Great-West Lifeco Inc
TSX:GWO
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
38.84
50.79
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Great-West Lifeco Inc
You don't have any saved screeners yet
Good afternoon, and welcome to Great-West Lifeco's Second Quarter 2019 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, Patrick, and good afternoon, everyone. We're glad to be here, and welcome to our second quarter 2019 conference call. With me on the call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. Garry and I will deliver today's formal presentation, although we have a number of other officers available to answer questions as required. That includes Arshil Jamal, President and Chief Operating Officer of Europe; Jeff Macoun, President and Chief Operating Officer of Canada; Ed Murphy, President and Chief Executive Officer of Empower Retirement and the Great-West Life & Annuity Insurance Company; and Bob Reynolds, President and Chief Executive Officer of Putnam Investments.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 material. I will begin with an overview of Lifeco's second quarter results, including a strategy update for each of our businesses, and Garry will then take us through a more detailed financial review. After our prepared remarks, we will open the line for questions.So let's start with Slide 4. The company reported adjusted net earnings of $658 million in the second quarter. This result included losses of $84 million related to U.K. retail property-related investments, and Garry MacNicholas will provide context around this matter in his comments. I would also note that Q2 2018 results benefited from a $60 million onetime refinancing gain in the U.S.The other unusual item impacting in-quarter earnings was the close of the sale of our U.S. individual life insurance and annuity business on June 1. Consistent with our disclosure around this transaction, we recorded a net loss on sale of $199 million resulting in net earnings of $459 million for the quarter. Setting aside the impact of these unusual items, we view this as a solid quarter supported by strong underlying business performance and a lower contribution from basis change.Turning to capital, the company reported a LICAT ratio of 136%, down from 140% last quarter. This result reflects the 6-point impact of our substantial issuer bid completed in April. Lifeco cash of $300 million does not include the cash from the ceding commission of $1.1 billion related to the sale, nor approximately $0.5 billion of statutory capital freed up in the U.S. insurance company. I would now like to take a few minutes to touch on the progress we're making on the strategic front across our 3 regions.Turning to Slide 5, in Canada, our move to one brand and the process of legally amalgamating our Canadian insurance companies is a core part of our strategies. These initiatives will simplify our business, increase our speed to market and allow us to better focus on meeting the needs of our customers and advisers. The Board has approved our plan to create a single legal entity, and we're moving forward with presentations for a policyholder vote in the fall.Our transition to one product shelf under the Canada Life name is underway starting with the Individual Customer business. We're generating momentum as we meet with advisers and introduce the Canada Life product shelf, including a number of new product launches. Along with an enhanced critical illness and new investment fund offerings, we've introduced new term 30 and term to age 65 life insurance products giving our advisers and their clients a broader range of coverage options. Both are available on SimpleProtect, our digital insurance app, which has seen strong adoption rates to-date.SimpleProtect has dramatically reduced application processing times from weeks to an average of 20 minutes to complete the application with some receiving instant approval. Customers and advisers are embracing the simple, faster process with 62% of eligible applications submitted through SimpleProtect in June. We've also been improving our digital capabilities for group life and health customers with plan member self-enrollment, which is now available to 80% of our sponsor base. It then allows new plan members to activate their benefits online the same day they enroll eliminating a paper-based time-consuming process.In Europe, Lifeco leveraged its capabilities in the payout annuity and pension buyout markets where we wrote several U.K. bulk annuity deals and completed a long-term longevity reinsurance transaction covering GBP 2.5 billion portfolio of U.K. pension obligations. Our U.K. transformation, including the integration of Retirement Advantage, is proceeding as planned. We're migrating our Canada Life legacy systems to Retirement Advantage's modern and scalable platform. This will position Canada Life U.K. to deliver a competitive retirement-led wealth offering to financial advisers combining the strengths of Canada Life in payout annuities and Retirement Advantage in equity release mortgages.In Germany, where we're a top player in the unit-linked broker market, we've launched our new administrative platform, which is delivering improved customer and broker services at lower costs. This new platform will allow us to -- will position us with new capabilities to compete in the emerging group retirement savings market in Germany. Irish Life launched the MyLife platform into the Irish market during the quarter. MyLife is a personalized health and wellness app that promotes healthier and more active living. This is part of a broader strategy to increase engagement with our customers across our Irish Life retail, corporate and health businesses.And moving to the U.S., we completed the sale of our U.S. life and annuity business with a transaction value of CAD 1.6 billion made up of ceding commission and freed-up capital. The proceeds will support our M&A ambitions in U.S. asset management and the retirement markets. Empower Retirement had a strong quarter reaching USD 640 billion in assets under administration with solid sales across all product lines. Empower continues to deepen its offering for participants, including a focus on capturing IRA rollover business. Empower's IRA business launched in 2014 reached a milestone this quarter of $10 billion in assets under administration. This is an important starting point for Empower's long-term strategy to extend member relationships beyond retirement.Empower also recently launched adviser-managed accounts where advisers have the ability to deliver unique investment solutions for their client participants. I will conclude the strategic update by highlighting the improvement in Putnam Financials (sic) [ Investments ] performance this quarter. Putnam saw its pretax operating margin increase to 9% driven by an ongoing cost reduction program and an improvement in performance fees. Putnam's fund performance remains strong with 22 4- and 5-star funds in the lineup. As of June 30, 2019, Putnam's 3-year fund performance included 90% of Putnam's funds above the Lipper median and 74% performing in Lipper top quartile.Please turn to Slide 6 for a further discussion of the second quarter results. Lifeco sales were up 4% year-over-year, mainly due to higher sales at Empower and in Europe. In Canada, sales were down 3%, mainly driven by group customer sales mix with lower large case and creditor sales, but continuing strength in the higher-margin small case market. While we