Great-West Lifeco Inc

TSX:GWO

Earnings Call Transcript 2019-Q4

[Operator]

Good afternoon, and welcome to the Great-West Lifeco's Fourth Quarter 2019 Results Conference Call. I would now like to turn the meeting over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead, Mr. Mahon.

[Paul Anthony Mahon, President, CEO & Director]

Thank you, Roxanne. Good afternoon, and welcome to Great-West Lifeco's Fourth Quarter 2019 Conference Call. With me on the call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. Garry and I will deliver today's formal presentation. Also joining us on the call and available to answer questions are: Arshil Jamal, President and Chief Operating Officer, Europe; Jeff Macoun, President and Chief Operating Officer, Canada; and Bob Reynolds, President and Chief Executive Officer of Putnam Investments. Ed Murphy, President and Chief Executive Officer of Empower Retirement will not be participating in today's call as his father recently passed away, and he is with family. Given his absence, Andra Bolotin, our Empower CFO, has joined the call. While Arshil will handle questions regarding Europe and Reinsurance results on today's call, I wanted to note that earlier today we announced a number of organizational changes that will take effect following today. These include Arshil Jamal moving to a newly formed role at Great-West Lifeco as President and Group Head, Strategy, Investments, Reinsurance and Corporate Development. Working with these teams and operating company presidents, his focus will be on identifying and driving value-creation initiatives across Great-West Lifeco. As a result of this appointment, David Harney, currently CEO of Irish Life Group, has been named President and COO, Europe. Both Arshil and David will report to me, and I'm looking forward to working with each of them in their new roles. I would also note that David McCarthy, our deputy CFO, will continue to be associated with Garry MacNicholas, but will work very closely with Arshil in his new role. Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to today's discussion as well as to the presentation material. I will begin with an overview of Lifeco's fourth quarter results and business developments. Garry will then take you through the more detailed financial review. And after our prepared remarks, we'll open the line for questions. Please turn to Slide 4. The company reported adjusted earnings of $0.80 per share, up 11% year-over-year. These results reflect strong underlying growth in our operating businesses, a significant improvement in equity markets compared to Q4 last year, the sale of the U.S. Individual Markets business and our successful substantial issuer bid in the spring. In Canada, earnings included strong business growth in group customer and investment gains. However, this was more than offset by the impact of actuarial basis changes. In the U.S., adjusted earnings were higher due to improved markets, expense discipline at Putnam, participant growth at Empower and a net benefit from some onetime items. In Europe, higher earnings reflected solid underlying growth across all geographies, particularly in Reinsurance as well as the benefit of successfully resolving a long-standing tax matter in the U.K. There were 3 adjustments to net earnings in the quarter, 2 were at Putnam. The first was a $199 million charge related to the reevaluation of a deferred tax asset and the second was a $36 million restructuring charge related to cost savings initiatives. This third adjustment was a gain of $8 million realized on the sale of our U.K. heritage policies to Scottish Friendly completed on November 1. Garry will provide additional color on these adjustments later in the presentation. On a full year basis, adjusted earnings per share were $2.94. While down from 2018, business fundamentals remain solid and our capital position remains strong. The company's LICAT ratio was 135% at the end of the fourth quarter, well above our internal target range of 110% to 120%. And Lifeco cash was $700 million, giving us ample financial flexibility. We're also pleased to announce that the Board approved a 6% increase in our common dividend, making this our sixth consecutive year of dividend increases. I would now like to take a few minutes to update you on our strategic priorities and recent business developments. Turning to Slide 5. In Canada, we entered the new year as one strong unified company under the brand, Canada Life. With the amalgamation of our 3 insurance companies complete, we are sharpening our focus on growth while capitalizing on efficiencies from ongoing simplification of our business model. We continue to be an industry leader in group benefits, and we've demonstrated that leadership with the highest group life and health sales among our peers again this year. Innovative Benefit