Great-West Lifeco Inc

TSX:GWO

Earnings Call Analysis

Quarterly Fluctuations but Positive Growth Outlook

The company faced a challenging quarter, with a 13% drop in Canada's base earnings attributed to favorable tax impacts in the prior quarter, partially offset by a 3% earnings increase from higher interest rates and life and health business growth. In the U.S., a 22% rise in base earnings was fueled by organic growth at Empower, including asset fee income growth due to higher equity markets and participant and transaction fee income. Despite constant currency revealing a 9% decline, Europe's base earnings remained steady, balancing insurance experience improvements and FX benefits against lower trading gains. The Capital and Risk Solutions segment showed an 8% increase excluding prior charges, driven by organic growth and a strong structured reinsurance portfolio. Book value per share and return on equity have shown improvements, hinting at resilience and an ability to achieve medium-term financial objectives, with a book value per share increase of 5% year-over-year and a return on equity increase to 16.4%. Defined contribution business remains robust with approximately 97% to 98% plan retention, although Q3 experienced $2 billion in net outflows amidst $8 billion positive flows year-to-date. The outlook remains positive with expectations of double-digit earnings growth in the long term despite potential near-term volatility.

Strong Performance Driven by Empower's Organic Growth and Strategic Investments

The company's base earnings in the U.S. market saw a notable increase by 22%, reaching CAD 262 million. This uplift was strongly supported by Empower's organic growth, which benefited from higher average equity markets leading to an increase in asset-based fee income. Additionally, transaction-based fee income grew due to higher participant activity and volumes. Cost-efficiency played a significant role, largely due to the full realization of synergies from the MassMutual acquisition, and the company is on track to fully deliver targeted synergies from the Prudential business by the end of Q1 2024.

European and Capital Solutions Segments Show Resilience Despite Headwinds

Even though base earnings in Europe remained broadly stable, they experienced a 9% decrease when adjusted for constant currency, attributed to lower trading gains compared to the previous year. Nevertheless, the Capital and Risk Solutions segment outperformed with an 8% increase in base earnings, discounting a prior charge related to hurricane claims.

Future Outlook: Optimizing Synergies and Strengthening Retail Relationships

Regarding future expenses, the company is set to attain the full run rate of USD 180 million in pre-tax synergies in the U.S. by Q2 of the following year; presently, it has achieved a 66% run rate of this target. There are anticipations of strengthening customer relationships in Empower's retail sector and capturing more assets from the retirement space into retail services, which will present revenue opportunities such as managed accounts among others.

Asset-Based Revenue Faces Market Volatility; Long-Term Growth Remains Positive

On the front of market sensitivity, the company acknowledges the impact of market volatility on asset-based revenues. Increases in interest rates may push crediting rates higher, thereby creating potential pressure on margins. Despite the expected short-term fluctuations, the company's leadership maintains a strong conviction in the double-digit growth trajectory for the long term.

Book Value Growth and Robust Return on Equity Highlight Financial Health

The company observed an increase in book value per share to CAD 24.01, which signifies a 5% increase year-over-year and reflects retained earnings growth and currency translation gains. The return on equity has improved to 16.4%, benefiting from the higher base earnings, while financial leverage remained at 31% despite paying down short-term debt, with further reductions expected in the following quarter.

Looking Ahead with Confidence: Achieving Medium-Term Financial Objectives

In closing remarks, company executives expressed confidence in the resilience and strength of their businesses to meet medium-term financial goals. The narrative suggests an unwavering commitment to leveraging strategic initiatives, maintaining cost discipline, and capitalizing on organic growth avenues to navigate market uncertainties and sustain profitability.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Third Quarter 2023 Results Conference Call. [Operator Instructions]I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco.

[Paul Mahon, executive]

