Welcome to the Great-West Lifeco second quarter 2020 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead.
Thanks, Ariel. Good afternoon and welcome to Great-West Lifeco's second quarter 2020 conference call. I hope you and your families are safe, healthy, and enjoying, at least in part, this highly unusual summer that we're all experiencing. Before we begin, I'd like to once again extend my deep thanks to the healthcare and essential workers. Their courage, stamina, and resilience are truly inspiring, and our thoughts are with them as they care for our communities throughout this pandemic. To our advisors and employees, you continue to make us proud as you work remotely and show up every day with professionalism, positivity, and focus on serving our clients. Your guidance and support play a substantial role in ensuring our clients can better weather any pandemic-related financial and personal challenges. Joining me on today's call is Garry MacNicholas, Executive Vice-President and Chief Financial Officer.
Garry and I will deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and Chief Operating Officer, Europe; Arshil Jamal, President and Group Head, Strategy, Investments, Reinsurance and Corporate Development; Jeff Macoun, President and Chief Operating Officer, Canada; Ed Murphy, President and Chief Executive Officer of Empower Retirement; and Bob Reynolds, President and Chief Executive Officer, 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 cautionary notes will also apply to today's discussion and the presentation materials. Moving to slide four, you'll see a high-level summary of the key themes that we're going to cover today. To start, we reported a very strong quarter with base earnings up 13% to CAD 706 million. Net earnings of CAD 863 million were up 88% year-over-year.
While this strong result benefited from the significant market recovery in the second quarter, it also reflects our resilient and diversified business model, our strong risk management disciplines, and our high-quality investment portfolio. We will continue to benefit from these strengths as the economic impacts of the COVID-19 pandemic continue to play out. Across our operations, we've taken steps to support our customers, advisors, communities, and staff as they face the challenges presented by this pandemic. We're working to ensure our actions continue to align with the significant steps taken by governments to support individuals, businesses, and economies. While we've been acutely focused on managing risks, addressing stakeholder challenges, and serving clients to pre-COVID standards, we've also been successful in executing key strategic initiatives during this pandemic. A compelling example is Empower's acquisition in June of Personal Capital, a fast-growing U.S. digital hybrid wealth manager.
Yesterday, Irish Life completed the sale of IPSI, a subsidiary whose principal activity is providing outsourced admin services for life insurance companies. Last night, we announced the sale of GLC Asset Management to IGM Financial, a transaction which will help strengthen our Canadian wealth strategy and give us access to best-in-class investment management capabilities at Mackenzie. I'll elaborate more on this later. We'll turn to slide five for an overview of the second quarter results. Our second quarter results rebounded strongly with base EPS of CAD 0.76, up 13% year-over-year. The excellent performance can be attributed to strong investment gains, including seed capital and robust results in reinsurance, paired with limited in-quarter financial impacts from COVID-19.
Net earnings of CAD 0.93 per share were up 90% year-over-year, in part due to a loss on the sale of the U.S. Individual Markets business in the second quarter of 2019. Excluding that loss, net earnings per share increased 33% year-over-year, reflecting favorable basis changes and market-related impacts driven by equity market recoveries in quarter. Turning to slides six and seven, I'll provide an update on COVID-19 business impacts in Q2 and provide color on our near-term outlook. I'd like to acknowledge that although we've seen improvements in several jurisdictions, the pandemic remains fluid with some countries reintroducing stricter measures. As such, we're keeping a close watch on the situation and the majority of our 24,000 staff globally continue to work remotely. Across Lifeco, fee income was depressed by lower average asset levels due to the market declines combined with a slowdown in business activity.
Expectations for fee income going forward will depend on future market movements and levels of business activity. While we saw mortality increase across our businesses, the balanced nature of our insurance and longevity book greatly reduced the financial impact. Overall, we continue to expect limited financial impact from increased COVID-related mortality given the age demographic and diversification of our life and annuity liabilities. Looking across geographies, the locking down of businesses and economies significantly reduced market activity and sales in the second quarter. As lockdown measures relax, we expect activity to resume, and we've already seen some improvements in June and July. In Canada, health and dental claims are approaching normal levels, and as a result, premium reductions were phased out in July. The reduction in sales we've seen in some businesses was mitigated to some degree by stability of our in-force books.
A combination of reduced market activity and government support programs have led to fewer plan terminations and greater client retention in our group businesses in Canada, Europe, and at Empower in the U.S. At Empower, customers continue to stay invested. Only a modest number of clients access financial hardship loans, and demand for these loans is expected to be stable. Empower has also been enjoying a significant number of virtual sales wins, with sales opportunities approaching pre-pandemic levels. Outflows that Putnam experienced in Q1 slowed by mid-April, with positive net flows for the remainder of the quarter. Over 80% of the Q1 seed capital unrealized losses were recovered in Q2 due to market movements. In Europe, we've experienced good persistency across all books, with low take-up of customer acquisition accommodation measures.