solutions and service excellence contributed to these outstanding results. A key part of our growth strategy is deepening relationships with the 9 million Canadians we count as group customers. To this end, we're continuing to introduce new digital capabilities to increase group member engagement. An example is the pending launch of a new integrated member digital platform which will deliver a seamless experience to group customers who have both benefits and savings products with us. Turning to our Individual business. We launched a new Canada Life segregated fund shelf in the fourth quarter, bringing together the best funds from our 3 legacy platforms to create a simplified shelf for all adviser channels. The success of the launch and the attractiveness of the new seg fund product shelf helped boost our fourth quarter results and positions us well going forward. We also invested in digital tools and technologies to support the adviser community. A new adviser portal is currently in pilot and receiving positive feedback. In the U.S., Empower finished the year with record sales and impressive growth across small, mid- and large plan segments. Empower continues to be highly rated by retirement plan advisers. It was recognized as the #1 value for price for a fifth consecutive year by PLANADVISER magazine and received top marks for client service and online tools. External endorsements like these are driving a robust pipeline at Empower. At Putnam, strong investment performance is attracting flows with mutual fund net inflows of $1.5 billion in the quarter, the highest level in over a year. As of December 31, 2019, 82% and 86% of funds, fund to asset performed at levels above the Lipper median on a 3-year and 5-year basis, respectively. This, combined with expense discipline is contributing to an improvement of -- in Putnam's profitability. Turning to Europe. Our Reinsurance business continued to demonstrate its strength and risk in capital solutions, issuing a long-term contract covering the longevity risk within a EUR 12 billion portfolio of Dutch pension liabilities. This follows another significant transaction earlier in the year covering EUR 5.5 billion of euro pension liabilities also in the Netherlands. These transactions add to our diverse longevity portfolio and highlight our expertise in creating unique risk transfer structures to benefit our clients globally. In the U.K., we closed the sale of a heritage block of policies to Scottish Friendly, bringing up capital, allowing us to focus on growth in the U.K. retirement and group benefit markets. We're also leveraging recent acquisitions to extend distribution and growth of our wealth management franchise in Ireland and expand our footprint in the German broker market. With that, please turn to Slide 6 for a further discussion of our fourth quarter results. In Canada, sales were up 5%. As noted, group customer led the industry in Group Life and Health sales in the fourth quarter and for the year. Individual wealth sales were higher compared to last year, in part due to higher segregated fund sales as advisers and clients respond favorably to the new Canada Life shelf. In the U.S., Empower recorded sales of USD 12 billion with growth driven by mid- and small plan sales. At Putnam, net flows were positive on the back of lower gross sales. In Europe, sales were up 10% with higher fund management sales in Ireland. While not included in traditional sales metrics, the major reinsurance transaction noted earlier drove new business gains in the quarter and will add to future earnings. Turning to Slide 7. Lifeco fees were up 7% year-over-year with strong growth across segments. Excluding the divested U.S. Individual Markets business from Q4 2018 figures, Lifeco fees were up 10% and fees in the U.S. were up 13%. As noted on the slide, higher fees were driven by strong market growth, participant growth at Empower, improved performance fees at Putnam and strong net flows in the U.K., Ireland and Germany. Referring to Slide 8. Lifeco adjusted expenses were down 2% year-over-year, 1% in constant currency, with excellent cost controls across segments. In Canada, expenses were flat, reflecting continued expense discipline. Adjusting for onetime items in the fourth quarter last year, expense growth was approximately 3.5%, in line with our expectations. In the U.S., expenses were down 3%, but again adjusting for the sale of the Individual Markets business would have increased by 3%. Empower expenses were higher, in line with sales and participant growth. And expenses at Putnam were down 6% in local currency, reflecting benefits achieved to date with restructuring. And in Europe, expenses were flat and up 2% in constant currency as we continue to balance growth initiatives with good expense controls. I will now turn the call over to Garry. Garry?