Thank you, Ashia. Good morning, and welcome to Great-West Lifeco's third quarter 2023 conference call.Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. And together, we will 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, Investments, Reinsurance and Corporate Development; Jeff Macoun, President and COO Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO, Putnam Investments. I'd also like to take this opportunity to formally introduce John Nielsen, who joined Lifeco in September. John was appointed CFO Designate and will assume the CFO role when Garry retires next year. Welcome, John.Before we turn to the business of the day, I want to acknowledge the terrible loss of life and hardship related to current geopolitical conflicts. Our companies have made a donation for humanitarian aid, and our hearts go to all of the people, families and communities impacted.I'll now draw your attention to our cautionary notes regarding forward-looking information and non-GAAP financial measures and ratios on Slide 2. These cautionary notes apply to the information we will discuss during the call.Please turn to Slide 4. The company delivered excellent financial performance in the third quarter of 2023 with base earnings per share of CAD 1.02, up 17% from last year. This represents a record quarter for base earnings, base EPS and the first-time Lifeco reported base earnings above CAD 1 per share. These results reflect solid contributions across all segments and continued the company's strong earnings growth trajectory this year. We remain focused on disciplined capital allocation and execution of our growth strategies. Our earnings reflect the benefits of recent strategic transactions as well as operational improvements across our businesses. These results also reflect the smooth transition to IFRS 17 and are supported by disciplined expense management as we focus on efficiency and effectiveness.During the quarter, we continued to advance our wealth-focused strategies. In Canada, we completed the acquisition of Value Partners and are on track to complete the acquisition of IPC by the end of the year. In the U.S., we're on track to complete the sale of Putnam, and we continue to unlock value from the Prudential integration. In late October, 1.4 million Prudential clients and CAD 100 billion of assets were successfully migrated to the Empower platform in our largest integration wave to date. Net earnings per share from continuing operations were CAD 1.01. Unlike last quarter, there was no significant difference between base and net EPS. Given IFRS 17 dynamics and current economic conditions, market experience relative to expectations was positive with some offsetting reduction in U.K. real estate asset valuations.We've expanded our disclosures on property-related investments in the appendix to include greater detail on our exposure to office and U.K. mortgages given heightened interest in these asset classes. These disclosures highlight the diversified and high-quality nature of our portfolio. We've taken steps to reduce risk over the past few years in our real estate portfolio, and it remains resilient to stresses in property markets. Our exposure to direct office properties is relatively low and these holdings remain high quality. Garry will unpack these and other items excluded from base, including changes in assumptions later in his remarks.On a year-to-date basis, the company performed strongly against our medium-term financial objectives. Base EPS exceeded our target and base ROE and dividend payout ratios were within our target ranges. Finally, our LICAT ratio remains strong, growing to 128% on the back of strong earnings in the quarter and up 2 points relative to last quarter.Please turn to Slide 5. In Canada, our Workplace businesses remain an area of particular strength. Group Life & Health premiums were up by 23% year-over-year due to strong new sales organic growth in the existing book and the addition of the Public Service Health Care Plan. We've enrolled over 1.68 million of the 1.7 million individuals covered under this public sector health plan and a large majority are accessing their benefits without issue. That being said, you may have seen reports about others who have experienced challenges receiving timely service. The underlying cause of these service disruptions relates to the public sector's requirement that each member re-enroll as well as changes they made to benefits coverage for their plan members. Regardless of the cause of these disruptions, we're working hard to resolve the remaining challenges for these important customers. We're working with the government to make excellent progress towards our target service levels.Moving on to Group Retirement. We saw solid growth over last year with some softness in sales this quarter. We remain focused on strategies to enable capital-light growth, including continued improvement in plan member rollover asset retention. In our Individual Wealth business, mutual fund net flows were positive, but we continue to experience seg fund outflows. While this is consistent with industry experience, we believe that this fund execution of our recently communicated wealth strategy will position these businesses for strong undergrowth and performance going forward. As noted, we completed the Value Partners acquisition in the quarter and IPC is on track to close before the end of the year. These 2 strategic transactions are advancing our goal to be the leading full service wealth and insurance platform for independent advisors in Canada.Finally, our CSM in Canada declined year-over-year, largely due to amortization of insurance experience. As we previously noted, we continue to approach non-participating insurance with a focus on customer value base balanced with pricing discipline. CSM is not a key growth metric at Lifeco. Capital generation from our in-force business is a better indicator and we plan to share more on these measures in future quarters.Please turn to Slide 6. Across Europe, our businesses maintained solid momentum in the quarter despite economic uncertainty. As I've noted in the past, much of our business in Europe is tied to financial necessities like benefits and retirement savings. These products have actually seen a lift in revenue driven by strong employment and wage inflation. In Workplace, we experienced strong organic growth in Group Life & Health in both U.K. and Ireland and strong pension sales at Irish Life.We achieved steady growth in wealth, which is reflected in positive net flows for the quarter. This is in part driven by the successful execution of our wealth strategy in Ireland under the Unio brand. We're also advancing our well-focused joint venture with Allied Irish Bank. This includes the November 1 portfolio transfer of seg funds with a carrying value of almost EUR 2 billion from Irish Life into that. While recognized in sales in the prior quarter, Irish Life completed the onboarding of a EUR 133 million bulk annuity transaction, the largest bulk annuity deal to take place in the Irish market so far this year.Please turn to Slide 7. Empower delivered another strong quarter as we advanced our strategy, focused on workplace, retirement and personal wealth. In Workplace Solutions, we achieved strong organic growth with DC plan participants up 4% year-over-year and DC assets under administration up 14%. In quarter net outflows reflect seasonality as well as a modest impact from Prudential deconversions. Empower's execution of the Prudential integration program is going well with client retention ahead of target and annualized run rate synergies of USD 66 million achieved to date. In quarter net outflows reflect fewer large plan sales, rollover of assets to Empower Retail and normal seasonality as well as a modest impact from Prudential deconversions.I would also note that on a year-to-date basis, the DC business has achieved net inflows. Empower's execution of the Prudential integration program is going well with client retention ahead of target and annualized run rate synergies of USD 66 million achieved to date. Empower Personal Wealth is also maintaining excellent momentum with AUA up 30% year-over-year, supported by strong growth in sales and higher markets. Sales effectiveness and a powerful digital dashboard are generating money in motion opportunities and increased new asset inflows from the DC business by over 50% relative to last year. Lastly, with the previously announced sale of Putnam Investments to Franklin Resources, the results of Putnam Investments are now classified as discontinued operations. As I mentioned earlier, this transaction remains on track to close by the end of the year.Please turn to Slide 8. Our Capital and Risk Solutions business continues to play an important role in diversification of risk across the portfolio, while also delivering growth and cash generation. Earnings on short-term business increased 23% year-over-year, reflecting growth in structured business. Note this business is accounted for on the PAA basis, which does not involve CSM. Sales on longer term business were relatively soft this quarter, reflecting the bespoke nature of these transactions and our disciplined approach to underwriting and pricing. While the third quarter is seasonally slower, CRS continued to see solid new business momentum and we'll maintain discipline as we leverage our strong capabilities for the remainder of the year.With that, I'll now turn the call over to Garry to review the financial results.

[Garry MacNicholas, executive]