continue to be a leader in individual life insurance sales, an area of softness was our individual investment fund sales, which were down year-over-year, consistent with industry trends.In the U.S., Empower followed record Q1 sales with a solid 25% year-over-year sales increase in sales in Q2. This result reflected growth in all segments, and the Empower pipeline is strong. The decline in Putnam sales reflected lower institutional sales. In Europe, sales increased 29% with higher fund management sales in Ireland and higher bulk annuity sales in the U.K.Turning to Slide 7, Lifeco fees on an adjusted basis, excluding the ceding commission referenced earlier, were up 2% year-over-year. In Canada, fee income was up 2% with higher fees in group partially offset by lower margins in individual. In the U.S., Empower fees were up 5% in local currency, reflecting growth in participants and AUA. At Putnam, fees were down 3% in local currency, primarily due to asset mix partially offset by improved fund performance fees. In Europe, fee income was essentially flat year-over-year in constant currency.Referring to Slide 8, Lifeco's adjusted expenses increased 3% year-over-year, 1% in constant currency. Adjusted expenses exclude the cost of $120 million related to the sale of the U.S. life and annuity business. In Canada, expenses were up 1% with continued investments in technology. While the rate of expense growth was moderated considerably in recent quarters, there was a couple of one-off items that reduced Canadian expenses this quarter. Excluding these one-off reductions, Canada's expenses would have risen 3% to 4%, more in line with our expectations. We continue to focus on striking the right balance between investing for growth and keeping a tight rein on costs.Moving to the U.S., expenses were up 4%, but flat in constant currency. This result reflects higher expenses at Empower due to participant growth and lower operating expenses at Putnam where we've implemented a number of cost reduction initiatives. In Europe, expenses increased 1% or 3% in constant currency, as we balance business growth and strategic investments with good expense controls across our operations.I'll now turn the call over to Garry. Garry?
Thank you, Paul. Starting with Slide 10, adjusted net earnings in the quarter were $658 million or $0.70 per share, a decrease of 17% year-over-year. U.K. retail property-related investment losses negatively impacted EPS by $0.09. In Canada, earnings declined 16%, mainly due to lower basis changes partly offset by strong trading gains. In the U.S., adjusted net earnings were up 19% or 25% in constant currency, excluding the onetime $60 million refinancing gain last year.At Putnam, core net earnings improved to USD 15 million from USD 5 million last year. At Empower, earnings were steady year-over-year in local currency. Increased revenue from participant and market growth was largely offset by growth-related expenses and narrowing interest spreads. Europe's earnings were down 21% reflecting U.K. retail property-related investment losses and lower basis changes partly offset by gains on U.K. bulk annuity sales.Please turn 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, second quarter results reflected significantly lower contributions from management actions and changes in assumptions, which were $35 million compared to $232 million in the second quarter last year partly offset by increases in other categories.Year-over-year expected profit was up 2%. There were improvements at Putnam, and Europe generated 6% growth, but the overall increase was dampened by higher expenses in Canada and only 2 months' contribution from the Individual Markets business sold on June 1 compared to 3 months last year. New business strain was lower than both prior quarter and prior year as gains were recognized on recent U.K. bulk annuity sales reflecting good progress on the purchase of spread assets to back those liabilities.Turning to Slide 12. Here we have expanded on the experience gains and losses to highlight various items in the quarter, again, on a pretax basis. As shown in the table, it was a good quarter for yield enhancement, although this was offset by impairments in the U.K. retail sector. This impacted results by $98 million pretax, largely as a result of the Debenhams' CVA process. While there were variations by segment, overall results for mortality, longevity and morbidity were generally in line with expectations.Expense gains benefited from those onetime items in Canada, but this was more than offset by losses from policyholder behavior. Policyholder behavior assumptions will be a particular area of focus in our basis reviews for Q3 given recent poor experience, which has dampened the positive trends in other areas such as critical illness and U.K. longevity. It is too early at this stage to estimate the negative impact of basis changes in the second half of the year other than the Actuarial Standards change impact, which we did disclose. That work is nearing completion with an estimated reduction to Q3 net earnings of between $50 million and $75 million.Turning to Slide 13. Here we've provided little more color on our exposure to the U.K. retail property sector in addition to the appendix slides, which outline our U.K. property holdings more generally. In the past number of years, U.K. retailers have been pressured by a combination of increased Internet penetration coupled with higher wages and property taxes resulting in significant adjustments in the sector. Since 2017, 36 major retailers have entered administration impacting more than 5,600 stores. We have predominantly been impacted by 3 of these administrations where 17 stores were affected, a number with meaningful rent reductions and 2 store closures.The mortgage losses to-date have predominantly occurred in our pre-2008 shopping center and department stores category where our residual portfolio now stands at $90 million. As background on the mortgage side, underwriting standards tightened following the 2008 crisis, which resulted in less concentration on single assets, a lower exposure to the retail sector and lower LTVs. We have had no losses in the post-crisis or post-2008 mortgage portfolio, and average LTVs are currently 39%. We have a further $223 million of investment property exposure -- direct investment property exposure to the sector against which on average we hold actuarial margins, which equate to approximately 25% of the value. Overall, we continue to feel our portfolio was well positioned for both the trends in the retail sector and, more broadly, for the Brexit situation.Turning to Slide 14, our book value per share was $20.84, down 6% from last quarter, reflecting the impacts of the substantial issuer bid and currency. Our LICAT ratio was 136%, down from 140% last quarter, again, primarily due to the substantial issuer bid with some benefit this quarter from interest rates. As a reminder, return on equity is based on rolling 4 quarters. Adjusted return on equity was 13.2% in the second quarter, and we continue to target a long-term ROE of at least 15%. Reported ROE of 12% includes the $199 million loss on the sale of the U.S. life and annuity business.Turning to Slide 15, assets under administration were $1.6 trillion, up $145 billion or 10% year-over-year, reflecting higher markets and business growth. This is also up sharply from year-end given the market recovery so far in 2019.That concludes my formal remarks. Back to you, Paul.
