Session here. Delighted to have Paul Mahon here, the CEO of Great-West. Paul, thank you for coming again.
Thanks, Darko and Peter.
This is a good shift. We got a chance to talk to a life insurance company, and I think right off the bat, we'd love to hear a little bit of your perspective on the current situation with respect to tariffs and, you know, how this might be affecting your business's shorter term. And, you know, I'll just leave it there. It's a very wide open question to start the.
Yeah, and I'd love to get to the business, but, but maybe I'll speak for a moment. Clearly, I don't think tariffs are the ideal tool for driving economic growth. Obviously, innovation attracting investment. So that's kind of the mindset I bring, and that's kind of the mindset we have in our business. We're thinking about the long game, how do we, how are we building for the future? If we think about the impact of, you know, any dislocation from tariffs, I'd start out by saying that, you know, our businesses are diversified across multiple geographies. About 70% of our earnings come from outside Canada, about 40% of those are U.S. dollar. Pretty diversified across different classes. And to a large extent, our businesses tend to be what I call financial necessities. They're not things that are gonna have an on-off switch for people.
They're things like benefits and pensions. And people don't say, "Well, I'm not gonna save for my pension this year." There are things that naturally occur. So to a large extent, if you think about our business, we're domestic businesses in Canada, the U.S., and Europe. We operate in those environments. We don't do cross-border stuff. So I don't see any first-order impact of tariffs. So it just doesn't play into our business model. Obviously, if there's economic slowdown, that could play through to our businesses. But having said that, our businesses really are financial necessity in nature, diversified earnings, lots of exposure to U.S. dollar, 40%. So the reality is, in the short term, I don't lose sleep around that. Obviously, what I wanna have is strong growing economies for the benefits of, you know, our customers and, the benefits of our company and our shareholders ultimately.
But, you know, we're a very large diversified company. We've been around for 178 years. We've managed through a few dislocations, and this is not one that right now I'm seized with. I'm more seized with the business.
And so there's the business and the product, but what about the investment environment? If you can maybe touch on the volatility that's out there in the marketplace today, and is there anything that you're keeping an eye on?
You know what, whether it was COVID, whether it was the Great Financial Crisis in 2008, this, we're always looking at volatility. We're always looking at risk, managing risk. But having said that, you know, there's nothing sort of top of mind. You know, if you, for example, auto sector, we tend to be invested in the top company. So we're not sort of thinking about the auto sector in particular in Canada. We think of that. So, we keep an eye on all those things, and this just happens to be one of many of the risks that exist, and that's the thing I love about a diversified company.
and what I would say a conservatively managed investment portfolio, trying to manage, you know, lower concentrations, good asset-liability matching, all the things you would do to be well risk managed relative to, you know, the beta that's gonna occur in a portfolio.
Maybe we can dovetail some of this into the discussion, but, you know.
Diversification of the business and the diversification of our income streams or our margin across a whole range of things, so we'll, let's get to the business.
Okay, perfect. So, it was great having you here last year 'cause we devoted a good amount of time in last year's discussion on your rollover opportunity.
Yep.
You know, Empower Personal Wealth, we saw an increase in earnings. We saw some movement there. I just wanted to sort of go back to that opportunity of capturing the rollover. Is there anything? I mean, the rollover opportunity is so large. Maybe you can size it for us once again, as you did last year, and talk about how you can perhaps more aggressively go after that market and what you're doing to grow that business.
Yeah. So it's a, there's kind of the long answer. I'll try and, you know, constrain this, but you have to start out with thinking about what Empower is in total. So Empower is a, first, a retirement platform 'cause that's the largest. That's about 80% of the earnings. 20% are the wealth business where, you know, which is sort of the capture, in part, of the rollover. So Empower had, you know, really strong growth, over CAD 1 billion of Canadian earnings last year. If you think about its potential, there's 18.5 million participants on the platform. There's $1.7 trillion of AUA on the platform. And each year, there's about $120 billion of money in motion.
So this is people that are leaving the plan either to retire, leaving the plan for a job change, maybe deciding to step away from work. And those assets will go somewhere when they leave. So that is kind of, if you think about the opportunity that exists, the way we think about capturing that opportunity is not just about what you do at the point of rollover. Like, for example, when you receive notification that someone's moving into retirement or they've identified on your website what they're gonna do, it's all about how do you build, a deep and more meaningful relationship with the plan participant while they're in the plan. So we did the acquisition of Personal Capital a number of years ago.
