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Great-West Lifeco Inc
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Good afternoon, and welcome to the Great-West Life Company First Quarter 2019 Results Conference Call.I would now like to turn the meeting to the -- call over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Life. Please go ahead sir, Mr. Mahon.
Thank you, Francis. Good afternoon, and welcome to Great-West Lifeco's First Quarter 2019 Conference Call. With me on the call today is Garry MacNicholas, Executive Vice President and Chief Financial Officer, and Garry and I will deliver today's formal presentation. Also joining us on the call and available to answer questions are Arshil Jamal, President and Chief Operating Officer, Europe; Jeff Macoun, President and Chief Operating Officer, Canada; Bob Reynolds, President and Chief Executive Officer, Putnam Investments; and Ed Murphy, President and Chief Executive Officer of Great-West Life and Annuity Insurance Company.This is Ed's first time participating on the call, having been appointed through this role in February. Welcome, Ed.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 to the presentation materials. I'm going to provide an overview of Lifeco's first quarter results, including highlights from our Canadian, U.S. and European businesses. And then Garry will take you through a more detailed financial review. And after our prepared remarks, we will open the line for questions.So please turn to Slide 4. The company reported net earnings of $657 million in the first quarter, down 10% year-over-year. Several factors contributed to the decline, which we will discuss during the presentation. While the results this quarter were well below our expectations, the underlying fundamentals of our business have not changed. We continue to take strategic action to drive sustainable long-term growth for the company.I would like to take first -- the first few minutes to review those actions before we get into to discussion of the results. So to start, in January, we announced the sale of our U.S. life insurance and annuity business. As noted in our last call, the decision to sell that business followed the strategic review of our global portfolio. Given a large portion of the business was closed block and then runoff, and with returns on the open business below our targets, we concluded that the capital backing those businesses would be better deployed elsewhere. The sale is expected to close in the second quarter and result in deployable proceeds of USD 1.2 billion. We intend to leave this capital in the U.S. to support our growth objectives in the retirement and asset management markets.On March 4, we announced a $2 billion substantial issuer bid. The bid expired on April 12, and Lifeco subsequently repurchased 59.7 million shares at a price of $33.5 per share. We were pleased with the results of the bid, which allows us to return capital to shareholders and offset the earnings dilution from the sale of the U.S. business. Garry will discuss the expected impacts of the bid later in the presentation.On April 3, we announced the launch of a new single brand in Canada, Canada Life. This single brand will replace Great-West Life, London Life and the current Canada Life brands. While operating under 3 brands has served us very well for many years, moving to a single brand now makes sense as we look to simplify our business and deliver a unified presence in the marketplace. We are also moving forward with the process to amalgamate our 3 Canadian insurance companies into 1 company under the Canada Life name. Subject to Board, regulatory and policy holder approvals, amalgamation into a single legal entity is the next logical step to further simplify our business. With that, let's get back to our discussion of the first quarter results. The company reported net earnings of $657 million in the first quarter, and as I noted previously, that's down 10% year-on-year. Within our insurance businesses and in Europe, in particular, we saw higher-than-usual claims resulting in experience losses. Typical, we would see pluses and minuses in experience across our books of business. This quarter, we had mostly minuses. The first quarter results were also impacted by lower average equity market levels compared to Q1 2018, which negatively impacted fee income. While equity markets improved in the first quarter of 2019 by quite a bit, it is important to keep in mind that the low starting point, following the market declines in the fourth quarter, had a real impact. Finally, the effective tax rate of 18% was high relative to recent quarters. On a pretax basis, our earnings were down 2%.Please turn to Slide 5. The first 2 bullets recap the earnings in quarter that I was just reviewing with you. The company reported a LICAT ratio of 140% and Lifeco cash of $1 billion. As a reminder, the LICAT ratio and Lifeco cash do not reflect any impact of our substantial issuer bid, which was completed after quarter end.As you will see in the pro forma metrics, we continue to have a strong capital position following the bid. M&A remains a priority, and we continue to evaluate the opportunities to advance our businesses, strategies and drive profitable growth.Moving to Slide 6. Lifeco sales increased significantly year-over-year, driven by large transactions in the quarter, one in the U.S. and one in Europe. In Canada, overall sales were down 17%. The decline was mainly due to 3 large fee sales in group customer in the first quarter of last year that did not repeat in 2019. Separate from this, group sales in the small- and mid-markets were up year-over-year, and Individual Insurance sales grew by 33%. In the U.S., there was an outsized increase in sales, driven by a single large plan sales at Empower, which added close to 200,000 participants and USD 37 billion of assets.Beyond that, Empower had a strong sales quarter and Putnam sales were up 40% -- 4%.In Europe, sales increased 95%, reflecting higher fund management sales in Ireland, driven by a large new mandate and higher bulk annuity and wealth sales in the U.K.Turning to Slide 7. Fee income for Lifeco increased 3% from the prior quarter. Fee income was negatively impacted by lower average market levels compared to last year. In the U.S., the decline in fee income at Putnam was partly offset by higher fees at Empower due to participant growth.In Europe, fee income increased 9% year-over-year and 12% in constant currency, driven by business growth and higher investment-related fee income in Ireland.Referring to Slide 8. Lifeco adjusted expenses increased 5% year-over-year, 3% in constant currency.In Canada, expenses were up 7%, with continued investments in technology and strategic initiatives, including the launch of our single brand. The rate of expense growth moderated relative to recent quarters, and we would look to continue this trend.Moving to the U.S. Expenses were up 4%, but down 1% in constant currency, mainly due to lower operating expenses at Putnam, where we have a strong focus on efficiencies. Expenses at Empower were in line with participant growth.In Europe, expenses increased 5%, 8% in constant currency, mainly due to bringing onboard the business of Invesco Ireland, which we acquired last year, and strategic investments related to our U.K. business transformation.I will now turn the call over to Garry. Garry?