[Garry MacNicholas, Executive VP & CFO]

Thank you, Paul. Starting with Slide 10. Earnings in the quarter were $0.80 per share on an adjusted basis, an increase of 11% year-over-year. Adjusted EPS growth reflects solid operating performance as well as the combined impact of the sale of U.S. Individual Markets business and our substantial issuer bid earlier this year. The results included a number of larger items that overall were generally offsetting; however, created variability within the segment. In Canada, fee growth, good expense discipline and strong trading gains were more than offset by reserve strengthening, which led to a 39% decline in earnings. In the U.S., Empower earnings were $77 million, with strong underlying business results and the benefit of a positive basis change. At Putnam, core net earnings improved to $13 million from a loss of $22 million in Q4 2018, primarily due to higher fees and lower operating expenses. Europe's adjusted earnings were up 27% and included a gain on the large reinsurance transaction, good yield enhancement results and the settlement of a U.K. tax issue, partially offset by adverse health and disability claims. Please turn to Slide 11. This table summarizes adjustments to our net earnings in 2019 and 2018. The first adjustment I'd call out was the $199 million charge related to the revaluation of a deferred income tax asset at Putnam. This is a noncash accounting change in respect of certain restricted tax losses that arose in the years immediately following the Putnam acquisition. It is important to note that tax losses are still available and management intends to utilize these losses in due course through a combination of continued organic growth, tax planning strategies and potential strategic initiatives such as M&A. From a prudent accounting perspective, we are limited in the income we can project from these activities, which resulted in the revaluation. The second adjustment I'd note was the $36 million restructuring charge at Putnam covering expense initiatives, including realigned technology and facilities, fund consolidations and staff reductions. We expect to realize USD 33 million in pretax annual expense savings as a result of the restructuring, mostly by the end of 2020, with USD 24 million in savings achieved to date. The third adjustment was an $8 million gain on the sale of U.K. heritage policies to Scottish Friendly. While the earnings impact is modest, this sale freed up approximately $70 million of LICAT capital and positioned the U.K. to move off certain legacy systems as part of its overall transformation efforts. Please turn to Slide 12. This table shows the segment and total Lifeco results from a source of earnings perspective. And as a reminder, the SoE categories above the line are shown pretax. Looking first at expected profit, and excluding U.S. Individual Markets which accounted for $35 million in Q4 2018, the year-over-year increase was 7%, reflecting growth at Putnam, Empower and Reinsurance and improved volumes in Canadian group customers. New business strain was lower than both prior quarter and prior year due to a couple of factors. Putnam and Empower showed higher strain, but we think of this as good strain, reflecting primarily nondeferred sales cost on strong new business activity. Balancing this was the upfront gain on the longevity Reinsurance transaction noted earlier. Experience gains contributed $55 million in the quarter while management actions and changes in assumptions reduced pretax earnings by $112 million. I'll discuss both on the next slide. Earnings on surplus of $57 million improved due to a number of favorable items, including realized gains on trading of surplus assets and the swing in key seed capital impacts from a negative last year in the market turmoil to a gain this period and this is most notable at Putnam. And in the tax line, you can see the impact of resolve in the U.K. tax matter noted earlier. Turning to Slide 13. These tables expand on the experience results and management actions and basis changes to highlight various items in the quarter, again on a pretax basis. Starting with experience results. Strong yield enhancement was supported by equity release mortgages originated in the U.K. through Canada Life home finance. These gains, however, are partly offset by experienced pressures from morbidity, expenses and policyholder behavior. There were continued morbidity losses in Ireland in group LTV and health as we've noted in prior quarters. We have taken repricing action, including several increases in health insurance premiums, but the impact will come in over time as repricing occurs at contract renewal dates. There was also some morbidity impact in Canada due to recent OHIP changes, but we expect this to be temporary as the market adjusts. The expense variance was primarily in Europe, and this represented higher strategic costs in Q4 than originally planned as we continue to make some good progress there. This quarter, we completed a number of actuarial reviews in Canada. Typically, these reviews result in both some positives and negatives. This quarter, while none of the individual changes was material, there were fewer positives, resulting in an overall negative $113 million. In the U.S., we strengthened mortality assumptions on retained U.S. legacy block, who is not part of the Individual Markets transaction. But this was offset by the positive impact of a partial pension closeout. Turning to Slide 14. This table shows the segment and total Lifeco results from a source of earnings perspective for the full year 2019. I'll just make a couple of comments here. With expected profit, again excluding U.S. Individual Markets from the prior periods, Lifeco's expected profit of $2.9 billion in 2019 was up 4% year-over-year. Experience gains in 2019 were comparable to 2018. Strong trading gains were partially offset by U.K. retail property losses as noted in Q2, especially and morbidity losses in Ireland, which we are working to turn around. Management actions and changes in assumptions were $139 million compared to a historically high level of $717 million last year, driven in part last year by the sharp changes in U.K. longevity. We have commented throughout the past year and provided additional disclosure to explain the drivers of lower contribution of basis changes, the most material of which was policyholder behavior in Q3. Offsetting this were positive contributions from individual mortality and economic and some morbidity updates. While contributions from basis changes were lower this year, the balance sheet remains as strong as ever. Historically, experience gains and basis changes together have averaged around 20% of total earnings, with about 60% of that coming from basis changes. While always difficult to quantify in advance, given the balance sheet fundamentals remain consistent, we'd expect basis changes to continue to contribute positively. However, given our focus on operational growth, including investment and pricing actions noted earlier, we expect operating earnings over time, including experience gains, will be a higher proportion of total earnings. In total, adjusted earnings before tax were $3.3 billion for 2019 and the full year effective tax rate on shareholders earnings was 10% compared to 13% last year. Turning to Slide 15. Book value per share was $21.53, down 2% from last year, primarily reflecting the impact of the substantial issuer bid and currency translation. Our LICAT ratio was 135%, down from 139% last quarter. The 4-point decline was mostly related to the capital impact of the large Reinsurance transaction in the quarter. As a reminder, return on equity is based on a rolling 4 quarters. Adjusted return on equity was 13.8% in the fourth quarter, and we continue to target a longer-term ROE of at least 15%. Reported ROE of 11.7% includes adjustments for the loss on sale of the U.S. Individual Markets business in Q2 2019 and those noted this quarter. Turning to Slide 16. I'd just note, assets under administration were $1.6 trillion, up $231 billion or 17% year-over-year, reflecting higher markets and business growth. That concludes my formal remarks. Back to you, Paul.