The whole strategy around that, that was 2019, was to create a hybrid digital wealth capability that could be used both, you know, in a wealth business at rollover, but also how do you embed those capabilities in plan such that you're starting to build deeper relationships with that client. So that would be one tool that you've got there. The other thing you do is you have to think about a broader range of products and services. So, for example, this past year, we announced the acquisition of OptionTrax, which is a stock plan management service. So if you think about someone who's in plan and they've got, you know, part of their income is regular income and retirement savings, but they've also got stock options, how do we become the provider of services around that?
How do we think about health spending accounts? What are the other executive services we can have such that we become a meaningful relationship for them where they're in plan, and when it's time to rollover, we become a natural place where they would want to look at their overall accumulation. If you look at our those participants, on average, they have less than, you know, if we look at the average mass affluent individual, less than 2 million of assets, probably not being served by a higher-end RIA or wirehouse. So there's sometimes a bit of an advice gap. So how do we apply advice when they're in plan through things like managed accounts, these alternative products and services, so that we're in a good position to retain those assets, and this is early days for us.
We just, you know, we acquired Personal Capital, as I said, 2019, just getting those things embedded and adding things like OptionTrax, building out our managed account services, and we're in. I'd arguably say the first inning of a nine-inning game in terms of building this wealth model, but you've seen the, you know, we've had growth of 20%-30% in terms of that business, and, you know, our capture rate is kind of mid-teens, pushing mid to high teens. The best demonstrated practice in the market is 40%-50% rollover capture rate. So if you think about the long game we've got, you've got growth you could get in rollover capture, and we're very seized with that. Today we've got 1,000 advisors. I would say we're undersized relative to the opportunity.
We have to think about how are we gonna grow that advisor base. The other thing we have to do is we have to build brand, though, at the same time. You'll have seen us building brand, whether it's, you know, an NFL team, whether you'll see us on, you know, TV advertising, on MSNBC, things like that, really trying to create that sense of our existence such that as people are thinking about where do they wanna actually have that wealth management, that financial wellness relationship as they move into retirement, that we're a natural place for them to go. As I said, we're getting high growth. We see lots, huge opportunity for growth. We're making the right investments in technology to make it easier to do business with us, brand. There's that awareness, the product and service offering.
Then we have to think about how do we extend and expand that sales force so we can achieve that capture.
And so as you think about that, the first question that comes to mind with in plan.
Mm-hmm.
Are there any barriers? I mean, it seems like every plan is almost bespoke, and is it as easy as just discussing it with the plan?
I would say not every sponsor. I would say increasingly sponsors look at this and they say, "I need to think about what do I do to attract and retain employees?" And employees, you know, spend a lot of time worrying about wealth and their future. And to the extent that employers can provide services for their employees to help them with their financial wellness, increasingly we see employers wanting to do that. So, you know, I would say it's a growing percentage. You know, well over. It's a majority of plan sponsors that allow for that. And then our job is to do all the hard work of actually building the participant relationships in plan.
Right, so the sponsor views you as a partner.
Exactly.
Okay. And so thinking then about the offering, I mean, you said you're in inning one.
Yeah.
I realized, by the way, he's gonna. There's an investor day coming. So.
Yeah. Yeah. We'll talk more about it.
I do wanna.
Yeah.
Don't wanna steal too much of your thunder, but maybe you can think a little bit about how much of the offering has to be expanded and are you finished with the sort of acquisition side of things there? Are there capabilities that you think you can just bolt on, or is this all organic in terms of the build?
Yeah. Well, I guess I'd start by saying when you look at our, you know, we've set some organic growth objectives. Those objectives are organic in nature. We believe that the platform with the hard work and discipline we're doing in terms of and frankly the organic capital we're investing in technology and brand and stuff, we believe it has that double-digit growth in it. Having said that, if you wanted to accelerate growth, you could look to inorganic. So, you know, if you think about a thousand sales force with a size of a thousand, are there ways to accelerate growth there? If you think about the product and service offerings, a good example would be retirement income. Today we provide third-party retirement income solutions embedded in the platform. Should we be looking at trying to build our own?