Thank you, Paul. Starting with Slide 10. Net earnings in the quarter were $657 million or $0.67 per share, a decrease of 10% year-over-year. As Paul noted, a major contributor to the earnings decline was the higher-than-typical effective tax rate in the quarter. Effective tax rate on shareholders' earnings was 18% compared to 10% last year and 9% last quarter. The increase is due to changes in certain tax estimates in Canada and the U.K., coupled with the fact that comparative quarters were lower than what we would typically see. In Canada, earnings were down 10% due to the higher taxes, plus lower fee income and higher expenses. In the U.S., earnings were up 8%, 2% in constant currency, mainly due to improved results at Putnam, where earnings benefited from lower operating expenses and gains on seed capital, partly offset by lower fee income. Overall, this pushed Putnam's core operating margin to 6.6% in the quarter.At Empower, earnings were impacted by lower investment results with no yield enhancement in period and an asset impairment, which offset solid underlying business growth. I'd also like to note that the very large sale did not contribute to the bottom line this quarter as we brought it onboard, but it is expected to contribute positively going forward. Europe's earnings were down 13%, with higher-than-usual claims in several areas, including Irish Life Health and higher taxes in the U.K., offsetting good underlying business growth.Please turn to Slide 11. This table shows the segment and total Lifeco results from the source of earnings perspective. And as a reminder, the source of earnings categories above the line are shown pretax. Overall, first quarter results reflected a lower level of experience gains, with higher-than-usual claims in a number of our insurance businesses. In fact, life and annuity immortality, health and disability and policyholder behavior all contributed less than they did a year ago. In total, these categories were down $85 million year-over-year. Again, that's pretax.Equity markets rebounded sharply during the quarter, but average equity market levels didn't quite get back to last year's levels. Expected profit was down 6% from the prior quarter, reflecting lower starting asset values. The in-quarter market growth did not impact this line for Q1, though it will be a benefit for expected profit for Q2. Year-over-year, expected profit was relatively flat, with lower expected fee income and higher expenses, offset by business growth, particularly in Europe. New business strain was lower than the prior year, which have included upfront strain on a large longevity swap in reinsurance. Note that new business strain last quarter was reduced by the benefit of upfront gains on bulk annuity sales. We did not recognize such gains this quarter, as we have not yet fully completed asset purchases to back the new sales.Experience gains of $18 million were lower than our historic run rate this quarter. Solid trading gains and positive impacts of equity market improvements were largely offset by life, health and policyholder behavior losses, as well as expenses related to strategic investments. While the higher-than-usual claims are generally considered in-period volatility, we did note an adverse trend developing in Irish Life Health and have recently announced rate increases to restore margins.Management actions and changes in assumptions contributed $151 million this quarter, with more than half of it due to updated U.K. annuitant longevity assumptions. Earnings on surplus of $38 million primarily reflect the gains on seed capital at Putnam and in the Canadian operations.In total, earnings before tax of $838 million were down 2% year-over-year. And as discussed earlier, the effective tax rate on shareholders' earnings was atypically high, at 18%, compared to a lower-than-usual 10% in the first quarter last year.Turning to Slide 12. As a reminder, the metrics on this slide do not include any impacts of our substantial issuer bid, which was completed after quarter-end. Lifeco's uncommitted cash position stood at $1 billion, and this is not included in the Great-West Life LICAT ratio. Our book value per share was $22.07, up 5% year-over-year, and our LICAT ratio was 140%, unchanged from last quarter.As a reminder, return on equity is based on rolling 4 quarters. Adjusted return on equity was 13.7% in the first quarter, and we continue to target a longer-term ROE of at least 15%. Reported ROE of 13.5% includes the impact of U.K. restructuring charges in the third quarter of 2018.Turning to Slide 13. I'd like to spend a few minutes discussing the results for our substantial issuer bid and its expected impacts. As stated in our April 17 news release, the company purchased 59.7 million shares at $33.50 per share for aggregate consideration of $2 billion. The bid was funded by Lifeco cash of $700 million and operating company dividends of $1.3 billion. We expect the impact of these dividends to reduce Great-West Life's LICAT ratio by approximately 6 points. The reduction in shares is expected to add $0.16 to EPS on an annualized basis, combined with lost annual earnings of $0.14 per share from the sale of the U.S. life and annuity business, net accretion is expected to be approximately $0.02 a share on an annualized basis.We expect an increase in ROE of approximately 0.6%, including the impact of both the bid and the U.S. sale, and a reduction in book value per share of approximately $0.75.Turning to Slide 14. Assets under administration were $1.6 trillion, up $159 billion or 11% year-over-year, reflecting the higher market levels at the end of the quarter.That concludes my formal remarks. Back to you, Paul.
Thank you very much, Garry. We will now open the lines to questions from analysts. Operator?
[Operator Instructions] The first question is from Steve Theriault from Eight Capital.
A couple of things for me. If I could first just clarify, Garry was talking about the tax rate, went in some detail there and qualified it as changes in tax estimates. Can we just get a bit more detail, like are you suggesting there were some onetime tax charges or catch-up charges? Or I guess initially, I was wondering if it was more mix issue than the tax rate? So just maybe a little clarity there.
Yes. I'll let Garry to take that. Garry?
Sure. Yes, the tax assets in any given quarter we would both have either setting up or -- setting up of new provisions or settling old tax issues, and there were additions to our existing provisions. They weren't that large in the quarter, probably added 1% or at most 2% to the tax rate. That does -- that can -- they can go plus or minus any given quarter.
But, Garry, the corollary to that would be that the lower-than-normal tax rate a year ago would have probably included a bit of contribution from releases from -- for those tax.
That's right. A year ago, we had tax settlements. The other thing I'd point out in the quarter -- you haven't asked it specifically, but I think people are curious, is in the U.K., it was less of a tax. And we did report in Q4 that we had $30 million of U.K. tax recoveries that were related to the sharp decline in the market. And, basically, $20 million of that reversed this quarter, and it -- in other words, it added to taxes due to the sharp market recovery. So there's a -- this is a legacy U.K. tax item that impacts certain products, and it has an impact of buffering the market moves and has ties to our legacy business that we're actually -- we announced the disposition of, and we should complete the transfer of that to the other party later...