Thank you, Paul. Please turn to Slide 10. Base earnings per share of CAD 1.02 was up 17% from Q3 2022 driven by strong performance across all segments, particularly the U.S., which is up over 20%. As shown by the top 2 rows in the chart on the right, this balanced performance across segments was a continuation of what we saw in Q2. Quarter-over-quarter, the base earnings increase was 3%, primarily a result of more favorable insurance experience, partially offset by lower trading activity contribution in the investment results.The comparative period from 2022 had a number of larger items, both positive and negative, in Canada, Europe and Capital and Risk Solutions, which makes the year-over-year comparison by segment a bit more challenging. In Canada, base earnings of CAD 296 million were down 13%, primarily due to beneficial tax impacts that occurred in Q3 2022. Base earnings before tax actually showed an increase of 3% as a result of higher earnings on surplus driven by higher interest rates and continued growth within the Group Life & Health business, including favorable mortality and morbidity experience.In the U.S., base earnings of CAD 262 million were up CAD 48 million or 22%, primarily due to strong organic growth at Empower. On the revenue side, there was growth in asset-based fee income from higher average equity markets and increases in other participants and transaction-based fee income based on growth and volume. On the expense side, results now include the full MassMutual synergies. And we remain on track to deliver the targeted synergies on the Prudential business by the end of Q1 2024. This strong expense discipline and effective execution of our MassMutual and Prudential acquisitions has allowed us to strategically invest in the business to continue Empower's strong organic growth trajectory.In Europe, base earnings were comparable to last year, although down 9% in constant currency. Improvements in insurance experience and the benefits from FX were largely offset by lower trading gains than the prior year. Q3 2022 benefited from above-average trading gains in the investment results, whereas this quarter, newly sourced spread assets were deployed against strong individual and bulk annuity sales. This new business contributed to CSM growth in Europe, which Paul noted earlier. And the CSM growth is amortized into earnings over time rather than an earnings gain in quarter.The Capital and Risk Solutions segment had another strong quarter. The year-over-year growth is distorted by a charge related to hurricane claims in Q3 2022. However, excluding this, base earnings are still up a strong 8% due to organic business growth, particularly in the structured reinsurance portfolio. Overall, looking at this on a net earnings basis, the net EPS from continuing operations was CAD 1.01, almost the same as the base earnings per share. Net EPS was down 5% from last year as higher base earnings were offset by the year-over-year change in items excluding a different base, which I'll cover on the next slide.So turning to Slide 11. This table shows the reconciliation from base to net earnings. Net earnings from continuing operations were CAD 936 million or CAD 1.01 a share. While overall, the excluded items have a small impact this quarter, there are 2 items I'd like to highlight. The first is market experience. As noted on our Q2 2023 call, these are typically items that we would expect to oscillate around 0 over longer periods, although they will vary quarter-to-quarter. This quarter, the positive market experience was primarily driven by increases in interest rates in Canada, partially offset by lower non-fixed income returns, primarily lower real estate valuations in the U.K. property portfolio. The positive earnings impact from interest rates helped to offset pressure on LICAT capital that comes from higher rates. This offset is [Technical Difficulty] given our ALM approach.The second item relates to assumption changes. The annual review of actuarial assumptions led to an overall positive impact to the balance sheet and LICAT ratio as a result of updating mortality and longevity assumptions to begin to recognize pandemic impacts. There is an important presentational point to note within IFRS 17 as basis change impacts appear in 2 places. The impact on the CSM is calculated at original locked-in discount rates. This is the amount that's being amortized into earnings in future periods. But given that rates have risen so much since the opening balance sheet transition on January 1, 2022, the CSM amounts are larger than the current fair value of the basis change. The difference goes into earnings in the period when the change is made, and that was a negative this period, even though the assumption change overall is a favorable impact.Also recall that certain basis changes or financial assumptions or where there is no CSM go straight into earnings positive or negative. Given the CSM and earnings impacts are both included in LICAT capital, the presentational approach has [Technical Difficulty] impact. We still get the positive impact on LICAT and on future earnings. The remaining items excluded from base are predominantly related to integration costs, which will continue for a few more quarters and the amortization of acquisition-related finite life intangibles which will continue over a longer period.Turning to Slide 12. As noted on our Q2 2023 call, we improved the drivers of earnings -- view of earnings to improve the articulation of our results and alignments with our peers. One change was to provide a clearer view of the insurance result by differentiating between expected versus experience impacts. The expected provides insight into the underlying growth of the business, whereas we typically see period-to-period swings in the experience results.In the top row of the table, you can see the expected insurance earnings of CAD 732 million were up 8% year-over-year due to business growth, particularly in the shorter duration renewable contracts like group insurance plus some currency tailwind in Europe. The overall insurance result of CAD 786 million was up 26% year-over-year, driven by the non-recurrence of the charge related to hurricane claims in Q3 2022, which was the driver of last year's experience loss. This quarter, we had favorable insurance experience, driven mostly by mortality and morbidity gains in Canada, which contributed to this overall result.The net investment result of CAD 222 million was up 6% year-over-year. This was mainly driven by higher earnings on surplus due to increases in interest rates, partially offset by lower trading activity impacts, particularly in Europe. This is an area where we plan to expand disclosure further in future periods. Similar to insurance, this would benefit from separating the expected investment earnings, as the label says, from the in-period investment experience. Net fee and spread income related to our non-insurance businesses were up 13% year-over-year. Most of this result is driven by our Empower business.As noted earlier, we benefited from our asset-based and transaction-based fee streams for this business, while also benefiting from the realization of acquisition-related synergies through strong expense management. Non-directly attributable and other expenses were up 5% relative to prior year due to business growth and the currency impacts in Europe. The effective tax rate this quarter was 13% on base shareholder earnings, reflecting the jurisdictional mix of earnings, including the growing U.S. contribution and a limited impact of one-time tax items. Overall, we record -- we had record base earnings of CAD 950 million, a reflection of the strong results across all the segments.Turning to Slide 13. The book value, LICAT ratio, return on equity and financial leverage numbers are shown on IFRS 17 basis unless specifically stated otherwise. The Q3 2023 book value per share is back above CAD 24 at CAD 24.01. This was up 5% year-over-year and 3% from last quarter, driven by the growth in retained earnings plus currency translation gains in other comprehensive income. It is worth noting that the book value per share is well on the way to reaching the CAD 24.71 level pre-transition to IFRS 17. And at the same time, ROE has risen from the mid-14% in 2021 to 16.4% currently, benefiting from higher base earnings that we are now reporting.The LICAT ratio of 128% was comparable to the prior year and up from the prior quarter results. The 2 point increase from Q2 2023 was primarily driven by lower capital requirements. And as a reminder, the IPC transaction that's expected to close in Q4, as Paul mentioned, will reduce the ratio by about 3 points. The base return on equity figures shown on this slide are all IFRS 17 basis. The results for Q1 2023 as shown rather than Q3 last year, since this is a rolling 4 quarter average and we did not have all the information for Q3 2022 on an IFRS 17 basis. The base ROE began the year at around 16%, but has improved to 16.4% this quarter, reflecting the strong earnings results recently. Financial leverage remained at 31%. We made USD 100 million repayment on the short-term debt used as part of financial funding, which leaves a remaining balance on this debt facility of USD 100 million, which we expect to pay down in Q4, which should lower the leverage to about 30%.And with that, I'll turn the call back to Paul.

