Great-West Lifeco Inc

TSX:GWO

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco's Third 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.

[Paul Anthony Mahon, President, CEO & Director]

Thank you, Ariel. Good morning, and welcome to Great-West Lifeco's third quarter 2021 conference call. We hope that you and your families are safe and healthy. 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 COO, Europe; Arshil Jamal, President and Group Head, Strategy, Investment, Reinsurance and Corporate Development; Jeff Macoun, President and 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, and that's on Slide 2. These apply to today's discussion and presentation materials. Please turn to Slide 4. We're very pleased with our third quarter performance, and that's highlighted by solid underlying business results across all businesses and strong continuing momentum. Before we get into a review of the third quarter results, I'd like to take a moment to address our changing world. There's a range of important issues that are reshaping both national and global priorities. That includes the ongoing COVID pandemic and plans towards recovery, stubborn and persistent challenges that we see regarding racial and social injustice, rising inflation and disruptions to the global supply chain and also the urgent need for collective action on climate. And the reality is these are real issues, and we are engaged in the important discourse that's happening globally to resolve them.We fundamentally believe that to effectively address these issues, it will take collaboration between government, business, communities and civil society. And I can assure you that Great-West Lifeco is deeply committed to being an active participant in defining and implementing solutions driven by our values and our purpose. A great example is our purpose at Canada Life here in Canada, which is to improve the financial, physical and mental well-being of Canadians. This mindset helped shape our role in addressing environmental, diversity, equity and inclusion and sustainability challenges in the context of our own ESG programs, and our values inform similar work in the United States and across the European markets. We look forward to sharing more on this in the coming weeks and months.Amid all this challenge and change, Great-West Lifeco is well positioned to continue creating value for stakeholders across our businesses. Our performance is supported by our values, a resilient and diversified business model, our disciplined approach to capital deployment and our deep risk sensitive experience and expertise. Looking to our value creation priorities and medium-term financial objectives, we're very pleased with our progress this quarter, including strong financial results.I'll provide some insights into how we're advancing our business strategies when we get to our segment discussion shortly. These include launching solutions that marry our expertise with customers' values and needs like responsible investing, digital experiences that are personalized and advice that guides customers as they move towards their financial wellness goals. We've been very active in M&A over the last year with a focus on 3 customer-focused priorities, advice, digital delivery and workplace extensions.Let me pause now on the fourth priority, risk and investment expertise. Last month, we announced a strategic partnership with Sagard Holdings. This follows another transaction we did a year ago with McKenzie to acquire a strategic stake in North Leaf. These actions and other steps we've taken across the portfolio broaden our access to alternative investment capabilities. This is a key area of focus as we work to strengthen products and service our customers and increase returns for shareholders. By focusing on our values and investing in our priorities, we are confident in our ability to achieve our medium-term financial objectives. While Garry will elaborate on the drivers in his prepared remarks, the bottom of this slide illustrates our performance this quarter relative to our stated objectives.Please turn to Slide 5. Our third quarter saw strong -- very strong overall results supported by consistent performance across businesses. Results reflected solid operating fundamentals and the benefits of disciplined capital deployment. While our Capital and Risk Solutions segment set up provisions for catastrophe losses and experienced U.S. mortality issues related to COVID, expected profit growth was strong. Overall base earnings in the quarter were $870 million, and net earnings were $872 million. Base EPS of $0.93 was up 27% year-over-year. The strong year-over-year growth in EPS reflects higher market levels, the mass neutral business coming on stream, including synergies and excellent expected profit growth in all segments.Net earnings of $0.94 per share were up 6% year-over-year, mainly due to higher base earnings with positive actuarial basis changes and market-related impacts, offsetting acquisition-related costs. You'll recall that in Q3 2020, there was a gain on the sale of IPSI in Ireland that moderates the year-over-year growth rate.Turning to Canada results on Slide 6. We're pleased to see solid momentum in insurance sales and strong wealth sales in quarter for both group and individual customers. We're advancing our Canadian wealth management strategy with the launch of new Canada Life Sustainable Portfolios in September. The new portfolios provide investors with access to responsible investing strategies that are diversified across both asset classes and regions. And our strategic partnership with Sagard will broaden our access to alternative assets for both wealth management and balance sheet solutions. We're also extending our group offering through the acquisition of ClaimSecure, which closed on September 1. It will enhance Canada Life's workplace benefits capabilities and extend our presence in a growing market for TPA and TPP services.Moving to Slide 7. Empower's strong growth trajectory continued this quarter with large plan sales driving a year-over-year increase, combined with strong growth in the government, non-profit and retail wealth management segments. Notably, Empower IRA assets and Personal Capital assets were both up over 50% compared to last year. As I noted last quarter, Empower IRA growth has been achieved using our existing model before leveraging Personal Capital capabilities. We're pleased to have recently launched the first phase of a new personalized digital platform that combines the experience and technology of Empower and Personal Capital for the first time. This enhanced customer experience will continue to roll out across Empower segments over 2022.And importantly, the MassMutual and Personal Capital integrations are progressing well. To date, we've achieved USD 60 million in annual pre-tax run rate synergies related to MassMutual. We're on track to reach our USD 160 million target in 2022. And finally, we continue to track to a Q1 2022 closing for the Prudential transaction.Moving to Slide 8. Putnam has continued to deliver strong investment performance for customers with 28 funds rated 4 or 5 stars by Morningstar. This performance underpins our ability to sustain and grow our assets under management, which increased by USD 18 billion year-over-year to just under USD 200 billion. This growth was supported by strong equity markets and solid asset retention across equity and longer duration fixed income solutions with net outflows of USD 1.6 billion, primarily from lower fee fixed income products.Moving to Slide 9. Sales in Europe continued to rebound from COVID impacts with a $1.3 billion U.K. annuity deal in quarter. Additionally, we've seen strength in equity release mortgage sales alongside higher wealth sales. Europe also saw overall positive flows in both wealth management and investment only solutions. In Ireland, we closed the Ark Life acquisition on November 1, bringing 150,000 policies and EUR2.1 billion in assets to Irish Life. As a reminder, this is a very straightforward integration as we were already administering the business on the Irish Life platform as an outsourced service provider.Moving to Slide 10. Capital and Risk Solutions saw strong expected profit growth of 8% year-over-year. The pipeline for new business remains very strong in both structured life and longevity, and we competed -- we completed a reinsurance agreement covering a significant block of life policies in Japan. Japan is a new market for us, and this is the second transaction we've done there this year, a testament to our strong reputation and recognized expertise.Although not covered on this slide, there were 2 reinsurance headwinds in quarter that impacted base earnings. These were P&C cat loss claims related to flooding and elevated U.S. traditional life reinsurance claims related to COVID. While Garry will cover these matters in his comments, we remain comfortable with our overall reinsurance risk profile and confident with our growth prospects.With that, I'll now turn the call over to Garry to review the financial highlights. Garry?