[indiscernible] friendly by the end of this year.
So that plus the -- those of tax rates, as I mentioned earlier, that's what led to an 18% increase. And we'd normally see something lower than that in any given quarter.
Can you remind me, have you in the past or would you be willing to share a normalized expectation for the tax rate or a range?
Yes. Garry, we've talked about this one. So Garry, over to you.
So I'd just share a reminder. The tax rate overall will depend on the jurisdiction mix for the business. We're obviously earning money in a number of different countries, so it does depend in any given quarter on where we earn the money. I think given our current mix, it would probably be in and around 15%, maybe a little bit lower than the 15% range wouldn't be unusual. But again, it does depend on the mix. And then I say, historically, we've had either setting up new [ bridges ] or settling tax matters. And typically that's we set up fairly cautiously, and we look to resolve those positively. But that, again, can move around.
Okay. And one more quick one for me, if I could. Just a clarification on the $23 million gain on seed capital. Can you give us the split between how much was allocated to Putnam versus what was made in corporate?
Yes, Garry.
Yes. That's -- that was split almost evenly between the 2. On the source of earnings, it would be about $30 million because that's pretax. And it was split very close to 50-50, at -- between I think $16 million for one and $14 million for the other. So this -- it gives you a ballpark there.
The next question is from Sumit Malhotra from Scotiabank.
First question is going to be about the ultimate reinvestment rate. Your 2 -- or I guess all of your counterparts have discussed this to some extent. Can you just remind me, where does Great-West have the URR set right now? And the last number I had from a sensitivity perspective was that a 10 basis point reduction would have a net income impact of $50 million. So just hoping you could refresh those for me, please?
Garry, I'll let you do the refreshing.
Sure. The URR is set at $320 million. And you're right, we do disclose a 1% change, which isn't quite the same as disclosing a 10 basis point because these things aren't completely linear. So a 1% change, and I think it is right around $500 million after-tax impact, and it's in our financial statement note every quarter, but it's right around $500 million for a 100 basis point move. So the URR this time around, it will depend, obviously, there's the deterministic interest rate and then they also update the calibration criteria for those who run stochastic models. I think we're thinking that it's just a ballpark. It's -- we don't have the final runs, but ballpark the impact if it does go ahead at the 15 basis points, it's probably in that $50 million or so range. There might be a titch higher, but it's in that sort of range.
Okay. This is relatively small for you guys, it's like $0.10 on book values, so it's not that big. Those numbers, I just wanted to make sure, were not unchanged too much.
Great.
Okay. And then secondly, as far as the investment portfolio is concerned, in your MD&A, in the credit section, you did make some reference to a tenant in 4 of your properties that is enduring some financial difficulties. Just hoping you could give some information. So it's on 4 of your properties, how does that tie in to some of the investment disclosure you've given us in the U.K.? And is it appropriate to link this with the issue we heard about from Great-West as far as U.K. retail exposure 6 months ago as well?
Yes. I'll -- as a starting point, yes, I think it is fair to talk about it in the same context as U.K. real estate -- retail exposure. And I think Raman, who is on the phone, our Chief Investment Officer, can provide a little bit of color regarding the MD&A disclosure. Raman?
Sure. Thanks. And I -- I mean, I'll start by putting this in the context of the whole exposure we have for retail. So if I could ask you, actually, a good place to start would be on page -- if you had slides, Page 26 in the appendix of the slides. We try and lay out in some detail there exposure to retail across the U.K. with -- in mortgage as well as properties. If you look at our shopping centers, department store exposure, you can see there is 0.4% of invested assets, so relatively small amounts. Some of the details below. The overall LTVs on our retail mortgages are just over 50%, at 55%. The other color I might add to that, which is not on the slide, but if you think about the markets, there's been a market shift in the way of mortgages were underwritten following the financial crisis. So you have following the financial crisis, you have stronger underwriting, you have more diversification with respect to tenants, less exposure of retail and lower LTVs.
And actually stronger covenants as well.
Stronger covenant as well. So our -- to-date, the losses you were mentioning before, 6 months ago, what we disclosed in the MD&A, that's -- that has been concentrated primarily in our precrisis exposure. We haven't taken any write-downs in our postcrisis mortgages exposure. And over the years, what's happened is, due to amortization, maturities, dispositions and limited number of defaults, bulk of our exposure now sits in that postcrisis mortgage origination, as opposed to precrisis mortgage originations. So we feel that -- while, there will be continued headwinds in U.K. retail and retail in general, the data here on Page 26 as well as this composition shift to the post financial crisis, originated mortgages keeps us well insulated from the headwinds they will expect to continue in [indiscernible].
And Raman, for this specific retailer that you call out in terms of the April 2019 of that, what kind of exposure are we looking at here in terms of -- which category does it fall into and what are the numbers like? And, specifically, so it's under -- I think you phrased it here it's under the control of its secured lenders. How does -- how are you anticipating the creditworthiness or the credit impact to Great-West changing as a result of that shift?
So that situation remains fluid -- it's uncertain, basically. So, the company, as we mentioned in the MDA -- MD&A, they're entered into a prepackaged administration. There's likely to be a, something called a CVA, which is a company voluntary arrangement, is basically a type of insolvency proceeding. But we're awaiting the results. This is going to be -- there will be creditor votes. This is going to be details, which will come from that, which we're awaiting to see. So at this point, we don't have enough clarity or information around the situation to quantify it precisely. But it's something that we're watching. And as that CVA process unfolds, you wouldn't be surprised if there are some impacts. But at this point, we don't have clarity.
Last one for me will be in and around Empower. So the staying in the slides, the fee income disclosure that you provide to us shows a increase of 3% year-over-year. We've talked a lot about the pressure on fees and margins in the asset management space. I guess, maybe so somewhat broadly, when we think about Empower, are you starting to see some of the same fee pressure enter into that space, which hadn't seen into the same extent? Or is the slower pace of fee growth related to other factors, such as just broader market conditions? Just kind of an overview on what you're thinking about the fee trend in the Retirement Services.
