Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco 2024 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Mr. Shubha Khan, Senior Vice President and Head of Investor Relations at Great-West Lifeco. Please go ahead.
Thank you, Operator. Hello, everyone, and thank you for joining the call to discuss our second quarter financial results. As many of you already know, this is my first time hosting Great-West Lifeco's quarterly results call since I joined the company earlier this summer. It's a pleasure to welcome many familiar faces on today's call, and I look forward to working with you all. Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at greatwestlifeco.com under the Investor Relations tab. Please turn to slide three. I'd like to draw your attention to the cautionary language regarding the use of forward-looking statements, which form part of today's remarks. Please refer to the appendix for a note on the use of non-GAAP financial measures and important notes on adjustments, terms, and definitions used in this presentation.
Please turn to slide four. To discuss our results today on today's call, we have our President and CEO, Paul Mahon, our Group CFO, Jon Nielsen, David Harney, President and COO, Europe and Capital and Risk Solutions, Fabrice Morin, President and COO, Canada, Ed Murphy, President and CEO, Empower, Linda Kerrigan, Senior Vice President and Appointed Actuary, Jeff Poulin, Executive Vice President, Reinsurance, and Raman Srivastava, Executive Vice President and Chief Investment Officer. We will begin with prepared remarks followed by Q&A. With that, I'll turn the call over to Paul.
Thanks, Shubha. It's great to have you here. Please turn to slide 6. I'm very pleased to report strong results for the second quarter, which builds on our performance over the last 12 months. As we work to strengthen our business and deliver for our customers, we continue to create sustainable, profitable growth for our shareholders with a fourth consecutive quarter of record base earnings. In the second quarter, both base and net earnings exceeded $1 billion for the first time. This positive momentum is backed by clear strategies, disciplined decisions, and focused execution from our teams across Great-West Lifeco. These results have been supported by equity market tailwinds, partially offset by headwinds facing many of our businesses, including regulatory and policy changes, an inflationary environment, and shifting interest rates.
We are executing against our ambitions in the U.S. with focused investments to deliver scale and build new capabilities, which are fueling an engine for sustainable growth. In line with the target we provided in early 2024, Empower continues to report double-digit earnings growth, driving a nearly 200 basis point increase in the U.S. segment ROE in just the past 12 months. Our U.S. segment is on course to become the largest within the portfolio this year. Overall, the portfolio continues to create value for shareholders. We're operating at the top end of the range of our medium-term objective for Base ROE, despite the full impacts of the newly implemented Global Minimum Tax. In light of the market volatility we've seen in recent days, it bears noting that the earnings mix of our business is diversified across our geographies and value drivers.
In our insurance business, we run a well-matched book, removing a lot of the sensitivity to market movements. We also remain in a position of financial strength with building regulatory capital levels. This provides additional downside protection as well as substantial flexibility to take advantage of future opportunities as they arise. We are well equipped to navigate the current market environment. Please turn to slide seven. This quarter's results continue to deliver strongly against our medium-term objectives. Base earnings of CAD 1 billion and base EPS of CAD 1.11 both increased 13% over the prior year. Base ROE increased to 17.2%, up over a full percentage point from the prior year, and book value per share also increased 9%. We've maintained a comfortable leverage ratio, and our regulatory capital position has strengthened with our LICAT ratio increasing one point over last quarter. Please turn to slide eight.
In Canada, we remain committed to driving growth and unlocking value for our customers. Recent acquisitions, coupled with positive market performance, have accelerated growth in our Canadian individual wealth business. Net flows have improved despite the overall industry trend to outflows in segregated funds. As we discussed at our Wealth Focused Investor Day last year, our wealth strategy includes providing a full range of market-leading products and support for advisors and their customers. This approach will help us capture an increasing share of investable assets as they move from segregated funds to other wealth products. Further, we've remained focused on strengthening our seg fund value proposition and reinforcing the unique benefits of these products for customers. In Group Life and Health, our results continue to reflect our commitment to growing the business and deepening plan member relationships.
Book premiums were up 17% year-over-year, supported by the addition of the Public Service Health Care Plan and solid organic growth. The negative net cash change in book premiums for the quarter is the result of a single termination of a large administrative services-only plan. In insurance and annuities, CSM declined largely due to insurance experience losses. As a reminder, given our focus on growing our wealth platform and extending our leadership in the workplace, we do not consider CSM to be a key growth metric in Canada. We have maintained discipline in our approach to risk selection and pricing within the more capital-intensive insurance and annuities businesses. We continue to believe in the value of protection products and regularly review our non-par insurance book. We will take actions as appropriate to maintain its sustainability and stability. Please turn to slide nine.
At Empower, we delivered another strong quarter across both workplace and personal wealth. In workplace, average AUA was up 14% over last year due to sales and U.S. equity market performance. Net flows were negative this quarter, largely due to the anticipated one-time impact of terminations from the Prudential Retirement business that we acquired in 2022. Excluding these shock lapses, the business had modest net outflows due to higher withdrawals by DC plan members, principally as a result of higher balances they have achieved over the past years from strong equity markets. While this is weighing on flows in the near term, Empower remains well positioned to meet growing market demands for retirement solutions over time. The expanded range of offerings introduced earlier this year provides Americans with even more options to secure the income stream they need in retirement and will bring more Americans into the retirement system.
We continue to believe that we are well positioned from a scale perspective to drive long-term growth in the DC business at Empower by gaining market share through differentiated customer experience while maintaining our cost advantage. The need for cost competitiveness and differentiated customer experience will drive more consolidation in the DC market, which we are uniquely positioned to benefit from. Empower Personal Wealth also benefited from positive equity market performance, with average AUA up 23% over the past year. This business continues to see gains largely from the scale brought by the workplace business, adding another $1.6 billion in net flows to the platform this quarter. Looking ahead, Empower remains focused on driving profitable growth and building on its recent success and is well positioned to continue this performance over the medium term. Please turn to slide 10.