Thanks, Garry. And I will now turn the line back to the operator, so we can open it up for analyst questions. Patrick?
[Operator Instructions] The first question is from Steve Theriault from Eight Capital.
A couple things for me. First maybe just following on Garry's comments on the U.K. property exposure. I want to make sure I understand what you guys think the go-forward risk is. That's some helpful disclosure on breaking out the pre- and post-2008 exposure. But so do you think the risk here is really just on the $90 million? You talked a little bit about it, but the LTV sound low on the post-2008 but I wonder if the LTVs are also low on the pre-2008 mortgages.
Yes. I'll start with that one, Steve, and then I'm going to actually turn it over to Raman, our Chief Investment Officer. We definitely made a shift in our underwriting standards and our approaches post the 2008 crisis and put in place a lot more discipline. We've focused on lower LTV properties. We also focused on a shift in the type of properties where we're focused -- where we had that. So to put it in context, the area where the damages occurred really has been in that shopping center and department store sector and has been the pre-2008 mortgages where there's very little exposure there. And the reality is it was a pressure on kind of mid-market high street retailers, and we don't really have a lot of pressure there. And the balance of our portfolio is in different categories that are really standing up quite well on the existing market. But I'll let Raman add a little bit more color there.
Yes. Thanks, Paul. So I guess what I would add to that is -- and I think Page 13 is probably the key slide to focus on here, which lays it out by category. I mean the risks are across these areas, but to-date where we've seen impairments or losses so far have been in that shopping center and department stores. Structurally and as mentioned in the bullet points at the top, it doesn't come up quite clear in the pages. It is much more broadly diversified as well. So if you look at the -- where we had the bulk of our exposure in that post-crisis line not only are you looking at better LTVs -- lower LTVs, but you're also looking at less exposure to retail in general and also broader asset diversification, so not as reliant on one single asset. So we do feel that $90 million is predominantly where we have seen losses in the past, you see it bigger than $90 million. So we do feel we're much more diversified, and that particular area of the market where we've had the losses is a modest exposure in the context of our overall portfolio today.
Would it be safe to say that in the post-2008 mortgages in that shopping center and department store category there is nothing watchlisted or anything that's spending much time on that?
Yes. That would be correct. And as Raman said, we really did shift our thinking to different sectors of the retail environment, including you'll see the significant uptick in warehouses and distribution, which is really all about enabling digital and Internet selling. So it was really a fundamental shift in our thinking.
Okay. Thanks for that. And then on Empower, some good sales numbers. The sales have been strong for a while. Can you talk a bit about -- in the context of earnings being a little bit lighter first half '19 versus first half '18, can you talk about your outlook going forward second half? And Garry, you mentioned narrowing spreads. Are you seeing competition heat up? Some comments around that would be great.
So I'll start off on that -- it's Paul, and then I'm going to turn it to Ed Murphy. In the context of Empower, what you're seeing is very high growth. So you would've seen in Q1 leverage by kind of a large mega sale but some significant sales really across all segments. And interestingly, in this business, you can't defer your acquisition costs. So we take that business on. We incur the cost. So when you're in high growth, you're kind of chasing the expenses. If we decided to back off on growth, we could see actually a nice uptick in earnings. But the reality is the sales that we write in the latter parts of last year or the earlier parts of this year, the earnings on those are kind of on the come -- they come sort of 3 quarters later. So that's part of the drive. On the margin side, I'll let Garry speak the margin side, and then I'd like to turn it over to Ed just to comment on his views on continuing growth.
Sure. Just a quick comment on the margin side. That's one where coming into the year ourselves and a number of the players in the industry were looking at increasing their credit spreads. I think there's a general sense of perhaps some people had some rising rates in mind. So there was pressure on crediting rates, which, of course, would narrow our spread. And obviously what has transpired is we've seen interest rates going the other way and spreads tightening. So we haven't seen the pickup in our earned rates, but there was pressure on the credit spreads in the early part of the year. So that's really what led to the comment. It's not a large item or -- but it is -- was worth calling out.
Yes. And then, Ed, perhaps you could just comment on the fact that I don't think we're really thinking about trying to slow down sales to see an immediate lift in earnings. We want to keep the growth, growing the franchise we really like. But Ed, I'll let you comment on sort of our views on growth.
Yes. I think clearly this will be our strongest year for sure in terms of growth across all market segments. Obviously, when we win large mandates, those tend to be more fixed fee versus asset-based. And that's what you're seeing play out a little bit here in the first and second quarter is a disproportionate amount of the growth in the mix in that large and mega space. That being said, as I said, we will continue to see very, very strong growth. Our pipeline is as large as it's ever been. Our sales are up 15% -- our plan sales are up 15% year-over-year, and we're also seeing really strong growth in our IRA rollover business. And we forecast a very, very strong finish to the year there as well.
So Paul mentioned that you can't defer the cost and you had that mega sale in Q1, and I'm hearing that you expect this to be your -- maybe your strongest year ever. Does that mean like you would expect expenses to remain somewhat elevated in the back half of the year? And it's really next year that sort of that on the come earnings start to come through more? Is it...
Well, you're seeing participant growth of 8% year-over-year. The market is growing at about 2.7%. So we are investing a lot in distribution, both in terms of the B2B2C side of our business, but also the IRA side of the business as well. In terms of cost per participant, we're continuing to see that move in the right direction. So we are getting benefits from scale. We're getting benefits from our transformation efforts. That will continue to play out. And I think you'll continue to see improvement in the cost picture. The challenge is always on the revenue side, but -- and that's driven by mix, it's driven by market dynamics, certainly driven by the market itself because a large percentage of our revenue is asset-based revenue. So a lot of different factors there that ultimately drive the margin.
