Thank you for standing by. This is the conference operator. Welcome to the Great West Lifeco Second Quarter twenty twenty one Results Conference Call. I would now like to turn the conference over to Mr. Paul Mann, President and CEO of Great West Lifeco.
Please go ahead.
Thank you, Ariel. Good afternoon, and welcome to Great West Lifeco's second quarter twenty twenty one conference call. We hope you and your families are safe and healthy, and we continue to encourage vaccination for all those who are eligible. Joining me on today's call is Gary MacNicholas, Executive Vice President and Chief Financial Officer, and together we'll deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and Chief Operating Officer, Europe Arjul Jamal, President and Group Head Strategy, Investments, Reinsurance and Corporate Development Jeff McCallan, President and Chief Operating Officer of Canada Ed Murphy, President and Chief Executive Officer of Empower Retirement and Bob Reynolds, President and Chief Executive Officer of Putnam Investments.
Before we start, I'll draw your attention to our cautionary notes regarding forward looking information and non IFRS financial measures on Slide two. These apply to today's discussion and presentation materials. So please turn to Slide four. Before we get into a review of the second quarter results, I'll take a few minutes to touch on progress relative to our value creation priorities. As we continue to advance each of our business unit strategies, we're pleased to have recently announced four strategic transactions, which align with these priorities.
In The U. S, Empower's acquisition of Prudential's full service retirement business has significant scale and reinforces Empower's leading position in The U. S. Retirement market. The addition of this business is expected to increase Empower's base to over 16,000,000 participants, 71,000 workplace savings plans and approximately trillion dollars in assets under administration.
The deal will further strengthen Empower's overall offering for participants and sponsors through additional expertise and expanded product offering and new capabilities acquired from Prudential. Once fully integrated by the 2023, we expect Empower's contribution to Great West Lifeco's earnings to be 30%, further diversifying Lifeco's earnings profile with another strong cash generative business. Through our acquisition of ClaimSecure, Canada Life is investing further in workplace capabilities in Canada, a core strategic focus for Lifeco. This deal increases the number of plan members served by Canada Life by 1,250,000 individuals, including plan members and their dependents with annual claims payments of more than C1.2 billion dollars It will also enhance our ability to provide leading workplace benefit solutions by expanding our presence in a growing market for TPA and TPP services. We also recently announced the acquisition of Arc Life in Ireland.
The transaction will see approximately 150,000 policies and EUR 2,100,000,000.0 in assets moved to Irish Life's balance sheet. This is a straightforward integration given that we already administered the business including management of assets backing liabilities. These policies were previously underwritten by Allied Irish Bank. So this transaction aligns with another strategic step we recently announced where we'll be expanding our distribution relationship with AIB into a full joint venture. Moving to Slide five.
We recently shared our medium term financial objectives as noted on this slide. These objectives include the benefits of the personal capital and mass neutral transactions and are supported by Lifeco's diversified portfolio and significant organic and extension growth potential. The expected benefits of the recently announced Prudential transaction will be incremental to these EPS and ROE objectives. Moving to Slide six, our second quarter results were driven by strong earnings across all operating segments. Base earnings were $826,000,000 and net earnings were $784,000,000 Base EPS of $0.89 was up 17 year over year and up from last quarter.
Expected profit increased 26%, reflecting solid business growth, higher markets and a strong contribution from the MassMutual acquisition. These second quarter results reflect strong organic performance across our businesses and capture some of the expected MassMutual integration benefits. Net earnings of $0.84 per share were down 9% year over year. You may recall last year's second quarter included large positive market related impacts due to the rapid market recovery, which reversed most of the Q1 twenty twenty initial COVID impacts. Q2 twenty twenty one also includes U.
S. Transaction and integration costs related to recent acquisitions and the unfavorable impact of UK corporate tax increases. Moving to Slide seven, we're pleased to see the very strong sales performance in Canada this quarter. Looking first to insurance, on the group side, sales were strong in the small and mid sized segments with limited large case activity. Individual insurance sales were consistent with pre COVID levels.
Individual wealth sales and asset growth was strong with proprietary mutual fund sales up 23% year over year. Similar to Empower's retail strategy to capture rollover and rolling assets, Canada's group asset retention strategy focuses on maintaining a relationship with customers when they're leaving their defined contribution plans. Second quarter asset retention sales increased by more than 20% compared to the same quarter last year. Our Canadian strategy includes continuing investments in digital and technology enhancements to improve customers' and advisors' experience. A great example is our virtual health offering enabled by Dialogue, where this quarter we surpassed more than 500,000 group members and their dependents being eligible for this service, which has been so important during COVID lockdowns.