[Paul Mahon, executive]

Thanks, Garry. I will now turn the call back to Ashia, who will get us set-up for the Q&A portion of the call.

[Operator]

[Operator Instructions] The first question comes from Meny Grauman with Scotiabank.

[Meny Grauman, analyst]

Garry, in Q2, you talked about evaluating improvements around metrics tied to capital generation. And I'm wondering if there's anything you can update us on that or is that coming in Q4?

[Paul Mahon, executive]

Yes. Garry, why don't you speak to that?

[Garry MacNicholas, executive]

Yes. We are still working on the capital generation metrics. We want to make sure we get that right. I would make a couple of notes. First off, the base earnings are a good proxy for 75% of our business that haven't really been materially impacted by IFRS 17. And then obviously, for the remaining 25%, the introduction of CSM does introduce some complexity there. So we are looking to get this out, whether it will be in the first part of 2024, whether it's with our Q4 results or our Q1 results is not yet finalized, but it will be one or the other. We're definitely keen to get that out. But as I said, the base earnings I think are -- a high percentage of those base earnings would be a good proxy in the period while you're waiting.

[Meny Grauman, analyst]

And then just wanted to talk about your expanded disclosure on your real estate exposure; specifically, Slide 23 in the appendix, the office mortgage exposure by maturity. Just wanted to better understand how to interpret this particular slide. It looks like if you look out to next year to 2024, there is a little bit of an increase in office maturity. So just wondering is that something we should be concerned about? Just broadly how to interpret this particular disclosure?

[Paul Mahon, executive]

So Meny, I'll turn that one over to Raman in a moment. But just suffice it to say, we've been very disciplined with this portfolio. We've been looking at the overall exposure, reducing where it made sense. But I think as we kind of go into a period of some volatility here, we're feeling pretty confident about the portfolio. But I'll let Raman speak to the 2024 maturities. Raman?

[Raman Srivastava, executive]

Yes. Thanks, Meny, for the question. So what we do try and provide a lot more detail and disclosure in the appendix on the real estate portfolio. Page 24, the point of this and the details here are to give you a sense of the balance we have across the upcoming years. So in other words, there's no one particular year that stands out as a big risk in terms of rollover. This is a gradually maturing portfolio. While there is -- it's going to ebb and flow, but you can see the bigger bars there in 2026, '27 and then out 2030 and beyond. So the purpose of this page is just to give you a sense of the strength we have in the LTVs, the high debt service coverage ratios and the fact that we're not particularly exposed to any one year in terms of rollover risk.

[Paul Mahon, executive]

Yes. So I guess, Meny, I'll just follow on what Raman was saying is that we're not particularly concerned about 2024 in particular, although we are in a volatile time, but you'll see that there's strong debt service coverage there. We've got -- we've structured these mortgages in a way that we've got good confidence. But you need conservatism if you want to weather more difficult times like this.

[Operator]

The next question comes from Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, analyst]

I'd like to keep going on the CRE topic, the detailed disclosure on make-up. I just want to make sure I'm getting this right. If I look at office in particular, 60% of it is allocated to Power accounts. So from a mark-to-market standpoint, there's no real concern I guess for the equityholders?

[Paul Mahon, executive]

Gabe, that would be correct.

[Gabriel Dechaine, analyst]

Okay. And you did mention there were some adjustments to that U.K. portfolio. Could you quantify that?

[Paul Mahon, executive]

I'll let Raman speak to that. I think that should -- are you referring to the fact that we've been managing the portfolio and the overall exposure? I just want to clarify your question.

[Gabriel Dechaine, analyst]

No, no, that we've covered before. I just want to get the number if there was any negative mark-to-market adjustment on that particular portfolio this quarter.

[Paul Mahon, executive]

I think Garry can take that one.

[Garry MacNicholas, executive]

Yes. The returns were down about 3% in the quarter in terms of markdown, and again, a lot of this is just reflecting the higher interest rates. So we're getting the benefit of the higher interest rates in other places in our results. And obviously, we saw that in the overall market impacts, but it does -- it is bringing the valuations down. So yes, they were marked down about 3%, which is -- and then you can see the size of the portfolio, so that gives you an idea. And that's -- we often -- in our excluded items, we are doing the amount relative to our expectations. So we would expect in a given quarter that you might have a growth of -- in the order of 1%, a modest growth during the year to each quarter of that. So I think the gap from expectations was about 4% in the quarter.

[Gabriel Dechaine, analyst]

Can I imply that to the entire portfolio or just office?

[Garry MacNicholas, executive]

That implies -- that was for the entire U.K. portfolio. It was less in Canada.

[Gabriel Dechaine, analyst]

All right, perfect. Well, speaking of the higher rate stuff, I just want to drill down a little tiny bit in the Empower or the U.S. rather. It looks like the -- almost the entirety of the growth of earnings in the U.S. was rate-related. I mean, there's a little bit from synergies, but I mean a big increase in earnings on surplus and then the -- what is it, the fee income. Can you -- to the extent it was earnings on surplus related, are we at a run rate now or like were there not that much more upside to be seen from that line item in the U.S.?

[Paul Mahon, executive]

I'm going to let Garry take that one. Garry?

[Garry MacNicholas, executive]

Yes, I think that's right. I think most of the portfolio -- so there are some longer bonds that would not have matured, but most of the portfolio has [Indiscernible] So you're seeing the impact of the current rates. And we had some smaller contributions, some good results in some of our alternative investments, but it would be single-digits. So I think it's a reasonable indication.

[Gabriel Dechaine, analyst]

Okay. And then just -- I know you probably don't want to give me specifics, I get that. But just from a ballpark standpoint, what would be the duration of your surplus portfolio? How much would be in short-term cash? And then how much would be -- would the rest be about 2, 3-year duration? Maybe you can shed some light on that.