Yes. So I have turned it out, but generally speaking, I think some of the same themes we talked about which was, if you look at Q1 2019 versus Q1 2018, while there was that great recovery post Q4, we didn't get back to Q1 level. So that is a starting point. There's sort of a dampening effect of market levels. And that impacts all of our fee, either our direct fee businesses or fee-related businesses. But I'll let Ed speak more to strategically kind of where that in the Retirement space.
I mean, this is just a comment on the quarter to build off of Paul's comment and then I'll speak more broadly about fees. But with respect to the quarter, you have some repricing of the book. Clearly, where we were marking to market on clients that have been on the platform for some time, and revenue has grown as a result of asset growth. You also have the impact of that one large sale that we have, over 200,000 participants. So that impacted fee revenue. That was a fixed fee arrangement. So that sort of speaks to the quarter. More broadly, I'd say, there's fee pressure both on the investment side and on the admin side. I think it's starting to level off a bit on the admin side. But you're still seeing downward pressure on fees, which is why, we -- frankly, we've been focused on generating other sources of revenue to offset some of the degradation in the admin fees.
I think the other aspect that I would note is that the key here is you've got your revenue per participant, and then you've also got your cost per participant. And Empower has been very focused on a transformation initiative to drive down the cost per participant. And the key is, if you can be leveraging your scale, plus a lower cost per participant through automation, you can get ahead of fee compression. But the reality is, fee compression is a constant and really across all asset management-related businesses.
And we saw the cost per participant dropped 2% year-over-year. Frankly, I think it would've been lower if not for some onetime outside legal fee growth. Good trend overall in terms of cost per participant.
And are those that we -- I won't get specific here. I know you can't talk about specifics in that sense. Obviously, there was a well-publicized transition in the space. Is it fair to assume that, that downward pressure on fees is increasing the willingness of potential sellers to lead to the consolidation that, Paul, you've -- you certainly highlighted as something you expect for the last few years?
Yes. Well, I actually -- I'll make a very high-level opening comment, which is, yes. And now I will turn it over to Ed to provide some context because, yes, scale, you cannot be competing in this business without scale. Ed?
Yes. No, clearly, our view is, we'll continue to see more consolidation in the space. I think based on the transaction -- the most recent transaction and the level of demand that there appeared to be in the market, I think that there will be other sellers. It is a scale game. We think scale is at a minimum 3 million to 4 million participants. So the cost to serve is getting higher. And if you don't have the scale to compete, then you probably look in -- at alternative approaches, so.
The next question is from Doug Young from Desjardins Capital Markets.
Maybe I can just keep going with Empower. And I think there's some moving part here that maybe I'm missing. But it looked like on a U.S.-dollar basis, the earnings were down 14%. Your participant level was up 7%. And I get that includes some of the sale that came through and not all the revenue from that sale came through, but participants were still up, even excluding the sale. And I think, Garry, maybe you mentioned that there was an impairment charge that may be factored in here. So I'm just trying to understand the different movements here. And in participants, I think what you've indicated in the past, participant growth is what's important, because it's sometimes fee per participant, but then how important is the asset level to this as well? Just hoping to get some color.
Yes. There's obviously a number of moving parts. I'm going to let Garry speak to the investment impact. But when we think about Empower's contribution in a given quarter, there's going to be the core business, which is, as I said, that revenue per participant versus cost. And then there's going to be aspects of the business that are related, but not directly related to the core. So that would be, for example, your investment gains to the extent that we got assets backing liabilities. And so the Empower core actually is moving along quite nicely. I think you pointed out the 7% growth, which is -- that's organic. And I think Ed will tell you that's 2 or 3x the market level. And we're working at revenue and cost per participant. You then get related issues like investments, and Garry will give a little bit of color on that. And then, Ed, if you want to add more, go for it.
Sure. Thanks, Paul. The -- what I'll call the noncore, the nonproduct part of Empower, these are investment-related items, yield enhancements and assets, either recoveries or impairment. The delta, the change year-over-year that is in U.S. dollars, so you're -- you quoted native currency. In U.S. dollars, it was $7 million, which is getting close to 20%. So it is a -- that was a big driver of the year-over-year change. The underlying product business of Empower did actually grow as we'd expect.
And what's that -- what does that relate to, Garry?
The one impairment, this is you might remember some California wildfires and Pacific Gas and Electric. We did have some of that. And Empower would've had a share. It's in a couple of our businesses. Again, not substantial holdings, but in the year-over-year comparison, we didn't have any impairment last year. In fact, I think we had a recovery last year on some of these. So as -- and yield enhancement, the yield enhancement market is not that attractive in the U.S. at the moment. It's -- other jurisdiction is good, but the U.S. is not much opportunity for yield enhancement.
Ed, anything else you'd add on the...
Not really. I will just say to Garry's point, if you look at earnings growth from the core business, up 4% year-over-year, excluding the asset impairment that you referenced,
Yes. And then the other point I'd make is that the addition of that one large client, this would be a quarter where the cost to set it up, the cost to actually put that under the books, outweighs the benefit you can get from it. So it will start to become a contributor. So you get kind of the benefit of the 7% lift in parts, but a lot of those parts were related to that particular account. And so we'll start to see the full -- not the full benefits, but it'll start to carve in over the coming quarters, but at a time as the acquisition cost kind of trail off.
And if you exclude the large mandate, participant growth was 4.6%, 4.7% versus a market that's growing at 2.2%. So you still had a multiplier impact.
Okay. And I just -- and maybe for Arshil. I mean, there's a lot going on in the U.K. But Brexit aside, it looks like there could be a change of government, I'm not going to speculate on that, but tax policy changes are being thrown around and some of those changes, while some of the current tax policies are supportive of demand for reverse mortgages, some of that could change and impact that, at least that's what I'm getting from what I'm reading. But I just wanted your thoughts on, and I know it's very fluid, but any thoughts on that particular topic?