But Steve, to sum up, the high, high level of sale in Q1 attracts a lot of cost. We wouldn't expect a repeat of that anytime soon. And so you would see a relative moderation of expenses growth as you go forward. But as Ed said, the IRA rollover business is one where we view that as a real potential place for growth going forward. So we are investing in capacity and capability to really drive that. So ultimately, do we think that expenses will outstrip sales growth ongoing? No. We think we're going to get some leverage in it, but right now we're sort of in that phase of having taking on that very, very large account in the first part of the year.
Your next question is from Gabriel Dechaine from NBF.
Just to clarify that $90 million in the pre-2008 mortgages that you're showing that are against the shopping centers and department stores. That's net of this quarter charge and the one that you took in Q3 last year. Is that correct?
Yes, that is correct.
What's the duration on the [ most ] things? I know -- I kind of had in mind that mortgages -- commercial mortgages, life insurance would be more in the 10-year range, but these are clearly much longer than that.
I'm going to let Arshil touch on that one.
A number of these mortgages were originated 15 years ago, and the typical duration in our commercial mortgage portfolio given our annuity mix is closer to 20 years. But we are active in the commercial mortgage arena all the way out from 5 years out to 30 years. But the longer the term, the more protection we look for in terms of lower LTVs covenant protection, amortization, those kinds of aspects or whatever. So we do participate in the market from 5 to 30 years. So you are right. There is a concentration around 10, but these particular ones were 20-year mortgages originally or a number of them were 20-year mortgages originally.
And do you have any exposure to -- because there were a number -- a couple other big retailers post the Q2, I guess, that went into these arrangements or proceeding, and you don't have any exposure to them?
So I think, at this stage, we would just highlight that the $90 million exposure is our residual exposure net of the provisions that we've already taken on a go-forward basis. Obviously, we're impacted as to further developments on all of this, but at this much more modest level or whatever on a go-forward basis off of a $90 million base. So whatever -- I mean we're not making any predictions for the second half of the year.
Yes. We're not making any predictions. Last quarter we had a sighting on Debenhams, so we made that prediction. But right now, these are properties that are paying off and doing the things we're supposed to do.
Yes. I'd just add. The other -- there were a couple others in the quarter. We had very modest like single-digit impacts. Over 80% of the impact we reported was Debenhams. So it's the one major retailer.
Okay. All right. The yield enhancement gain that you acknowledge, that was big and it was. Could you, first of all, give me a breakdown geographically where that flowed through?
Yes. I'll let Garry touch on that one.
Sure. The bulk of the yield enhancement was in -- it was actually in Canada, would've had around $90 million, and Europe would be about $50 million, just the round numbers.
Okay. Let's see. Okay. I'm just trying to get a sense, and I thought it was Canada because of the way you'd written it up in the MD&A there. But the Canada -- I'm just trying to get a sense for the earnings trajectory here because it looks on the surface to be a negative growth quarter. But in the individual segment, you had some basis change stuff last year, so that's a messy number. The group business -- was there anything going on there? Because like occasionally we see morbidity experience as negative. And if that's the case -- and while I'm talking about morbidity and I'll bounce around geographically here, was Ireland an issue again this quarter?
Yes. I'll start off and say that on the morbidity front, in particular, Irish morbidity, as you know, we put through some price increases last quarter. Now those typically take 12 to 24 months to carve in because this is either a 1-year or 2-year renewable accounts. But what we did see was a moderating impact of claims. And so we saw a bit of an improvement there. So we almost called that a bit of a -- it was a spike in Q1 and a softening into Q2, which was good. And in the context of Canadian morbidity, Garry, can you speak to that?
Yes. Canada was actually a positive contribution for morbidity this quarter in the experience gains and losses. So it's -- again, you're in the sort of 10%, 12% range, that sort of area for the group side in Canada. So that was a good contribution, good to see. And Europe, as Paul mentioned, it was very moderate. I think it was close to 0 overall, so small pluses and minuses in the regions. But it was -- the morbidity was not really a factor in Europe this quarter compared to the first quarter where you had the health losses.
So was the issue on the Canadian group then?
Those wasn't an issue. It was a positive in Canadian group.
No, no, no, I get that. But I'm seeing $161 million of earnings this quarter versus $194 million last year, so yes, something -- it's down quite a bit. I'm just trying to figure out if there wasn't -- I would've assumed there was morbidity, but that's not the case.
No, I think that was the -- part of the basis change would have impacted -- the last year's basis change, part of that would have impacted the group business through -- probably through the disability reserves -- the assets in the disability reserves.
I'm going to annoy my fellow analysts here. Just one more. Did you do any FX hedging here on the pound pre the drop recently?
No. We've not taken any action like that.
The next question is from Scott Chan from Canaccord Genuity.
If I could look at your year-to-date experience gains, management actions and assumption changes, it's 14% of net income. Historically it's been 20%. If I kind of exclude credit, particularly U.K. credit, is there any other factors to think about that looking out maybe over the next 6 quarters that it wouldn't stay above that 20%?
Yes. I'm going to let Garry speak to that one.