[Garry MacNicholas, Executive VP & CFO]

Thank you, Paul. Please turn to Slide 12. Overall, as Paul noted, we were very pleased with the financial results this quarter. In addition to highlighting the strong momentum we see across the businesses, the results also reflect the strategic deployment of capital in the past year. Compared to the prior year, base EPS of $0.93 was up 27% and closer to 30% in constant currency. The increase was due to a number of factors: broad-based business growth, higher stock market levels and the significant acquisitions in the last year.Notwithstanding adverse claims experience in the Capital and Risk Solutions reinsurance business unit, the strength in base earnings was evident across the segments. While there are a number of larger items impacting results this quarter, they were generally offsetting with the strength in base earnings, reflecting very solid underlying business fundamentals. Starting with Canada. Base earnings were $312 million, up 16% from Q3 last year. Business performance was good, with expected profit up 6% and the insurance experience, life health and disability, producing a solid gain. Canada also saw a steady contribution from yield enhancement activity in the quarter.In the U.S., base earnings were up significantly from Q3 2020. The acquired MassMutual business continued to perform well, adding CAD68 million or USD 54 million to base earnings, including some early expense synergy gains and strong fee income. Note, this includes financing costs and amortization of intangibles on the MassMutual business. On a run rate basis, USD 60 million of the targeted USD 160 million pre-tax expense synergies have been achieved thus far. Customer retention to date has also been excellent and integration activity is on track.Personal Capital continues to invest in new customer acquisition to fuel growth and profitability, and it narrowed the base loss this quarter to USD 4 million as the in-force book of business continues to grow and generate profits. The rollout of Personal Capital digital capabilities to the broader Empower client base is successfully underway with an initial pilot group with further rollout scheduled for later this year and into Q1.Looking at Empower, excluding MassMutual and Personal Capital, base earnings were up sharply year-over-year as a result of strong organic growth, higher markets and the continued growth trajectory of the Empower IRA rollover business with assets under administration growing 54% year-over-year in that book. Empower also benefited from investment gains in the surplus account this quarter and a one-time tax gain of CAD6 million.Putnam's results also improved year-over-year. Fee revenues were up due to the growth in AUM and also the growth in equity mandates relative to short duration fixed income and improving mix from a revenue perspective. While fee capital results were largely breakeven in period compared to strong gain in Q3 2020, Putnam did benefit this quarter from a one-time tax gain of CAD14 million.In Europe, base earnings increased 27%, helped by a onetime pension expense gain in Ireland, although somewhat offset by FX rates on the euro. Good underlying performances in the U.K., Ireland and Germany were driven by the continued recovery in sales, favorable insurance experience and increased fee revenue from net flows and market growth. The U.K. landed a $1.3 billion bulk annuity sale this quarter. New business gains have not been recognized to date as the backing assets are still being finalized.Capital Risk Solutions had a more mixed quarter. The business itself continues to grow nicely, including the expansion into newer markets with strong new business gains in quarter. However, in period, there were significant adverse claims experience in the P&C catastrophe line and in the U.S. life reinsurance line. The P&C experience impacted earnings by $61 million, resulting from provisions for potential losses on Hurricane Ida and the extraordinarily severe German flooding. The higher U.S. life claims impacted earnings by $71 million, which includes a provision for additional excess claims in the near term. These are primarily COVID-related claims as the current wave has resulted in elevated infections and mortality rates in the U.S. However, compared to the U.S., mortality rates have been less impacted recently in the U.K. and Netherlands. And as a result, we did not see the offsets in the longevity business this quarter.Coming back up to the Lifeco level and looking at net earnings, the overall impact of excluded items is immaterial at $2 million and net EPS of $0.94 mirrors the strength in base EPS. Net earnings were up 6% from Q3 2020, which included a $94 million gain on the sale of Iris progressive services unit IPSI.Turning to Slide 13. Here, we can see the impact of the various excluded items, which netted to $2 million overall. Actuarial basis changes in management actions were a positive $69 million, and that incorporates or includes a negative impact of $33 million from the actuarial standard change effective this quarter. In addition, greater clarity on property valuations in the U.K. led to the recognition of market value gains on U.K. property holdings, particularly the industrial sector, and this