Our equity release mortgage business in the U.K., which had been temporarily disrupted by lack of access to valuations, is returning to normal. Residential property values in the U.K. are proving resilient thus far. Finally, I'd like to note that our reinsurance business continues its strong performance. Q2 was a record quarter, and its robust business pipeline remains intact. Please turn to slide eight. Last quarter, we reviewed our de-risking actions for our invested assets portfolio since the financial crisis. Today, we'll focus on two areas that are garnering attention in this environment: corporate bond downgrades and mortgage and rent deferrals. First, we'll look at the bond portfolio. At approximately CAD 170 billion, it represents 69% of our invested assets. The portfolio is diversified and of high quality, with 99% of bonds investment grade and 79% rated A or higher.
To date, we've seen limited corporate bond downgrades within the portfolio. The negative earnings impact from these downgrades was CAD 18 million in the quarter, similar to Q1 this year. We expect the downgrade cycle to continue over the medium term, but believe we're well positioned given our books' high quality. Turning to our investment property portfolio, economic stresses have put pressure on businesses of all sizes. As such, we've received a modest number of requests for mortgage and rent payment deferrals. To put this in perspective, we've approved CAD 1.7 million in deferrals on commercial mortgages and CAD 5.2 million in rent repayment deferrals. We'll continue to monitor our asset book, particularly as fiscal stimulus measures subside. Finally, turning to our U.K. property related portfolio, investment related losses were minimal in the quarter.
Looking forward, we expect the economic dislocation will continue, but we expect corporate bond downgrades and defaults resulting from the current credit downturn to continue to be manageable in the context of our total invested assets. Please turn to slide nine. Across Lifeco, sales were up 10% year-over-year. As expected, we observed muted sales activity in some products and markets owing to the pandemic. Conversely, this was balanced by fewer terminations, higher net cash flows, and strong retention in group businesses. In Canada, our individual insurance sales held up well due to a robust new business pipeline. Additionally, we saw increased customer adoption of digital tools, such as our online life insurance application, Simple Protect. Moving to the U.S., Putnam sales increased by approximately CAD 6 billion year-over-year, with institutional sales up CAD 5 billion.
This was partially offset by lower Empower sales across all plan sizes due to reduced market activity. In Europe, sales were flat over Q2 2019. This can be attributed to lower bulk and individual annuity sales in the U.K. In contrast, Ireland saw higher fund management sales compared to Q2 2019. Please turn to slide 10. Overall, Lifeco fees were down 7% year-over-year, or 5% excluding those Q2 2019 fees related to the sold U.S. Individual Markets business. In Canada, the decline in fee income was largely due to a reduction in ASO fees relating to lower claims volumes. Although average Canadian AUM was down year-over-year due to market levels, it was muted by positive net cash flows given our resilient business model.
Turning to the U.S., fees remained flat year-over-year at Empower, while Putnam saw a reduction in fees due to lower average AUM. In Europe, fees were lower due to the sale of the Scottish Friendly business in the U.K. and a new reinsurance treaty in Ireland. Next on slide 11, we'll look at expenses. Lifeco operating expenses were up 3% year-over-year, reflecting expense discipline company-wide, as well as strong business growth and transaction costs in reinsurance. Strategic investments continue in Canada and across Europe, while travel and training expenses were lower due to COVID-19 lockdowns. Now I'll turn the call over to Garry to review financial highlights. Garry?
Thank you, Paul. Starting with slide 13, base EPS was CAD 0.76, up 13% year-over-year, driven by strong base earnings growth in all four segments. Net earnings per share was CAD 0.93 with the additional contribution from actuarial assumption changes and other market related impacts on liabilities. Last year's results included a loss recorded on the sale of the U.S. Individual Markets business and excluding that, net earnings per share were up 33%. In Canada, base earnings improved 8% from last year with solid business results, continued strong trading gains and a lower effective tax rate this quarter. In the U.S., after excluding CAD 30 million in Q2 2019 from the sold Individual Markets business, base earnings were up 16% year-over-year. Underlying business growth was solid at Empower with participant growth of 5%.
Improvement in Putnam's results was due to unrealized seed capital gains, reversing most of the mark-to-market losses seen in Q1, also from Putnam's continued focus on operating expense discipline. In Europe, base earnings were up 15% as investment results improved considerably from last year when the U.K. had experienced sizable retail property losses. Insurance experience in Europe, including morbidity, also improved from last year. Capital and Risk Solutions again saw very strong year-over-year growth, particularly in longevity reinsurance solutions. Base earnings were up 63%, reflecting the contribution of significant longevity new business written over the past year, plus new business gains of CAD 4 million recorded this quarter compared to new business strain of CAD 36 million last year. Overall, base earnings have been very resilient, notwithstanding the COVID-19 environment, with good underlying operating performance including strong investment results, expense disciplines, and growth in all segments, particularly reinsurance.