We're proud of this achievement, which helps enhance Canadians' access to healthcare when they need it. We've also been investing in artificial intelligence to improve both renewal and long term disability management for group insurance. AI's data driven insights should strengthen our ability to deliver the best outcomes for plan sponsors, plan members and advisors. Moving to Slide eight. Empower's strong growth trajectory continued this quarter with large plan sales driving a year over year increase, combined with strong growth in the core and retail segments.
Empower's retail business continues to accelerate with total retail wealth management AUA now exceeding US40 billion dollars This includes Empower IRA and Personal Capital. Of note, Empower IRA assets have doubled in the last two years from $10,000,000,000 to $20,000,000,000 on the back of our existing model, even before leveraging Personal Capital capabilities. We're pleased that the Personal Capital business has been making significant progress in signing up new client assets and is running ahead of our expectations at the time of acquisition. The integrations of MassMutual and Personal Capital businesses are progressing well. We achieved USD 48,000,000 in annual pretax run rate synergies to date related to MassMutual and are on track to reach our USD 160,000,000 target in 2022.
Moving to Slide nine. Assets under management at Putnam have grown by US30 billion dollars year over year to just under US200 billion dollars Net outflows of US3.7 billion dollars were mainly from fixed income products, while equity products saw net inflows. Investment performance continues to be strong with 24 funds having four or five star Morningstar ratings. The combined impact of market growth on AUM and the shift in flows to equities drove strong fee income and Putnam's core margin improved to 13% in the quarter. Putnam also launched its first actively managed ETFs, which are based on four of the firm's leading equity strategies, including two sustainable funds.
Moving to Slide 10. Europe demonstrated very solid commercial performance this quarter with strong underlying performance in all three operating countries. Notably, individual wealth sales are now higher than pre pandemic levels with strength in The UK, Ireland and Germany. And client retention in all countries continued to be strong, supporting another quarter of positive net inflows. Excluding the impact of the sale of the Ipsi business in Q3 twenty twenty, assets under administration are up 13% over the last twelve months.
We're pleased with the continued performance of our equity release mortgage business as it helps our customers use the value in their UK residential properties to gain financial flexibility in their retirement. Our bulk annuity pipeline is building and we're actively engaged in quotation activity with potential for sales in the second half of this year. Moving to Slide 11. Capital and Risk Solutions had another solid quarter with expected profit growth of 10% year over year. The quarter over quarter decline was largely due to currency impacts.
The pipeline for new business remains strong in both structured life and longevity, and we completed two new longevity reinsurance agreements in The UK during the quarter. With that, I'll now turn the call over to Gary to review the financial highlights. Over to you, Gary.
Thank you, Paul. Please turn to Slide 13. Base EPS of $0.89 was up 17% compared to the prior year due to business growth, improved market levels and the significant acquisitions we made last year. On a constant currency basis, which takes account of the sharp decline in U. S.
Dollars since Q2 twenty twenty, base earnings were up 22%. All four segments have again delivered strong base earnings results, and I'll provide highlights momentarily. Net EPS of $0.84 was a decline from last year largely due to several market rebound related positive impacts experienced in Q2 twenty twenty that were excluded from base earnings. The excluded items this quarter were primarily costs related to The U. S.
Acquisitions last year as well as the recently legislated U. K. Corporate tax rate increase. On a segment basis, starting with Canada, base earnings were $293,000,000 down 7% from a strong Q2 last year. Business performance was good, with expected profit up 8% and insurance results across life, health and disability producing a net gain.
Canada also saw a solid contribution from yield enhancement, although down from the elevated levels seen in Q2 twenty twenty. Favorable outcomes on tax matters partly offset onetime expense and asset impairment items. In The U. S, base earnings were up significantly from Q2 twenty twenty. The acquired Mass Mutual business continued to perform well, adding $63,000,000 to base, including some early expense synergy gains and strong fee income.
Note this also included a positive $7,000,000 true up from Q1. Customer retention has been excellent, and integration activity is on track. Personal Capital continued to be profitable on in force but recorded a base loss of GBP 9,000,000 as we continue to invest in new customer acquisition to fuel growth and future profitability. The rollout of Personal Capital digital capabilities to benefit the broader Empower client base continues on schedule for later this year. Excluding MassMutual and Personal Capital, Empower's base earnings essentially doubled year over year as a result of higher markets, disciplined expense management and strong organic growth.
