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Great-West Lifeco Inc
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Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Second Quarter 2021 Results Conference Call. I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead.
Thank you, Ariel. Good afternoon, and welcome to Great-West Lifeco's Second Quarter 2021 Conference Call. We hope you and your families are safe and healthy, and we continue to encourage vaccination for all those who are eligible. Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer, and together, we'll deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and Chief Operating Officer, Europe; Arshil Jamal, President and Group Head, Strategy, Investment, Reinsurance and Corporate Development; Jeff Macoun, President, Chief Operating Officer, Canada; Ed Murphy, President and Chief Executive Officer of Empower Retirement; 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 apply to today's discussion and presentation materials. So please turn to Slide 4. Before we get into a review of the second quarter results, I'll take a few minutes to touch on progress relative to our value creation priorities. As we continue to advance each of our business unit strategies, we are pleased to have recently announced 4 strategic transactions, which align with these priorities. In the U.S., Empower's acquisition of Prudential's full-service retirement business at significant scale and reinforces Empower's leading position in the U.S. retirement market. The addition of this business is expected to increase Empower's base to over 16 million participants, 71,000 workplace savings plans and approximately USD 1.4 trillion in assets under administration. The deal will further strengthen Empower's overall offering for participants and sponsors through additional expertise and expanded product offering and new capabilities acquired for Prudential. Once fully integrated by the end of 2023, we expect Empower's contribution to Great-West Lifeco's earnings to be 30%, further diversifying Lifeco's earnings profile with another strong cash generative business. Through our acquisition of ClaimSecure, Canada Life is investing further in workplace capabilities in Canada, a core strategic focus for Lifeco. This deal increases the number of planned members served by Canada Life by 1.25 million individuals, including plan members and their dependents with annual claim statements of more than CAD 1.2 billion. It will also enhance our ability to provide leading workplace benefit solutions by extending our presence in a growing market for TPA and TPP services. We also recently announced the acquisition of Ark Life in Ireland. The transaction will see approximately 150,000 policies and EUR 2.1 billion in assets moved to Irish Life's balance sheet. This is a straightforward integration given that we already administered the business, including management of assets backing liabilities. These policies were previously underwritten by Allied Irish Bank. So this transaction aligns with another strategic step we recently announced, where we'll be expanding our distribution relationship with AIB into a full joint venture. Moving to Slide 5. We recently shared our medium-term financial objectives as noted on this slide. These objectives include the benefits of the personal capital and mass neutral transactions and are supported by Lifeco's diversified portfolio and significant organic and extension growth potential. The expected benefits of the recently announced Prudential transaction will be incremental to these EPS and ROE objectives. Moving to Slide 6. Our second quarter results were driven by strong earnings across all operating segments. Base earnings were $826 million, and net earnings were $784 million. Fixed EPS of $0.89 was up 17% year-over-year and up from last quarter. Expected profit increased 26%, reflecting solid business growth, higher markets and a strong contribution from the MassMutual acquisition. These second quarter results reflect strong organic performance across our businesses and capture some of the expected MassMutual integration benefits. Net earnings of $0.84 per share were down 9% year-over-year. You may recall last year's second quarter included large positive market-related impacts due to the rapid market recovery, which reversed most of the Q1 2020 initial COVID impacts. Q2 2021 also includes the U.S. transaction and integration costs related to recent acquisitions and the unfavorable impact of U.K. corporate tax increases. Moving to Slide 7. We're pleased to see the very strong sales performance in Canada this quarter. Looking first to insurance. On the group side, sales were strong in the small and midsized segments with limited large case activity. Individual insurance sales were consistent with pre-COVID levels. Individual wealth sales and asset growth was strong with proprietary mutual fund sales, up 23% year-over-year. Similar to Empower's retail strategy to capture rollover and roll-in assets, Canada's group asset retention strategy focuses on maintaining our relationship with customers when they're leaving their defined contribution plans. Second quarter asset protection sales increased by more than 20% compared to the same quarter last year. Our Canadian strategy includes continuing investments in digital and technology enhancements to improve customers' and advisers' experience. A great example is our virtual health offering enabled by Dialogue, where this quarter, we surpassed more than 500,000 group members and their dependents being eligible for this service, which has been so important during COVID lockdowns. We're proud of this achievement, which helps enhance Canadians access to healthcare when they need it. We've also been investing in artificial intelligence to improve both renewal and long-term disability management for group insurance. AI's data-driven insights should strengthen our ability to deliver the best outcomes for plan sponsors, plan members and advisers. Moving to Slide 8. Empower's strong growth trajectory continued this quarter with large plan sales driving a year-over-year increase combined with strong growth in the core and retail segments. Empower's