Sure. I think in your question you did note that this quarter would have been impacted by the credit losses in the U.K. So that obviously had an impact bringing the amount down. And I note that, certainly, quarter-to-quarter, the amounts can fluctuate, both the experience gains and basis changes. And both of those can move, and they can move differently. So we don't -- A, we don't tend to make predictions, but it's also quite difficult to make predictions going out over the next period. Some of the drivers to be thinking about, on the experience side, a lot of our experience gains are driven by investment results, by the trading gains, yield enhancement. And so as we look at contributions, we've had good contributions from equity release mortgages, backing several liabilities, and we've got Retirement Advantage now. So that's a potential source.We've got -- on the basis change side, it was quite a quiet quarter. We didn't do -- undertake a lot of the larger reviews. I think outside of our German operation, most of the more detailed annual reviews are still to come. And as I mentioned, there is some positive trends, but there is also a positive behavior, a potential negative trend there. So we'll keep an eye on that. And the basis change experience, very, very difficult to forecast that out to several quarters let alone 6 quarters. So we typically don't -- we just look back. And we do record the average, but it's always dangerous to just sort of assume it will naturally be carried on at 20%. It's been a steady contributor, but it is subject to a lot of factors.
Okay. Got you. And I may have missed this, but the ASB review on the URR assumption, I think you cited $50 million to $75 million. Did you kind of said when that might impact you? It would be Q3 or...?
Yes, Q3.
Q3, okay.
Yes. Our intention is to early adopt in Q3.
Q3. And just lastly, Paul, M&A aspiration, I've got to ask. You kind of talked about U.S. Asset Management, Putnam, Empower. Any update on that front since last quarter?
I would just say that we remain active, but disciplined. Those would be the key themes, active but disciplined, probably in a lot of ways more proactive than we have been just because we see it as opportunity. We're obviously engaged -- we're always engaged with a number of files in mind. And so we'll clearly be out in the market -- as soon as we have good news, we'll be out in the market, and we're not there at this point in time. I'd also say though we remain active looking at other opportunities across Europe as well and in the U.K. And as we think about that environment, clearly, I don't think we'd be picking any action pre-Brexit. But there may be some dislocation opportunities there, which will create potential for us to take action there as well. So we've got files open for that as well. So you should leave it with view that we remain active, but disciplined across a number of different markets.
The next question is from Doug Young from Desjardins Capital Markets.
Just wanted to go back to your comment, Garry, on the policyholder experience. And it sounds like in reading your MD&A, the policyholder experience was negative in individual insurance in Canada. Just wanted to understand a little bit more about what's going on, and if you can unpack that $26 million negative impact. And how much was Canada and how much was some of the other regions, if there was any impact in the other regions?
Garry?
Sure. So I'll start with the second part of that question. The $26 million was $21 million in Canada and $5 million in the reinsurance area, I believe, it was, which should be reinsuring similar types of term insurance business but in the U.S. markets. That means there are a number of factors when it comes to policyholder behavior. This picks up, surrenders or lapses, exercising certain contractual options and features. A lot of the focus -- and it has been for a number of years in Canada, but ourselves and other industry participants have been around term insurance. And what we're finding is relative to what we would have assumed when people were buying the contract when we were initially pricing them, more people are replacing -- like they are lapsing their old ones and replacing the new ones rather than just renewing for the contractual renewal premium rates in the policies. So this tends to add more expense because you have the upfront sale and tighter margins or lower -- improved pricing as term rates have typically been coming down over time. So you've got -- when people do that, you're effectively losing that profit you would've expected to earn had they renewed, and you've got to set up a new policy. And it may be you or someone else setting up the new policy. So that's -- it's a lot to do with the replace rather than renew on term insurance. That's been a lot of the trend, and it's been a feature for -- in the Canadian industry for probably a decade now, at least close to it, as these policy come to renewal. We're constantly keeping up to date. So that's where a lot of work is going in this year.
And that's where you mentioned in Q3 in your actuarial review you're going to be doing a little bit more of a deep dive? And I think...
Yes. A little more deeper dive, yes.
Specifically in Canada. And does this have to do with -- like is this essentially the negative reserves that you have, and essentially the clients are kind of executing better than you anticipated? Or am I just confusing terms here?
Well, you can have policyholder behavior issues relative to negative reserves, but this is one where the clients are -- you could say they're willing to -- they are more willing than anticipated to go back through fresh underwriting and buying new policy than they are to just renew automatically in their existing one.
Okay. And then just second, you mentioned expense benefits in Canada. Can you elaborate on that?
Are you referring to the onetime expense benefits?
Exactly.
Okay. Garry?
Yes. I mean they weren't large. It was only a portion of the $20 million we called out on the slide. It was a commodity tax refund, which -- that were sort of a onetime commodity taxes or an expense, and there were onetime benefit from outsized refunds in the period. So that was -- we called it out just to make sure that the underlying trend, which is still I think positive and shows good discipline with the 1% might have overstated that.
And sorry, how much of that $20 million was that in Canada?
About $10 million.
$10 million, yes.
The next question is from Sumit Malhotra from Scotiabank.
Just a couple of clarification questions to start. So to go back to the U.K. property exposure on Slide 13, the $90 million you told us is ex of the charges that have been taken in 2 of the last 3 quarters. The question I have there is, on the call last quarter, Garry, you said, of the 4 properties that had entered the receivership, the exposure there was in the tens of millions. So the $84 million that you specify this quarter, is that effectively the bulk of the exposure or all of the exposure that you were referring to last quarter when you specified the tenants that had gone into receivership?
Yes, it is. Yes, it is.
So that -- for lack of a better term, that has been accounted for now?
Correct.
And then the second clarification, you mentioned when talking about the U.S. divestiture that you now have $1.1 billion of cash from the ceding commissions. So I just -- when we're thinking about the balance sheet flexibility of GWO, so you've got now $300 million of cash at the Holdco. In the past, I think, Paul has talked about you'd want to maintain at least $500 million. Are you thinking about cash from the ceding commission and the Holdco as analogous and you put them together and think about a $500 million floor or do regulators look at that differently?