We had great results in Europe, where we delivered a sixth straight quarter of growth across all value drivers. These results are supported by a set of targeted strategies and focused actions to strengthen our positions in Ireland, the UK, and Germany. Average AUA across wealth and retirement businesses was up 15% year-over-year due to solid market performance and net inflows. We are continuing to deliver against our wealth strategy in Ireland, building out Unio to become a business of significant regional scale to provide more individuals with advice on managing their wealth. In workplace, we experienced solid sales and organic growth in Group Life and Health in both the UK and Ireland, with book premiums up 8% year-over-year. In insurance and annuities, growth in the individual and bulk annuities in the UK helped drive CSM up 13% year-over-year.
We see further opportunities for targeted growth in our bulks business this year, supported by discipline pricing and risk selection in line with our value creation objectives. Please turn to slide 11. Capital and risk solutions provided a consistent contribution to base earnings and remain an important source of diversification to the overall portfolio. Run rate reinsurance earnings were up slightly over last year as our short-term structured businesses continued to drive growth. These results are pre-tax and better reflect the underlying trend as they do not include the impact of Global Minimum Tax. CSM remained relatively stable as we continued to approach our other reinsurance businesses with pricing discipline. And with that, I'll now turn the call over to John to review the financial results. Jon.
Thank you, Paul. Please turn to slide 13. We continued to see strength in global asset markets in the second quarter, and macro factors continued to benefit our financial results, primarily as a result of higher interest rates in equity markets. Equity market performance supported growth in assets under administration within our wealth and retirement businesses, with average assets up 4% from the first quarter and 18% versus last year. Rising asset levels are positive for our clients who see their wealth growing. However, as clients have benefited from healthy market returns, we experienced increased withdrawals in dollar terms from our workplace savings plans, a dynamic we've seen play out at Empower, as Paul just noted.
Interest rates remained at elevated levels in the second quarter, easing somewhat on the short end of the curve as the Bank of Canada and ECB cut rates for the first time after a historic hiking cycle. Markets are expecting the US Federal Reserve to cut four times in the second half of 2024. Against this backdrop, we continue to ensure that our fixed income holdings remain optimized for any changes in rates. In terms of currency exposures to earnings, the US dollar, euro, and British pound appreciated against the Canadian dollar both year-over-year and quarter-over-quarter, benefiting our results by 2% in terms of growth in base earnings. Turning to slide 14, we delivered another record quarter for base earnings, which increased 13% year-over-year and 11% in constant currency. Both base and net earnings surpassed $1 billion in the second half.
The results were driven by strong business growth in all segments, partially offset by the impact of the global minimum tax, or GMT. Excluding the impact of the GMT, base earnings grew 14% in constant currency in the quarter and 18% for the first six months of 2024. GMT reduced second quarter base earnings by CAD 28 million. About 80% of this was within our capital and risk solutions business and 20% within Europe. The effective tax rate on base earnings includes an approximate 2 percentage point impact related to the GMT, and this was in line with our expectations that we shared in previous calls. Our base return on equity for the quarter is slightly above the upper end of our medium-term objective of 16%-17%, reflecting strong growth in base earnings and the continued focus we have on growing our capital-like businesses.
Turning to slide 15, our Canada, U.S., and Europe segments delivered strong performances with double-digit increases in base earnings year-over-year. Capital and risk solutions were impacted by GMT, but otherwise posted solid underlying growth. In Canada, base earnings increased 14%, driven by strong insurance experience, particularly in Group Life and Health. Growth in fee income reflected the contributions from the IPC and Value Partners acquisitions. Non-directly attributable expenses were elevated by one-time and other items this quarter, tempering earnings growth in this segment. A more representative run rate for this line would be the average of the four quarters in 2023, with modest growth due to inflation and business volumes. This aligns with the expense run rate that we are targeting for Lifeco overall. In the U.S., Empower maintained strong momentum with base earnings up 19% year-over-year in constant currency.
Results reflected higher net fee and spread income resulting from rising equity markets, the realization of the expense synergies that we've articulated in prior calls, and a one-time true-up payment of $30 million from Prudential. Partially offsetting the strong earnings growth were impairments on two U.S. commercial mortgage loans totaling $40 million. Nevertheless, underlying earnings growth remains well within our 15%-20% target for 2024. As a result, the ROE for this business has increased by nearly 200 basis points in the past 12 months alone and remains on track to reach our medium-term objective of 16%-17%. In Europe, base earnings increased 12% year-over-year in constant currency, driven by growth in net fee income, improved insurance experience, and higher expected insurance earnings from a growing annuities book. Within capital and risk solutions, results were adversely impacted by the GMT, as we expected.
Excluding this impact, base earnings growth was solid at 3% year-over-year in constant currency, with continued strength in our structured business. While we continue to see unfavorable claims experience in our U.S. traditional life portfolio, experience has improved meaningfully on a year-to-date basis. We continue to monitor U.S. mortality rates post-COVID and are maintaining pricing discipline in this segment of our business. We are strategically allocating capital to opportunities with strong returns and diversifications with our other segments. In addition to life and non-life structured business, this includes property and casualty retrocession, which is approximately 10% of CRS earnings. Our exposure is primarily to natural catastrophe activity, which can be volatile from year to year. However, we've taken action over the last two years to significantly limit our risk.