I'm going to start, then I'll turn it over to Arshil. It's Paul. Our U.K. business is a domestic one. So clearly things like tax policy that would impact the attractiveness of products and services is always going to be on our mind. That said, we weathered lots of tax policy changes. You think about the restructuring of the tailed annuity market with the ability for people to access drawdowns and the like. And we've pivoted quite nicely with different products and services with the acquisition of Retirement Advantage. So while, changes in government will happen, we've got a core business that underlying it is all about serving the Retirement income needs of people in the U.K., big population, huge well of money rolling from defined benefit plans into a need for retirement incomes and needing for advice. And so we kind of look at that and say fundamentals are -- even with change in government, there's opportunity there. But Arshil, maybe you can prognosticate a bit on where you think things might go.
What I would add is, in the near term, I think Brexit dominates all of the political discussions in both governing party and in the opposition parties. So I am not expecting and I am not reading very much about any near-term public policy changes impacting either equity release or the pensions' market. I would say that over the medium-term, there was some change around the use of equity release to fund retirement income. It would almost certainly happen at the expense of pensions. So people will still need money at retirement. And if they're not drawing out of equity release products, then I think we will see an extra pickup on the annuity side. So I do feel reasonably comfortable that we're sort of hedged between the 2 parts of that business or whatever. So yes, we're seeing some people draw equity release to fund retirement and then keep their pension invested in not annuitizing. So if there were -- ever was a shift over or whatever, I think the fact that we're participating in both sides of the business, it will give us an agility to capitalize on the other side. But again, I'm not expecting anything near term because I think Brexit is sort of dominating all of the political discussions for both parties. And that will likely drive sort of the discussion into the next election is, like whenever that happens.
Okay. And if I can just sneak one last one in. In Putnam, I think, Paul, you mentioned last quarter, you're taking further actions to maybe cut costs or to improve efficiencies at Putnam. Any updates on that?
Yes. I'll let Garry start just for the bit of color, and then you might want to turn it to Bob.
Yes. Sure. Just on the operating expense saves, I think we've tallied about $12 million in after-tax worth of operating expense reductions for a variety of factors. So it was headcount-related. Some of that is also in the incentive compensation side. So -- and then some on the systems side as well. So across the group -- just a real focus on efficiencies at Putnam.
Yes, Bob?
Yes. It was a project we started last June and it's called fast forward and just take a look at the overall cost structure, some of the cost savings that we identified, such as double rent and different things like that, were going away by itself. But we went after many, many projects, and we're on track for the cost savings we have set forth for this year.
And what are -- is that $12 million, is U.S. dollars, Garry? And then can you talk about what your target is?
I don't think we'd -- I don't think we've published or generally we publish a target on that, although we've made good progress, and I do believe the $12 million was actually U.S. dollars, yes.
Yes. But we're -- they're still -- we're still working on it, and we would expect some further contributions.
The next question is from Gabriel Dechaine from National Bank.
So a quick few questions here. Ireland, the product, you talked about health insurance product, where morbidity is elevated now and you're repricing it. That's an individual product or group? Not that it matters really, but...
No. I'll turn that one. Just a reminder, you think about our -- when we're dealing with some group morbidity issues in Canada, a group LTV in particular, couple years ago, and it took us a number of quarters to reprice and to sort of get back to our target margin levels. And I think it would be good for Arshil to provide some context -- some comparative context on what we're talking about in Ireland.
Yes. So the business in question is Irish Life Health. It is an individual health business, so this is the combined previous Aviva Ireland Health business that we acquired, along with the GloHealth startup, that we backed. So those 2 businesses came together under the Irish Life Health banner. It's the #3 player in the Irish Life Health market, and it's largely annual contracts covering major medical and both public and private hospitals. And what we saw in the fourth quarter and continuing into the first quarter is an elevated utilization level of hospitals and a slightly longer stay in the hospitals leading to higher [ pay ] costs. And in response to that, we're putting through pricing adjustments and embed over the next round of renewals over the next 12 months. And then we're monitoring all the trends as closely as we can, and we're committed to taking pricing actions to maintain margins in that segment.
So that's an annually repriceable product? And is that maybe a year from now before we see that normalize? Is that correct?
I think it will take us a year to get the full restored margins in. I'd be cautiously optimistic that the higher claims utilization, that we won't see the same delta going forward as we've seen. So I think we've seen the increase in the utilization and increase in the length of the stay. I hope that doesn't continue upwards from where we are now. So...
So it could take a few years. What was the [indiscernible]
[indiscernible] 18 months, I think.
Gabriel, typically, the group LTV takes a little bit longer as it did in Canada -- because sometimes, you got 2-year rate guarantees, and you're waiting for a year from now. This is one where the rates are up. Next week, rates are -- next week's renewals rates are up, and the week after, and the week after. So the reality is it will carve into this next 12 months.
And what was the specific number of experience loss on this product?
I don't think we're calling that. That would be market sensitive. We have competitors in that market, but it was largest contributor from expected -- from an experience gain perspective in the Europe, $41 million number. So...
That's okay. All right. Expenses in Canada were not as -- well, they were similar to what we saw in Q4 on a normalized basis. And I'm just trying to understand that cost savings that we're expecting from the restructuring a while back, is it safe to assume that the lion's share of that was being reinvested?
Yes. I'll start on that, and then I'm going to turn it to Jeff Macoun. So as a starting point, we started out some elevated -- we obviously went through the restructuring, and we brought savings. We then made a focused and intentional investment starting in Q2 last year. And it was a fair number of automation initiatives, a fair number of innovation initiatives, all with the objective of trying to drive out expense savings, try and drive new revenues. So you had that elevation. What you'll see, obviously, as we go into future quarters is, this will be the last quarter where we're going to see a comparison to where it was relatively low Q1 last year. So we'll see a natural moderation. But the reality is yes, we are investing significantly in the business. And maybe Jeff could speak to that. But I will make the point the investments are actually to drive out a number of benefits, one of them being to fundamentally lower cost. So you can lower cost by just taking headcount out. But if you can automate and get straight through, once the adoption has taken off, you can really drive out cost savings. So Jeff, maybe you can provide a bit of context as to what you see going forward.