I don't think it's really a regulatory issue. This is more a matter of how we like to manage the business and from the standpoint of safety, security, flexibility, but we would view that as they are both levels of strength that we can draw on. Right now we just like the geography of where we are leaving the ceding commissions right now from the standpoint of opportunities before us potentially in the U.S. Garry, anything you would add?
Yes, 2 things. One is, to answer you, we do think of them as analogous in terms of cash -- Holdco-type cash, but also I just don't want to forget the approximately $0.5 billion that we would expect to be freed up from the statutory capital within the insurance company which we would add to that as well. So you're really up to $1.6 billion on top of the $300 million as flexible cash. And as Paul mentioned, we are, at this stage, thinking it would be wise to keep the U.S. funds in the U.S. to support our ambitions there.
Yes. And I think that part makes sense. You guys have been very clear with us that the U.S. is the area of focus from a deployment perspective. And just thanks for that reminder, Garry. When does that $500 million additional benefit get realized?
Well, in terms of -- the business [ has gone. ] It's more of just -- insurance company has to do its analysis and then dividend up out of the insurance company. So insurance leaves appropriate RBC ratio, that's the statutory capital in the U.S. Leaves an appropriate RBC ratio. That works in progress and that's why I said it's a ballpark of -- in that sort of $0.5 billion range that we'd expect to come up.
All right. So moving on to something else. So it was referenced earlier, the slide that you've shown us for many years on the aggregate contribution from experience gains and, let's call it, management actions or basis changes. You've given us some more disclosure on what's driving the experience, and thank you for that. But in aggregate, I know, Paul, we've had these discussions over the years, that part of the reason that the contribution the company has received from these lines has been larger is some of the conservatism around reserving and the investment portfolio. When we start to see these lines migrate lower, does that tell us that something has changed in that conservatism? Or that -- is it just a reflection that the benefit that you have been able to derive for a long period of time, there just isn't as much available going forward? Hopefully, that's coming across clearly, but it's, obviously, when you see the management actions line at the lowest level we've seen in a few years, and materially so, it just leaves one to question whether there has been a shift in the earnings power.
Yes. I'd start off by saying that, we do see -- that the page you're referring to shows you annual measures and what we're talking about is half year so far. So we do -- it's not a steady stream, we do reserve basis studies, we tend to do those more in Q3, Q4. But having said that, the context would be continuing discipline in terms of the way we think about underwriting and investing. So nothing changes there. Certainly, as we grow the business, having grown Irish Life, we would have had -- you suddenly add a block of business and that adds overall strength to the business in terms of both capabilities, but also your balance sheet, relative balance sheet strength. So we tend to think of things like that. So M&A transactions will tend to position us with strength. And I'd say, at this stage right now, we're dealing with -- clearly, we had the property-related challenges this particular quarter where we're highlighting, I think, that we believe, that, that exposure is not as large as the relative overall property exposure. And I think Garry was highlighting for example, policyholder behavior. We've got lots of different moving parts in any given different quarter, but I don't think we should -- I'm not going to -- we wouldn't be at a stage where we would want to be projecting for any given quarter or any given year exactly where that's going to go. I think Garry is trying to provide some context around looking ahead at the next quarter that we want to make sure that we get on top of this policyholder behavior matter. At the same time, as we'll be continuing on with the basis studies on the annuity -- mortality and other things. Garry, anything that you would add to that?
I would just note that I did have a look back and look at basis changes and they -- I used the last 10 quarters so and they are -- the 4 of the 10 quarters would have seen single-digit impacts. And I did notice that, obviously, I think on the back of a favorable trend from our perspective financially on the rate of improvement in U.K. longevity, we've had some quite strong contributions -- particularly in 2018 and a bit in the back half of 2017. So it really does fluctuate around. But our overall balance sheet, we feel very comfortable with as we would have been in the past.
And I'm going to stop here. I certainly appreciate that quarters come and go. And from a bigger picture perspective, you folks are going to manage the company, looking at the long term. I mean if we look at the last year for the company and at least the way I am parsing your numbers, on an operating perspective, earnings have declined on a year-on-year basis for 4 quarters. And, Paul, listening to you talk about the M&A, but it certainly has been my experience that GWO has been very good at taking acquisitions and not only making them work from a synergy perspective, but having that benefit to reserves that comes forward. Would it be right to say that the -- that contribution that you get from those streams should be lower until another M&A transaction? Or is that a little bit too simple to look at?
I think that's likely a bit of an oversimplification because there are a lot of different moving parts. As I said, this quarter, we had some property challenges. We'll be doing our good discipline reserve studies. As I think about growth, one of the areas that we're very focused on is actually investing in trying to drive operating earnings growth. And as we look ahead, we like the way our businesses are positioned. We've talked about what we are doing in the U.K. to try and enhance and advance that business. Similarly, in Canada, a lot of the investments we're making are to drive the operating line. But we are looking for that balance and diversification. We recognize that we do have good, strong conservatism and discipline, which helps, and will continue to. We recognize the need to have competitive products and services we've got, and that's what's going to drive your operating earnings and we recognize the fact that we've got a strong capital position, we've got good skills and discipline around doing M&A. So that will feature. But as we look ahead, we see each of those being important parts of our growth story.
Your next question is from Paul Holden from CIBC.
Just a couple of quick ones. With respect to the Irish Life health, obviously, the experience improvement versus last quarter came quicker than expected. Like what kind of comfort level can we have that it's not going to -- in Q3, it won't change that negative experience again or what kind of comfort level do you have that we are not going to see some volatility in results from Q to Q until you have been able to roll those through those price increases?
So I will start off as someone who grew up in the Group business -- this is Paul Mahon -- that you don't know, you never know what can happen with health claims. We saw a spike in claims in Ireland in the latter part of '18 and into early '19, and we have seen that fall away on the claims side. We have improved our premium rates and the market has followed from our perspective, and we think that's the appropriate thing. And ultimately, it's a business where you are forward-pricing based on the claims that you believe you will be incurring as you move forward and you are managing for margin. And I think we will have good discipline managing for margin like we do in all of our health businesses. Arshil, what would you add to that?