For example, it would now take $160 billion in Florida for our business to incur the same $130 million loss that we saw for Hurricane Ian in 2022, and Hurricane Ian cost the industry about $70-$80 billion. This is precisely why we do not expect to incur any losses related to the recent Hurricanes Beryl or Debby and have yet to experience a loss-triggering event this summer. Overall, we remain very comfortable with our risk exposures within CRS and see plenty of opportunity to continue generating attractive risk-adjusted returns in this business. Turning to slide 16, insurance service results were up year-over-year, reflecting favorable group experience in Canada as well as Europe, as well as higher expected insurance earnings due to growth in our group businesses and structured business at CRS.
The net investment result declined year-over-year as the benefits to earnings on surplus from higher interest rates and the addition of Franklin Templeton dividends were more than offset by the credit experience losses in the U.S. and lower trading gains in Europe. As I noted earlier, the negative credit impact relates to the impairment of two mortgage loans within the U.S. office portfolio. We continue to monitor our commercial real estate exposure closely, while we don't expect to be fully immune from headwinds in commercial property markets. We maintain a high-quality and well-diversified portfolio and do not expect losses of this magnitude to recur for the remainder of 2024.
Turning to slide 17, net fee and spread income was up both year-over-year and sequentially, primarily to growth at Empower, reflecting higher equity markets, synergies from the Prudential acquisition, underlying business growth, and the one-time fee adjustment from Prudential. Non-directly attributable expenses at CAD 318 were largely in line with the expected quarterly run rate we communicated last quarter, but included the one-time items in Canada that I previously mentioned. Turning to slide 18, within the quarter, net earnings were modestly below base earnings as overall positive market experience and the favorable impact of assumption changes and management actions were more than offset by business transformation costs, ongoing amortization of intangibles, and the one-time GMT catch-up from the last quarter.
Positive market experience was primarily driven by higher interest rates and credit spreads in Canada and the UK, partially offset by lower-than-expected returns in both our Canada and UK property portfolios. The positive impact of $39 million from assumption changes and management actions was mostly related to the finalization of the longevity reinsurance transaction that we completed in 2023, and you may recall from one of our previous calls. Business transformation costs moderated from quarter one and were mostly attributable to the integration of the acquired Prudential operations, which was completed in May. We expect these costs to be negligible in the third quarter. Turning to slide 19, we maintain a strong and stable balance sheet to ensure we are resilient through all market cycles. As Paul noted earlier, our business is well-diversified, and the insurance book is well-matched, limiting our sensitivity to market movements.
In the appendix to this presentation, we've included a table showing the immediate impacts of adverse movements in market indicators. I would note that both net earnings and balance sheet sensitivities have broadly declined over the past six months, and our balance sheet resiliency remains strong. Our strong regulatory capital levels provide an additional buffer against market-related volatility. In the quarter, our LICAT ratio increased to 130%, up 1% from the prior quarter. As a result of our ALM strategy and accounting policy choices, we've experienced a much more stable LICAT result under IFRS 17. This stability highlights the resilience of our balance sheet, which gives us the capacity to execute on strategic opportunities as they arise. Our leverage ratio continues to decrease and now sits at 29%, down 1 point from a quarter ago on solid growth in shareholders' equity.
Our cash balance also grew as strong earnings and capital generation within our businesses allowed for a flow of cash up to Lifeco. I note that there is some seasonality in our cash flow from quarter to quarter. Nevertheless, we expect to continue to deliver strong capital generation and for excess cash to build at Lifeco. Overall, we're extremely pleased with the results of this qua rter and for the first half of 2024. With that, I'll turn the call back over to you, Paul.
Thanks very much, John. Please turn to slide 20. We've had a strong first half of the year with base earnings growth above our medium-term objective of 8%-10%. For the full year, we remain confident the portfolio will deliver at or near the high end of this range.
As we look beyond this year and into 2025, we're closely monitoring a number of externalities and potential headwinds, including evolving geopolitical trends, equity market volatility, and changes in interest rates. However, we remain well-positioned thanks to the diversification, strength, and resilience of our businesses. We have the right team to continue executing against a clear strategy and drive growth across all value drivers. With plenty of momentum right across the business, we're looking forward to building on our track record and a strong close to the rest of 2024. And with that, I'll now turn the call back over to Shubha to start the Q&A portion of the call. Shubha?
Thanks, Paul. In order to give everyone a chance to participate in the Q&A, we would ask that you limit yourselves to two questions per person and then re-queue for any follow-ups.
Operator, we're ready to take questions right now. Thank you.
We'll now begin the Q&A question and answer session. To join the question queue, you may press star , then 1 on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your headset before pressing any keys. To withdraw your question, please press *, then 2. We'll pause for a moment as callers join the queue. The first question comes from John Aiken from Jefferies. Please go ahead.
Good morning. Thank you very much. A couple of questions on Empower Defined Contribution, if I may. It looks like the participants have flatlined over the last several quarters. Does this relate to the terminations from Pru? If not, what's going on there, and when can we expect growth to resume within the number of participants, please?
Thanks, John.
I'm going to turn that one over to Ed to talk about participant dynamics and our anticipation in growing that. Ed?
Sure. Yep. Thank you, Paul. Thanks for your question, John. In terms of participant growth, we did see, obviously, a lapse related to Pru. So we had participants coming off the platform associated with that loss. But if you look at the growth trajectory of the DC business, it's very, very strong. So consistently, we've grown our participants at a rate of twice the rate of the market. In some years, we've been growing at three times the rate of the market. That's oganically supplemented with M&A and the Mass and Pru acquisitions. But if I look at just sales in the defined contribution business year- over- year, we're up 47%. The small market, which represents all the growth opportunity, is up 35% year- over-y ear.