[Paul Anthony Mahon, President, CEO & Director]

Thanks very much, Garry. So with Slide 17, I'm going to close our formal comments. So referring to Slide 17. As we look ahead, many of the same value creation drivers from 2019 will continue to be our focus and the focus of our efforts in 2020. We made strong progress in expanding our Empower IRA rollover and Canadian next step rollover strategies. These strategies are being strengthened by highly engaging and digitally enabled platforms like Empower's My Total Retirement. We will continue to build up these and other workplace-delivered solutions to meet the lifetime needs of millions of plan members across all of our businesses. We continue to invest in digital tools like SimpleProtect in Canada and our Redesigned Retirement Account in the U.K. The focus is on helping advisers be more effective and productive in delivering Wealth Management solutions to their clients. We will continue to advance these capabilities to grow our share of advised Wealth Management customer assets. This continued investment in distribution is key to our meeting the needs of affluent and high net worth customer segments. We leveraged our Reinsurance and bulk annuity expertise to capture significant pension risk transfer opportunities in Europe and North America. We will continue to strengthen and expand these capabilities to increase our share in a large and growing market for risk and capital solutions. We delivered excellent fund performance driving positive flows across many of our asset management platforms. We also leveraged new investment capabilities like equity release mortgages to support liability pricing and yield enhancement. And we will continue to invest in expertise and innovation to drive strong asset management performance and investment solutions to deliver AUM growth and strong general account performance. That concludes my formal remarks, Roxanne. And we will now open the line for analyst questions.

[Operator]

[Operator Instructions] Our first question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, Analyst]

I wasn't expecting to go first here, but anyway, can we discuss the morbidity issues in Canada and Ireland. These have come up before. I just want to get some updated timing on -- well, first of all, I want to get the size, how much was it in Canada, how much was it in Ireland? And then an updated, I guess, timing on when you expect the repricing initiatives to start to bring margins back up to normal standard?

[Paul Anthony Mahon, President, CEO & Director]

Okay. Thanks, Gabriel. That is sort of a 2-region, 3-part question. So I'm going to start off with that. So generally speaking, we're talking about group businesses where -- but in slightly different shapes and sizes. So if you think about the group business in Canada, it's annually renewable. So as we see some challenge on the morbidity side, we tend to -- we take pricing reaction -- actions. And generally, those pricing actions will carve in over a 12-month period as we sort of increase pricing through the renewal process. I'm going to let Garry speak to sort of the size and scale of that. On the Irish side, this was more market-related increases in claims in the market. It was not anything to do with our book, in particular. It was just higher claims rates right across the market. And as a result, we're putting through pricing increases. And the bottom line is, over time, that will also carve in. And I think Garry again, can provide a bit of insight into the scale of that. So slightly different drivers, but the reality is these are things on both disability and health, where we're really trying to make sure that we're on top of pricing. Garry would have referenced one of the things we had some changes to OHIP plus where there was some increasing claims as a result of a change in government policy. Again, we'll adjust pricing, and we'll get back on [ side ]. So these are the typical ebbs and flows of morbidity businesses where you just have to stay on top of pricing and we are very, very disciplined in doing that. Garry, do you want to give some context?

[Garry MacNicholas, Executive VP & CFO]

Sure. So we showed, I think, $58 million pretax in the source of earnings disclosures for this. You see just over $20 million that was in Canada. And there's a couple of factors. We've had good experience recently. So it's more of a -- this OHIP issue, and I think that will work its way through pretty quickly. On -- the remainder was in Europe, but most of that was in Ireland. And again, it's part of the health business, which is annually renewable. And we have already put those increases in. And then some of it's in the group LTD, which has longer renewal dates, often 2 or 3 years in Ireland. And again, we'll bring those in. The ones you've heard about earlier in the year were primarily on the health side, and that was an industry-wide phenomenon. So that gives you a little more color.

[Gabriel Dechaine, Analyst]

Okay. So Canada, quick fix. Europe might take a little longer?

[Paul Anthony Mahon, President, CEO & Director]

Yes, that's a good characterization. Thank you.