[Paul Mahon, executive]

Garry, do you have a bit of color on that?

[Garry MacNicholas, executive]

Sure, yes. Just at a high level, a lot of the portfolio is quite short in Canada. And you might recall, we shortened the port too. We had an OCI reclassification recycling into the P&L as we took some older long-term assets and moved them short-term subs. That's actually helped in Europe this period. So yes, Europe would probably be -- the U.K. is probably in that 1 to 2 years, the U.S. has a slightly longer duration, probably more in the 3 to 5-year range. And then Canada is actually quite short, probably closer to a year.

[Gabriel Dechaine, analyst]

Okay, great. And then lastly, on the Group business. Last quarter, the message was that incidence rates and claims trends overall had been -- they regained I guess pre-pandemic pattern. And here, we have a quarter where experience gains are quite positive, it's great. I'm just wondering, was that against your expectations or is it a seasonal factor and things are still expected to be relatively modest from an experience standpoint going forward?

[Paul Mahon, executive]

I guess, Meny, I'll start off. Pardon me, Gabe, I'll start off and I'll hand it to Jeff to provide a bit of context. But the reality is we run this particular business with a ton of discipline in terms of our pricing and our underwriting. And so over the long-term, we see this as a differentiator as a positive contributor. And I think you're just seeing the benefits of that discipline. I'll let Jeff speak to the particulars of the quarter though. Jeff?

[Jeff Macoun, executive]

Yes, Gabriel. I mean, just to build on Paul's point, it has been and continues to be a continued strength of our offering in the Workplace and the Group Life & Health. And I think as we've mentioned in the past, we spend a lot of time on our pricing and looking at trends in the marketplace. So we're -- we believe we're well ahead on an ongoing basis. So much of the actions you would have seen in the quarter and they're flowing out are actions we would have taken a year, year and a half ago in terms of looking at the future. So it is a continued area of strength for us within the organization. And I would say that we're not surprised on the results in quarter and it continues to be a strong differentiator in the marketplace in terms of our value to customers and members in the market.

[Paul Mahon, executive]

Yes. I might just finish by saying that I think with really good pricing and underwriting discipline, we would kind of expect some modest experience gains over time just by having that same discipline and staying on top of it. And obviously, we're going to go through cycles over time, we go through economic cycles. But if you stay on pricing and you stay on your underwriting disciplines, we would be seeking to outperform modestly over time.

[Operator]

The next question comes from Doug Young with Desjardins Capital Markets.

[Doug Young, analyst]

Just maybe continuing on with the insurance experience, I guess the top of house, it was $56 million. I guess, I assume that most of that $47 million in Canada relates to the group experience that we just talked about and you can clarify. But I guess in Europe, there's $28 million positive. Can you kind of delve into what drove that? And then obviously, there is some negative elsewhere, maybe you can flush that out a little bit?

[Paul Mahon, executive]

Yes. For sure. In Canada, the majority is that group performance, and I'll let Garry speak to what we're seeing in Europe. Garry?

[Garry MacNicholas, executive]

Yes. I think in Europe, again, we had favorable mortality and a bit on -- the morbidity was actually a bit weaker what was improved from prior periods. So that's helping with that. And then we do have some expense fluctuations that go through this line. So in Canada, they were actually a bit behind on the expenses. So that was a bit of an in-period drag, whereas Europe is actually a bit ahead. So those are some of the trends we'd be seeing.

[Doug Young, analyst]

Okay. And then there is a big decline in expected investment earnings, is mostly out of Europe. I don't think that was the trading gains going down, but maybe I'm wrong. Can you flesh that out a little bit?

[Paul Mahon, executive]

Yes. Garry, over to you.

[Garry MacNicholas, executive]

Yes, sure. And I think right up front, I should just acknowledge that the label for the line that you're looking at expected investment earnings is not really clear because this includes both the normal or run rate expected earnings as well as any in-period investment experience. And that's really -- there's really 2 types of investment experience, and that's -- that you'd see here regularly, which is trading activity impacts, the contribution for trading activity. And then you'd also see credit impacts go through this line as well.So if we look at compared to the prior year, the majority of the decline was really around the trading activity. And that was quite elevated in the U.K. in both through Q3 and Q4 last year. And last year, we had low individual bulk annuity sales, and so the spread assets were allocated to the in-force portfolio. But this quarter with the strong sales growth with a spread assets went more towards supporting new business and those -- so that value goes into the CSM, which obviously will come into earnings over time.So it really is year-over-year, it's mostly the trading activity. Quarter-over-quarter, it's -- probably 2/3s is the lower benefits of trading activity and about 1/3 of it is a little more, again, modest credit impacts, but they're really none in Q2, and there is a small credit impact to Q3. So those are the numbers that are driving.

[Doug Young, analyst]

And you walk to my next question is credit. And so I know credit goes through that line item, but we don't have great visibility. Can you talk a bit about the ECL on the AOCI assets? But also what the credit -- can you quantify what the credit move was elsewhere and what you're seeing from a credit perspective? And how we should think engage from the outside looking in the credit impacts for your fixed income portfolio?

[Paul Mahon, executive]

Garry, why don't you start with that? And then you could pass on to Raman?

[Garry MacNicholas, executive]

Yes. So I mean, overall, the credit impacts were overall very modest this quarter, I think probably in the $20 million range pre-tax. So it's modest. There's -- the ECL, it really would only come up on the U.K. mortgages held at amortized cost, that would be a single-digits impact. So it wasn't material actually, it actually is a bit of doubling up on the ratings downgrade. So it is -- I think we're -- and Raman could comment. I think where we saw the ratings downgrade was only just a couple of the U.K. commercial mortgage holdings.

[Raman Srivastava, executive]

Yes. That's right. So the impact was from the U.K. commercial mortgages, it was modest. I think on the bond side, what you should expect is it's been actually more upgrades than downgrades in general over the past few quarters. If the economy turns, that could shift. I'd just point you back to the fact that we have a high-quality portfolio, 99% of our book is investment grade, and the vast majority of that single are better. So if we do get into a credit cycle that turns the impacts were more muted at the higher rating levels. So that's just something to keep in mind.