Putnam's results also improved sharply year over year. While seed capital showed less of a gain than the rebound related gains in Q2 twenty twenty, fee revenues were up due to the growth in AUM and, in particular, in equity mandates relative to shorter duration fixed income. In Europe, base earnings increased 3%. Good underlying performances in The UK, Ireland and Germany were driven by continued recovery in sales, favorable insurance experience and strong yield enhancement. This was partially offset by net one off negative tax adjustments of GBP 32,000,000.
Capital and Risk Solutions saw another quarter of strong base earnings growth, up 9% over Q2 twenty twenty and up 15% on a constant currency basis, which reflects a substantial portion of that segment's earnings in U. S. Dollars. COVID continued to impact mortality rates, though the financial impacts remain modest, with higher claims in The U. S.
Life reinsurance business being offset by experience in the European longevity business. Turning to Slide 14. We've added an additional table this quarter to show the more material tax impacts by segment. There were several items this period, in part due to a backlog of matters with tax authorities due to COVID. Base earnings items are typically interpretation and audit related issues from tax filings that are being resolved, either positively or negatively in period, relative to the provisions established.
Items excluded from BASE would typically be those related to tax legislation changes, such as the deferred tax liability increase arising this quarter from the recent corporate tax rate increase in The UK. The overall impact of these tax matters was not material. Turning to Slide 15. This table shows the segment and total LIFO source of earnings from a base earnings perspective, the lines for management actions and changes in assumptions and other, as well as certain market related items in the experienced gain losses, are excluded. Expected profit was up 26% year over year, notwithstanding some currency pressure from the decline in the U.
S. Dollar. The majority of the growth came from The U. S. Segment with the addition of MassMutual and Personal Capital, plus increased fee revenue from higher stock markets and organic business growth.
The other segments showed good growth as well, with Canada and Europe benefiting from higher fee income and capital rich solutions from continued business growth. Regarding new business impacts, we saw an increase in new business strain in The U. S, which now includes Personal Capital and MassMutual. And as a reminder, The U. S.
Strain is on investment contracts and represents business acquisition costs that cannot be deferred under IFRS. On the flip side, the benefit of future margins, including the margins to recover those acquisition costs, will come through the expected profit line in future periods. New business strain was lower in Canada due to pricing actions taken in 2020 and lower in Europe as higher sales volumes in Q2 this year covered more fixed expenses than occurred last year. Experience gains contributed positively in the quarter, and I'll cover these on a later slide. Earnings on surplus of GBP 21,000,000 is down from a strong result in the prior year, which had been boosted by large seed capital gains on the sharp market recovery in Q2 twenty twenty as well as realized gains on available for sale assets last year.
The effective tax rate on base shareholder earnings was 9%, reflecting primarily the jurisdictional mix of earnings with a contribution from settling certain outstanding CRA matters, as noted earlier. Turning to Slide 16. The table on this slide is a reconciliation of base to net earnings, highlighting the key items that are not included in base earnings. In addition to the tax matter noted earlier, I would highlight the personal capital transaction costs. Recall, an element of the purchase price was a contingent consideration payable in December this year and next year, provided certain targets are achieved.
Based on the strong performance of Personal Capital to date, we have increased the provision for this contingent consideration. Please turn to Slide 17. This table shows the segment and total Lifeco net earnings results from a source of earnings perspective. It combines the information from the base earnings SOE with adjustments for the excluded items on the prior slide and is included for completeness. The line labeled other is where we record the integration costs and the transaction costs mentioned earlier, and note again that these are all pretax numbers.
Please turn to Slide 18. These tables expand on the experience results as well as the management actions and changes in assumptions to highlight various items in the quarter, some of which we have touched on already. As shown in the chart on the left, yield enhancement continued to contribute positively, particularly in Canada and The UK. We continue to originate a steady volume of equity release mortgages in The UK on an improving residential property backdrop. The market impact on liabilities arises in The UK.
While property prices have improved, the growth rate pickup from last year's downturn was not quite as high as assumed in the actuarial liability calculations, which resulted in a modest impact on future cash flow projections as we trued that up this quarter. I'd also call out there was again a positive combined net impact of mortality, longevity and morbidity, reflecting the benefits of our diversified book of business. Expense variances were primarily due to project spend, mostly in Europe, and credit related impacts were again negligible this quarter, reflecting the quality of the portfolio. Moving to Slide 19. This slide highlights operating expenses by segment.
While expenses are up notably year over year, this is to be expected given the growth in business and expected profit, both organically and through M and A. Expense growth in Canada can be thought of in roughly three equal pieces. The first is more normalized growth, aligned with the rebound in sales and operational activity volumes. The second is increased sub advisory fee expenses following the GLC Mackenzie Investments transaction late last year. And then the third is just a number of one time items.