Gabriel, I'd just add a couple things to what Paul said into your question. In quarter, as I think you called out, we're actually down 1.2% from '18 quarter to '19 or about $8 million. But in quarter, there's really 3 drivers of the expense. To build on what Paul says, one is that really a development spend. And we're seeing good progress on that. I think we've called out some of that in the previous calls or into the market. Our investment on SimpleProtect, which is now at in market. And we're having good success with e-enrollments, which is through the group's side, which is -- which we've launched to close to 10,000 customers, adviser workspace, some work on our GRS platform. So I would say of the 7% in quarter, that's a contributing factor. The other one, which we talked about at the start of the call, was brands. There was investment in quarter on brands as to our successful launch on April 3. And in addition to that, investing in the future in some of our tech areas. All 3, though, with a goal of development of greater growth revenue going forward.
And Jeff, to your point, when you think about things like SimpleProtect, it makes the whole underwriting process paperless. And therefore, for argument's sake, you could say peopleless. So you are really getting to a point where we're really thinking about benefits that will drive revenue, but also benefits that ultimately, with adoption, are going to drive down cost. Same thing that Ed Murphy's working on as he looks at the transformation in Empower to lower that cost per participant.
Okay. Last one, M&A. We've been told that it's still a priority. I imagine the usual suspects, either it's something for Putnam that looks like Putnam or something for Empower that looks like Empower, but smaller, let's say. Is there a possibility that we see you expand the scope of what you're looking at to include something that may include asset management, but also an insurance-type element to it? Or are you strictly looking at your Putnam-like and Empower-like entities?
That is -- that's a good question. I mean, obviously, if you could exactly define what targets would look like and then just sort of conjure them up and they'd show up, that would be a wonderful thing. But the reality is the targets you look like don't exactly ever match. You're looking for businesses that are going to be complementary, that are going to drive synergies, scale. And then, obviously, you're looking for cultural fit as well. Those are always going to be core issues. I would say that as we think about the U.S. in particular, we like the growth prospects for Empower in the retirement space. Ed talked about scale. But sometimes, the targets might be businesses that could have complementary capabilities. It doesn't necessarily -- it might not be just the pure 401(k) record keeper. It might be a record keeper with some other capabilities for reaching end customers. So we're open to acquisitions that will not only scale, but also extend our businesses. On the other hand, we're not looking for businesses with scale, but also distract our businesses. In other words, getting yourself into a space that's not a competency, a space where you actually don't want to play. Let's say it was a high-risk insurance business that was complementary to it -- attached to it. You wouldn't be so attracted to that. If you think about Putnam, Putnam is an asset manager. And in the context of thinking about how you would scale Putnam, you'd love to get scale. You'd like to get that complementary capability. You'd like to have the right culture. And then the other aspect of Putnam always would be -- if there was things that could be added to that, it would tend to be net capability or it might be a bit of a reach into distribution if you could access some direct customer relationships. That would always be complementary. But I'll let -- Ed, why don't you, each of you and Bob, just speak to [indiscernible].
[indiscernible]
Go ahead.
Before -- because I might forget some of it. You said there the -- what I'm reading from -- or hearing from your comments is something that, let's say you had an asset management fees, but attached to it was some sort of individual insurance business you wouldn't...
No, no, no. That wasn't my -- that was not what I was saying. What I was saying is that asset -- I was saying in general asset -- Putnam will be more of a pure play asset management acquisition. I was just saying that asset management sometimes is not always third party. It might be -- there might be some direct client relationship, so you would always be open to that. But as we think about an asset manager that then has a very large insurance enterprise attached to it, not the ideal fit for us at this point in time.
The next question is from Paul Holden from CIBC.
Quick one on Empower to start. I recall -- I can't remember, it was 2 or 3 years ago, but you had some large sales at that time. And I remember it took sort of 12 to 18 months for the fee income that's associated with those sales to really ramp in. Is that going to be the case here as well? Or should we expect something different?
So Ed, why don't you talk about just sort of the -- what you see the trajectory there.
Yes. Well, first, in the large case that we referenced earlier, that will contribute in the second quarter. But typically, on the large cases, that takes 12 to 18 months to implement. Between all the acquisition and implementation expense, you're really not looking at a cumulative breakeven until about a year, a year to 18 months.
Garry?
Just I would note, that's a cumulative breakeven. In this case, we've actually got -- the case is already up and running as of January 1. So the last of the acquisition costs went through this quarter, which basically did no contribution. It will start to contribute in Q2. Most of the implementation cost, the sort of the expenses, were actually incurred in 2018. We just -- were not talking about them.
Yes. So Paul, the point being there, we've actually taken the expense drag for the most part. It will start to wane in over the coming quarters, and we'll start to see the benefit of the net contribution starting next quarter.
Got it. That's very helpful. And then a follow-up question on the Irish Health situation. Do you have a sense on whether the adverse experience is particular to your business or if it's more of a industry-wide phenomenon?
I'll let Arshil speak to that.
At this point, we're not aware of the situation with respect to our competitors. So we analyzed our own experience, and we made our [ piping ] decisions. Our competitors tend to report on an annual or less frequent basis, so whatever. So I can't say definitively whether that experience is just ours or an industry phenomenon.
Arshil, for context though, when we're dealing with our Irish Life Health customers, they are accessing services at, as you said, private or public institutions that other competitors would have their customers going to as well, correct?
That's absolutely correct or whatever. There's very little difference in provider access here, particularly, on the hospital side. So all of that insurance carriers in that segment of the market are dealing with the same suppliers, particularly at public and private hospital services. So little or no differentiation there. So it's likely that you could read this over, but we don't have any definitive knowledge what our competitors experience. So...
Got it. Okay. Really, what I was trying to get at there is what you think your customer retention experience might be as you reprice the product. But if it's industry-wide, obviously, retention should be okay. And then last question. Garry, you made an interesting comment about the U.S. yield enhancement market, and I think you said it was not good right now. Maybe you could expand upon that thought and why it's not good at the current time.
I think that's probably a better one for -- Garry, you can start, but that might be better question for Raman.
I think I'll let our Chief Investment Officer go. It's a great question for Raman.