is reflected in the actuarial liabilities.The remaining excluded items this quarter were primarily transaction and integration costs related to last year's U.S. acquisitions as well as a legacy cleanup item in the Corporate segment. I would highlight the Personal Capital transaction costs. Recall, an element of the purchase price was a contingent consideration payable in December this year and next, provided certain targets are achieved. Based on the strong performance of Personal Capital to date, we have increased the provision for this contingent consideration.Turning to Slides 14 and 15. These next 2 slides highlight the source of earnings, first, from a base earnings perspective and then a net earnings one. I'll focus my comments on Slide 15, the net earnings prospective source of earnings, with a reminder that the amounts above the line are pre-tax. Expected profit was up 23% year-over-year, notwithstanding some currency pressure from U.S. dollars and euros. MassMutual and Personal Capital were not in Q3 2020 but added $84 million this quarter. Even without that boost, we are seeing a 47% increase in the U.S. and a 12% expected profit increase overall, generally coming from organic business growth and fee income benefits from higher market levels. Canada, Europe and Capital and Risk Solutions were all up between 6% and 8% year-over-year.Moving to new business. Capital and Risk Solutions recorded an outsized new business gain this quarter, primarily on larger asset-based transactions, which similar to bulk annuities, recognize a portion of the investment gains upfront. As we develop good visibility on the assets to back the portfolio, we realized gains this quarter, including some catch-up on transactions written earlier this year. Notwithstanding the adverse claims experience in reinsurance, overall experience gains contributed positively in the quarter, and I'll cover these and actuarial basis changes on the next slide.Note that the U.K. property-related gains reflected in liabilities are excluded from base earnings, which accounts for the difference in experience gains between the base and net source of earnings displays. Earnings on surplus of minus $18 million is down from $8 million last year, primarily due to lower seed capital results at Putnam and increased financing costs and a reclassification in Canada. The effective tax rate on base shareholder earnings was 9.5% and our net earnings was 8%, primarily reflecting the jurisdictional mix of earnings and also a $26 million benefit from the release of certain tax provisions, including $20 million between Putnam and Empower and $6 million in Corporate. Before the release of those provisions, the effective tax rate on base earnings was 12%.Turning to Slide 16. 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 continue to contribute positively, particularly in Canada and the U.K. this quarter. We continue to originate a steady volume of equity release mortgages in the U.K. on an improving residential property backdrop. The net impact of mortality, longevity and morbidity was modestly negative this period due to the combination of the COVID-related claims in U.S. Life reinsurance noted earlier and generally positive experience in the other areas, again, reflecting the benefits of our diversified book of business.Credit-related impacts were positive this quarter as our high-quality investment portfolio continues to perform well, with minor ratings changes and a recovery in previously impaired assets leading to an experience gain. The chart on the right details the major basis changes with a positive impact from changes in the economic assumptions used in liability modeling, being partly offset by the actuarial standards change and an update to policyholder behavior assumptions in cannabis.Moving to Slide 17. This slide highlights operating expenses by segment. Expenses are up year-over-year as expected, given the increase in business, both organically and through M&A. While there were a number of adjustments to consider, overall, expense growth is well below the growth in expected profit as the company continues to apply disciplined expense management and benefits from leverage in market-related fee income.Please turn to Slide 18. The Q3 book value per share of $24.4 was up 8% year-over-year, driven almost entirely by increased retained earnings, given the solid results in each of the past 4 quarters. Currency movements in OCI have been a headwind with a strengthening Canadian dollar, but this has been largely offset by a pickup in pension OCI, given the increase in interest rates this year. The LICAT ratio at Canada Life remained strong, although lower by 3 points compared to last quarter, primarily due to increased new business requirements on the large asset-based transactions noted earlier.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. Lifeco cash ended the quarter at $0.6 billion, which is down from $0.9 billion at Q2 as a result of repaying the $500 million short-term debt component of the MassMutual financing plan, and that was within 9 months of the close date, slightly ahead of schedule, given the strong results to date. And just a reminder, the Lifeco cash balance is not included in the LICAT ratio.Back to you, Paul.