retail business continues to accelerate with total retail wealth management AUA now exceeding USD 40 billion. This includes Empower IRA and Personal Capital. Of note, Empower IRA assets have doubled in the last 2 years from $10 billion to $20 billion on the back of our existing model even before leveraging Personal Capital capabilities. We're pleased that the Personal Capital business has been making significant progress in signing up new client assets and is running ahead of our expectations at the time of acquisition. The integrations of MassMutual and Personal Capital businesses are progressing well. We achieved USD 48 million in annual pretax run rate synergies to date related to MassMutual, and are on track to reach to our USD 160 million target in 2022. Moving to Slide 9. Assets under management at Putnam have grown by USD 30 billion year-over-year to just under $200 million. Net outflows of $3.7 billion were mainly from fixed income products, while equity products saw net inflows. Investment performance continues to be strong with 24 funds having 4- or 5-star Morningstar ratings. The combined impact of market growth on AUM and the shift inflows to equities drove strong fee income and Putnam's core margin improved to 13% in the quarter. Putnam also launched its first actively managed ETFs, which are based on 4 different leading equity strategies, including 2 sustainable funds. Moving to Slide 10. Europe demonstrated very solid commercial performance this quarter with strong underlying performance in all 3 operating countries. Notably, individual wealth sales are now higher than pre-pandemic levels with strength in the U.K., Ireland and Germany, and client retention in all countries continue to be strong, supporting another quarter of positive net inflows. Excluding the impact of the sale of the IPSI business in Q3 2020, assets under administration are up 13% over the last 12 months. We're pleased with the continued performance of our equity release mortgage business as it helps our customers use the value in their U.K. residential properties to gain financial flexibility in their retirement. Our bulk annuity pipeline is building, and we're actively engaged in quotation activity with potential for sales in the second half of this year. Moving to Slide 11. Capital and Risk Solutions had another solid quarter with expected profit growth of 10% year-over-year. The quarter-over-quarter decline was largely due to currency impacts. The pipeline for new business remains strong in both structured life and longevity, and we completed 2 new longevity reinsurance agreements in the U.K. during the quarter. With that, I'll now turn the call over to Garry to review the financial highlights. Over to you, Garry.
Thank you, Paul. Please turn to Slide 13. Base EPS of $0.89 was up 17% compared to the prior year due to business growth, improved market levels and the significant acquisitions we made last year. On a constant currency basis, which takes account of the sharp decline in U.S. dollars since Q2 2020. Base earnings were up 22%. All 4 segments have again delivered strong base earnings results, and I'll provide highlights momentarily. Net EPS of $0.84 was the decline from last year, largely due to several market rebound related positive impacts experienced in Q2 2020 that were excluded from base earnings. The excluded items this quarter were primarily costs related to the U.S. acquisitions last year as well as the recently legislated U.K. corporate tax rate increase. On a segment basis, starting with Canada, base earnings were $293 million, down 7% from a strong Q2 last year. Business performance was good with expected profit up 8% and insurance results across life, health and disability producing a net gain. Canada also saw a solid contribution from yield enhancement, although down from the elevated levels seen in Q2 2020. Favorable outcomes on tax matters partly offset onetime expense and asset impairment items. In the U.S., base earnings were up significantly from Q2 2020. The acquired MassMutual business continued to perform well, adding $63 million to base, including some early expense synergy gains and strong fee income. Note, this also included a positive $7 million true-up from Q1. Customer retention has been excellent, and integration activity is on track. Personal Capital continues to be profitable on in-force, but recorded a base loss of $9 million as we continue to invest in new customer acquisition to fuel growth and future profitability. The rollout of Personal Capital digital capabilities to benefit the broader Empower client base continues on schedule for later this year. Excluding MassMutual and Personal Capital, Empower's base earnings essentially doubled year-over-year as a result of higher markets, disciplined expense management and strong organic growth. Putnam's results also improved sharply year-over-year while seed capital showed less of a gain than the rebound-related gains in Q2 2020, fee revenues were up due to the growth in AUM and in particular, in equity mandates relative to shorter duration fixed income. In Europe, base earnings increased 3%. Good underlying performances in the U.K., Ireland and Germany were driven by continued recovery in sales, favorable insurance experience and strong yield enhancement. This was partially offset by net one-off negative tax adjustments of $32 million. Capital Risk Solutions saw another quarter of strong base earnings growth, up 9% over Q2 2020 and up 15% on a constant currency basis, which reflects a substantial portion of that segment earnings in U.S. dollars. COVID continues to impact mortality rates, though the financial impacts remain modest with higher claims in the U.S. life reinsurance business being offset by experience in the European longevity business. Turning to Slide 14. We've added an additional table this quarter to show the more material tax impacts by segment. There are several items this period, in part due to a backlog of matters with tax authorities due to COVID. Base earnings items are typically interpretation and audit-related issues from tax filings that have been resolved, either positively or negatively in period relative to the provisions established. Items excluded from