So we're pretty sanguine about organic growth opportunities. Our pipeline is over $2 trillion, and the demand is very, very high. So we continue to see growth in all segments: not-for-profit, small market, large mega, our Taft-Hartley space. And the market, as we've discussed before, is consolidating. So if you look at the movement that's occurring when customers move from one provider to another, the top three to four players are capturing close to 70% of that business. And that's going to continue as the market shrinks.
Thanks, Ed. And that leads into my second question. Obviously, with the strength in your LICAT ratio, leverage ratio coming down, everything else like that, you've got a lot of dry powder, and you talked about, sorry, at the top of the house, you talked about strategic objectives. But of course, Empower has been part of the consolidation in the industry.
Is the dislocation of these plans or these members on an organic basis enough, or do you still expect to be able to pursue opportunities for additional acquisitions, be it today, tomorrow, or somewhere down the road?
Well, I think, Ed, you're on a roll, Ed. You take that one.
Okay. No, I was just going to say, I think organically, if you look at the market, the market's turning about 5%-6% a year. So our ability to capture our fair share of the plans that are in motion is very, very high. So we're going to continue to see solid organic growth. We'll continue to grow the business organically at a rate faster than the market. I'm convinced of that. We have a superior value proposition. We have a scale. We have a cost advantage.
On the inorganic side, there will always be entities that are looking to exit the business. And I think, as Paul and I have shared with you in the past, we'll be opportunistic there. I mean, we definitely see opportunities. And what typically we're looking for is, obviously, scale benefits, but also capabilities that allow us to extend our reach, to append to our existing offerings. And then, of course, the human capital dimension. We've acquired some great talent through these acquisitions. So the short answer is, I think we're going to be thoughtful and smart and strategic and opportunistic as these situations present themselves.
Thank you. I'll re-queue.
The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Good morning. Can I have you stick with the US? The net fee and spread income this quarter is $462 million.
Now, I appreciate that there's—is it $30 million or $40 million in there for the fees from Pru? But that improvement from one quarter to the next, I know it's net, so it reflects not just the revenue side but expense savings. But perhaps you could help me understand that delta from Q3 to Q1 rather than Q2, that significant increase, the extent to which it was driven by the top line, or perhaps it was mostly driven by expense savings at Pru. Just help me understand that delta, please.
Thanks, Mario. I'm going to ask John to take that one.
Yeah, Mario. Thanks for the question. Obviously, the one-time fee adjustment from Pru, I think, is well articulated in the material, so that's part of it. The other thing is, as you call out, fairly flat expense levels with the synergies coming through. We're now on track.
The full $180 million of synergies that we called out on the acquisition have been delivered. There's a small piece that didn't come through as we finished the integration in the middle of the quarter that you'll see come through further in the third quarter in terms of those synergies, as well as other cost actions that we take regularly to continue to drive that scale advantage. So that has an element of effectively growing, being a driver in terms of that growth and fee and spread income levels. The other part is, obviously, the strong markets that we experienced over the last months and some growth in overall assets under management. As Ed said, we've had a strong pipeline of plan sales, small amount of net outflows that were, call it, unrelated to the Prudential acquisition and priced in. So those were the main contributors of that strong result.
The one-off item in terms of the fee true-up is the part that you would assume wouldn't recur as we look forward and then factor in that scale and further synergies to come.
So from your answer, I take it that that $462, of course, adjusting for the one-time payment from Pru, that $462 adjusted for that is a reasonable run rate for this company. I assume. I appreciate that markets and rates will have their say, but assuming those are stable, this looks appropriate as a run rate for the company.
Yeah. And overall, we're really happy with the total result of Empower and think the run rate's going to be, now that we're through the integration, a little easier for you to get your hands around. If you look at pages 23-25 of our supplemental information package, it gives more details below the surface on that number.
And as a number of the analysts have suggested, we may look at making it a little easier for you to get below the surface in our disclosures as we look forward, Mario.
Yeah. And my second question is, I think you addressed this in your opening comments about the non-attributable expenses in Canada being somewhat elevated. What was your point there? I think the point you made is that you'd have us look at the average of 2023 as a better run rate?
Yeah, John, why don't you start, and then you can pass it over to Fabrice?
Yeah. Yeah. That's what I would say is we're looking at overall being fairly neutral in that line item or flat year-over-year, maybe some modest inflation, both at Canada and Lifeco.
But let me have Fabrice give you a little color on what came through or the quarter in Canada. That's right. And the non-directly attributable expenses, we have a few one-time items that we don't expect to recur to the tune of around CAD 15 million. So if you look at a run rate for 2023, that's probably close to the run rate that you should expect there.
Yeah. That makes sense. Thank you.
Thanks, Mario.
The next question comes from Doug Young with Desjardins Capital Markets. Please go ahead.
Hi. Good morning. And I do appreciate that you've given some sensitivities to the market movement on slide 24. I'm just curious if you can kind of walk through and help me understand how we should be thinking about the impact from lower rates on your base earnings, which there are not sensitivities provided to that line item.
If you can kind of walk through some of the areas where we should be thinking that impacts would flow through. I assume if you get a steepening yield curve, that's one outcome. But if it's a flat and parallel move, that's another. Just trying to kind of visualize this.
Hey, Jon. Do you want to take that?
Yeah. Thanks, Doug. Obviously, we've given you the sensitivities to rate in terms of our net profit, LICAT, and so forth. But let me give you a sense on base earnings. This does impact the number of lines within the DOE, not just surplus earnings, the spread earnings, but also to a certain degree, there is some impact in our group insurance experience as it relates to our long-term disability business where there's some duration in terms of claims.