[Doug Young, analyst]

And the radian upgrade downgrade and how you kind of flow that through credit, you look at that every single quarter, that's not an annual review, that's something that you dig into each and every quarter. So there would be a true-up at the end of the year or anything like that. Is that correct?

[Paul Mahon, executive]

That is an ongoing process, ongoing discipline we have quarter-to-quarter.

[Operator]

[Operator Instructions] The next question comes from Tom MacKinnon with BMO Capital Markets.

[Tom MacKinnon, analyst]

Just continuing on Doug's thread here. I guess the -- what you were trying to maybe explain was these trading gains, this normally your yield enhancements that you get. So would you be able to quantify the yield enhancements in this quarter and maybe what they were last quarter or an year -- 1 year ago?

[Paul Mahon, executive]

Yes. Garry, you can take that one?

[Garry MacNicholas, executive]

Yes, sure. I mean this quarter, I think the number gain pre-tax is mainly $13 million. So it's very modest. Last quarter, we had something that was around $50 million. I think last year was in the -- is around the $75 million range. These are all pre-tax numbers just to present basically. So it gives you an idea -- that's what that driver is year-over-year.

[Paul Mahon, executive]

Yes. And just to bring that back to Tom, you'll recall last year, those flowed through, they were applied against the in-force book. So you saw the benefit of that. We've actually leveraged the quality assets we had in new business opportunities here. So we're building strength in the CSM, which will flow into earnings in future.

[Tom MacKinnon, analyst]

Yes. Okay. And the -- I guess, the normal run rate or the -- what you get in that line other than yield enhancements would be your kind of normal run rate less than your finance costs. And the normal run rate, obviously, on the bonds is easy. On the mortgages, they're all amortized costs. What about on your equity release mortgages? Aren't those kind of fluctuate around with interest rates? And would that have any impact as a result of interest rates going up?

[Paul Mahon, executive]

Garry, do you want to start that one?

[Garry MacNicholas, executive]

Yes. Sure. Most -- I mean, a couple of things. One is the financing charges aren't going through this line. They don't go through this line here. What you will see here is the allowance for credit just comes through the expected like just the regular allowance for credit that would just run off the liabilities. You get a little bit of an uplift here from the non-fixed income relative to the liability rates. So we have a long-term assumption on non-fixed income of -- on that long-term returns.But that's really been a -- it's actually quite a small contribution there now because rates have -- liability rates have written. So that's probably less than 5% of our base earnings. So there's not much of a contribution coming from that, but there is some there. Yes, those are the main drivers, they're really just the additional rates there. Because again, most of like -- something like equity release mortgages, those are backing liabilities. So it's all in the discount rates, you don't see it here.

[Paul Mahon, executive]

Anything else to ask. Go ahead, Tom.

[Tom MacKinnon, analyst]

Yes. And then I guess the question with respect to Empower. Participants didn't really grow quarter-over-quarter, and I think kind of look year-over-year, they're only up about 3% -- 3% or 4%. How should we be thinking about the run rate here for participant growth? And why hasn't it been higher than 3% to 4% over the last 12 months?

[Paul Mahon, executive]

I'm going to turn that one over to Ed. Ed, do you want to speak to the momentum you see in the business? Ed, if you're on mute, you should take yourself off the mute.

[Edmund Murphy, executive]

Sorry, I was on mute. Thanks for the question, Tom. Yes, if you look at organic growth in the business -- participant growth year-over-year, it's up about 5%. You have to adjust about 1% for potential because we had some terminations on Prudential that are in line with expectations. As we've shared with you in the past, in terms of the Prudential results, we're running well ahead of our internal plan in terms of participant retention, asset retention, revenue retention. But if you look at the market, Tom, we're growing organically, our net participant growth is about 2x the market. So the market is going to grow roughly 2%. We're consistently growing between 4% and 6% a year if you look at the last few years, excluding acquisitions.So we're feeling really good about the growth. And if you look at the small end of the market, which is the under $50 million space, we'll have the best year in the history of the company this year, both in terms of the number of plans sold and total assets, we'll exceed $10 billion this year, and our pipeline is $2 trillion. So we feel really good about the overall growth trajectory of the business -- workplace business.

[Paul Mahon, executive]

To that point, there's no doubt that when you -- when we talk about the mega and the large case market, that can be -- they tend to be a bit volatile. They'll happen when they happen, not in particular, this quarter. But the overall, Tom, we continue to like the overall momentum of the business. I mean we've got a value proposition where we're winning more than we're losing out in the market. And I think that bodes well for looking forward.

[Edmund Murphy, executive]

Yes. I would just add on the planned flows. Just -- I want to reinforce Paul's point that in the large end of the market, you have the timing issue of large mandates. These are 9, 12 month mandates that we're pursuing. So you'll see quarters where you'll have large mandates that will hit. You'll see some where there will be a termination. So you'll continue to see that play out over the course of the year because it tends to be a little bit choppier when you're going after these multi-billion dollar mandates.

[Operator]

The next question comes from Paul Holden with CIBC.

[Paul Holden, analyst]

So first question is just a point of clarification on something Garry had mentioned and that's related to the equity release mortgages. I know in the past, they were used as a yield enhancement vehicle. Is that still the case? Is that still how it flows through under IFRS 17? Or has that changed?

[Paul Mahon, executive]

I'll turn that one to Garry. I think we used it as a -- we have used it historically as an asset to back liabilities I think that would be more the way I would characterize it, but I'll let Garry speak to that. Garry?