[Gabriel Dechaine, Analyst]

And just the -- I guess, while we're in -- on Canada overall, aside from this morbidity issue. If I ignore the management actions or the reserve adjustments, earnings were still down 13% weaker than what we've seen over the course of the rest of the year, but the rest of the year wasn't exactly blow out either. Just wondering if you can give me a sense of what's going on in the Canadian business. And what your outlook is there, if I could just put it that simply?

[Paul Anthony Mahon, President, CEO & Director]

Yes, Gabriel, I'll start off with that one, and then I will -- I'll defer to Jeff Macoun to provide a bit of color. So as we look at the outlook for Canada, we're very bullish overall on our business there. It's a very strong platform. On the group side, we're taking some pricing action where there's a little bit of drag there. But we really see significant upside as we have stronger sell-through, and we talked about next step rollover assets and those are -- that's a very profitable business as we really turn people from group plan members into more lifetime customers. We also like the fact that we're leveraging real strength on the Life and Health side into the group Wealth side. The individual business, I'd say, we're more in the process of retooling. I mean when you think about it, there's a lot going on in terms of digitizing advisers. There's the pressure of the low interest environment. But at the end of the day, we think that's a critically important business for reaching high net worth affluent customers from a standpoint of wealth management. I'll let Jeff provide a little more color there. Jeff?

[Jeffrey F. Macoun, President & COO for Canada]

Thanks, Paul. Gabriel, just to pick up on the morbidity side. As Garry mentioned, we've taken action on that. Garry called out on the health and on the disability, we had put through an adjustment on the rates earlier in the year. And of course, as Paul mentioned, that's renewable on an annual year. So I feel we're on top of that. To get a little bit more bullish on the outlook going forward on the group side, as Paul mentioned, our plan really is to engage the plan members directly more in 2020. Paul mentioned the next steps program is a good example of that. And we've seen actually 17% growth over the past year alone on that. So we have a number of plans and actions underway. Our sales are good, as Paul mentioned, #1 for the last 2 years in a row. And we have a number of innovative actions and digital implementations coming forward in '20. On the individual side, just to build off of Paul, we are looking to more modernize our product shelf, both on the life and wealth side. We are taking our triple protect option to more of our -- the term and our [ part ] side. And as also mentioned at the start, we have a number of launches underway on the wealth side, particularly, we launched in November on the [ take ] side. So we believe these are strong opportunities for growth in 2020.

[Paul Anthony Mahon, President, CEO & Director]

Garry, any comment on the growth number that Gabriel referenced?

[Garry MacNicholas, Executive VP & CFO]

Yes. I just -- I was looking at some of the source of earnings, Gabriel, and well, actually, I mean, the expected profit was up over year-over-year, it was up modestly, but it was up over year. And again, there's a little bit of pressure on new business gains in Canada. That's really just the fall in interest rates to the back end of the year. It takes a bit of time to reprice to the lower interest rates. None of those were that large, so I wasn't quite seeing a 13% drop, but I'm not sure I adjusted to it. Happy to take that offline later on though.

[Operator]

Our next question is from Sumit Malhotra from Scotiabank.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I'll start with Garry on Page #12 of the slides. This is maybe just a little bit more interpretation based in nature. So Great-West compared to most of your peers has never been a company that's done a lot of adjustments. I think you've basically -- for the most part reported it as is. When we look at the adjustments today and come to the results we see here in the segments, as you referenced, so Europe actually has a recovery which, I think, you said is due to a local settlement. Why wouldn't something like that when you're actually having a recovery in taxes be included in adjustments, if you're going to go that route and report an adjusted number. Philosophically, how do you decide what comes in and what doesn't because that seems like something that would be seen as nonrecurring?

[Paul Anthony Mahon, President, CEO & Director]

Yes. I'm going to let Garry touch on that one.

[Garry MacNicholas, Executive VP & CFO]

Yes. And we do actually -- used a very consistent approach over this over time. And there's -- the things that we look at as adjustments have typically been restructurings, and we've seen that a couple of times in Canada, Putnam, the U.K. last year. We see DTA, intangibles those type of things that are -- so those are quite unusual items. So if you look at something like the tax case resolution, I mean, it was a larger item. But we -- that's a part of our regular business. We have tax settlements, and they're generally being positive against what we felt, against them. This one's a little larger than a lot of have had been, but we've had some large ones in the past as well. There was a German one we called out a couple of years ago, that was -- at least half the size, if not more. It's quite a substantial one. We've had a number of them in Canada over the years. That's part of our regular business. It was a bit larger. So we make sure we disclose it.