I would not add anything to that. I think that hits all of the points.
And so until you get that sort of 12 to 18 months of rate improvement you've talked about, maybe there is potential for more volatility here?
Yes. There could be, but there could also -- we could also go through a period of calm and on the claim side and then we would just probably see, frankly, you would see widening margins happening during the period.
Fair. That's good.. Second question is just, can you remind us of your earnings sensitivity to the pound sterling?
That is a question I don't have on the tip of my tongue. Arshil or Garry, do you have?
I think in the SIP we have broken down our earnings between sterling earnings and euro earnings. I'm sorry, the U.K. earnings are all in sterling. I think the place you might need a little bit of help, and we can follow up through Investor Relations, is a portion of our Reinsurance earnings are also in sterling. So as the floor -- if you start with the sterling earnings disclosure in our SIP and use that and -- to estimate what -- based on whatever earnings exchange rate that you want to use in your forecast, and we can follow up through Investor Relations. My sense is something like 1/4 of our reinsurance earnings are also in sterling, but that's a number I want to double check before I pass it along through our Investor Relations team. So...
I think it's something like 200 -- if I look back over the last 12 months, probably GBP 250 million to GBP 300 million. I would put it in that ballpark. But we will follow-up with the exact numbers, again. We have translated everything to Canadian and Reinsurance is a mix as Arshil pointed out, but it would be in that sort of ballpark.
The next question is from Mario Mendonca from TD Securities.
Can I just take you back to Page 12? That was helpful disclosure. And it will be especially helpful when we have more numbers over time. Now at the risk of -- I understand that averages aren't always helpful in this case, but it's really the best we can do when it comes to yield enhancement. That $143 million, how would you compare that to, say, the average of the last 8 quarters or so?
I am going to let Garry take that one.
Sure. I don't have the last 8 quarters right in front of me, but typically I would think of a yield enhancement number overall on an average basis of approaching $100 million. And so that is a bit higher. Again, I think, it's benefited from, I mentioned the equity release mortgages, which are a newer asset class for us. And that really picked up in 2019 as we brought on Retirement Advantage and started providing some of the funding for those ourselves. And we've -- we're using those in Canada as well, swapping them from the U.S. And so that -- sorry, from the U.K. So that has certainly been a benefit, but it was a very good quarter, there's no question. I would classify it as a strong quarter, above the running average, but again, the equity release mortgages are something we're going to continue to work on.
And to help gauge what sort of headwind you might face from policyholder behavior in your assumption review, that $26 million negative that you saw this quarter, the unfavorable, is that similar to what you have seen over the last few quarters? Is that roughly what it has been running at? Or is this an especially bad quarter?
Garry, I'll let you take that one.
Yes, this was a higher quarter than we have been running at. I don't know if it is the highest quarter over the last 8 quarters. I think the average is less than 20 -- that's overall, and I said I said, not all of that comes from Canada. So Canada would have been running, on average, less than that. So this is -- this was a higher quarter this period.
And then finally, again, this is really helpful when it comes to experience gains and losses. Can you help me think through what particular assumptions drove such a meaningful year-over-year decline in basis changes and management actions? It was something like $230-some-odd million last year -- $232 million last year and minus $10 million. Is it essentially just UK mortality that would account for the majority of that difference?
Yes. Well, first of all, I'll start off and say a key issue here is the timing of when we do our studies. So in particular this quarter, we weren't as active in doing that. But in terms of the geography relative to various risks, I'll let Garry speak to that.
Sure. I think the key is, and I don't have it in front of me although I did look at it earlier is the disclosure in our 2018 Q2 MD&A, we did highlight that there was a - the U.K. longevity was certainly -- we did, and that was following on an industry study. We had gotten to that earlier in 2018. So that was certainly contributing. But there was also a change in Canada to -- we're looking at certain of our asset classes that we use and looking at the after-tax income that we were expecting from those -- that particular asset class, and we did improve the expectations there. And so that was a benefit as well. And it was a good size in Canada as well. And interestingly, I think there was a small negative on policyholder behavior in Q2 last year at around the same time. So I think that the 2 big drivers were U.K. longevity and this -- the Canadian investment income assumption that we put in. And that of course, that rolls into to all of our reinvestments -- sorry, investment income forecast. So that is part of the benefit last year, but it was not repeated.
I'm going to push my luck here a little bit. If you wouldn't mind, this type of disclosure that you provided on Page 12 for experience gains -- something like this with management actions would also be really helpful. Thanks again.
We will take that under advisement.
The next question is from Tom MacKinnon from BMO.
Just a few questions here. One is, I think you mentioned something about seed -- income on seed capital at Putnam. Can you hit that -- what that number is off the top of your head?
I'll let Garry take that one.
I do have the Putnam seed capital, it was -- I want to say it was $7 million. I think it's probably U.S. And just to put that into context, over the last, say, 8 quarters or so, we would have had positive contributions from seed capital in 7 of the -- I think we had 1 negative country. And that was Q4 2018 was negative with the sharp obviously market declines. All the rest are positive. So it wasn't unusually high this quarter. It might have been a touch higher than the average over those 8 quarters, but it's been a reasonably steady contributor over the period.
And is that a pretax or is that a posttax number, the $7 million?
That's probably a pretax number.
And just a little ahead of you, Garry, just sort of the outlook in terms of U.K. longevity. I mean it was a big win for you guys in 2018. What's coming down the pipe with respect to that? Is there other -- further industry studies done? Is there -- are we seeing -- the degree to which it was going to be a benefit start to plateau going forward? And how does that all fit in with the fact that, obviously, these sales are certainly a lot less than what they used to be pre- the regulatory changes as well? So how does that -- what does that mean in terms of the size of potential windfalls you can get in this block of business going forward?
