience that our customers are able to benefit from the relationship with us. So we've got a good starting point, and our intent is to grow that with a deeper understanding of the customer needs and wants so that we can best meet those.
The next question is from Mario Mendonca at TD Securities.
One sort of numbers question first. Over the years, I've observed a good amount of seasonality in the expected profit, particularly in Canada and Europe. But like, for example, going from a Q4 to a Q1, there's always been a fairly noticeable decline I've seen in '14 -- '15, '16, '17, but not in '18. So what do you figure bucked the trend there? Like why would the seasonality, the normal seasonality we've seen not appear? And what would you point us to going forward?
Well, I mean I'm going to turn it to Garry, but I would say that at any given point in time, you've got various businesses that are either, let's say, that are challenged or in recovery. So if I use the group as the example, of group mortality and morbidity, we've done a lot of heavy lifting, repricing over the last couple of years. So there's an example of a business unit that's in a trajectory of fundamental improvement in the expected profit, and we're seeing that come through. So you have to be careful. But you're right, there can be seasonality. But Garry, I'll let you provide maybe a bit more detail.
Yes. I think, in general, we have seen seasonality over the years. I think this -- as I look through the quarter, the things that we're improving, a number of them have really been developing through the years. So the expense benefits and transformation continues to develop. And so those things are increasing. So you've got things that are rising, at the same time, you might have a bit of natural seasonality pulling you back. I think that's what led to the large increase year-over-year, it's just -- whether it's a fee-based expectations because of the rising market through 2017, you had the group repricing which, again, was coming in steadily quarter-to-quarter. So these are all things that were naturally rising that would offset some of that seasonality. So we just didn't see as much as you might normally, that's why we're pretty flat from Q4. We thought that you might see a couple of percent drop.
Let me ask another sort of related then. Looking out to Q2 then, we've historically seen a good improvement in expected profit from Q1 to Q2, and that's true going back many years. Given what we saw this quarter and the things that you've highlighted, is there any reason why we'd expect that normal boost into Q2 not to play out this quarter or in Q2?
Garry?
Yes, I'll -- a couple of comments. One, I can't quite predict Q2 just yet. I would note one of the things that does influence us is the starting point for -- the starting point of the core for market levels because that's where we base our expectations for fee income in the coming quarter. And I haven't looked back on the prior years in terms of what that -- how that change has gone through. And whether we have the same seasonality anticipated now with our various repricing actions that we have taken, whether we see the same seasonality, that's also hard to predict at this date. So I think just keep in mind the market moves, and I think we did end Q1 on a bit of a down note, so we just have to keep an eye on that as well.
All right. A more broad question then. Paul, you referred to the company's 15% ROE outlook or, target, I think that was the word you used. You're sitting around 13.5% right now, so the nature of my question is this, do you -- when do you think 15% is achievable? Is it a 2-year target at more -- or an indefinite target? And secondarily, how do you figure you'd get there? Is it capital management earnings? And to what extent do the 2 play out?
Yes. Well, I might just go back to your reference to the 13-odd percent. If you actually exclude the catastrophe reinsurance losses we had in Q3 last year, the -- it was really 14.7%. So -- and we are in that reinsurance business, so I guess you can never say never. But our expectation is that we wouldn't have a cyclical change there. So from our perspective, we're pretty close to the 15% now. But part of that needs to be, are you disciplined in your repricing? And you've seen lots of good discipline in our group pricing and in our individual insurance pricing. Are you disciplined in looking at where you want to be deploying capital and thinking about where you want to grow? Do you have underperforming businesses that are underperforming in terms of being more capital-intensive as that are actually delivering sort of lower ROEs within the overall average mix? So the actions we need to be facing are [ staying ] disciplined with pricing, making sure that if we've got businesses that are underperforming from an ROE perspective, we either address those through repricing, address those through restructuring or address those through disposition. We could always consider those things. So that's kind of the frame we think about. But the reality is we're kind of on the edge of the 15% right now. And I think we've got the right disciplines that are going to continue to take us in a broadly positive direction.
[Operator Instructions] And the next question is from Sumit Malhotra at Scotia Capital.
I'll start with Garry, and just looking at the numbers on LICAT. So first off, if you'd be willing, the 130% ratio that you have under LICAT, if you were thinking about this apples-to-apples relative to the old MCCSR, where do you think the 130% compares to for Great-West? And then, secondly, the 110% to 120% range, so you're obviously above that, is that a range that you would -- is that effectively you telling us that that's a range that you'd be willing to manage to or trend towards upon an acquisition? Or is this something that you feel you're just overcapitalized at these levels, so there's other avenues you can take?
Why don't I -- it's Paul, Sumit. I'll take the second one, and then I'll turn to Garry to -- back to the first one. So if I think about the range we would go to, it fundamentally depends on the nature of the acquisition. For a transformational acquisition that was going to deliver the types of changes, let's say, that we saw with -- I'll use London Life or Canada Life, we'd be prepared to, obviously, move down into that target range and perhaps even the lower end of that target range. Right now, today, we do have considerable excess capital, and I would say it would be very comparable to where we were at with MCCSR. So it gives you that perspective. Now if we're looking at tuck-in acquisitions, if we're looking at less strategic acquisitions, we will tend to want to keep our powder dry relative to that range. And then before Garry answers the question, just maybe forestall a little bit on this, I don't think you can do an apples-to-apples comparison on LICAT -- MCCSR and LICAT. And Garry gave a good example of the treatment of intangibles. So it's just -- it's a fundamentally different range. So as we think about it, if you think about the intangibles out, but then you think about the fundamental relative -- our business and its relative risk profile, I think the 130% is representative of a strong ratio on a comparative basis. But Garry, I'll let you...