[Paul Anthony Mahon, President, CEO & Director]

Garry, I would also add that when you think about the tax gain, we were dampening earnings over many years as we were setting up. You're setting up provision in anticipation of that challenge. And the reality is then you ultimately -- we end up wherever you saw off with the tax authority. And the reality is it was dampening earnings, and it's now coming back into earning. So I wouldn't characterize that as an adjustment similar to something like the DTA write down.

[Garry MacNicholas, Executive VP & CFO]

Yes, the DTA and the adjustments we make are few and far between them. We've had more restructurings more recently. But the rest of the earnings like the large P&C claims that come in every now and then, the U.K. retail property losses, we just flow those to our earnings. And whether they're positives or negatives, that's part of our business. So we have been very consistent in that. It's just -- it happened to be in the same period. So I understand the question.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

No, and that's why I started it the way I did, you guys have been, shall we say, there's been less in the way of adjustments taken from this company over the years. But look, when you see an outright tax recovery in your larger segment, it just seems like if you're going to call out 3 things, and it seems like, at least to me, they would have been a fourth if we're trying to get to a run rate earnings power, but I understand your point. Okay. Let's move on from that. Paul, this is one, just -- it's a conversation that's come up with investors in the last few months. So I thought I'd ask it to you in this forum. Obviously, the -- since we had one of these calls last, there was the transaction between, shall we say, your partners at Power Financial, Power Corporation. How, if at all, would you describe to shareholders, how this transaction impacts Great-West Life? Whether it be from a management oversight, regulatory expense. Is there anything that shareholders will see different under that -- the change in structure between those entities?

[Paul Anthony Mahon, President, CEO & Director]

Yes, the reality is Lifeco is a separately regulated entity independent of that with different shareholders. And the reality is there's no direct impact. I would say, though, that if you think about that transaction, I think it's reflective of an increased focus on value creation, and that will flow through to our Board and our management team. And so it's sort of a sharpening of focus. I think the market actually responded quite favorably to it. And I think it's a real bias -- it's showing a bias to action, that's what I would characterize, but that will be more at the Board table at Lifeco, which is separate from what's going on in those holding companies.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And last question. This might go back to Garry. I appreciate you talking about the impact of the basis changes this quarter in the management actions and changes in assumptions line. Your -- I agree with something you said, you've got to go back a long way to see a quarter in which that particular component of the SoE posted a negative result, and you seem to be suggesting it's not going to be negative, it's just not going to be quite as large going forward. When we look at a year in which, on your measure, adjusted EPS was lower and, obviously, you had a few moving parts, is the contribution of this stream been impacted by the fact that there have been consistent gains that have been realized for a number of years and there just isn't as much in the way of basis changes that can be released back into earnings? Is that the right way we should be thinking about that going forward?

[Paul Anthony Mahon, President, CEO & Director]

Garry, I'll let you...

[Garry MacNicholas, Executive VP & CFO]

Sure. I think the first thing I'd comment on, and it's particularly the last few years, a lot of the basic changes have been driven by good experience. So we've been on the right side of a number of experienced trends such as the longevity. So that really hasn't impacted the margins on our balance sheet. And as -- I think I made clear that we feel our balance sheet is just as strong in terms of the margins that are in our balance sheet as they have been in the past. So we would be expecting a positive contribution going forward. A part of my comment though was around our increasing focus on growing our operating earnings and really turning around our experience gains and getting those which are more influenceable if I imagine, getting those stronger contributions. So naturally, as those grow, if the other makes a steady contribution, that percentage will decline.

[Paul Anthony Mahon, President, CEO & Director]

Yes. The other comment I'd make is there's a natural -- if you think about the shape of our business in terms of the growth, we're growing wealth management platforms. We're focused on trying to unlock value on the asset management side. And those are businesses that are going to tend to flow into more an operating earnings view than sort of building up balance sheet strength. So I think it's just a natural evolution. But as Garry said, we have strengthened the balance sheet. We just see that as a natural progression of the business. There's going to be stronger contributions on the operating earnings side. And some of those balance sheet items will continue to make contributions, but probably on balance not to the same extent as the operating earnings growth.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

So to paraphrase and to wrap it up for me, Paul, it seems like the way you're describing it, it's more of a geography of the sources of earnings. We're going to see more through the expected profit line and likely less through the -- basis changed line. Is that if I have to paraphrase what you're saying?

[Paul Anthony Mahon, President, CEO & Director]

Yes, yes, yes. Yes, that's a good way to put it. And frankly, that's kind of the world, we'll all be living in when we get to IFRS 17 as well. So it's a natural progression of the business.

[Operator]

[Operator Instructions] Our next question is from Tom MacKinnon from BMO Capital.