base will typically be those related to tax legislation changes, such as the deferred tax liability increase arising this quarter from the recent corporate tax rate increase in the U.K. The overall impact of these tax matters was not material. Turning to Slide 15. This table shows the segment and total Lifeco source of earnings from a base earnings perspective. The lines for management actions and changes in assumptions and other as well as certain market-related items in the experience gain and losses are excluded. Expected profit was up 26% year-over-year, notwithstanding some currency pressure from the decline in U.S. dollar. The majority of the growth came from the U.S. segment with the addition of MassMutual and Personal Capital, plus increased fee revenue from higher stock markets and organic business growth. The other segments showed good growth as well with Canada and Europe benefiting from higher fee income and Capital Risk Solutions from continued business growth. Regarding new business impacts, we saw an increase in new business strain in the U.S., which now includes Personal Capital and MassMutual. And as a reminder, the U.S. strain is on investment contracts and represents business acquisition costs that cannot be deferred under IFRS. On the flip side, the benefit of future margins, including the margins to recover those acquisition costs will come through the expected profit line in future periods. New business stream was lower in Canada due to pricing actions taken in 2020 and lower in Europe as higher sales volumes in Q2 this year covered more fixed expenses that occurred last year. Experience gains contributed positively in the quarter, and I'll cover these on a later slide. Earnings on surplus of $21 million is down from a strong result in the prior year, which had been boosted by large seed capital gains on a sharp market recovery in Q2 2020 as well as realized gains on available for sale assets last year. The effective tax rate on base shareholder earnings was 9%, reflecting primarily the jurisdictional mix of earnings with a contribution from settling certain outstanding CRA matters, as noted earlier. Turning to Slide 16. The table on this slide is a reconciliation of base to net earnings, highlighting the key items that are not included in base earnings. In addition to the tax matter noted earlier, I would highlight the Personal Capital transaction costs. Recall, an element of the purchase price was a continued consideration payable in December this year and next year, provided certain targets are achieved. Based on the strong performance of Personal Capital to date, we have increased the provision for this contingent consideration. Please turn to Slide 17. This table shows the segment and total Lifeco net earnings results from a source of earnings perspective. It combines the information from the base earnings SoE with adjustments for the excluded items on the prior slide and is included for completeness. The line labeled, Other, is where we record the integration costs and the transaction costs mentioned earlier and note again, that these are all pretax numbers. Please turn to Slide 18. These tables expand on the experience results as well as the management actions and changes in assumptions to highlight various items in the quarter, some of which we have touched on already. As shown in the chart on the left, yield enhancement continued to contribute positively, particularly in Canada and the U.K. We continue to originate a steady volume of equity release mortgages in the U.K. on an improving residential property backdrop. The market impact on liabilities arises in the U.K. While property prices have improved, the growth rate pick up from last year's downturn was not quite as high as assumed in the actuarial liability calculations, which resulted in a modest impact on future cash flow projections as we true that up this quarter. I'd also call out, there was a gain of positive combined net impact of mortality, longevity and morbidity, reflecting the benefits of our diversified book of business. Expense variances were primarily due to project spend, mostly in Europe and credit-related impacts were again negligible this quarter, reflecting the quality of the portfolio. Moving to Slide 19. This slide highlights operating expenses by segment. While expenses are up notably year-over-year, this is to be expected given the growth in business and expected profit both organically and through M&A. Expense growth in Canada can be thought of in roughly 3 equal pieces. The first is more normalized growth aligned with the rebound in sales and operational activity volumes. The second is increased sub-advisory fee expenses following the GLC-Mackenzie Investments transaction late last year. And then the third is just a number of onetime items. In the U.S., the expense increase is driven by MassMutual and Personal Capital acquisitions, which added $156 million of expense compared to last year. In Europe and Capital Risk Solutions, expense growth is in line with business growth, while some additional strategy-related costs in Europe. Please turn to Slide 20. The Q4 book value per share of $23.70 was up 8% year-over-year, driven largely by increased retained earnings, given solid results in each of the past 4 quarters. Currency movements have been a headwind with a strengthening Canadian dollar, but this is being largely offset by pension related to other comprehensive income, given the increase in interest rates. LICAT ratio at Canada Life remained strong, up 3 points from last quarter. The primary impact came from retained earnings at Canada Life. Market movements also helped with a bit of a pullback in interest rates following the sharp price in Q1 and continued stock market growth. In addition, as noted in recent quarters, this also includes the continued phase-in of the new most adverse LICAT scenario, which impacted the ratio by 1 point. And assuming we stay in this LICAT interest scenario, the full impact will continue to be smooth in over the next 2 quarters at just under 1 point a quarter. And finally, just as a reminder, Lifeco cash of $0.9 billion is not included in the LICAT ratio. That concludes my formal remarks. Back to you, Paul.