[Paul Anthony Mahon, President, CEO & Director]

Thank you, Garry. Please turn to Slide 19. As outlined in my opening remarks, amidst the many challenges that are shaping aspects of our world, we believe Great-West Lifeco is well positioned to adapt, respond and create value for stakeholders. We delivered a strong quarter with continuing momentum supported by solid operating fundamentals and the benefits of disciplined capital deployment.Looking ahead, we are confident in delivering on the financial expectations we've set for ourselves. And we'll do this by focusing on and investing in our 4 priorities to drive value creation, while being an active participant in defining and implementing a sustainable path forward for all stakeholders in the markets where we operate.And with that, that concludes my formal remarks. And Ariel, please open the line for questions.

[Operator]

[Operator Instructions] Our first question comes from Meny Grauman of Scotiabank.

[Meny Grauman]

Just wanted to talk about excess capital and potential capital deployment, Paul. Just if you could update your thoughts on the dividend? And then also, if you have -- what do you see as the capacity in terms of excess capital potentially for buybacks and your view on buybacks at this stage given Prudential and everything that you've done so far?

[Paul Anthony Mahon, President, CEO & Director]

Okay. That's a fulsome question. So I'll start off with the first question about our views on excess capital. And actually, I'll sort of start off at the top and say that we have deployed significant amount of capital over the last 18 months. And I think we've deployed it quite effectively. You can see that in our strong results. And I would say that if you think about in the U.S. with Empower, we've got our plate pretty full with the integrations over the coming quarters. So we'll remain very laser-focused on that. Having said that, we are not shy to continue looking at opportunities to strengthen the portfolio. So the reality is, for the right opportunities, we're going to find ways to finance those. So that's our mindset as we think about growth going forward. At this stage, as I think about dividends, clearly, we have to wait and see what happens with the communication that's going to presumably flow this afternoon with the communication from [OSP]. But with that in mind, we've always had a progressive dividend policy, and we would anticipate moving back to that. But I think we have to actually wait and see what the lay of the land is as we hear from [OSP]. And our intent would be, as I said, to get back into a progressive dividend policy. And at this stage, we're very focused on thinking about how to create value through M&A and through extending our businesses, and that would always be a priority from our perspective versus buybacks.

[Meny Grauman]

Got it. And you have an active NCIB. Should we read anything into that? I guess, based on your comments, not so much, but I'm just wondering about that.

[Paul Anthony Mahon, President, CEO & Director]

No, I don't think you should read anything into that. Anything you would add, Garry?

[Garry MacNicholas, Executive VP & CFO]

No, that's in place. Largely, at a minimum, we would look to be removing the dilution from granted share options, and we've typically used it for that purpose. And then obviously, it gives us flexibility in other circumstances arise. But certainly wouldn't read anything into us just keeping that open.

[Operator]

Our next question comes from Gabriel Dechaine of National Bank Financial.

[Gabriel Dechaine, Analyst]

I got the cut-off here before noon. So I can still say that. First question is on your yield enhancement gains. Year-to-date, just under $200 million pre-tax. Very simple question. Does that number look the same under IFRS 17? Or is it lower? I'm still not quite sure I've gone back and forth with a few companies. It sounds to me like it might be lower because it's no longer upfront recognized upfront and it's amortized, but curious to hear what you have to say.

[Paul Anthony Mahon, President, CEO & Director]

Okay. I'm going to turn that. And I'll turn that one right over to Garry.

[Garry MacNicholas, Executive VP & CFO]

Sure. Yes, I would expect almost be -- will be somewhat lower. It doesn't disappear, but it will be somewhat lower, and that will ultimately depend on the various accounting policies, all the different blocks of business. But -- so there will be -- it'll be a little lower in the short term. Obviously, you get the benefit, the economic benefit from the yield enhancement will show up. In some of the cases, it will be feathered into earnings or amortized in earnings over time, but some will continue to end up being upfront through the discount rate mechanism in IFRS 17. So a bit of a mix.

[Gabriel Dechaine, Analyst]

So just trying to get a sense here. Is it -- does that number affected like on a pro forma on an IFRS 9 basis -- 17, sorry, basis, based on the duration of the add so you take cash, you put it into a riskier asset. If it's a 5-year asset or a 10-year asset, you divide instead of present valuing it in year 1, you would spread that gain over a 5 or 10-year period, that type of concept? Is that how it work?

[Garry MacNicholas, Executive VP & CFO]

I think, Eric, this might be 1 to be worth follow. We do plan to have -- obviously, as IFRS 17 approaches a lot more discussion about how the various mechanisms will work. So just the high-level answer is that there'll be some adjustment to the yield enhancement, but there's a lot of moving parts with the CSM and all that to be considered. So I wouldn't want to draw a conclusion just looking at one component. I think that's the transition over.