I'm going to start off with [ a reset ] -- just maybe a bit of a reset on the sales assumption. I'll let Arshil speak to sales and then Garry can speak to the actuarial side.
So you are correct that our retail sales following the changes in the pension freedoms legislation in the U.K. have fallen. So this quarter was quite a strong quarter for us on the retail sales side, but at GBP 125 million of retail annuity sales in the quarter, that would've been less than we would have experienced back in that heyday of the retail market. But this quarter, we had GBP 325 million of bulk annuity sales in the U.K., and that was a market that we would not have been in, in the past. And if you add those 2 numbers together, our run rate of annuity sales in the U.K. are actually higher than what we would have experienced when we were exclusively a retail player. And then, in addition to that, we also have the $2.5 billion longevity swap through our reinsurance business on U.K. lives that we reported on in this quarter and called out in the introductory comments. So I think, overall, our exposure to longevity is probably modestly increasing, not decreasing. So just wanted to make sure that, that was sort of correct in your mind.
Thanks for that. So just turn it over to Garry on the outlook then?
So on the U.K. longevity, obviously, we had seen quite a rapid turnaround in the rates of improvement that have been seen -- if you go back 10 years ago and the last few years. I think, that will naturally plateau in terms of a rate just in terms of the trend -- to have it keep going that way would not be good for the British population. But we haven't seen it going back the other way, we haven't seen evidence of that. So it was more of the rate of improvement. And we do tend to follow the trends. So as we want to make sure we see the trend bedding down, so that will be a feature in our review. And one of the reasons why I probably had a bit more of a positive comment on the trend is that we know we have been following this trend. It has moved in our favor. And in the absence of new industry studies, I think the next major industry study would probably be towards the end of this year. They typically come out once a year. I don't know the UK schedule off of the top of my head, but we often seem to get them in the first month or 2 of the year. So it will be a while. We are still working on the one we got just this past spring. And again, it showed a positive trend -- slowing of the trend, but still a positive trend, and we'll be reflecting that in due course.
Okay, thank you. And just one last one. As you talk about the IRA rollover business with respect to Empower, just want to, if you can just -- why do you think that is so attractive? And just maybe highlight any Department of Labor issues here associated with fiduciary duties and proprietary product recommendation issues associated with that? So maybe just give us a one minute as to why you think it's attractive given some of those issues that may [indiscernible]?
I'm going to turn that one over to Ed because that's the exact same question that our Board would ask along the way. An important one to make sure you've got -- you are well positioned relative to -- actually, the new fiduciary standard, or the best customer, best interest standard that is coming out of the SEC, that's really where our sights are on. And making sure that we are well aligned with that. But, Ed, do you want to speak to why we view this as an attractive market, and how we manage that fiduciary accountability, which we -- by the way, we take very seriously?
In terms of the market itself, we've got, obviously, relationships with 9.3 million Americans that are in plan across over 40,000 institutional relationships. And so, in any given year we have anywhere between $25 billion to $35 billion that's essentially leaving the platform, either staying with us or going somewhere else. And those individuals, invariably, are looking for guidance. So we do act as a fiduciary at the individual level. And in fact, we're giving advice to them and helping them in terms of asset allocation and like. And so it's a very attractive business. Those clients, typically, are investing in some cases in our own funds and investing in advice-based products and it tends to be very sticky business, particularly if you provide really good service. So that's a business that we have been ramping up and investing in distribution and building up more capacity. And so we are not only just capturing the opportunities as they come off our platform, but as we build relationships with those customers, we can garner greater share of wallet. We have $650 billion on our platform, and we think those clients, in general, have another $650 billion elsewhere. So the idea is to build long-standing relationships with them. With respect to the SEC standard, there's not really much that we will need to do that we're not already doing to comply with that standard. And so I would say the -- we'll wait to see what the DOL rule -- changes to the DOL rule, see what they look like. But essentially, it should align pretty much with the SEC best interest rule, and we don't really see it as a material change for us in our day-to-day operations based on the way we run the business today.
And what are any of the implications that were issues associated with, you mentioned, rollover investing in your own funds. What are some of the -- can you highlight some of the issues associated around that? Or what you need to do? I don't think you can put everybody in your own proprietary product.
No, there's no issues. Obviously, everything we do is fully disclosed. The client, ultimately, makes the decision. They have the opportunity to invest in some 300 different mutual fund families. They can buy individual securities. So it's a very comprehensive needs-based discovery process that we follow that ultimately leads to the client making decisions. Sometimes they make the decision to stay in plan, other times they make the decision to roll. And when they make the decision to roll, they make the decision either to roll to us or they would roll to a competitor, obviously. So no issues with respect to how those investment decisions get made.
What I would note, Tom, is that this business is built off of the combination of us bringing together the Great-West Life and Annuity and the Putnam and then the JPMorgan business under Empower. And probably different than a lot of companies, we're profitable as a record-keeper and our game has not been heavy, heavy reliance on proprietary product. And we kind of think in terms of an open architecture solution for our clients and that's one of the reasons why we win. So that's from the standpoint of people rolling over to an IRA with you. You don't have to have proprietary products for that to be profitable for you. You're providing -- we tend to think of it as providing guidance and advice to midmarket Americans. And you can build relationships and you can roll on other assets. And certainly, we should get our fair share, but we also need to make sure that it's a model where it's economically viable even if we're not winning in all proprietary or a high-rate of proprietary.
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, Patrick. 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 at the end of third quarter. Have a great day and a great summer. Take care.
Thank you. The conference has now ended, please disconnect your lines at this time. And thank you for your participation.