Yes, I agree. The 130%, especially to say there's no credit for the intangibles, and they have been in MCCSR for 1.4 billion, so it's a fair change. So I do think the 130% is a very strong ratio, and it is above the top end of the range. We do have the firepower to fund growth. The only thing I'd say on the comps, I know and I think the caveat that Paul has mentioned is good that you can't really compare the 2. But just mathematically, the old benchmark of 200% are our estimates. And I know others have estimated the market to be in that sort of 115% to 118% range. Ours, we'd probably say it's in 116% to 117% as the old 200%. So that gives you an idea of, relatively speaking, the new -- the old, for us, an old MCCSR point was about 65 million, whereas the LICAT point is 200 million. So it's 3x the size, but it gives you a sense of the equivalent. So all that I really need to say is that the 120, is certainly operating at the top end of that, we would be happy to operate at that level. It would be very good capital level. The fact that we're 130 now gives us opportunities.
As the reality is 130 is representative of excess capital above our top end range, which is similar to the excess capital we had over the old top end range.
Yes.
That's a lot of good detail guys. And let's stay with the deployment opportunity. Paul, I feel like, going back to Investor Day, I think the company's signaled pretty clearly to the market that if you found the right opportunity, you're certainly in a position to transact. It does seem like the focus coming from management has been more on the U.S. opportunities, whether that's asset management or retirement services. I wanted to go back to Europe. I know you did the deal for the Retirement Advantage business last year. But that's obviously been a geography that has been one of your stronger ones over the years. What's the appetite in -- as far as Europe is concerned? And what are the key areas that you'd be looking to add to? I think going a little bit long here but coming after Brexit, I had the view that there might be some books of business that might come available. Has that not materialized the way we would have envisioned?
Well, I'd start out, Mario, by saying that we remain active looking at all markets where we think we can create shareholder value, and Europe would not be an exception to that. So that's where Retirement Advantage emerged. That's where some of these tuck-ins in Ireland are emerging. I would say that we're cautious right now with Brexit. I mean, there's still some bumps ahead. But I would say structurally, if you thought about the U.K. and with a very strong retirement income business, something that would pair up quite nicely would be a group retirement savings business. Now there's not a lot of those around. So, but we remain active in monitoring and watching those things and waiting to see whether there could be a potential restructuring in the market where you could -- where it could free up some of those opportunities. We look at markets like Germany where in a kind of a post-Solvency II environment where there may be some targets there where there's opportunities to acquire for incremental scale. And while Germany is a small part of our business, it's fast-growing, and it's quite profitable. And it's a market we think is not fully served. I think there's opportunities for innovation and change there. So capital deployment in Europe, we're absolutely open-minded to it. But I would say we would approach it with a degree of caution, ensuring that we're very thoughtful about the risk of Brexit. The other comment I'd make though is that we had the same degree of caution with Irish Life. And we did take a very cautious approach and waited for things to settle out before we transacted on that. So I think it needs to be a balance of interest and patience when you've got a little bit of destabilization in a market like that. Arshil, anything else you'd add?
No. I mean I'd just remind you that we have been reasonably active. They might not be sort of in the scale of Irish Life. But in Ireland, we've expanded into the health care market place so we had an investment in a startup and then we'd acquired the old Aviva Health care business there. We announced the transaction with Invesco to expand into distribution. And then we talked a little bit about Germany, but we've been seeing exceptional organic growth in the German market, and we want to continue to drive that business forward, so there's some significant system investments to try to expand the market that we can serve with our administrative platform. And in the U.K., I think we're reasonably excited about the opportunity that we have to offer equity relief type products to advisers to round out the retirement income offering. So I think we've been quite active in the markets that we're already in. And then, as Paul indicated, there is every opportunity to think about a broader position in the U.K. But I'm very happy with what we accomplished over the last 2 to 3 years across the European businesses.
And just to round that out, it's still delivering strong performance, these businesses we're in. So I -- we'd love to augment and bolster them, but we also want to ensure that we get the most out of the businesses that are working well for us.
Last one, I think when you're answering a previous question, Paul, you talked about -- I think you referenced improving flows or at least in one of the products on the Putnam side. It did look like in both institutional and retail, particularly institutional, the outflows have picked up in the last couple of quarters. So did I hear you correctly? Were you giving us -- was that more a comment on what you're seeing recently? Or just any comments on the -- what seems to be a pickup in institutional outflows.
Yes. So what I was referencing was actually retail was a little bit up. We did see an improvement in retail net flows -- or it was lower outflows is what I would say. If we were to parse the balance of the business into defined contribution investment only, we have seen strength in flows there. If we look at some of our traditional institutional, we actually had solid flows. We're actually into, to a little bit of positive territory. Where we saw some outflows and, obviously, you see the totals, the outflows were in some large quant offerings we have, where clients were doing some rebalancing post a very high-ending equity markets at the end of 2017. So there's some rebalancing. We didn't view those as people moving away from us in terms of confidence, it was more of a rebalancing. So I think we like the trajectory we see that's emerging in the market. But obviously, we'll be reporting on that at the end of the coming quarter in August to see whether those trajectories hold.
Thank you. This is the end of the question-and-answer session. I would now like to turn the meeting over to Mr. Paul Mahon.
Thank you very much, Michael. Well, I'd like to just thank all of the people who participated in the call. We really appreciate you taking the time. We look forward to reconnecting with you at the end of the second quarter. And I'm hoping then we can all be satisfied and cheering on the Raptors having run deep into the playoffs and the Winnipeg Jets as well. Take care.
Thank you. Ladies and gentlemen, your conference is now ended. All callers are requested to hang up their lines at this time. And thank you for joining today's call.