[Garry MacNicholas, executive]

Yes. We would have used it in both Canada and the U.K. in prior years. So there's a couple of things I'd note. First off, with the rise in rates, what we're seeing is bringing a lot of individual annuities and that for people applying, but we're seeing a lot lower interest in equity release mortgages new originations. So the volumes are down. Historically, a lot of those would have gone into the, well, Canada and the U.K., I think they both had good shares. And so a lot of those yield enhancement gains would have been in Canada from those. And we're not going to be seeing those going forward. Canada, we use -- we have an illiquidity premium. So any yield pickup would be offset by an illiquidity premium adjustment.And you wouldn't see the impact. They still add a lot of value when we add them, but you wouldn't see an in-period yield enhancement. And then in the U.K., you could still see that, but we just haven't had much volume. So it's really not been a big feature, but we would have had a bit.

[Paul Mahon, executive]

Yes. And I might add, Paul, that I like the diversification of the payout annuity and equity release mortgage book in a high interest rate environment, we see payout annuities are actually -- people are looking for that certainty of income, they like the underlying return, and we're really seeing solid momentum there. You see some softening in equity release mortgages. And if we get into a different interest rate environment, we've got that nice diversification of product where we can help people with their retirement needs, and it's good for us from an economic perspective.

[Paul Holden, analyst]

Got it. Okay. That all makes sense. Second question, going back to the direct real estate holdings in U.K. and Canada. Are you able to give us how much you've changed cap rates in 2023?

[Paul Mahon, executive]

Raman, can you provide some color on that?

[Raman Srivastava, executive]

Sure. The -- so they've risen more in the U.K. than they've risen in Canada. I'd say from the over the past year, it's been over 100 basis points in the U.K. in terms of rising cap rates, it's probably closer to 70 basis points or 80 basis points year-to-date. It's different by sectors. You've seen a higher rise in office versus say industrial. But in general, we've seen over 100 basis points rise over the past 12 months or so in cap rates.

[Paul Holden, analyst]

Okay. And just to be completely clear and following up on what Gabe asked before, cap rates change on Canadian property for the most part, that doesn't flow through your earnings because that's related to power product?

[Paul Mahon, executive]

Yes. For the assets that are backing part, that is correct. And then there'll be a modest amount of assets back in non-par and then you would see some impact there.

[Paul Holden, analyst]

Got it. Yes. Okay. That makes sense. And then last question is related to Empower, and I think what people are trying to figure out is there is some attrition expected in the business as you roll over the last of the Prudential customers. But at the same time, you have some additional cost synergies to roll through the earnings. So forget about the changes in asset levels and AUA. But net of those 2 factors, is there additional earnings upside related to this business?

[Paul Mahon, executive]

Garry, do you want to start with that and then turn it to Ed.

[Garry MacNicholas, executive]

Yes. I think I'll just start with a small comment. I think Ed can do the strategic side. Just on the small side, just on the synergies, we are still, as I mentioned, on track for $180 million amidst U.S., and it's pre-tax and we've recorded a run rate of 66% to date. So you've got that gap there. I just do the math in my head it's around $114 million, I think, if I'm doing it right. But you've got that there. And we should be at the -- at that run rate, so the full run rate of those synergies starting in Q2 next year. So there is certainly some upside on the expense, just that small point, and maybe over to Ed.

[Paul Mahon, executive]

Why don't you talk about your perspectives on earnings growth in that business. And I would say, Paul, one of the things that I know Ed will speak to this, is that there's kind of 2 businesses we have here. We've got the record keeping workplace business and then we've got the retail business. And one of the dynamics we see is, we are retaining more and more of those record keeping assets as they roll to retail, and we're seeing growth in retail. So you've got to look at it as an overall business, and I'll let Ed speak to that. Ed, over to you.

[Edmund Murphy, executive]

Sure. Thanks, Paul. Yes, I would say, to answer your question specifically on the revenue side, as we bring those clients over to the Empower platform and as was noted in the presentation, we brought 1.4 million participants over the third week of October, and we have the remaining 2.2 million participants that will come over in the first quarter and then we'll be done with the Prudential integration. And one of the opportunities for us is to deepen relationships with those existing participants.So that comes in the form of other products and services that we offer within Empower that wasn't necessarily offered, frankly, in the legacy Prudential book of business. So if you just look at it from a workplace perspective, the short answer is yes, there are certainly revenue opportunities within the workplace services area, things like managed accounts and other services that participants will adopt over time. [Technical Difficulty]

[Paul Mahon, executive]

Yes. Ed, your line is breaking up there. I'm not sure what's going on, but I think you'll have picked up on that, Paul, but I'll just sort of reiterate what Ed was saying is that increasingly, we've improved our technology, our contact rate. And the key for us is that, that capture of the roughly $80 billion in flow money that's in motion every year rolling out of the DC book. And what's our capture rate. And I think in my speaking notes, I noted though that our year-over-year improvement in that is significant.So again, I go back to -- I think there's some good underlying growth, and I'll call it true organic growth as we penetrate that client base more in the -- while they're in plan. But it's that opportunity really that -- it's at that rollover rate where we can capture those assets and then think about it more from a lifetime value perspective.

[Operator]

The next question comes from Mario Mendonca with TD Securities.

[Mario Mendonca, analyst]

Can we go back to the U.S. and Empower specifically. The -- you referred in your -- I think your opening remarks or in your MD&A to the $6.6 billion in outflows. And I think you referred to it as deconversions. So maybe just help me understand what does that mean. That just means that folks that didn't convert to your system on that conversion date, essentially the assets left the company. Is that what we're looking at?

[Paul Mahon, executive]

Yes. And the deconversion is, we've often talked about when you do a group acquisition, you're expecting to retain -- in the case of Empower, I think we retained well into the mid-80s on the mass mutual and we had similar targets on Pru. We expect -- at this stage, we're outperforming those targets. But when certain clients choose to go elsewhere, we would call it a deconversion. So we would have a little bit of deconversion in the quarter, but the other dynamics in the quarter would have been money that was moving out of retirement accounts and people were either leaving one at a time, leaving the employer moving into retirement.And our job is to actually capture those assets and retain them in our other business, the other pool, which is retail, so that would have been a dynamic. And then the other dynamic in the quarter would have been some seasonality where you tend to see people a little bit lower growth in participant account sizes in the third quarter. It's just the dynamic we see. It's driven by tax planning and things like that. So those are the dynamics. Ed, let's see how your line is whether you're breaking up and there's anything else you want to add to that?