In The US, the expense increase is driven by MassMutual and Personal Capital acquisitions, which added $156,000,000 of expense compared to last year. In European Capital Risk Solutions, expense growth is in line with business growth, plus some additional strategy related costs in Europe. Please turn to Slide 20. The Q4 book value per share of $23.7 was up 8% year over year, driven largely by increased retained earnings, given solid results in each of the past four quarters. Currency movements have been a headwind with a strengthening Canadian dollar, but this has been largely offset by pension related other comprehensive income, given the increase in interest rates.
The LICAT ratio at Canada Life remained strong, up three points from last quarter. The primary impact came from retained earnings at Canada Life. Market movements also helped with a bit of a pullback in interest rates following the sharp rise in Q1 and continued stock market growth. In addition, as noted in recent quarters, this also includes the continued phasing of the new most adverse LICAT scenario, which impacted the ratio by one point. And assuming we stay in this LICAT interest scenario, the full impact will continue to be smoothed in over the next two quarters at just under one point a quarter.
And finally, just as a reminder, Lifeco cash of $900,000,000 is not included in the LICAT ratio. That concludes my formal remarks. Back to you, Paul.
Thank you, Gary. Please turn to Slide 21. Looking ahead, we will continue to maintain a high level of vigilance around COVID-nineteen, focusing on the safety of our employees and customers, while closely monitoring risks in the markets where we operate. But at the same time, we will continue to seek out both organic and inorganic growth opportunities. Over the last two years, we've taken steps to transform Great West Lifeco's portfolio through disciplined capital deployment to drive both organic and inorganic value creation.
Following the sale of The U. S. Individual markets business in June 2019, we have proceeded to grow our U. S. Retirement business at Empower and reinforce our leadership position through a series of strategic and value enhancing transactions.
At the same time, we've extended our market leading positions in Canada and Europe with several tuck in acquisitions in the wealth and insurance spaces. We are confident in our ability to meet our medium term EPS and ROE growth objectives supported by the expected benefits of the in flight personal capital and MassMutual integrations And the potential benefits of the recently announced Prudential transaction will be incremental to this growth. As we carry on with the integrations of Personal Capital and MassMutual and work towards the successful close of the Prudential deal, our focus remains locked on achieving our integration objectives, including strong customer retention, the successful migration of planned participants and the achievement of synergies. That concludes my formal remarks, Ariel. So please open the line for questions.
Thank you. We will now begin the question and answer session. Our first question comes from Meny Grauman of Scotiabank. Just
a first question on the commentary you ended off with on COVID. Just wondering if there's any sort of message in that. Is that just a general statement, a conservative statement? Or are you seeing anything or watching anything specifically as it relates to the evolution of COVID here? Just wondering about that, first of all.
Thanks, Meny. It's Paul. No, there's nothing loaded in that. I was just commenting on the fact that we continue to think about our return to work strategies, ensuring that we're looking we're set up as well as we possibly can be to serve our customers. That's number one.
And to keep our employees safe. And clearly, we just need to remain vigilant and not sort of lose sight of the fact that there is transition and change that continues in this as we transition into a post COVID environment.
Got it. Then just on Putnam, you talk about sales of short duration income products slowing due to lower yields. I'm just wondering what your outlook is in terms of fixed income sales going forward. And at this point, are you making any changes in product lineups in relation to what you're seeing in terms of that demand for fixed income?
Thanks, Manny. I'm going to turn that question over to Bob Reynolds. Bob?
Yes. Thank you for the question, man. There are no changes for the fixed income lineup. Obviously, we do have ultra short duration. We have a short duration bond, and we go up the duration ladder.
So we do provide choice in fixed income. We're very comfortable with that. We have rolled out in this quarter four actively managed ETFs, but they're all focused on equity, two in the sustainable area, one in large cap growth and one in large cap value. But our fixed income line up remains the same.
Thanks for that. Our next question comes from Gabriel Dechaine of National Bank. Please go ahead.
Hi. Good afternoon. A couple one quick numbers question here. The 52,000,000 US from MassMutual, does that include financing costs or is it net of financing costs? I'm just trying to line that up against the, you know, the 2022 earnings target you have for that business.
Gary, that's for you.
Yep. That's that's after the the financing and the amortization costs.
Okay. So on that basis, it's looking like, you know, the the the 2022 target's around 220,000,000 US, and you're just 5% off of that. Is that, you know I mean, that's I'm using your presentation information there and converted Canadian to US dollars. Is that is that a reasonable number?
Gary, I'll let you speak to that.