[Tom MacKinnon, MD & Analyst]

Yes, just continuing on that point, I think you said 20% of the earnings typically were from the combination of experience gains and actuarial assumption changes and 60% of this 20% was from actuarial assumption changes. So that's 12% of earnings. So give us some metric as to what this might be going forward if it's typically been around 12% of earnings? Do you think probably somewhere in the area of 3/4 or 2/3 of that number? Just to help us get a handle as to how we should be able to forecast that impact?

[Paul Anthony Mahon, President, CEO & Director]

Yes. So Tom, it's Paul Mahon. I'll start off. Not being an actuary, I'll answer that one. As a starting point, and I'll say that we can't forecast exactly what's going to happen. 5 years ago, 6 years ago, we couldn't have forecast what was going to happen with U.K. and with mortality over time. You can't forecast what's going on with morbidity and the like. There's obviously controllable things where we're driving down expenses. And you got to look at your expense reserves, you got to have discipline on the investment side and you'll have asset default provisions and the like. But at the end of the day, you can't forecast that. What we're saying is that as we drive the business forward, we see a lot of potential upside in growth in our operating earnings. And as that will flow through and your experience gains and your new business gains. And as we shift the business that way, it will naturally see a bit of a moderation in the contribution to the balance sheet. But it's still a strong balance sheet. It's as strong as it ever was. It's just the shifting of the business. So Garry, I don't know, I don't think you're going to give a number, but I'll let you go there because you have this -- there's actuarial standards where if you knew what it was now, we'd be addressing it in our earnings right now.

[Garry MacNicholas, Executive VP & CFO]

No, no. I think you mentioned 12% and suggesting it's going to moderate a bit, and you can put your own number on what moderate a bit means. That's I think all I'd add.

[Tom MacKinnon, MD & Analyst]

Yes, maybe it's a function to some extent as to how much of the business is balance sheet related versus how much is really off-balance sheet related and Putnam and Empower are really off-balance sheet related. So as those become a bigger portion, hopefully, then this binded by -- this naturally should fall. Is that a safe assumption?

[Garry MacNicholas, Executive VP & CFO]

[ That's the way we're looking at it. ]

[Paul Anthony Mahon, President, CEO & Director]

That is -- and even think about -- we've got our Wealth Management businesses, which are far less balance sheet related than the traditional life businesses that we would have. And so it's just -- and our Reinsurance businesses. A lot of those have very little balance sheet impact. So as we see growth, it will have its -- they're all different shapes in terms of the profit signatures and the capital signatures and the balance sheet signatures.

[Tom MacKinnon, MD & Analyst]

Okay. That's great. Just a couple of questions with respect to -- numbers questions with respect to Slide 12. The fact that the tax rate was actually a negative tax rate. Do we have -- do we know what the help was from the tax settlement? I mean that $19 million negative in taxes from that slide. Do we know what was driving the fact that you got a tax rebate here?

[Garry MacNicholas, Executive VP & CFO]

Yes. I think it is noted in the MD&A, which I did have -- right in front of me here, but I believe it was $100 million or $101 million was the U.K. tax issue in the tax line.

[Tom MacKinnon, MD & Analyst]

Okay. Good. And the $38 million earnings on surplus gain in Europe, is that largely AFS gains?

[Garry MacNicholas, Executive VP & CFO]

Yes. It's a combination of a couple of things. There are -- there were certainly AFS gains in both the U.K. and Ireland. And there's -- we have had some interest accrued, but we hadn't -- that we hadn't let flow through to earnings. It's just -- Paul was saying, we've been adding to these expenses and interest accruals to these tax spends, so some of that reversed as well. But it was AFS gains predominantly in Ireland and the U.K.

[Tom MacKinnon, MD & Analyst]

And the $38 million impact to new business in Europe was from the Reinsurance transaction, is that correct?

[Garry MacNicholas, Executive VP & CFO]

Yes. That was the #1 driver. We had strong annuity gains in Q4 last year, actually, and then we had them again this year. Last time it was in the U.K. in the bulks. This time, it was in the Reinsurance, but that's what's driving that.

[Tom MacKinnon, MD & Analyst]

And the last one is the partial pension closeout in the U.S. did that -- was that booked in the Empower numbers that we get on the other supplement?

[Garry MacNicholas, Executive VP & CFO]

No. Actually, there was another change that didn't quite make the list. It was the partial pension closeout and that legacy mortality adjustment were both in the retained business. And so they were largely offsetting. And then the Empower got about a $22 million lift, if I recall, U.S. dollars after tax from a interest margin reduction on their general account product.

[Tom MacKinnon, MD & Analyst]

And is that -- do we look at that as more of a onetime item?