Also, net fee and spread income in terms of if you think of our wealth and retirement businesses, if you think of the portfolio, our clients have a diversified portfolio. So think of that portfolio being about 30% in fixed income. So a rate decline, obviously, then impacts our fee income as well. If you aggregate those impacts in terms of give you a sensitivity to base earnings that we would expect in a year, about 50 basis points decrease in rates, call it about 1% impact on our base earnings negatively. So all those movements provide some offsetting. And you can think of it about 1% of our base earnings for 50 basis points, Doug.
That's helpful. And just, yeah, I guess on the earnings on surplus, because you did shorten up the duration of your fixed income portfolio, is there a meaningful impact to that line item?
Can you remind us what the duration of that portfolio is as well?
Yeah. It varies by segment. This is something that we're always optimizing, in particular as we look forward to some upcoming changes in terms of LICAT, something that we're always going to look to optimize. It varies by country or by segment. You can think of it as around half of that earning sensitivity that I shared with you comes from the surplus piece. The other impacts, positive and negatives, are the residual. I would call it kind of a 2-3-year duration on average across, not equal in each segment because we manage ALM by business unit. You can think of it in those types of terms.
Perfect.
And then just lastly, in the CSM, there was negative insurance experience in it related to claims volatility on the longevity business in Europe and the CRS. I'm just hoping you can flesh this out, maybe dumb it down for me as to what drove that.
I'm going to actually ask Linda Kerrigan to take that one. Linda?
Yeah. The longevity was really across the overall Lifeco CSM insurance experience. So you did see negative experience in the insurance experience across Lifeco, and longevity was, in a large part, the driver of that. We did take a very disciplined approach to our longevity risk, both in terms of underwriting, pricing new risks. And we do have good diversification in our portfolio between a mortality and longevity risk. But you can just get a volatile claims quarter. And that's really what we're seeing this quarter in terms of the longevity experience.
So, nothing you'd call out, just volatility in this particular quarter. And that didn't go through earnings. It went through the CSM as per just the mechanics of it. Is that a simple way to think of it?
That is. Exactly. That's the next step that I've got to think that.
Okay. Appreciate the call. Thank you.
Thanks, Doug.
The next question comes from Paul Holden with CIBC. Please go ahead.
Thank you. Good morning. Last question on Europe. You announced a number of profit improvement strategies, I think, in 2023. We've seen very good earnings growth out of the segment now for two consecutive quarters. Wondering how you're thinking about how far along are we in that path in terms of profitability improvement?
How would you frame it, whether it's from an ROE perspective or growth perspective, and trying to really get at how much more is still to come?
Yeah. I'll start off with that, and then I'm going to turn that to David Harney to provide a little more color. So the actions we took in the latter part of 2023, in part, were cost-driven, but a lot of it was actions to try and strengthen capital and cash generation as well. So it was kind of a balance of those two things. And the actions we took, if you think about it, in part, were pulling back in some businesses that we did not think were long-term sustainable. And notwithstanding that, pulling back from businesses, we've seen growth.
So maybe, David, you can provide a bit of color and a little perspective on that and how the expense actions will play out.
Yeah. So yeah, I think that's a pretty good answer, Paul. We've seen good sort of top-line experience in Europe over the last six quarters. The actions we took at the end of last year have translated that into the bottom-line earnings growth that we're seeing in this quarter. So like I say, overall, this quarter is probably a good indication of Europe going forward. So the expense actions we've taken have helped translate the wealth and retirement top-line growth into earnings growth. Then some of the actions that we've taken have positioned us well on the insurance and annuities line, particularly for changes that have happened in the UK that the PRA has implemented around fund reinsurance and capital requirements.
The actions that we've taken there have positioned that product line pretty well going forward. So overall, good quarter for Europe and pretty good indication, I think, of potential going forward.
Okay. So I get the impression then that most of the benefits have been realized and are flowing through.
Yeah. I think the actions we've taken are on the capital side to position us for growth on the annuity side. So we're pretty happy on that segment. And then I think the cost actions, they will continue to sort of moderate expense growth in Europe. So we'll continue to see growth in, I think, the wealth and retirement segment be true into the bottom-line results. So I think the actions will continue to moderate expense growth. So overall, it positions Europe pretty well. And this quarter is a good indication of potential going forward for the segment.
Yeah. The way to think about it, Paul, would be that we're not taking a major cost initiative over a short period of time. There's plans over a number of quarters to come. And it's really just to sort of hold expense growth at a lower rate. And we're really looking to continue to strengthen our earnings base.
Okay. That's great. Thank you. Second question, Paul. In your opening remarks, you mentioned competitive pricing environments and remaining discipline, I guess, both from a pricing and capital perspective in the individual insurance business in Canada. So really curious if you can follow up on that question just in terms of the competitive pricing dynamics you're seeing. Give us a sense of how competitors are reacting, as I said, in any particular product lines where competitive intensity has increased
Good question. I'll start off at a high level.
I think that was, to a large extent, a general statement in fact that we look at products through a very disciplined lens. When we see, for example, if I think about some of the actions that some competitors have taken with longevity pricing, we've kept our powder dry. We want to make sure that we understand the impacts of a post-COVID environment and what does a real stable environment look like going forward. So that was more of a general term. But as it relates to Canada, I think Fabrice can provide you with some insights into the way we think about the market and its competitive dynamics. Fabrice?
Thank you. And thank you, Paul, for your question. We're pleased with our sales results and our business performance in individual insurance in Canada.
A lot of growth at the market level is in Participating Whole Life Insurance, which has slightly different dynamics. We remain disciplined in the way we approach the Participating Whole Life Insurance market. In the Non-Participating side, we're pleased with the results as well, balancing that pricing discipline, but also the volume in the market. We have, over the past several quarters, changed some of our product structures in Canada to limit the risk that we have, some of the long-term risk that we have into these products. We've also limited our appetite to some of the very long-tail risk that exists in some versions of permanent products on the Non-Participating side. So overall, Individual Insurance is a very competitive market in Canada. We continue to be focused both on growing our presence, but also on pricing discipline and risk discipline overall
Yeah. F abrice, would it be fair to say that there's been no acute change in the competitive dynamic? It's more the fact that we're really trying to look at it through both a sales and a risk lens.