Thank you, Garry. Please turn to Slide 21. Looking ahead, we will continue to maintain a high level of vigilance around COVID-19, focusing on the safety of our employees and customers while closely monitoring risks in the markets where we operate. But at the same time, we will continue to seek out both organic and inorganic growth opportunities. Over the last 2 years, we've taken steps to transform Great-West Lifeco's portfolio through disciplined capital deployment to drive both organic and inorganic value creation. Following the sale of the U.S. Individual Markets business in June 2019, we have proceeded to grow our U.S. retirement business at Empower and reinforce our leadership position through a series of strategic and value-enhancing transactions. At the same time, we've extended our market-leading positions in Canada and Europe with several tuck-in acquisitions in the wealth and insurance spaces. We are confident in our ability to meet our medium-term EPS and ROE growth objectives, supported by the expected benefits of the in-flight Personal Capital and MassMutual integrations and the potential benefits of the recently announced Prudential transaction will be incremental to this growth. As we carry on with the integrations of Personal Capital and MassMutual and work towards a successful close of the Prudential deal, our focus remains locked on achieving our integration objectives, including strong customer retention, the successful migration of plan participants and the achievement of synergies. That concludes my formal remarks, Ariel. So please open the line for questions.
[Operator Instructions] Our first question comes from Meny Grauman of Scotiabank.
Just a first question on the commentary ended off with on COVID. Just wondering if there's any sort of message in that. Is that just a general statement, a conservative statement? Or are you seeing anything or watching anything specifically as it relates to the evolution of COVID here? Just wondering about that, first of all.
Thanks, Meny. It's Paul. No, there's nothing loaded in that. I was just commenting on the fact that we continue to think about our return to work strategies, ensuring that we're looking -- we're set up as well as we possibly can be to serve our customers, that's number one, and to keep our employees safe. And clearly, we just need to remain vigilant and not sort of lose sight of the fact that there is transition and change that continues in this -- as we transition into a post-COVID environment.
Got it. Then just on Putnam. You talk about sales of short duration income products slowing due to lower yields. I'm just wondering what your outlook is in terms of fixed income sales going forward. And at this point, are you making any changes in product lineups in relation to what you're seeing in terms of that demand for fixed income?
Thanks, Meny. I'm going to turn that question over to Bob Reynolds. Bob?
Thank you for the question, Meny. there are no changes for the fixed income lineup. Obviously, we do have ultra-short duration. We have a short duration bond and we go up the duration ladder. So we do provide choice in fixed income. We're very comfortable with that. We have rolled out in this quarter 4 actively managed ETFs, but they're all focused on equity. Two in the sustainable area, 1 in large-cap growth and 1 in large-cap value. But our fixed income line remains the same.
Our next question comes from Gabriel Dechaine of National Bank.
A couple -- one quick numbers question here. The USD 52 million from MassMutual, does that include financing costs? Or is it net of financing costs? I'm just trying to line that up against the 2022 earnings target you have for that business.
Garry, that's for you.
Yes. That's after the financing and the amortization costs.
Okay. So on that basis, it's looking like the 2022 targets, around USD 220 million, and you're just 5% off of that. Is that -- I mean, that's -- I'm using your presentation information there and converted Canadian to U.S. dollars. Is that a reasonable number?
Garry, I'll let you speak to that.
It looks like you're pretty close.