Looks like
you're pretty strong. Yeah. I think the the way I'd I'd I'd think about this is, obviously, the acquisition is off to a good start. You know, the employees have transitioned over well. The client retention has been good.
That integration planning is all on track. Financially, I'd I'd break it into a couple of pieces. So on the expenses and synergy side, which would be part of our our ultimate Mhmm. Your ultimate targets, we've achieved, on a run rate basis, 48 out of a 160 target, and and we're still targeting the 160,000,000. On the revenues, obviously, we've had a real tailwind from the markets, which is good.
There obviously doesn't fluctuate. So we're not really ready to predict what it might mean at the end of integration next year when we we sort of identified the run rate target. But, certainly, we're off to a good start. A little bit of a headwind from currency translation, but I think the market tailwinds have been helpful. So it's really how how you wanna translate those current tailwinds into the the down the road targets, but we're certainly off to a good start.
Gotcha. And then even if I look at Empower excluding MassMutual, it's now look like earnings were up. They doubled year over year. Is there anything up market, or is there anything unusual in there?
I'll I'll let Gary, why don't you start with that one, but then you can maybe pass it on to Ed.
Yeah. I would do. I I just I was really just agreeing there with Capo that it was and then over to Ed, which is that the the markets have certainly driven up the revenue. And we've had good growth as well over that year just organically. So you've got those two things coming to bear, but maybe I'll let Ed add more color.
Yes. Thanks, Gary. Yes. I would just add the market certainly has benefited us, but we've also seen really strong organic growth. We're also seeing really solid growth in discretionary managed account business.
That's up pretty materially year over year. Obviously, benefits from the market, but if you look at net flows and contributions there and new sales, it's up it's up pretty pretty well. So it's a it's a combination of a number of factors.
Okay. And just the last
The other the other comment I would the other comment I would just make, Gabriel, is is on the expense side, you know, really, really strong expense discipline. So while expenses were were certainly up, it's primarily driven by the growth in the business. Right. So when you isolate growth and just and just look at sort of core operating expense, it was know, year over year was on on a BAU basis, it was pretty benign.
Yeah. Okay. Appreciate that. And then the last one, the tax rate base 9% reported as 12. I I I mean, I don't know if this even applies to a company of the size of Great West, but is the global minimum tax even on your radar screen?
If so, do have any thoughts?
Gary, I'll let you take that one.
Sure. Yeah. We're we're certainly watching the the developments on the global minimum tax. It doesn't affect a lot of our jurisdictions just because of the most of the jurisdictions we're in are are at least at that level. But we are keeping an eye on the developments.
So that's one, Gabriel, I say that the devil's gonna be in the detail as the proposals take shape over time. You know, some of our jurisdictions, more than reinsurance, might be impacted, but we'll have to we'll just have to see how that plays out over the next few years, frankly.
Okay. So the the reinsurance, like, the Caribbean area would be an area that could be effective?
It it could be depending on how the the final rules come out. It's it's just way too early for us to know.
Yeah. Okay.
But we are actively following it for sure.
Okay. Well, enjoy the rest of your summer.
Thanks, thanks, Gabriel.
Our next question comes from Tom MacKinnon of BMO Capital. Just
a couple of questions here. First on you mentioned UK corporate taxes. You've done the DTL adjustments. But so how should we be thinking about any change in UK corporate taxes affecting your guidance of low to mid double digit base earnings tax rate?
I'll I'll let Gary take this that one first. Gary?
Yeah. I think the way I think of that, Tom, is that that low to low to mid double digit tax rate is on all of Lifeco. So you'd have to look at just the UK piece, and I'm trying to think how the the rate went from maybe nine to sorry, nine eighteen to to 23 or 25. So it's a it's a fairly modest increase on just a just a portion of our earnings. So I don't see it changing.
We've given a range, and I don't see it really moving the range that materially.
Tom, I would echo that. It's from 19% to 23% on a meaningful but nowhere near a majority of our earnings. So as a result, we would not see it as having a material impact on our projected growth.
Okay. And so just a couple quick ones with respect to Empower. If I look at just sort of quarter over quarter, the general account AUM really in terms of US dollars was actually down a little bit. Yet your spread income, that's sort of your premium income plus investment income, less the total paid or credited to policyholders, that was up substantially quarter over quarter, in US dollars. So, like, was there anything what happened here?
And does it ex and maybe while you're at it, you can explain why virtually all of the experience gains on a base earnings basis were in The US. Maybe was there anything in there related to Empower? I because, basically, I don't only two of the 59 there was related to Putnam. So maybe on the spread income and on the experience gains and losses in The US.
Gary, I'll let you start with that one.