[Gabriel Dechaine, Analyst]

Okay. And Paul, you were -- I cut you off.

[Paul Anthony Mahon, President, CEO & Director]

No, I just wanted to say, underlying this, as Garry said, the economics of the business will remain very attractive. We're -- we like the way we're strengthening the business through yield enhancement through considering alternative assets through leveraging things like our equity release mortgages. And we feel all of that ultimately driving value creation. There's going to be obviously some timing differences there, but we don't see it as being a significant impact, but I do think the key is to unpack that a bit through some education sessions.

[Gabriel Dechaine, Analyst]

Right. And while another thing that might arrive in 2023 is the global minimum tax. I asked about it last quarter. I got to ask if you have any additional thoughts on the impact. I see year-to-date, and again, this quarter, sub-10% tax rate. I looked over the past 5 years, 13 out of 20 quarters where your tax rate below 15%. Is this something that's becoming maybe more pressing issue as far as how you're structuring your business?

[Paul Anthony Mahon, President, CEO & Director]

I guess I'd start off by saying that we don't have full clarity and insight into what the global minimum tax will look like. And so I think it's too early in the process to start drawing direct conclusions. I would say, though, that if you were to look at our normalized tax rate this quarter, and I think Garry quoted that, that it was in the low teens. And that's a function of our mix of business. And obviously, in any quarter, we're going to have various provisions that occur that would move that up and down. As we think about the business going forward, though, the reality is we're seeing high-growth in our business in some higher tax jurisdictions like in Empower business, for example. So as we think about the overall impact of this, it's not something that's really concerning us. And more importantly, as we look out ahead, we don't see it having an impact on the guidance we provided regarding our EPS growth expectations. So we kind of look at it from that context and recognizing the growth we're going to see in the U.S. in particular.

[Gabriel Dechaine, Analyst]

Okay. So you don't see that affecting the 8% to 10% target?

[Paul Anthony Mahon, President, CEO & Director]

No, we don't.

[Operator]

Our next question comes from Doug Young of Desjardin Capital.

[Doug Young, Diversified Financials and Insurance Analyst]

So we mentioned that the CRS division or was mentioned the CRS division had adverse mortality claims experienced in the quarter, it was $71 million. I assume that's after tax. And I'm hoping maybe, Arshil, you can flush that out a little bit. I know you talked a little bit about flexing that business in times when pricing is attractive and contracting it when it's not. Just want to get a sense of, first off, what are you seeing so far in Q4? Should we expect that to kind of continue to linger the COVID debt claims? And how are you thinking about this business? And then I just have a follow-up on that.

[Paul Anthony Mahon, President, CEO & Director]

Okay. So it's Paul. I'm going to start off just talking at a high level about CRS where as we look at that business, we like its diversification across a range of different risk classes. And I think it fits really well within our portfolio. There's significant expertise we draw on, the same expertise that all of our customer base draws on. So we recognize that there can be some volatility in things like P&C cat claims, but those will occur over longer cycles. And we do view that business as ultimately profitable. And the other thing we like about that aspect of it is the risks are actually uncorrelated with broader Lifeco risks. So overall, we're comfortable with the risk profile, and we're actually comfortable with viewing it as a continuing element of a growth strategy across Lifeco. But I'll let Arshil comment on the specifics of thinking about it, looking at it going forward. Arshil?

[Arshil Jamal]

So before digging into the numbers in quarter, I just wanted to give you a little bit of perspective sort of looking both through 2020 and across 2021. So within the CRS segment, we have both longevity exposures, primarily in the U.K. and in the Netherlands. And then the mortality exposure, which is largely in the U.S. and cumulatively, over the 2 years, the favorable impact of excess deaths on the longevity book continues to be a little bit higher than the cumulative impact on the mortality book, but we did not see that offset this quarter as we noted. So we're very comfortable with the overall portfolio and the diversification between longevity and mortality. In quarter, you noted the $71 million after-tax of variance Canadian dollars, and that was $90 million pre-tax, a $90 million pre-tax, $71 million after-tax. And within that provision is an allowance about just over 1/3 of that for continuing excess claims into Q4. But I'm not going to comment on our position in internal reporting through October or into November. We're engaged with our clients. We're monitoring all of the population level of data in all of the jurisdictions that we're operating, and we're taking pricing action where it makes sense for us or whatever and being very cautious in underwriting new traditional mortality business in the U.S. in this environment. So that's really the context that I would provide, but $71 million after-tax is $90 million pre-tax in the quarter.

[Doug Young, Diversified Financials and Insurance Analyst]

And it takes me to my follow-up. Garry, on page or Slide 16, you have mortality, longevity, morbidity experience. It was negative $22 million post tax. This is obviously $71 million. So there's obviously some big positives that's on the other side of this negative. Can you maybe unpack that negative $22 million? So this was a big negative of $71 million, what were the big positive items?