Yes. I think the way I'd think about this is, obviously, the acquisition is off to a good start. The employees have transitioned over well. The client retention has been good. The integration planning is all on track. Financially, I'd break it into a couple of pieces. So on the expenses and synergy side, which would be part of our ultimate targets, we've achieved on a run rate basis, $48 million of the $160 million target, and we're still targeting $160 million. On the revenues, obviously, we've had a real tailwind from the markets, which is good. But obviously, this can fluctuate.So we're not really ready to predict what it might mean at the end of integration next year when we sort of identified the run rate target. But certainly, we're off to a good start. A little bit of a headwind from currency translation, but I think the market tailwinds have been helpful. So it's really how you want to translate those current tailwinds into the down the road targets, but we're certainly off to a good start.
Got you. And then if I look at Empower, excluding MassMutual, even now, it looks like earnings were up -- they doubled year-over-year. Is there anything up in markets? Or is there anything unusual in there?
Garry, why don't you start with that one, but then you can maybe pass it on to Ed.
Yes, I would do. I just -- I was really just agreeing there with Gabriel that it was -- and then over to Ed, which is that the markets have certainly driven up the revenue. And we've had good growth as well over that year just organically. So you've got those 2 things coming to bear. But maybe I'll let Ed add more color.
Yes. Thanks, Garry. Yes, I would just add, the market certainly has benefited us, but we've also seen really strong organic growth. We're also seeing really solid growth in our managed account, discretionary managed account business. That's up pretty materially year-over-year. Obviously, benefits from the market. But if you look at net flows and contributions there and new sales, it's up pretty well. So it's a combination of a number of factors.
Okay. And just the last...
Another comment I'd just make, Gabriel, is on the expense side, really, really strong expense discipline. So while expenses were certainly up, it's primarily driven by the growth in the business. So when you isolate growth and just look at sort of core operating expense, it was -- year-over-year was on a BAU basis, it was pretty benign.
Yes. Okay. I appreciate that. And then the last one. The tax rate, base 9%, reported is 12%. I mean I don't know if it even applies to the company the size of Great-West, but is the global minimum tax even on your radar screen? If so, do you have any thoughts?
Garry, I'll let you take that one.
Sure. Yes, we're certainly watching the developments on the global minimum tax. It doesn't affect a lot of our jurisdiction, just because of the most of the jurisdictions we're in are at least at that level. But we are keeping an eye on the developments. That's one, Gabriel, where I'd say the devil is going to be in the detail as the proposals take shape over time. So some of our jurisdictions more than reinsurance might be impacted, but we'll have to -- we'll just have to see how that plays out over the next few years, frankly.
Okay. So the reinsurance like the Caribbean area would be an area that could be affected?
It could be, depending on how the final rules come out. It's just way too early for us to know. But we are actively following it for sure.
Our next question comes from Tom MacKinnon of BMO Capital.
Just a couple of questions here. First on -- you mentioned U.K. corporate taxes. You've done the DTL adjustments. But so how should we be thinking about any change in U.K. corporate taxes affecting your guidance of low to mid-double-digit base earnings tax rate?
No, I'll let Garry take this -- that one first. Garry?
Yes. I think the way I think of that, Tom, is that, that low to mid-double-digit tax rate is on all of Lifeco. So you'd have to look at just the U.K. piece, and I try to think now the rate went from maybe 9 -- sorry, 19% to 23% or 25%. So it's a fairly modest increase on just a portion of our earnings. So I don't see it changing. We've given a range, and I don't say really moving the range that materially.
Yes. I'll -- Tom, I would echo that. It's from 19% to 23% on a meaningful but nowhere near a majority of our earnings. So as a result, we would not see it as having a material impact on our projected growth.
It will put some upward pressure on the [indiscernible].
Okay. And so just a couple of quick ones with respect to Empower. If I look at just sort of quarter-over-quarter, the general account, AUM really in terms of U.S. dollars was actually down a little bit. Yet your spread income, that's sort of your premium income plus investment income less the total paid or credited to the policyholders, that was up substantially quarter-over-quarter in U.S. dollars. So like was there anything -- what happened here? And does it -- and maybe while you're at it, you can explain why virtually all of the experience gains on a base earnings basis were in the U.S.? Maybe was there anything in there related to Empower? Because basically, only $2 million of the $59 million there was related to Putnam. So maybe on the spread income and on the experience gains and losses in the U.S.
Garry, I'll let you start with that one.