Yeah. So on the on the spread income, that's the the quarter over quarter move. I'm trying to think of what would drive that off the top of my head. The so I'll I'll come back. We might have to actually follow-up with that one after some.
Certainly, in terms of I know with bringing MassMutual on board in the just this year, They you know, there's a fairly sizable general account, and so that's that may have created a bit of that noise, but it shouldn't have created much noise quarter over quarter. And then the, in terms of the experience gains in The US, I mean, there were that was, that did actually drive a, you know, a fair bit of the overall. Although we did have, let's say, we had some in, in Canada and Europe as well. But the, The US ones, I mean, we had some that were some of those experience gains were the market related impact on fees, just obviously markets went ahead in period. So some is in in your expected profit, some is in your ex experience gains.
We had some expense and other fee gains in in The US, both in terms of the existing block and and the the newly acquired Mass Mutual business. So I'm just trying to think if there's anything that would particularly call out there. There's, again, a fair bit of expense discipline that Ed had noted earlier in The US relative to what we've baked into the expected profit. So that's the geography. So that's why we're seeing when I look at the the charts here, most of The US ones were were related to expenses and fees.
That's what was driving them there.
Yeah. I mean, it's fine. Overall, expenses and fees were a hit of negative 20 post or a hit of negative 22 pretax yet.
I guess would help with
the SOE on That's what I mean, that'd be the key thing. If we had an SOE on Empower, like you have one for Putnam, that'd be helpful. So and and just as a as a as a quick follow-up, if we went the assets were up 6% year over year, but the fee income was up 9% at Empower. Was there any change in mix? What was driving that?
Gary, why don't you start, but maybe Ed can speak to the nature of the fact that a lot of the fees are asset based, but there's also other related fees and that can we can see growth there. Ed was making reference to managed accounts as an example.
Yeah. I'm not I think I think that is it's more of a a mixed question, Paul. So maybe we'll go straight to Ed on that as to how that's that's played out.
Yeah. I I certainly, managed accounts the the growth year over year is up dramatically in in in managed accounts. And so that that's definitely a contributor to the mix that we're seeing, the 9% versus 6% on assets. We can get you more of a breakdown on that. But that was a big contributing factor for sure.
Our next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Hi, good afternoon.
Hello? Can you hear me? Yeah. We can hear you, Doug. Yeah.
Okay. There we go. Okay. So just from a use of capital perspective, I mean, there's lots going on. I mean, you've mentioned some of these, obviously, the PRU deal.
You're buying the ARC business for EUR230 million, and you're buying ClaimsSecure in Canada. I'm just trying to understand the latter two. So the ARC and the ClaimsSecure, is this financed with cash on hand, which I think it is? Or are you borrowing? And should we be thinking about there being an impact on the LICAT ratio from these transactions?
Well, I'll start out by saying that they were financed with cash on hand, but I'll let Gary speak to any impact on LICAT.
Sure, Paul. Thanks. Yes. I mean, there's a small impact on LICAT. It was in the it was less than a well, it will be once they close.
It'd be it'd be less than a point, though, in total between the two of them. So it's it's only quite modest on LICAT, and that's just for any goodwill that comes on board. And then in particular, in the case of our client, we will get a credit for the insurance related actuarial PVADs because they're they're a that's in your surplus allowance. So there's some offsetting credit there. So it it's quite a modest impact on my cap.
And as Paul said, it's funded from cash on hand.
Okay. So this isn't going to be material. Perfect. And then just in the description for the base results for CRS, longevity experience was obviously still favorable, but it was less favorable. Just wondering if there's anything in there, any trends that you're seeing.
And then in the same flip side in Europe, Gary, I think you said in your prepared remarks, costs were inflated by higher strategy costs in Europe. Just hoping you can maybe unpack that as well. Thank you.
Why don't we have we'll have Arshil speak to what we're seeing on the capital and risk side. And then David Harney, why don't you speak to the strategy costs that are going on in Europe. Arshil?
Thank you, Paul. So turning to the claims experience in the CRS segment. All last year, we saw elevated levels of life claims in The U. S. Traditional block.
And then offsetting that or largely offsetting that, we saw elevated levels of death claims on the longevity books, both in The Netherlands and in The UK. And that trend sort of peaked in q one of this year where we saw particularly elevated level of, excess life claims in The US, and and also a very high level of excess mortality on the longevity books. That trend did continue into q two, but at a lower level. So we were down in terms of excess longevity benefit as well as life claims in q one in q two relative to q one this year, and the straight year over year quarterly comparisons were were the same as well. So mortality was adverse this quarter, but less adverse in the traditional block than the same quarter last year.