[Paul Anthony Mahon, President, CEO & Director]

Yes Garry, why don't you take that?

[Garry MacNicholas, Executive VP & CFO]

Sure. I think the -- just on the positives, I think I mentioned earlier, Canada had a gain when you look across the life disability in health claims in Canada, the health and dental. And then again, you see it in some positives in the other jurisdictions in Europe. So most of that the positives were pretty much split between the 2. I think there'll be more positives in Canada. And again, that's partly a good experience on the disability book. Some actual positive experience on the life book and the annuity book again small positives, but they all went positive. And then again, we're still seeing some underutilization on the -- some of the health like the dental, the chiropractor those type of claims in Canada. Similarly, we're seeing some underutilization on the health claims in Ireland this period. So yes, it was pretty much split across the group in the other areas it was positive.

[Paul Anthony Mahon, President, CEO & Director]

Yes. And Garry, I would just add that it speaks to the diversification of the business. So we're diversified by country. We're diversified by across mortality and morbidity. And the other thing I would note, and Garry made reference to that, or Arshil made reference the fact that we're actively managing this from the standpoint of pricing and underwriting and risk selection. We take a very, I would say, disciplined approach when it comes to underwriting and selection of risk, managing pricing, looking at these -- you've seen us work our way out of past disability, group disability issues in Canada. We are active on this in exactly the same way, and we'll continue to have those disciplines.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just a quick numbers question. Garry, did I hear you say you had a tax benefit at Putnam of $14 million, a $6 million one is in of Empower and then $26 million at Corporate for a total of $46 million, is that -- did I get all those numbers right?

[Garry MacNicholas, Executive VP & CFO]

Just to clarify, it was $6 million at Corporate. And then the $14 million and the $6 million that you've noted at Putnam and Empower, respectively. So $26 million was the total. And then if you -- which is about 2.5% on the effective tax rate for base earnings, that's how what takes it from the 9.5% up to a 12% effective tax rate.

[Doug Young, Diversified Financials and Insurance Analyst]

Got it. Got it. And then lastly, just to clarify, on the LICAT being down sequentially. I was actually surprised, but did you move cash out of the opco up to the holdco? Or was this purely just a function of business growth? And what -- where was that business growth? Was that related to the annuity? Business you wrote in Europe?

[Paul Anthony Mahon, President, CEO & Director]

Garry?

[Garry MacNicholas, Executive VP & CFO]

Sure. There was -- in terms of the dividends up, that -- I think the dividends were a little bit higher in Q3. I mean, obviously, the earnings were also quite strong in Q3. So -- but the dividends were a bit higher. So that might have accounted for a small portion. But really was those large -- both the asset-based transactions in the reinsurance segments that drove the new business gains, plus also the bulk annuity in the U.K., those large asset-based transactions added to the new business requirements, but that would be more profitable transaction. So we're quite happy to take the Life at earn a good return on that.

[Doug Young, Diversified Financials and Insurance Analyst]

Sorry, I going to throw one quick one in here. You've got -- you said that you did that $1.3 billion bulk annuity, but you didn't finalize the assets. So we should assume there's going to be a gain coming through when you finalize the assets?

[Paul Anthony Mahon, President, CEO & Director]

Yes. So I'll start off at a high level. Obviously, as we lock in these sales, we're always looking for yield enhancement and improvement in the overall ALM matching and opportunities to enhance yield. We're not going to project on that, but that is a discipline we have across our businesses, and we'll continue to have that discipline moving forward.

[Operator]

Our next question comes from Tom Mackinnon of BMO Capital.

[Tom MacKinnon, MD & Analyst]

Just continuing on that $1.3 billion bulk annuity deal. I understand you had liberty to talk about potential deal enhancements, but my understanding is there's generally a new business gain associated with this. So how should we be looking at the new business gain associated with that for the fourth quarter? And I have a follow-up.

[Paul Anthony Mahon, President, CEO & Director]

Okay. Garry, I'll let you take that one.

[Garry MacNicholas, Executive VP & CFO]

Sure. So I think the way I'd describe it is there's -- provided we secure the right asset. There is an opportunity for a new business gain in the fourth quarter, but we have to finalize those assets. Often, on the smaller deals, we've often got the assets lined up, and so you'll see a gain in the same period. And in this case, given the size of the transaction, we wanted better visibility on those assets before declaring any gains that might come. So I describe it as an opportunity in Q4 for us.

[Tom MacKinnon, MD & Analyst]

Okay. Now the question with respect to Capital and Risk solutions then, and the $85 million impact on new business. I'm not really sure how we can really kind of model it because it's been like it was largely negative in 2020 and hasn't [dominated] so far in 2021. So was this related to this Japan reinsurance deal? And how should we be thinking about these -- the impact of new business with respect to Capital and Risk Solutions going forward? Like, obviously, we're not expecting $85 million one-time increase in that every quarter, but we're going to need some help here in trying to figure out why that happens and how frequently it will happen, just given the fact that you look historically, we haven't seen anything like that in Capital and Risk Solutions before.