Yes. I think the short answer is it's just the function of the market opportunity. If you look at not just stocks hitting record highs recently, but look at the credit markets. If you remember, the bulk of our investments are in public and private fixed income as well as commercial mortgages. And you're looking -- especially given the rebound in Q1 of tightening in credit spread across the credit spectrum, both public markets and private markets, significant amount of demand for private assets and commercial mortgage loans. So we gain yield enhancements via the -- being able to rotate into higher spread opportunities without adding credit risk. And right now, in U.S., those opportunities were limited, given the valuations across most fixed income and mortgage space.
The next question is from Tom MacKinnon and from BMO Capital.
First question's for Garry. I think you had said that -- well, you had some bulk annuity sales. And in the U.K., you haven't fully completed the asset purchases to back them. So consequently, we have a strain -- more negative strain in Europe than we would normally have had. Assuming that you had purchased those assets, which I assume you're going to be doing shortly, what would that -- what would the impact be on the strain in Europe as a result of that?
Garry, you should answer that question.
Thank you, Paul.
Or you should choose to answer that question.
No, no. Yes. So in general, the strength we had in the quarter, which I'll call the typical strain we had on the investment products, where we don't -- we can't defer all the acquisition expenses. So we always label that good strain, because obviously, we get the fee income in future periods, and we've have already paid for the acquisition cost. The bulk annuities, when we get them and we have the permanent assets, they are typically a positive. The short answer to your question, Tom, is that it will depend on -- if we get the type of assets we're looking for, then we would expect to see some gains on that. The quantum of the gains will entirely depend on the assets we can secure. But typically, these have contributed positively, just not this quarter. We didn't have either strain. We had effectively a neutral contribution from the bulk annuities we've written, but there's still some work to go to finalize those. So we should expect it to be positive, just don't know the quantum yet.
Okay. The reason I ask is just because in the fourth quarter, you had only $11 million of negative strain. And you mentioned that it was because you had gain from bulk annuities. And then you sold a bunch of bulk annuities this quarter, and you don't have it yet. So...
Yes. We just haven't got the permanent assets yet.
Okay. And the next question's for Raman. We never really did get the exposure of these properties in the U.K. associated with this U.K. retailer. So if I look at Slide 26, you got $830 million total in terms of the U.K. retail mortgages and investment properties in shopping centers and department stores. How much is -- are these 4 properties that you've been talking about that are going into insolvency proceedings?
So Garry, I'll let you start on that.
Yes. We haven't actually disclosed the property-by-property mortgages. I'd characterize the exposures we're looking at in the tens of millions. So it's not a trivial exposure, but it's certainly -- it's a well-diversified book. So it's only a modest portion of that, the amount you see on Slide 26.
Okay. And then I guess the final thing is with respect to Empower. We get a lot of discussion going on here, the fact that fee income was up, but pretax earnings were down and operating expenses were up and the same kind of measure as fee income. So I guess what we're getting at here is this is the first I've heard of core business in Empower and noncore business in Empower. So in order to get any kind of better visibility as to what's happening with Empower, presumably if we can get a little bit better disclosure in terms of when Empower's core business is, which is really bringing in participants and getting fee income and getting better cost per participant, getting that stuff down. And then as all other noncore stuff, which has active back-end liability and impairments and yield enhancements. And I'm not sure how that fits into a record keeping platform, but just my comment.
Yes. Just as an opening comment, if you think about Empower as the business, you're absolutely right. You think about fee income and then cost per participant, so fee per participant, cost per participant -- and at the end of the day, that will drive. And I use -- it's like I made up a new term for everyone today, core income. I perhaps regret that. But the other part of this is one of the products we provide would be a general account product, which provides clients with a certain type of guaranteed return products. And that, obviously, would have assets backing liabilities and investments, therefore, investment gains or losses. So that's the little bit of background context on that, but I'll let Garry speak to disclosure.
Yes. Sorry, just upon on that, I mean, we've -- in our -- in the appendices, we do put the fee and the expenses, which are the main drivers at Empower. It is the -- as Paul mentioned, we do have this general portfolio fund. And that can have some yield enhancement from time to time. And occasionally, and it is quite rare, but we do have -- we could have an asset default situation. Typically, it's very small. Usually, when we do have, we call them out. But other than that, they're -- they don't make much of a contribution on a regular basis. Most of what you see in Empower is the core underlying business. It was just from time to time, you'll get a swing. It was unusual this quarter, we had a strong contribution from -- in Q1 last year, and a negative this time. That's why you're getting a bit of a swing year-over-year, but it's the reason we've stayed with this. Those other amounts are generally quite small.
The next question is from Darko Mihelic from RBC Capital.
I just have a couple of question. The first one's simple and straightforward, I think. Just looking for any sort of thoughts on the amalgamation, if there's any cost that you will have to go through in that and we'll see in earnings. But more to the point, is there any sort of capital impact and if things sort of stay the same at the top of the house for the holdco?
Yes. I'll let Garry speak to that.
Sure. Answering those in reverse order. Yes, it does stay the same at the top of the house at the holdco. And we wouldn't expect to see capital impacts. There's -- you will obviously -- will look at the ALM that might have some benefits and bring all 3 companies' ALM together. But we already manage those quite costly. So I don't think there's going to be significant changes there. And on the cost side, there are costs, there's mailings and various administrative costs that will take place here. But again, I don't expect those to be material in the year, and that will be -- we've already had some with the -- with the various advisers, and that will carry on. So I think we have them as characterized as not material.
Okay. That's helpful. And just a question on the U.K. business, rather big drop in life expectancy in the U.S. -- sorry, the U.K. And recognize that you did take some action there with your reserves, but it seems like you've done bigger actions in the past. And so I'm just curious where you stand on that. And should we be expecting more reserve releases for the drop in life expectancy out of the U.K.?
It's Paul. I'm going to turn that to Garry and then Arshil may add some color. But our general stance on this is to take a conservative approach. We're not going to be reacting quickly to things like that. You want to look at the population mortality and annuitant mortality in our own experience. And we want to be cautious as we approach that. But I'll let Garry add a bit more color.