Absolutely. Yeah.
Okay. That's helpful. I'll leave it there. Thanks.
The next question comes from Meny Grauman, which is Scotiabank. Please go ahead.
Hi. Good morning. I just wanted to ask about insurance experience higher than what we saw in Q1. It's always hard to forecast. We saw a favorable experience in Canada, not so much in the U.S. traditional life. Just wondering if you could give us a little sense of where to expect insurance experience to go from here and then in terms of the specific dynamics in terms of what's happening in Canada specifically and how persistent you see that.
Yeah.
So Meny, I think you actually make a good point with your question, is the fact that we've got a diversified book of insurance risks. So we see what we have going on with traditional life in the U.S. We see the strength of LTD in Canada. And that's the benefits of diversification. At any given point in time, we're going to see different dynamics in different segments, different markets. And we're seeing a net benefit. But I go back to the fact that we focus on discipline in pricing, discipline in claims management. And that, if you maintain that focus, then it can be a contributor recognizing that you're going to have cycles and volatility. So I'll turn it over to Fabrice maybe to get into a bit of the Canadian dynamic.
Thank you, Paul. And thank you, Meny, for your question.
We're very pleased with the insurance experience this quarter. It's a good quarter for us. The insurance experience is mainly driven by our workplace long-term disability, but also driven in part by our workplace health experience and also a significant improvement in individual mortality experience, which has been a drag in some of the past years since COVID. As I think of long-term disability, typically these cycles are more than one quarter long in nature. There can be long cycles. We see this experience at the industry level. They're driven in part by the external market environment on disability, as John was mentioning earlier. And I'd reiterate the point that Paul made. We believe we have a very strong franchise in workplace, especially as it relates to our disability operation. It's about the underwriting, first of all, making sure we choose our risks carefully. We price our risks carefully.
Then it's about doing what's right to support these individuals facing disability situations and help them overcome these situations and get back to work. And that's what our business is focused on. And we have, over the years, been able to achieve good results. We're careful in how we bake these results into our expected profit. We grow our expected profit relatively in line with the growth of our insured book growth. So I think we're conservative with the way we're approaching that.
Thanks for the detail.
Thanks, Meny.
The next question comes from Tom MacKinnon with BMO Capital Markets. Please go ahead.
Yeah. Thanks. Good morning, everyone. First question just with respect to Empower defined contribution net flows. Even excluding the impact of shock lapses, we're still in net outflows here. And you talk about one of the reasons is because just higher account balances here.
So you're getting increased withdrawals reflecting that. So why is that? Does that imply that as markets do better, you're going to have more net outflows in DC? Am I reading that correctly here? Is it a function of planned demographics? Maybe you can help us understand that. Thanks.
Yeah. Tom, I'll start off maybe at a high level, and then Ed can get into the dynamics that we saw in this quarter and our perspectives on the fact that we actually still view this, notwithstanding all of those movements and dynamics to be a potential growth engine for us. So the reality is there are demographic headwinds. If you think about an aging population, you think about the wealth that someone who's nearing retirement has versus a new plan member entering early on in their career.
When you think about it, the money that rolls into an IRA as someone who's built up their wealth, the money that someone's contributing based on their paycheck early in their career would be different. So you've got that dynamic, but that's frankly one of the reasons why we love the consolidation opportunity we have in this market. It's a market that has that dynamic. If you have scale and if you have differentiated capabilities, you can win on the organic growth side, and then you can be a winner on the acquisition side. That's a lot of opportunity to offset what is more of a fundamental dynamic that would be happening on a population basis. So I'll turn it over to Ed maybe to talk about the dynamic we saw this particular quarter. Ed?
Sure. Yeah.
I think there's two elements, Tom, in terms of the way to think about this. There's plan-level flows, which were positive, which I think speaks to the comments I made earlier about the demand that we're seeing and the growth that we're seeing. Our net participant growth will be at budget or exceed budget in that regard. We're seeing good flows at the plan level. On the participant side, it's up about 5% in terms of participants taking distribution, but it's driven more by rate than volume. Balances are up 35% due to higher markets, as you referenced. While distributions are higher, on the flip side, our rollover sales are higher. They're up 28% year-over-year. As there is dislocation and people are leaving, our ability to capture some of those assets on the wealth side has certainly worked to our advantage.
Yes, there's a demographic trend playing out here. We've been in a high inflationary environment. So in some instances, the distributions people are taking are a little bit higher to augment other income that they have to address any challenges they have with expenses and the like. But there's also a lot of growth on the participant side. And if you have what I would say is just a couple of key points I would make there. One is you have 18 million participants, and there's a large subset of those that are continuing to contribute to their plans. And we're seeing savings rates continue to increase. They've leveled off a little bit because of the economy. But over the last few years, savings rates have continued to rise. And that's in part due to the way that we engage the participants.
The second thing I would say is we've got public policy and regulatory policy in the U.S. that's very constructive around new plan formation. So it took the industry 40+ years to get to 700,000 defined contribution plans in the country. And Cerulli, an independent third-party research company, estimates it's going to grow to 1 million by 2028. So you're going to have 300,000 new plans. And we have a product to address that opportunity in the marketplace. There's 40 million Americans today that work for small companies that are not covered by workplace savings. So we see a lot of opportunity to drive flow. And as we referenced earlier, we have the scale and the competitive pricing and the product capabilities to be able to take advantage of that. So in summary, I would say the dynamic isn't so much that there's a higher volume of people taking distributions.