[Paul Anthony Mahon, President, CEO & Director]

Yes. So Tom, I'll start off and then I'll pass it to Arshil. To start with, we have a very disciplined approach to selecting transactions that we fundamentally believe will drive value creation. Now the reality is the profit signature of transactions can be quite different. So it's not like there's a single way of looking at all of these. This particular transaction had a profit signature and was of a scale where it had that level of impact. So the reality is we can provide you with some insights into this particular transaction. But the reality is some transactions will have a bit of strain upfront, and then we'll have stronger releases in subsequent periods. And so I'll let Arshil give you a bit of context for that. Arshil?

[Arshil Jamal]

So Paul, you're absolutely right. The nature of the businesses that we have in CRS or whatever spans some businesses like the business that I'm just going to talk about that generates potentially upfront gains when we write new business. And then we have other businesses from time to time that generate upfront losses, and we really look at sort of the economic position and our return on capital over the life of the product. So you will see sort of fluctuations in the impact of new business, positive and negative, which is why we anchor most of our disclosure around expected profit growth. And I think that's the forward-looking measure that I encourage you to look upon the most. Turning to these deals. I think we've highlighted through the discussions and in the MD&A that we've taken on 2 blocks of Japanese liabilities with upfront premiums. And cumulatively, we have just over CAD4 billion of Japanese government yen that we brought into the investment portfolio. And we've been working really, really hard on the investment side to get into the flow so that we can get corporate bonds in yen denominated, both multinationals that issue in yen and domestic Japanese companies. And then alongside that, we've also been ramping up our efforts to buy sterling and U.S. dollar assets, corporate bonds and swap them into yen with the appropriate collateral and cross-currency swap arrangements. And then finally, we're thinking about introducing in a very modest way, some illiquid assets into that portfolio. And it's really getting all of those things up and running that's allowed us to have the confidence to book a new business gain on that whole set of transactions this quarter. So that's really the color around that. And if we get opportunities in the future to bring on lots of Japanese government bonds or other government securities and then deploy them using our investment management capabilities or whatever, then we will see other opportunities to add new business profits and/or yield enhancement gains. But that's really what happened in this period around that -- those liabilities in Japan.

[Tom MacKinnon, MD & Analyst]

And how much of it was a catch-up from prior quarters? And how much of the $85 million actually happened in the quarter?

[Arshil Jamal]

It's almost impossible now to untangle because we're managing the 2 transactions together and looking at our total pool of yen liabilities or whatever. So I wouldn't want to get into that or whatever. But the transaction that we did this quarter was about twice the size of the transaction that we did earlier. But then again, we've been sort of truing up our -- building our capabilities and then truing up all of the assumptions or whatever, but rough orders of magnitude, sort of 2/3 this quarter, 1/3 from earlier in the year.

[Tom MacKinnon, MD & Analyst]

Great. And isn't this more of an investment gain? Why is it classified as a new business gain, shouldn't we be thinking about more of an investment gains based on what you're trying to do with all swapping currencies and whatnot, it seems to me like it's more of an investment gain. Is -- am I correct there? Or how should I think of that?

[Arshil Jamal]

You're absolutely right. It is an investment gain, but then we get into a classification issue when we get investment gains on new business within 12 months of writing that contract and certainly within the same calendar year. So it's been our practice to try to reflect some of that as new business gains, and you would have seen that on the bulk annuity side as well. So as Garry indicated on some of the smaller bulk annuity transactions where we already have the assets in place. We'll often report a new business gain, but that's really driven by our investment performance and the difference between the discount rate on the liability side and the assumed rate on the asset portfolio. So it's really hard to split to whatever new business gains and yield enhancement gains. But certainly, within the first year, our bias is to reflect and call it new business gain.

[Operator]

Our next question comes from Paul Holden of CIBC.

[Paul David Holden]

First question is related to [ACA]. And specifically, the economic assumption updates. Wondering if you can give us some color if that's related to a shift in asset allocation or if it's just simply a change in return assumption.

[Paul Anthony Mahon, President, CEO & Director]

Garry, do you want to take that?

[Garry MacNicholas, Executive VP & CFO]

Sure. This is the economic assumptions one. So as we were -- as part of our work on implementing the new actuarial standards, which included a review of the ultimate reinvestment rate. We also did a review of our overall provisions for reinvestment risk under various scenarios. And then we concluded from that review that our existing provisions were more prudent than required, given the continued low interest rate environment. So it's an area for excess strength in the balance sheet, and that's what led to the release this quarter. So it's really just a broader review of reinvestment risk and provisions within our balance sheet rather than a specific assumption.

[Paul David Holden]

I see. So that's more likely to be a one-time type gain than something you can continue to drive going forward.