And longevity was favorable again this quarter, but less favorable than a year ago. And we're seeing improving trends in all of the markets as the vaccines kick in, and the death rates start to fall, and there's promising signs in July. But as Paul indicated in the early part of the discussion here, you know, we still have a watching brief on this or whatever, and we we don't think this is all behind us or whatever, but the trends are certainly improving. And I'll turn it over to David to answer the Europe part of the question.
Yes. So just on Europe, on the expenses, like we have ongoing strategic development costs in Ireland, Germany and The U. K. But we did have some one off costs in this quarter. So those costs were related to completing the ARC acquisition, which was of a modest enough size.
So that I think most people will be aware that Phoenix had some other books up for sale that didn't proceed in the end, but we had some costs associated with investigating that also.
Okay. Great. Thank you.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Thank you. Good afternoon. Just want to ask another question on m Power given your answers to prior questions. I mean, my takeaway from this kind of discussion on the earnings growth is it seems like incremental revenues pretty much dropping direct to the bottom line. Is that the correct takeaway?
And is that also a relevant conclusion going forward?
I'll perhaps start off there, Paul. I think we're seeing strong leverage in that business. And saying that all the incremental revenue is a direct drop might be an overstatement. We're seeing the benefit of markets rising as well. But Ed was talking about the strong expense discipline at Empower.
So maybe Ed, you can provide a bit of context of the leverage we see in this business.
Yeah. I mean, it's clearly a scale business. And we have, I think, a very good operating discipline and model. And you know, we're also not only are we seeing good cost controls, but we're seeing really strong revenue per participant. And and that's in part a contribution from the market, but it's also the fact that customers are aggregating more of their assets with us.
So existing participants rolling in outside assets into their existing defined contribution plan or into an IRA that they might hold with us. So we're seeing the leverage sort of on both sides. We're seeing really strong growth on the revenue per participant, revenue per customer side, but we're also seeing the benefits of the scale that we have and the fixed nature of the business where it is delivering the flow through that you referenced. And we do expect that to continue.
Okay. So I think I got it. If it's sort of existing clients and that sort of consolidation of assets as you talked about, then it may not be one for one in terms of revenue to bottom line, but pretty close. But if it's a new corporate customer, new client win, then you wouldn't get the same exactly the same translation.
Well, you have upfront expenses associated with bringing those clients on from an acquisition standpoint. You know, if you look at the you know, our average customer stays with us sixteen, seventeen years. And so while you have the upfront expense, those plans and those participants contribute favorably to the bottom line within a relatively short period of time.
Understood. Last quarter, there was a reference to asset and client retention with MassMutual tracking higher than planned. Is that still the case? Or is it kind of normalized now in line with expectation?
Ed, that question is for you for sure.
Yes. Paul, I'd say it's still really early in the process at this stage, but the short answer is we are running ahead of plan. But a lot of those customers' decisions are yet to be made. And so that will play out over the next several months. As I think we shared with you in the past, we're going to begin the process of migrating customers in the third quarter of this year, and that will carry over until the third quarter of next year.
But we feel really confident about where things stand at this point, the reception that we've received from advisers who are advising on those mass match mutual plans as well as the customers themselves. So the team is very confident about where we stand now in terms of our ability to to to be successful in retaining the client base. But, yes, we are running ahead of our
target at this stage.
Okay. Okay. Good to hear. Last question is related to the US dollars 400,000,000 line of credit repayment you highlighted that took place in July. Just want to understand the funding for that.
Will that impact LICAT? Or is it funded from the HoldCo? And then the second part of the question is, with the Prudential transaction, you expect the financial leverage on close to be around 36%. Did that incorporate this USD 400,000,000 repayment or not?
Gary, that question is for you.
Sure. Yes. So first off, the repayment was funded out of The US. So again, some of this would have been cash at The US Lifeboat Holding Company, and then some of it would have been dividended up from Great West Life annuity, the Empower Insurance Company, the Great West Life annuity. That would have been dividended up in the quarter.
So the funding was didn't have an impact on LICAT. It's just funded from from our US sources of cash. And, obviously, that business has been performing, and it generates a fair bit of cash. And and then so the second part of your question, when we were looking at the Prudential financing, we had actually anticipated not just the 400, but actually we have anticipated that we would pay off the remaining 100,000,000 of that facility as as part of our overall comment on leverage once the the deal is closed. So we'd assume that the full amount would be paid off by the time the the Prudential transaction closes, and certainly, we're well on the way to that.
Got it. Okay. Thank you. Our
next question comes from Nigel D'Souza of Veritas Investment Research. Please go ahead.