Sure. I think we -- you touched briefly on the -- probably the key point to this is that the CMI study, the continual mortality improvement study, in the U.K. That is a population-based study. And one of the -- if you read through the reports, they did note that some of the different subsets of population were moving at different rates. So we're taking a -- we did take some action in the first quarter. The news came out and confirmed some of what we had been seeing on our own, so we took some action. Our actuarial team there and -- corporately and in the U.K., are working on analyzing how the various subsets might affect our own book of business, different socioeconomic demographic groups there. So we certainly have work to come this year and as we have news, we'll obviously disclose that news.
RThe next question is from Mario Mendonca from TD Securities.
First, can you help me understand a little bit more about expected profit in the U.S.? Like that whole concept of core or high grade, it's something I hadn't really heard of before. But I understand the concept. Would it be fair to say that expected profit in the U.S. would be a reasonable proxy for what's happening to, let's call it, the core participant business? And if so, is it true that the reason why we didn't get U.S. expected profit growth this quarter is because of the reinsurance or the sale in the U.S. life and annuity business? Help me understand that.
That source of earnings question, I'm going to let Garry interpret that one.
Sure, sure. The first part of your question, I think for the businesses there, if you look at the Empower and the Putnam business, it really is going to be -- the expected profit is a good proxy for those underlying earnings. You're absolutely right with that. Probably the biggest driver there is generally it's going to be your asset under administration, both the quantum of them and also the mix of them across various asset mandates. So you’re, because a lot of the fees are asset-based in a lot of the margins, not entirely in the record-keeping side, but a lot are. And again, the expected profit is set right at the start of the quarter, so the December 31 market. So coming in to Q1, obviously, markets were quite a ways down from Q4. So the expected profit gets hit quite a bit. That will reverse in Q2 because we already know that March 31 ended much higher than December 31. So there will be a pickup in expected profit. The ultimate earnings will obviously depend on how their quarter all unfolds, but the expected profit, we know from the -- from market impacts, will be higher. I think the drop from Q4 to Q1 was something in the order of $35 million to $40 million in the expected profit drop across Lifeco, just from the change in market levels from September 30 to December 31. So did that give a little more color on that, Mario?
It does. So it sounds for me that with the improvement in AUM market participant -- sorry, participant growth, Q2 expected profit just simply should look better, certainly better than Q1 in the U.S.
Yes, yes.
Okay. Then I think it's -- I think everybody would appreciate it, I think you've even highlighted it yourself, that experience gains and management actions make a meaningful contribution to this company's pretax earnings every quarter, certainly more than they do for your peers on a core basis. Garry, is there any way you could look at your experience gains and management actions or whomever, if someone else, if it's probably for someone else, Paul, you let me know. But is there any way you could help us understand the composition of those in the quarter and in previous quarters, maybe so we're not so surprised when we get volatility in those numbers? And I think it's fair to say there has been more volatility in the last few years than in the past? Is there anything you can offer us there, so that maybe we're not so surprised when it drops.
I'll let Garry take that -- and go, Garry.
Sure. So I'll take -- every quarter moves around, but what -- I won't get too granular on this, but I'll put it into maybe 4 categories. So on the investment results side, we would've had a contribution in the order of $70 million, I'll just use round numbers, whereas the insurance component, this is the health and some of the mortality impacts, they contribute overall a negative, probably around the $50 million mark. Expenses, fee pressures, some of those probably in the $30 million mark.
Negative?
On the market. $30 million negative. That's negative, so you've got $50 million negative, $30 million negative, $70 million plus from investments. That's our yield enhancement activity primarily. And then the markets themselves, they started low, but they really picked up during the quarter. So in period, we had gains of about $30 million. So that's how you end up with a net of about $20 million. I will say $18 million was the actual number. That give you some more color?
It does. That would -- something like that on a more regular basis would be helpful, so that maybe we're not so surprised, because what would be really good to know now is that $70 million of yield enhancement, how does that compare to prior quarters? How does $50 million negative in health and mortality, how does that compare? So something like that on a more regular basis so we're -- maybe we're not so surprised would be very helpful, but I do appreciate you taking the time to go through it now, Garry.
Right. And I think it's fair, Garry, to say that we're -- there's always potential for volatility. So you could think about averages and this quarter in particular, we called out that insurance contribution was the one that was -- that we had unexpected volatility in that -- in the mortality and morbidity side.
Yes. And usually, that's closer to neutral.
Neutral or -- yes. So that -- was the one that was more of a surprise.
Thank you. The last question is from Scott Chan from Canaccord Genuity.
Garry, I want to go back to Tom's question on Slide 26. And I just didn't understand the, I guess, the reference of the comparison. Just in terms of the exposure to the 4 U.K. retail property, you said it was in the tens of billions. But if I kind of compare that to the amount on the total aggregate of $830 million, is that what you're trying to drop on? Or is it something else?
Sorry, that was tens of million.
Oh, tens of million, okay. I thought you said billion.
That was Garry's Austin Powers moment.
Yes, yes. It's been a long day so far. Maybe just lastly, Paul, just on the -- now that it's behind you -- and if M&A pipeline or if the M&A is kind of more muted this year, how are you thinking about the current NCIB that you have in place?
I would say we're not sort of thinking in terms of the pipeline being muted. We think there's opportunity out there. I mean if it ends up muted, we'll obviously need to think about our overall liquidity cash position, and we'll think about making sure we have our capital working for it -- working for us. Garry, anything else you'd add to that?
No. I think you summed up well, Paul. It's one of the tools we have, not a focus, particularly at the moment, given that we've just completed the substantial issuer bid. So -- but it's something that, obviously, going forward, it's just one of the tools we have to manage capital.
Thank you. There are no further questions registered at this time. I would now like to return the meeting back over to Mr. Mahon. You may proceed, sir.
Thank you very much, operator. With that, I would like to thank all of you for joining us on the call today. Please contact Investor Relations if you have any follow-up questions, and we look forward to speaking with you again next quarter. Have a great day.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.