[Edmund Murphy, executive]

Yes. Thank you, Paul. No, I think you handled that well. If you look at across our defined contribution business, we have about a 97% to 98% plan retention. So invariably, every year, there's 2% to 3% of our plan sponsors that are leaving us either they've gone bankrupt, it's a buildings failure or they've converted to another provider, and we characterize that as a deconversion. And then the other comments that Paul was making more around planned flows and participant flows, which I think we've spoken to that in terms of what drives that.

[Mario Mendonca, analyst]

So would it be appropriate to suggest that in the early days because the conversion has just been done. In the early days, we could see some net outflows maybe for the next couple of quarters before that starts to grow again. Is that a reasonable thing to suggest?

[Edmund Murphy, executive]

With respect to the plans that may not choose to come with us, the potential plans that we're referring to.

[Mario Mendonca, analyst]

If you look at the roll forward of your AUA for Empower defined contribution, that -- this was the first quarter where I saw any meaningful outflows. Admittedly, there's not a lot of data to look at right now. But is this something we can see play out over the next few quarters, some outflows, net asset flows out as we seize more and more deconversion in this quarter?

[Edmund Murphy, executive]

Well, as we said earlier, if you look at planned flows, if you look at it on a full year basis, we're $8 billion positive. But in any given quarter, based on large plan sales and terminations in that quarter, you can get some volatility, and that's what you saw in Q3. On a net basis, it was $2 billion negative in the quarter, $8 billion positive year-to-date.

[Paul Mahon, executive]

Yes. And Mario, let me add this. So I think what Ed is pointing out is the overall dynamic of the book. Your question is whether there will be additional crude deconversions in Q4 and in Q1, and there will be some. Like we -- put it this way. Maybe there'll be -- there won't be, but the reality is we'll be well ahead of our target there if that were to occur. So we should probably anticipate some of that. Having said that, those will be offset by growth in sales. And so this particular quarter, we didn't have any mega sales.We had some deconversions, and we had what we view as a really good story, flows moving off of the DC platform into the retirement space. I did ultimately gather you get a bit of a negative. We could see a quarter where if we were to book some large case sales or mega sales in that quarter, it could overcome the deconversion. So we'll just have to look out, but there will be in our overall flow dynamics in the next 2 quarters, the remaining Pru deconversions. That's fair to say, right, Ed.

[Edmund Murphy, executive]

Yes.

[Mario Mendonca, analyst]

So looking beyond just the assets and the flows, market is obviously pretty weak. That's like a nice chunk out of the asset base as well this quarter, which was different than what we saw in previous quarters. So is it fair to say that this business -- the dynamics in this business, at least in the near-term, are also impacted by what happens with markets, what happens with rates like declining rates could actually eat into the spread income a little bit. I just want to know -- I want to flavor for the dynamics that could drive the margins in this business as we look at markets and rates.

[Paul Mahon, executive]

Well, it is an asset-based business. I mean if you look at our revenue, a large percent of it is asset based. And to your point, when you see volatility in the market, you'll see that play out on the revenue line. And if you look at this quarter on the DC side, we did increase crediting rates at the beginning of the quarter. And so, we have to be competitive in the marketplace. So from time to time in a rising interest rate environment, we will raise the crediting rates to our participants.

[Mario Mendonca, analyst]

So some volatility certainly possible in the near-term, but your long-term outlook for earnings growth in the segment would still be in the sort of double-digits. It seems like such a promising business...

[Paul Mahon, executive]

Yes, absolutely.

[Mario Mendonca, analyst]

Okay.

[Paul Mahon, executive]

Yes. Mario, that was really well said. That's exactly the way we think about it. There'll be some volatility with markets, but our long-term view is double-digit growth.

[Operator]

The next question comes from Tom MacKinnon with BMO Capital Markets.

[Tom MacKinnon, analyst]

I just wondering if you might be able to split the $153 million that happened as a result of -- you have marked on your non-fixed income publicly traded stocks and bonds as well that wasn't in the base earnings. I wonder if you can split that to for me between what it was related to interest rate changes and what it was related to changes in stock values, and then what it was related to changes in your non-fixed income asset values, so into those 3 buckets, if you could please.

[Paul Mahon, executive]

Garry, you could start. That's a fair bit of detail, Tom. But Garry, why don't you start off? And if we need to, we can take that offline as well to get it...

[Edmund Murphy, executive]

I think we might well do a follow-up, but just for the benefit of all of those on the call. I'll use round numbers. And again, these are pre-tax. The interest rates probably contribute about $300 million and then the non-fixed income returns. So that's mostly the U.K. real estate, but also some below expectations on some of the equities is about $150 million going the other way. So that's where you get your $150 million net, round numbers, that's pretty much what's happening. And we can...

[Tom MacKinnon, analyst]

The big gain in the bond stuff is really just because -- is that because the liabilities are shorter than -- your assets are much shorter than your liabilities there. Is that what's happened -- is that what's driving that much higher than expected interest rate impact?

[Edmund Murphy, executive]

Actually, Tom, it's more to do with the fact that some of our liabilities are backed by non-fixed income. And so when interest rates move, all of the liabilities have a lower discount rate, but not all the assets move at the same time. So you end up with a pickup. So it's not that we've -- we're mismatched per se from a side of duration in fixed income best match. It's more that some of our liabilities are in non-fixed income, and they aren't moving with the interest rates, whereas the full impact goes to liability. So happy to take this offline.

[Operator]

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

[Paul Mahon, executive]

Thank you very much, Ashia. So to close, I really want to highlight that we remain confident in the strength and resilience of our businesses to deliver on our medium-term financial objectives. And with that, we're kind of pushing into Q4 now. So I really want to thank you all for your participation for those who participated and listened in. And I also want to wish all of you a peaceful and happy holiday season, and we look forward to reconnecting in the new year when we'll report on our fourth quarter results. Have a great day.

[Operator]

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