Yes. So on the spread income, that's the quarter-over-quarter move. I'm trying to think of what would drive that off the top of my head. The -- so I'll come back. We might have to actually follow up with that one after some -- certainly, in terms of -- I know with bringing MassMutual onboard in the -- just this year, there's a fairly sizable general account. And so that's that may have created a bit of that noise, but it shouldn't have created much noise quarter-over-quarter.And then the -- in terms of the experience gains in the U.S., I mean, there were -- that was -- that did actually drive a fair bit of the overall. Although we did have, as I said, we had some in Canada and Europe as well. But the U.S. ones, I mean, we had some that were -- some of those experience gains were the market-related impact on fees, just obviously, markets went ahead in period. So some is in your expected profit, some is in your experience gains. We had some expense and other fee gains in the U.S., both in terms of the existing block and the newly-acquired MassMutual business.So just trying to think if there's anything that I would particularly call out there, there's, again, a fair bit of expense discipline that Ed had noted earlier in the U.S. relative to what we baked into the expected profit. So that's the geography. So that's why we're seeing -- when I look at the charts here, most of the U.S. ones were related to expenses and fees. That's what was driving them there.
Yes. I mean it's funny -- overall expenses and fees were a hit of negative 20% post -- hit a negative 22% pretax, yet I guess, SoE on Empower -- that's what -- I mean, that would be the key thing. If we had an SoE on Empower, like you have one for Putnam, that would be helpful.And just as a quick follow-up, if we went -- the assets were up 6% year-over-year, but the fee income was up 9% at Empower. Was there any change in mix? Or what was driving that?
Garry, why don't you start, but maybe I can speak to the nature of the fact that a lot of the fees are asset-based, but there's also other related fees, and that can -- we can see growth there. And Ed was making reference to managed accounts as an example.
Yes. I think that is -- it's more of a mix question, Paul, so maybe we'll go straight to Ed on that as to how that's played out.
Yes. I certainly managed accounts. The growth year-over-year is up dramatically in managed accounts. And so that's definitely a contributor to the mix that we're seeing, the 9% versus 6% on assets. We can get you more of a breakdown on that. But that was a big contributing factor for sure.
Our next question comes from Doug Young of Desjardin Capital Markets.
Okay. So just from a use of capital perspective, I mean, there's lots going on -- I mean, you've mentioned some of these, obviously, the Pru deal. You're buying the Ark business for EUR 230 million, and you're buying ClaimSecure in Canada. I'm just trying to understand the latter 2, so the Ark and the ClaimSecure. Is this financed with cash on hand, which I think it is? Or are you borrowing? And should we be thinking about there being an impact on the LICAT ratio from these transactions?
Well, I'll start off by saying that they were financed with cash on hand. But I'll let Garry speak to any impact on LICAT.
Sure, Paul. Thanks. Yes, I mean there's a small impact on LICAT. It was in the -- it was less than -- it will be once they close, it'd be less than a point, though, in total between the 2 of them. So it's only quite modest on LICAT, not just for any goodwill that comes onboard. And then in particular, in the case of Ark Life, we will get a credit for the insurance-related actuarial [indiscernible] because they're -- that's in your surplus allowance. So there's some offsetting credit there. So it's quite a modest impact on LICAT. And as Paul said, it's funded from cash on hand.
Okay. So this isn't going to be material. Perfect. And then just in the description for the base results for CRS -- longevity experience was obviously still favorable, but it was less favorable. Just wondering if there's anything in there, any trends that you're seeing.And then in the same flip side in Europe, and Garry, I think you said in your prepared remarks, costs were inflated by higher strategy costs in Europe. Just hoping you can maybe unpack that as well.
Why don't we have -- we'll have Arshil speak to what we're seeing on the Capital and Risk side. And then David Harney, why don't you speak to the strategy costs that are going on in Europe? Arshil?
Thank you, Paul. So turning to the claims experience in the CRS segment. All last year, we saw elevated levels of life claims in the U.S. traditional block. And then offsetting that or largely offsetting that, we saw elevated levels of death claims on the longevity books, both in the Netherlands and in the U.K. And that trend sort of peaked in Q1 of this year, where we saw a particularly elevated level of excess life claims in the U.S. and also a very high level of excess mortality on the longevity books.That trend did continue into Q2, but at a lower level. So we were down in terms of excess longevity benefit as well as life claims in Q1 -- in Q2 relative to Q1 this year. And the straight year-over-year quarterly comparisons were the same as well. So mortality was adverse this quarter, like less adverse than the traditional block than the same quarter last year and longevity was favorable again this quarter, but less favorable than a year ago.And we're seeing improving trends in all of those markets as the vaccines kick in and the death rates start to fall, and there are some promising signs in July. But as Paul indicated in the early part of the discussion here, we still have a watching brief on this or whatever. And we don't think this is all behind us or whatever, but the trends are certainly improving. And I'll turn it over to David to answer that Europe part of the question.