So that would be an organic investment. You think about OptionTrax, that was an extension. We think about tax and estate planning capabilities. We probably would acquire some capabilities in that space. So I think in the whole wealth space, there's lots of tuck-in and add-on things we could do to build the moat, if you thought about it, and then create the better overall experience. At the same time, the retirement business itself in the U.S. remains fragmented, and so we have lots of opportunities for capital allocation, but I would say first and foremost, we're doing the right things to drive that organic growth that we think is just, exists in the business, the opportunity that exists there.
And so the overall business in and of itself, I mean, one of the obviously being fragmented, and so we think about how you grow that business. And there are two, there could be organic and inorganic. Can you talk a little bit about your progress on those fronts?
Yeah. So I'll start off with organic growth in the retirement business, so there's three ways we can grow organically in that business. First is winning more plans, growing share of plans. Given our low-cost position and, you know, little data point, when we acquired the businesses of MassMutual and Pru, we were able to take 40% cost out of those businesses. That was the synergy capture, so we have a highly efficient platform, but we actually think we can drive greater efficiencies through automation over time, and that's one of the benefits of scale, and if you've got that scale advantage and you can invest in technology and client experience more than, say, a subscale player could, and you've got cost advantage, you can win in the market, so we think we can grow organically there.
We think we can grow organically in plan with participants through things like OptionTrax, through broader managed accounts. We also see that when we add additional products and services and people actually start to take advantage of them, they actually increase their savings rates. They individually do that, the more engaged someone is. So you grow, you know, the off-plan assets that you could bring in, so you can grow in plan. And then the third element of growth, obviously, is that significant rollover opportunity. So we see all of that being the organic growth engine that can lead to this double-digit growth from Empower. If I think about inorganic, the places where you would think about would be, we could continue to scale. The market remains fragmented. There could be smaller targets that, you know, are a nice fit.
There might be some larger ones that, you know, become available at some point in time. So we will remain focused and, but really disciplined to make sure they're a good fit. Because when you think about our execution of the MassMutual and the Pru transactions, they were high synergy, but also high client retention. So we retained in that sort of mid 80% revenue and participants and plans. That is really good execution. What you don't wanna do is choose the wrong target where you're not able to retain at that level. So you gotta be disciplined there. We think about adding capability acquisition. So you think about OptionTrax as a natural capability acquisition.
And then, as we think about the wealth space, are there ways we could accelerate the wealth growth by, you know, extending our wealth offering and almost thinking about it a little bit more in a segmented way. So I'd say we're pretty well positioned right now today in what I'd call the mass affluent segments of the client base, those 18.5 million participants. But if you started to think a little bit upmarket, are there ways we could augment our capabilities? So I think there's lots of tools for growth. The primary driver, though, is to make sure we get the organic engine working. 'Cause if the organic engine's not working, then inorganic doesn't make a lot of sense. You've gotta really be disciplined to make sure that the model is working. And then as you add onto it, it naturally accelerates growth.
As I think about the environment, we'll move on to other businesses.
Yeah.
Soon, I promise.
Yeah.
But, as I think about the environment in, you know, we went through a period of inflation, I would've thought that there would've been more pressure on some of these other smaller players that, I mean, you're like number one, I think, by number of participant, right?
number two.
Two in the country.
There's a lot of.
There's a big gap.
In case you get past number three, there's a big gap. So I would've thought there would've been a lot of pressure.
Deals would be abundant. Is there something else that's going on?
Yeah. Well, there was lots of deals that moved, obviously, when you look at that period, 2000- 2023. You know, right now, I think there's lots of.
You know, right now, there's lots of people a little bit on the sidelines waiting for, you know, some stability. But having said that, you know, the traditional retirement model was, you've got a record-keeping platform and where you make your margin is on, proprietary asset management. So you use your host brand and that's where you make it. I think organizations need to come to terms with that model maybe being under pressure because of the Department of Labor and fiduciary standards and the like. We're an open architecture platform. We don't, ours is not a proprietary asset play into all of the solutions. And we make our margin in a whole bunch of different ways. I think over time those pressures will come to bear and I think consolidation will naturally occur, and at this stage, you know, we're patient.
When you've got as strong an organic growth engine as we have, we're not out in the market desperate to do transactions. We're thinking more about doing the right transactions that'll accelerate growth.
Okay. So maybe we can talk about some of the other businesses as well. I wanted to touch briefly on Europe, where, I mean, there's a few things going on in Europe, but one of the things that, you know, we see from over here is, especially in the U.K., you're a large player in bulk annuities, right?