[Garry MacNicholas, Executive VP & CFO]

Yes, that's -- I mean we have strong interest margins, but that was a onetime basis change.

[Operator]

[Operator Instructions] Our next question is from Doug Young from Desjardins Capital.

[Doug Young, Diversified Financials and Insurance Analyst]

Just on the Empower. So if I take that 60 -- $76 million, I think even I don't have the page up, but the $76 million and I think that's U.S. of earnings. So I would take out -- if I wanted to try to get to a normalized earning for Empower, I would take out that $22 million after-tax gain that you just talked about. And I think you -- correct me if I'm wrong. And then I think there's also some higher investment gains at Empower. I'm trying to just to get a sense of what -- if you normalize Empower, and not that there's ever a normal quarter. But if you normalized it, what would have been the earnings power for Empower in the quarter?

[Paul Anthony Mahon, President, CEO & Director]

Garry, can you provide a bit of color on that?

[Garry MacNicholas, Executive VP & CFO]

Yes, just -- I'd add a bit. I think we were showing Empower at $77 million. If I were to ballpark it, then again it's -- there's always a bit of noise, and we mentioned. We did have both that basis change and the gain, I would -- I would have said, around the $45 million range. And that would compare to $32 million this time last year. So it was a good increase year-over-year that -- I'd put it in that range. I know we tried to lay it out in the MD&A, but it's hard to do that, but that's how I'd think of it.

[Doug Young, Diversified Financials and Insurance Analyst]

So it's around USD 45 million versus USD 32 million. Okay. And then, Garry, just in Canada, there was quite a few, and the management actions and assumption changes, and I apologize if you've covered this already, but policyholder behavior was negative, Canadian longevity was negative, Canadian morbidity was negative. Can you unpack a little bit about -- obviously, you finished up some studies. Can you talk a bit about what the drivers were for each of those 3 items?

[Garry MacNicholas, Executive VP & CFO]

Yes, I should. I mean -- and then we're, as I went through -- as we were preparing for year-end going through reviews, a lot of them were just they experience wasn't -- hadn't been updated for a couple of years, and it was just finalizing. Even within those numbers, there were often 2 or 3 smaller pieces. So there really were lots of 10s and 20s that added up. There were some in -- there were a couple of universalized [ things ]. [ Also behavior is due to ] focus on universal life. Again, 2 different product lines. Within that some limited pay and some warranty, small changes in each of those. Disability, again, that was just catching up on experience and disability. And then in the -- I'm trying to remember what the last one was.

[Paul Anthony Mahon, President, CEO & Director]

The longevity.

[Garry MacNicholas, Executive VP & CFO]

The longevity. We've done a fair bit of work on the longevity [ hidden in ]. It has been reflected in our pricing success recently on really drilling down this in a much more refined approach. And we've applied that back to some of our older groups. We focused on a lot of our -- getting our new business, right, and we put this new refined methodology back. In total, it almost came out the same. It is a refinement, but it was a slight adjustment. And again, that's sort of a onetime item replace. So all smaller [ catch-up ] items.

[Paul Anthony Mahon, President, CEO & Director]

Yes, it's Paul. I would note that in behind those 3 categories, you probably have 6 or more items that are moving there. Typically, we would see 3 positive, 3 to the good, 3 might be -- 3 with the release and 3 with the strengthening. This was just an unusual quarter in that regard where they all moved in the same direction, but it's not indicative of any weakness in the balance sheet. It's indicative of the work we chose to do this quarter.

[Doug Young, Diversified Financials and Insurance Analyst]

So the policyholder experience was Individual Insurance, more limited pay YRT, the morbidity was more long-term disability in the group side? And then the longevity is more the payout annuity and just basically catching up on what you've been doing on the pricing. Did I catch that right?

[Garry MacNicholas, Executive VP & CFO]

Yes, except for one thing. The disability was on the individual side rather than the group side.

[Doug Young, Diversified Financials and Insurance Analyst]

The individual. Okay. And so the morbidity side, so what was the morbidity, did I catch that?

[Garry MacNicholas, Executive VP & CFO]

Yes, that was -- that's on the individual.

[Doug Young, Diversified Financials and Insurance Analyst]

So that's on the individual. So that's -- okay.

[Operator]

[Operator Instructions] This is the end of the question-and-answer session. I would now like to turn the meeting over to Mr. Paul Mahon.

[Paul Anthony Mahon, President, CEO & Director]

Thank you very much, Roxanne. So with that, I would like to thank all of you for joining the call today. And if you do have any other questions, or wanted to dig into a bit more detail, please do contact our Investor Relations for those follow-ups, and we look forward to speaking with you at the end of next quarter. Have a great day. Take care.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.