Yes. So just on the Europe on the expenses, like we've ongoing strategic development costs in Ireland, Germany and the U.K., but we did have some one-off costs in this quarter. So those costs were related to completing the Ark acquisition, which was of a modest enough size that I think most people will be aware that Phoenix had some other books up for sale, and that didn't proceed in the end, but we had some costs associated with investigating that also.
Our next question comes from Paul Holden of CIBC.
Just want to ask another question on Empower, given your answers to prior questions. I mean my takeaway from this kind of discussion on the earnings growth, it seems like incremental revenues pretty much dropping direct to the bottom line. Is that the correct takeaway? And is that also a relevant conclusion going forward?
I'll perhaps start off there, Paul. I think we're seeing strong leverage in that business. And saying that all the incremental revenue is a direct drop might be an overstatement. We're seeing the benefit of markets rising as well. But Ed was talking about the strong expense discipline at Empower. So maybe Ed, you can provide a bit of context of the leverage we see in this business.
Yes. I mean it's clearly a scale business, and we have, I think, a very good operating discipline and model. And we're also -- not only are we seeing good cost control, but we're seeing really strong revenue per participant. And that's in part a contribution from the market, but it's also the fact that customers are aggregating more of their assets with us. So existing participants rolling in outside assets into their existing defined contribution plan or into an IRA that they might hold with us. So we're seeing the leverage sort of on both sides. We're seeing really strong growth on the revenue per participant, revenue per customer side, but we're also seeing the benefits of the scale that we have in the fixed nature of the business where it is delivering the flow-through that you referenced. And we do expect that to continue.
Okay. So I think I got it. If it's sort of existing clients and that sort of that consolidation of assets, as you talked about, then it may not be one for one in terms of revenue to bottom line, but pretty close. But if it's a new corporate customer, new client win, then you wouldn't get the same -- exactly the same translation. Is that correct?
Well, you have upfront expenses associated with bringing those clients on from an acquisition standpoint. But if you look at the -- our average customer stays with us 16, 17 years. And so while you have that upfront expense, those plans and those participants contribute favorably to the bottom line within a relatively short period of time.
Understood. Last quarter, there was a reference to asset employment retention with MassMutual tracking higher than planned. Is that still the case? Or is it kind of normalized now in line with expectation?
Ed, that question is for you, for sure.
Yes. Paul, it's still really early in the process at this stage, but the short answer is we are running ahead of plan. But a lot of those customers' decisions are yet to be made. And so that will play out over the next several months. As I think we shared with you in the past, we're going to begin the process of migrating customers in the third quarter of this year, and that will carry over until the third quarter of next year. But we feel really confident about where things stand at this point, the reception that we've received from advisers who are advising on those MassMutual plans as well as the customers themselves. So the team is very confident about where we stand now in terms of our ability to be successful in retaining the client base. But yes, we are running ahead of our target at this stage.
Okay. Okay. Good to hear. Last question is related to the USD 400 million line of credit repayment you highlighted that took place in July. Just want to understand the funding for that. Will that impact LICAT? Or is it funded from the Holdco? And then the second part of the question is, with the Prudential transaction, you expected financial leverage on close to be around 36%. Did that incorporate this USD 400 million repayment or not?
Garry, that question is for you.
Sure. Yes. So first off, the repayment was funded out of the U.S. So again, some of this would have been cash at the U.S. Lifeco holding company. And then some of it would have been dividended up from Great-West Life annuity, the Empower insurance company. The Great-West Life annuity, that would have been dividended up in the quarter. So the funding was -- it didn't have an impact on LICAT. It's just funded from our U.S. sources of cash. And obviously, that business has been performing, and it generates a fair bit of cash.And then to the second part of your question, when we were looking at the Prudential financing, we had actually anticipated not just the $400 million, but actually, we have anticipated that we would pay off the remaining $100 million of that facility as part of our overall comment on leverage once the deal is closed. So we'd assume that the full amount would be paid off by the time the Prudential transaction closes. And certainly, we're well on the way to that.
Our next question comes from Nigel D'Souza of Veritas Investment Research.