Yeah.
but maybe you can talk a little bit about the activity levels that we've seen and maybe talk a little bit about the outlook because there's a view out there that, especially with the rate environment that we're in, that there can be a lot of activity.
Yeah.
So maybe you can give us a bit of a refresher here?
Yeah.
On that business and how you see it playing out.
Yeah. So the whole, you know, obviously these are large corporations with pension plans. They wanna de-risk. They're looking for a partner to do it. And, you know, pension risk transfer, they call it bulk annuities in Europe, same thing. We view that as a, you know, tens of billions of pounds of liabilities that will occur to be, that will continue to be offloaded into these types of transactions for the next arguably 10 years. So this is a, you know, it's not a long game like building the Empower Wealth platform, which could be a 10-, 20-, 30-year, but this is a meaningful opportunity that exists there. The other feature of that market is the U.K. government saw a lot of the risk being moved offshore to third-party providers.
That caused concern 'cause when you think about this as economic growth, they want, you know, invested assets in the U.K. They want to be able to manage the risk more readily. Through regulation, what they've really done is created some barriers to third-party capital entering that market. That's through things like, you know, the percentages that you can have through third-party reinsurance. That's through things like the capital requirements under Solvency II. All of that leads to us being a domestic provider of pension risk transfer or bulk annuities, highly rated, trusted, you know, in market with a strong brand that's been there since 1903, I believe it is, and well positioned for growth. Last year, you know, we wrote about GBP 2 billion in pension risk transfer.
We think there's growth beyond that in terms of an annual flow. Now it tends to be lumpy, right? You know, some providers, you know, end up filling up their risk appetite by mid-year. And one of the things I would say is that as the U.K. government has tried to press for more of that, those solutions being driven in market, there's been a lack of supply in market. So we look at providers like us where we think there's growth. Now we focus very much into the small to mid-size market plans where there's less competition. It's not going after the whales. It's going after the small to mid-market plans where we can be, you know, known as being able to be there, being there with the right quotes, being there with the right disciplines and technology to be able to follow through on those things.
So we see this as a growth opportunity for us. And, you know, when you think about our broader strategy, we tend to want to be in markets with leadership positions where we see natural, we'll call them tailwinds, secular tailwinds. So if you think about that, there's a secular tailwind driving bulk annuities. There's a secular tailwind think about retirement income rollover into the U.S. There's a secular tailwind of the need for, you know, broader, wealth solutions in Canada. So we're always trying to position ourselves there. And this is a natural market for us where we've got the license. There's a secular, secular tailwind, and there's a regulatory environment that, makes an onshore domestic provider, which we are there with Canada Life Limited, in an advantage position. So we like it. And we will grow it though within our risk appetite.
When you think about our overall portfolio, you know, we're about, you know, our wealth and retirement would be our largest growth engines. We've got our insurance businesses. We've got Capital and Risk Solutions. We've got this bulk opportunity, and we really like it as a great diversifier. It has strong returns, stable returns, but it's in the context of a broad diversified portfolio.
It's predominantly longevity risk. There's a little bit of movement on longevity, I think, in the U.K.
Yeah.
That's.
Yeah.
It's a bit concerning for some if you're in the U.K., but I mean.
We like longevity risk and pricing in the U.K. We've seen pricing on longevity in the U.S. getting really tight and competitive, and you've not seen us participating there. We think pricing, we don't like the pricing, and these are significant bets. We like the pricing relative to our view of longevity in the U.K., and that's why we're participating there.
So you mentioned the U.S., and that would be CRS, I guess.
Yeah.
We could segue into CRS.
Yeah.
Maybe you can touch a little bit about that business because sometimes when I speak with investors, you know, what's top of mind comes out of the quarter as well. There's no catastrophe, you know.
Yeah.
But that's not really, maybe you can speak a little bit to.
Yeah, so it's interesting that.
What's the secular headwind, the secular tailwind there?
well, the secular tailwind there would be constant and evolving changes in capital regimes.
Mm-hmm.
Whether it's Solvency II evolving, LICAT evolving, Solvency II equivalents in Asia evolving, changes in the RBC capital that are emerging. And how can we be there as a partner with counterparties to help them manage their growth and their need for, you know, some capital relief is the way I would think about that. But going back to your initial question, Capital and Risk Solutions is about 20% of our overall Lifeco earnings. And our P&C catastrophe is about 10% of Capital and Risk Solutions. So P&C Cat risk represents 2% of our earnings, and what we do is we cap our exposure to that. So, you know, when we see, you know, large hurricanes or wildfires or the like, you know, these things are contained with an overall cap. And in the context of Lifeco overall, it's a very, very small part of the business.