Thank you. Good afternoon. I wanted to follow-up on your experience gains and losses this quarter, and you mentioned one of the factors being favorable morbidity experience in your Canadian segment. And, you know, my understanding would be that, you know, dental and health claims would track higher as restrictions are lifted. So could you highlight some of the trends you're seeing on on the claims side?
And do you expect morbidity experience or when do you expect morbidity experience to move towards neutral as things reopen up?
Gary, why don't you start with that, perhaps Jeff can provide a bit of insight into our go forward expectations.
Sure. Yeah. There were there were gains in Canada on the morbidity side, the the health and disability side. And now some of that, I think, is is really have to think about when the quarter started. So the the easing up in in a number of places in Canada, I think you have Ontario in particular, but some other places easing up with later in the quarter.
So I think you're still getting some of that lockdown impact in the quarter. So that would certainly that's the one thing I would call out before handing over to to Jeff on where they're looking at the moment.
Yes. Just to pick up there, Gary and Nigel, on the disability side, we continue to see strong management in that area. Incidents remain stable through some work we've done on artificial intelligence. Some of the tools that we've been able to give to our disability managers is working well with our customers. That remains strong.
On the health and dental, I think Gary coined it well. I mean, due to restrictions and maybe apprehension, it has led to some mild experience gains in the short term. But the lower experience rating may lead to some lower margins in the future, but not material.
Okay. That makes sense. And if I could just end on the question on the components of your experience gains. When I look at the breakdown here, yield enhancement was by far the largest contributor. Could you help me understand, on a segment basis, how is that allocated?
Is there a particular segment that would have benefited from that component more in this quarter? Or is it evenly distributed?
Gary, I'll you should take that one.
Sure. Yeah. In terms of the yield enhancement, this quarter and and it's it's it's often the case, but particularly this quarter, it was primarily Canada and and Europe. And and within Europe, it was mostly The UK. I I don't have the exact split, but it would have been maybe 60%, two thirds Canada, and then the rest in in The UK or in Europe, primarily The UK.
So that gives you a rough idea. And that's you would often see Canada and Europe being the main drivers on on yield enhancement.
Okay. Got it. So The US 59,000,000 isn't really reflective of of the yield enhancement component there. Is that is that fair?
No. There's I think there's very little in in yield enhancement. They they would have had some some gains, I think, on some asset upgrades. It wouldn't be in the yield enhancement, comma, don't don't recall there being much of anything on yield enhancement in The UK sorry, in The US at this period. And just the nature of the the liabilities there, there's there's not that much scope for yield enhancement.
Got it. Okay. That makes sense. Thank you.
Our next question comes from Mario Mendoca of TD Securities. Please go ahead.
Afternoon. Paul, this might be most appropriate for you. It relates Putnam and how Putnam fits into the overall strategy of Great West Life. What would be helpful to understand is if Putnam is really just a stand alone business within Great West Life or if it has any direct tie ins or is integrated in some way into the strategic imperatives across the organization, either, let's say, Empower or Personal Capital. So how would you characterize Putnam, stand alone or integrated?
I would characterize Putnam as a strong partner with our other businesses around the globe. Putnam has some very strong performing capabilities, and we benefit from those on sell through in our wealth management offerings. But you wouldn't position it as proprietary because it's separately branded and Putnam competes with those strong offerings into those various channels. So Empower would benefit from that. Our European operations and our Canadian operations have some strong platinum mandates that we benefit from the performance and the flows there.
So I would characterize it as a strong partner.
A related question then. From an expense perspective, does Putnam absorb some of the expenses of the overall organization? What I mean by this is if Putnam were not part of the overall Great West Life business, would expenses throughout the organization necessarily have to increase?
Is that something you can think about?
Yes.
Anytime, if it was not part I guess there could always be that sort of an impact. But I don't tend to look at it in that way. I look at Putnam as a strong performing asset manager for their clients for Putnam clients. I see it as having some capabilities that we have sell through opportunities across the group. And I also see it as a business that has potential to be scaled.
We're seeing some organic benefits there, but also potential to be scaled if we could look at some transactions to scale it up where we could unlock value. And that is kind of the that's the strategy we're on and we remain on strategy. So I don't tend to think of it in the terms that you're outlining.
Okay, thank you.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mann for any closing remarks.
Thank you very much, Ariel. Well, listen, I'd like to thank everyone for attending our Q2 call. Feel free to reach out to our IR team if you have any follow-up questions. And I hope everyone can take some time to enjoy the summer in a safe way with your families. And we look forward to connecting with you in Q3 for our call in November.
Take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.