I wanted to follow up on your experience gains and losses this quarter. And you mentioned one of the factors being favorable, morbidity experience in your Canadian segment. And my understanding would be that dental and health claims would track higher as restrictions are lifted. So could you highlight some of the trends you're seeing on the claims side? And do you expect morbidity experience -- or when do you expect morbidity experience to move towards neutral as things reopen up?
Garry, why don't you start with that? Then perhaps, Jeff can provide a bit of insight into our go-forward expectations.
Sure. Yes, there were gains in Canada on the morbidity side, the health and disability side. And now some of that, I think, is really -- have to think about when the quarter started. So the easing up in a number of places in Canada, I think you have Ontario, in particular, but some other places, the easing up was later in the quarter. So I think you're still getting some of that lockdown impact in the quarter. So that would certainly -- that's the one thing I would call out before handing over to Jeff on where they're looking at the moment.
Yes. Just to pick up there, Garry and Nigel. On the disability side, we continue to see strong management in that area, incidents remain stable through some work we've done on artificial intelligence. Some of the tools that we've been able to give to our disability managers is working well with our customers. So that remains strong. On the health and dental, I think Garry pointed it well. I mean due to restrictions and maybe apprehension, it has led to some mild experience gains in the short term. But the lower experience rating may lead to some lower margins in the future, but not material.
Okay. That makes sense. And if I could just end on the question on the components of your experience gains. When I look at the breakdown here, yield enhancement was by far the largest contributor. And could you help me understand on a segment basis, how is that allocated? Is there a particular segment that would have benefited from that component more in this quarter? Or is it evenly distributed?
Garry, I'll -- you should take that one.
Sure. Yes. In terms of the yield enhancement this quarter -- and it's often the case, but particularly this quarter, it was -- it's primarily Canada and Europe. And within Europe, it was mostly the U.K. I don't have the exact split, but it would have been maybe 60%, 2/3 Canada and then the rest in the U.K. or in Europe, primarily in the U.K. So that gives you a rough idea. And that's -- you would often see Canada and Europe being the main drivers on yield enhancement.
Okay. Got it. So the USD 59 million isn't really reflective of the yield enhancement component there. Is that fair?
No. There's -- I think there's very little in yield enhancement. They would have had some gains, I think, on some asset upgrades who wouldn't be in the yield enhancement -- I don't recall there being much of anything on yield enhancement in the U.K. -- sorry, in the U.S. this period. And just the nature of the liabilities there, there's not that much scope for yield enhancement.
Our next question comes from Mario Mendonca of TD Securities.
Paul, this might be most appropriate for you. It relates to Putnam and how Putnam fits into the overall strategy of Great-West Life. What would be helpful to understand is if Putnam is really just a standalone business within Great-West Life or if it has any direct tie-ins or it's integrated in some way into the strategic imperative across the organization, either, let's say, Empower or Personal Capital. So how would you characterize Putnam, standalone or integrated?
I would characterize Putnam as a strong partner with our other businesses around the globe. Putnam has some very strong performing capabilities, and we benefit from those on sell-through in our wealth management offerings. But you wouldn't position it as proprietary because it's separately branded, and Putnam competes with those strong offerings into those various channels. So Empower would benefit from that. Our European operations and our Canadian operations have some strong Putnam mandates that are -- we benefit from the performance and the flows there. So I would characterize it as a strong partner.
Sort of a related question then. From an expense perspective, does Putnam absorb some of the expenses of the overall organization. What I mean by this is if Putnam were not part of the overall Great-West Life business, would expenses throughout the organization necessarily have to increase? That's something we can -- you can think about?
Yes. I -- anytime, if it was not part -- I guess there could always be that sort of an impact, but I don't tend to look at it in that way. I look at Putnam as a strong performing asset manager for their clients, for Putnam clients. I see it as having some capabilities that we have sell-through opportunities across the group. And I also see it as a business that has potential to be scaled. We're seeing some organic benefits there, but also potential to be scaled as if we could look at some transactions to scale it up where we could unlock value. And that is kind of the -- that's the strategy we're on, and we remain on strategy. So I don't tend to think of it in the terms that you're outlining.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mahon for any closing remarks.
Thank you very much, Ariel. Well, listen, I'd like to thank everyone for attending our Q2 call. Feel free to reach out to our IR team if you have any follow-up questions. And I hope everyone can take some time to enjoy the summer in a safe and -- safe way with your families. And we look forward to connecting with you in Q3 for our call in November. Take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.