So as I said, 2% of earnings overall, 10% of that because Capital and Risk Solutions is diversified really across two core parts of the business, what I'll call the traditional, things like, you know, life reassurance, reinsurance, longevity, and things where we're sort of more at the money risks where we're taking quota share and things like that. That's the traditional play and, and including some of the with assets transactions we do, which would be a lot like, bulk annuities. Then we've got structured reinsurance where we are a solution provider.
Right.
Which tends to be, you know, sort of more fee-based, tends to be tail risk. And really what you're dealing with more often than not is kind of redundant reserves, helping people with their capital. So really it's capital management more than anything else. And we really like that diversification. And the other thing that all of that leads to is it gives us insight into what other players are doing and what other markets are doing. And, you know, the reinsurance business does not have a lot of employees. It's a very low-cost business that's got a lot of really smart employees. And we leverage that talent throughout the group. We do some internal reinsurance as well, but it's a, I would argue, a great business with good solid returns.
We like scaling it at a point where it sort of stays within that realm of that 20% of Lifeco overall, but also leverage the capabilities across the group is really important to us.
Okay. Great. That's a great overview. And I, and then you, you know, you touched on longevity. You didn't like the pricing of longevity in the U.S. Is it mortality where there's?
Yeah. It's more mortality. When you think about, you know, people's outlook on mortality post-COVID, do you believe that, you know, the increased mortality rates will last and therefore, you know, you can have sharper annuity pricing? Or do you believe that there'll be different recoveries? And what we're doing is, we remain cautious. We've got a large book. We look at our own performance and we say we will play in markets when it makes sense to play. Again, this is a diversified book where we've got lots of growth opportunities and we'll go to them not out of necessity. We'll go to them out of opportunity.
Okay. Great. Maybe just now bigger picture. You know, you have an investor day approaching.
Yeah.
I've now, as a Lifeco analyst in Canada, gone through three investor days in recent times. There is a trend. The trend very much is our ROE targets are rising. Now there could be a lot of reasons for that, so maybe not only are ROEs rising, by the way, the other trend with that is more return of capital. We're seeing buyback.
Yeah.
We're seeing a lot of buyback.
Yeah.
So maybe you can speak to ROE expectations and how you see your ROE sort of developing over the longer term. And, you know, one thing that's rarely discussed at these investor days is how do you manage to get a higher ROE without some incremental risk? So maybe you can tie all this.
Yeah.
In your view of that.
I mean, so our current medium-term objectives are 8%-10% growth in earnings, 16%-17% ROE, and dividend, you know, payout in the 45%-55% range. We've outperformed, both the earnings growth and the ROE targets. Our ROE in this, you know, is currently almost at 18% relative to that 16%- 17%. Last year, our earnings growth was 14% with a big market tailwind, arguably. So when I think about earnings growth, I like the idea of that 8-10% range and focus management on outperforming on that. Like, let's not get ahead of ourselves. There's lots of, you know, market impacts there. So let's be disciplined there. With ROEs that are outperforming the target, you do need to sort of reflect on that. We will speak to that at the upcoming investor day.
But to give you context, we deployed $8 billion plus in capital into the Empower business, capital and obviously leverage into the Empower transactions, which suppressed ROE because you got a lot of capital backing, you know, earnings growth that was on the come. Now we're at a point where we've paid down debt. Earnings are coming. As I said, Empower delivered a billion dollars in earnings. And we ended up with a 4400 basis point increase in Empower's ROE. That's not risk. That's just deleveraging. And that is getting the earnings engine going. That was not us making a bet into a high ROE business. It was just getting that business to scale, delivering the earnings that we expected it to. And that's the primary driver of the growth in our the higher ROE. And we view it as a pretty stable, lasting.
So I would say, you know, we will review the ROE targets. But again, you don't wanna get ahead of yourself because there's always going to be, you know, volatility behind anything you do. So, I would say we'll speak to that at investor day, but that's kind of the backdrop. I don't view it as an increase in risk. I view it more as an outcome of really good disciplined transactions.
Wow. With that, we're out of time. We look forward to the investor day, Paul. Thank you very much for.