It is the factor of higher balances due to market growth. In some cases, the distributions that they're taking are higher. Instead of taking a third of the account, they might take a half of the account or two-thirds of the account. So hopefully that helps.
Yeah, that's good. Then follow-up questions with respect to operating expenses at Empower DC. Generally, they've gone up kind of quarter-over-quarter. This quarter, they came down substantially quarter-over-quarter. Was Q1 elevated? I'd assume that, or did some of these synergies from the Pru acquisition come in in kind of an uneven fashion? Is there anything in the quarter that would. How should we be thinking of that one just going forward, those operating expenses? Just kind of going into the situation.
Yeah. Well, we did have $20 million of synergies related to the Pru acquisition that hit in Q3.
I think we referenced that there's another CAD 8 million or so in Q3. But even if you adjust for that, on the workplace side, the expense growth year-over-year is pretty benign. The real investment that we're making isn't in Empower Personal Wealth, but we're making pretty meaningful investments in technology, distribution, and product capabilities.
So how should we be thinking about those operating expenses going forward then, just kind of growing at an inflation plus something?
yeah, I think that's fair. I mean, I think on the workplace side, we think about it in that sort of 3%-4% range. We have a lot of benefit coming to us based on the scale advantages that we have. But we also have 12,000 associates, and we provide merit increases to people every year. But we're also continuing to find ways to drive increases in productivity.
I think we've referenced the Full Potential program and what we've done from a transformational standpoint. But I think that expense growth rate that I referenced is probably in line for workplace. And then you'll see higher operating expenses in the wealth business. It's still an investment business for us. We're still focused on integrating to a single tech stack and growing our advisor distribution sales force and the like.
Okay. Thanks very much. Sure. Thanks, Tom. The next question comes from Gabriel Dechaine with National Bank Financial. Please go ahead.
Hi. Good morning. Question on those commercial mortgage impairments. Not trying to make a mountain out of a molehill here. The two of them and the numbers overall weren't that big in the context of your portfolio. My question, though, is just in how to kind of see these things coming, which sounds silly.
But if I look at your Q4, your Q1 slide deck, I see no commercial mortgages in arrears. So I'm wondering what the disconnect might be there or if I'm misinterpreting something. And then related to that, you might not have stuff in arrears or whatever, but do you maintain a watch list? And if so, how is that fluctuating? And where might it be fluctuating?
Okay. Thanks, Gabe. I'm going to turn that one over to Raman, and he can speak to that.
Yeah. Thanks, Gabe. And thanks for not making a mountain out of it. So I guess a couple of comments to answer your question. So just on the particular quarter, as John mentioned, this is driven by two mortgages. One was actually we impaired in Q4 of 2023. And we just got the final terms, and that related to a further impact.
That was one of our largest loans, if you might recall. The second was a more of an idiosyncratic event related to the second mortgage. I think just to your question, that's how you would think about these things going forward. They tend to be tenant-related, one-off idiosyncratic events that affect a particular mortgage. I'd remind you, if you think about our book, we benefit from geographic diversification, the fact that we have an LTV cushion across the book, good debt service coverage ratios, etc. When they do happen, and we don't expect we'll be immune, but we have a pretty good visibility that we expect impacts to be modest over the balance of this year. That relates to your question about the watch list.
So when we think about that, we do think for the foreseeable future over the course of this year, we expect impacts to be modest. Headwinds still exist. So just don't forget there's still headwinds in the office sector. But as John noted in his opening remarks, if you look at what's priced into the market in terms of rates, the fact that we have 100 basis points or so priced into the market in terms of rates coming down, that's helpful to the real estate market in general.
Yeah. Okay. So just if I understand you correctly, you do have a watch list, as I imagine you would. But based on that watch list, you're not expecting any significant losses this year. And then as far as the language around arrears goes, it sounds like one went straight from performing to impaired this quarter.
So you don't even have it categorized as in arrears prior to that. I'm just missing the point a little bit here.
Well, yeah. So I think the watch list would reflect that we do have a watch list, and it reflects loans that we have concerns on. And you do have—so for example, you might have a tenant that unexpectedly declares bankruptcy. So you—one-off things happen. But in general, if you look at our outlook for the balance of this year, we expect those impacts to be modest based on visibility we have at this point in time.
Okay. All right. We might want to talk about that offline. Thanks. Have a good one. Thanks, Gabe.
The next question comes from Darko Mihelic with RBC Capital Markets. Please go ahead.
Hi. Thank you. Two really quick questions.
I just wanted to go back to the answer you provided to Meny on the experience gains in Canada. While I understood the answer, in your written materials, it says that there were management actions that helped with experience. So I wonder if you can just touch on that. At what point do these experience gains prove to be consistent enough for you to change either the CSM or the risk adjustment?
Jon, do you want to start with that, or are you going to turn?
Okay. Yeah. So this over to you. I can take this one. So the experience gains that we see in Canada are mainly related to our par business, which would be a business that doesn't have reserves associated with it. It's our workplace business in Canada.
So in this case, management action would refer to pricing action and the way we cautiously manage our book. I mentioned earlier the fact that there's some macro factors related to the experience. There's the disability, in particular, is sensitive to rates. So we need to be careful as rate comes down. The cost of providing disability can go up. And as rate goes up, the cost of providing disability goes down. So we consider to be very cautious in the way we manage our pricing in the volatile rate environment. That's what the management action would refer to.
Okay. That's very helpful. Thank you. And just a follow-up question. Paul, in your opening remarks, you said something that caught my attention. You said that you were looking to strengthen the SEG Fund value proposition. Others might say that distribution is really the way to sell SEG Fund.