[Paul Anthony Mahon, President, CEO & Director]

Yes, it would generally be that. And then -- yes, that's a good way to characterize it.

[Paul David Holden]

Okay. Okay. Second question is with respect to LICAT and this interest rate scenario, which has been a negative drag on LICAT for a number of quarters now. Is there a way you can level set us to help determine where we might get a interest rate scenario switch back to a less adverse scenario? I'm just obviously asking because bond yields are starting to push higher prospect of Central Bank tightening. So any kind of sense you can give us might be helpful.

[Paul Anthony Mahon, President, CEO & Director]

For sure, Garry, why don't you get to that one?

[Garry MacNicholas, Executive VP & CFO]

Yes, sure. So just to -- again, just to level set we've had this grading in of about 1 point a quarter for the last 5 quarters. And all else being equal, you see that again in the fourth quarter. That said, you're right, with the rising rates, that's something that tends to be beneficial, the rates would have to go up still a fair bit, I don't have an exact number, but there's a fair bit of scope there. But also as another way, you could see this change is if you're lengthening your portfolio and improving some of the matching on some of that business. So as companies move towards IFRS 17, you might see companies -- you're looking at the duration of the portfolio given the new IFRS 17, and that could lead again to switching the scenario. So there's rising rates and your ALM strategies are probably the 2 biggest drivers I'd point to.

[Paul David Holden]

Okay. Are you then suggesting as part of that answer that with the transition to IFRS 17 Great-West, will be looking to extend the duration of its fixed income portfolio?

[Paul Anthony Mahon, President, CEO & Director]

So I'll start off at a high level and say that as we look to IFRS 17, we're looking broadly across all of our assets and liability pools and thinking about optimizing the business moving forward. And so there'll be obviously a series of actions we'll take in preparation for that and as we transition. No specific guidance, though, on lengthening any particular portfolio backing liabilities. But that's obviously one of the tools that we'll be considering as we transition.

[Operator]

[Operator Instructions] Our next question comes from Nigel D'Souza of Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

I had a first quick question on your capital levels here and your LICAT ratio, could you share with us what your internal target ranges? And the reason I ask that is just to get a sense of what your excess capital is above what your internal target is so we can get a sense of what's actually available for deployment?

[Paul Anthony Mahon, President, CEO & Director]

Yes. Our current internal target range is from 110% to 120% LICAT, and we're currently operating above that level. As Garry noted, we've been carving in this LICAT scenario switch, and we'll have a 6 quarter. So there's sort of a 6-point drag that's happened there. But we've also been deploying a lot of capital both to drive ongoing future value creation, and that's our M&A transactions in the U.S. and other transactions like the Ark Life and ClaimSecure transaction. So we've been very active in deploying capital. And then the other reality is we've been writing business. We've been growing organically and driving growth, things like this, these Japanese transactions and the bulk annuity transactions. So the backdrop to the LICAT ratio having coming down is positive in my mind. We've been deploying capital to drive shareholder value creation. I'll let Garry provide any other color you'd like to. Garry?

[Garry MacNicholas, Executive VP & CFO]

I think you pretty much hit it on the head there, Paul. The target range of $110 million to $120 million we like to operate towards the upper end of that target.

[Paul Anthony Mahon, President, CEO & Director]

Yes. And the reality is as the scenario switch finishes out as we transition into 2022, the natural growth in the business is going to drive a natural growth in our LICAT ratio. And as you know, we've provided some insight around our growth expectations. So I think it sort of lends itself to us anticipating that growth in our LICAT ratio moving forward.

[Nigel R. D'Souza, Investment Analyst]

Great. That makes sense. And if I could switch to the dividend. When I -- from what I understand, you don't have explicitly stated a payout ratio that you're targeting for the dividend. But when I look at your historical payout ratio, it has been as high as 70%, albeit, that was doing some repositioning on your U.S. business. It's currently at 50%, which is at the high end. So how should we think about the dividend going forward? Is that something that you'll consider increasing and then have earnings flow into it? Or is that payout ratio you want to see kind of move lower to a lower number before you kind of rightsize that again?

[Paul Anthony Mahon, President, CEO & Director]

So at a high level, we consider a range of factors as we look at our dividend. We're looking at the expected growth in EPS and growth in the business. We're looking at reinvestment opportunities in the business and the opportunity to grow both organically and inorganically. And fundamentally, taking all those things into account, we've generally had what I'd call a progressive dividend approach to dividends as we've increased the dividends as the business is growing and as we're growing our earnings. And that would be the mindset we would take as we move forward. At this stage, we're not in the market with a published range. So that's the mindset you should consider as we think about dividends going forward.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mohan for any closing remarks.

[Paul Anthony Mahon, President, CEO & Director]

Thank you, Ariel, and thank you to all who participated in the call for your -- for listening in and participating. Please feel free to connect with our IR team on any follow-up questions. And I would say that we look forward to reconnecting in February '22 for our Q4 call, and I wish you all a safe, healthy and happy holiday season. Take care.

[Operator]

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