So what is it specifically about the SEG Fund that you are targeting with respect to especially the ones that you're selling?
Yeah. Well, SEG Funds have some unique characteristics that are very helpful and powerful for small business owners and families and when people are looking for levels of protection. I'll let Fabrice speak to the actions we're taking because we think it's a, while we think a diversity of products is really important to meet a range of needs, we think seg funds have a strong place relative to our customer base. Fabrice?
Yeah. SEG Fund is a great vehicle. It's a great technology. Used in the right situations at the right price, we believe it can grow. It's a very small share of the wealth market in Canada right now, and it has room to grow if it's well positioned.
Some of these unique characteristics that Paul referred to, they come with some guarantees, variable by product. They offer creditor protection, no probate fee, confidentiality of the estate. No other wealth product offers these characteristics that are very relevant to some Canadians in specific situations, as Paul mentioned, business owners in particular. Many advisors we work with are well aware of these characteristics and promote these products appropriately. We continue to develop our market relationships to make sure that these products are available to all Canadians who need them. There's a big opportunity in the Canadian marketplace where not all one advisor needs to be insurance licensed to be able to distribute these products. Not all advisors have access under a platform to these products that have the relevant licenses.
So our focus on our wealth strategy is to provide the full range of products, not only SEG Funds, but mutual funds, securities, managed portfolios, and the acquisitions that we've done last year. We're committed to bringing this full range of products to entrepreneurial advisors in this country.
And how quickly can these products be rolled out for you?
What I would say here, and you might see the outflows that we see in SEG Funds and many of our peers, especially those that have mature blocks like us, would see outflows in the current period. We've seen elevated outflows since interest rates went up. That's true across the wealth marketplace. And it's especially true for SEG Funds given the makeup of clients that are into these products. There's cyclicality into that, we believe. And we've seen some improvement lately in the flow situations for SEG Funds.
So the comments that I made earlier relate to the longer-term prospects and actions that we have in the short to medium term. And of course, there's volatility into the flows that we see in these products given the market situation. That's what we've been seeing over the past 2-3 years.
Okay. Thank you.
Thanks, Darko.
The next question comes from Nigel D'Souza with Veritas Investment Research. Please go ahead.
Good morning. Thank you for taking my question. I wanted to circle back to Empower. I believe you outlined some revenue synergies that you expect to realize by the end of this year. Just wondering if you could expand on what's driving those revenue synergies and is there potential for more down the line?
Nigel, I'm going to turn that one over to Ed.
I think what he's referring to there is the continuing rollover opportunity that we see across the Empower platform with $90 billion of money in motion each year. But Ed, over to you.
Well, yeah. I was referring to when I made the comment about additional synergies in Q3, I was specifically referring to the Prudential acquisition, that there's some follow-on synergies that'll hit in Q3 at about $8 million. Okay. And then if I could—yeah. No, I was just going to say, Nigel. So yeah. So Ed talked about the Q2 synergies, the tailing remaining synergies associated with Pru in Q3. And then the long game for us is the significant opportunity for growth on the wealth side.
To a large extent, I made a comment in my opening remarks, and Ed did as well, that as we've grown the client-based 18 million participants, there's significant money in motion. And it's, frankly, a synergy associated with having grown the significant Empower workplace business, which essentially is a significant opportunity for us to grow the wealth business off the back of that. So that's the longer game there.
Okay. That's helpful. An interesting. I'll keep it there. That's it for me. Thanks.
Thanks, Nigel.
Once again, if you have a question, please press star, then one. The next question comes from Mario Mendonca with TD Securities. Please go ahead.
Hi. Now we're over, so I'll be quick. On page 9 of the presentation, you sort of offer definitively that the shock lapses are now complete.
How do you get confident on something like that, considering I don't imagine Great-West Lifeco controls the pace of shock lapses? Folks lapse when they lapse. So how can you be so declarative in that respect?
Yeah. Well, so we've actually, Mario, I'm going to turn it to Ed and talk specifically about the Empower book. But when you do an acquisition, you go up to all your clients, you establish the potential clients, right? Because you actually have to get their commitment. They're going to change carriers. They're going to move off of the platform of the carrier that they were on. And they're either going to come to your platform, or they're going to go to another one. So every one of those clients is going to make a commitment one way or another to join Empower or go elsewhere.
And we saw the same dynamic when we did our roll-up in the Canadian market. So to a large extent, all the clients have made those decisions. Ed, is there anything else you could add to that?
No. I think that's the response. They've all made the decision. They've come over to our platform. So now it just becomes part of our normal operating business. And we would just think about attrition, if you will, in the context of our normal business, which our retention rate is in the 97%-98% range.
That's clear. Thank you.
And maybe just to add, the notice period on that can be 12 months plus. So we had a pretty good outlook of when these would happen.
If you step back, Mario, we priced the transaction at a certain level of retention, and we outperformed that by a few percentage points. We think both the last two transactions ended up at a point far better than other integrations that have occurred in the market. So we're really pleased that we now closed the integration of the Prudential business really positively.
Yeah. I mean, I'll just put a finer point on it. I mean, we budgeted 82% revenue retention. We came in north of 86. So that's world-class in terms of what we see in the industry. And it was similar to MassMutual, frankly.
Got it. Thank you.
Thanks, Mario.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mahon for closing remarks.
Thanks, everyone, for joining us today.
Following the call, a telephone replay will be available for 1 month, and the webcast will be archived on our website for 1 year. Our 2024 third-quarter results are scheduled to be released after market close on Wednesday, November 6th, with the earnings call starting at 10:00 A.M. Eastern on the following day. Thank you again, and this concludes our call for today.
This brings to a close today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.