Turning to slide 14. The table on this slide is a reconciliation of base to net earnings. We have shown both Q1 and Q2 to highlight some of the market impacts across the two quarters. Base earnings have improved since Q1, largely due to seed capital gains, lower new business strain, and strong investment results. I would also like to highlight a couple of points on the excluded items. On actuarial assumption changes, we saw a full reversal of the Q1 equity market based assumptions in Canadian individual insurance, along with other experience related assumption updates, which I'll cover shortly. For other market related impacts, those that are tied more closely to the quarter end market level, these mostly reversed, where certain items like the impact of hedging effectiveness or U.K. property value declines in Q1 did not reverse. Please turn to slide 15.
This table shows the segment and total Lifeco net earnings results from a source of earnings perspective. Adjustments to get base earnings are footnoted and the SOE categories above the line are shown pre-tax. Expected profit was level year-over-year. As a reminder, we reset expected profit at the beginning of each quarter with starting market levels being one of the key inputs. We began Q2 at a fairly low market point, which dampens expected profit, but then we recorded experience gains in fee income as markets recovered sharply during the quarter. I'd also note Q2 2019 included CAD 23 million of expected profit from the sold U.S. Individual Markets business. New business strain was typical of recent years' averages. Experience gains and losses and the assumption changes contributed positively in the quarter, and I'll cover both in more detail in the next slide.
Earnings on surplus contributed CAD 102 million on the strength of seed capital gains in Canada and Putnam, totaling CAD 45 million, and realized gains on the trading of assets backing surplus of CAD 55 million. The effective tax rate on shareholder earnings was 9% this quarter, generally reflecting jurisdictional mix of income, as well as changes in certain income tax estimates in Canada. Please turn to slide 16. These tables expand on the experience results as well as the management actions and changes in assumptions to highlight various items in the quarter, again on a pre-tax basis. Starting with experience results, yield enhancement continued to contribute positively. The widening spreads referenced on the Q1 call provided attractive opportunities, particularly early in the quarter, and equity release mortgages continued to contribute.
The market related impact on liabilities includes the impact of market recoveries on the value of segregated fund and variable annuity guarantees, net of related hedges, and includes the legacy blocks in Irish Life and Reinsurance. This is largely a result of remeasuring the liabilities using the market level and interest rates at the end of the quarter. Experience losses also include some hedging effectiveness on our GMWB products this quarter, but these were at much lower levels than had been seen in Q1. I noted the fee income experience gained earlier as the market recovery lifted AUM. I'd also call out that there were a non-material combined net impact of mortality, longevity, and morbidity. In many cases, it's difficult to determine what is COVID-19 related versus other various factors, but we do benefit from a diversified book of business.
As Paul noted, the sharp reduction in certain claim types, such as routine dental, does have a knock-on impact on processing fees and expense recoveries, particularly for administrative services only contracts. Credit related impacts were modest this quarter, primarily arising from bond downgrades and mainly in Europe. Looking at the actuarial assumption changes on the right, I'll call out the Canada equity assumption, which was a positive CAD 134 million pre-tax this quarter, fully reversing the negative in Q1. Also in Canada this quarter, we lowered our future real estate growth assumptions, which was a negative impact of CAD 45 million pre-tax. You can also see the net positive results of other experience updates recognized in the period, with the impact of assumption changes for longevity partially offset by those for disability. Please turn to slide 17.
The Q2 book value per share of CAD 21.98 was up 5% year-over-year, but down 2% from Q1. The improved contribution from retained earnings this quarter was more than offset by currency translation and pension plan remeasurements, both recorded in OCI. The LICAT ratio at Canada Life remained steady, down 1% from Q1, with strong retained earnings offset by new business requirements, particularly in reinsurance and currency translation. Given the LICAT design, the market impacts were again very modest. We have added new LICAT sensitivities into our MD&A this quarter to help in estimating these impacts going forward. Lifeco cash rose to CAD 1.7 billion, with additional dividends in the U.S. from GWLA, the Great-West Life & Annuity, our U.S. insurance company, plus a CAD 600 million 10-year debenture issued in May in anticipation of refinancing an upcoming maturity this month.
Note that neither the CAD 500 million August maturity nor the additional CAD 500 million of 30-year debentures issued in July are included in this number. Overall, we remain well positioned from a capital and cash standpoint. That concludes my formal remarks. Back to you, Paul.
Thanks, Garry. I'll now ask you to turn to slide 18, where we'll briefly review our GLC Asset Management Group Limited transaction announced yesterday. As you know, Lifeco reached an agreement to sell our Canadian asset management subsidiary, GLC Asset Management Group Limited, to Mackenzie Financial. This deal leverages common ownership and already strong collaboration between our organizations while advancing our efforts to improve and accelerate Canada Life's wealth offerings and business. As background, we believe successful wealth managers need to control their product shelf and customer solutions. They also need access to asset managers with consistent high performance, at-scale mandates, and product innovation and breadth. By combining GLC with Mackenzie, Canada Life will have access to an asset manager with these strengths and will be able to focus its efforts on delivering high-quality wealth solutions to individual and group customers and distribution channels.
Lifeco will receive net cash consideration of CAD 145 million and will assume fund management responsibility for the Quadrus Group of Funds. For this reason, Canada Life is currently in the process of establishing a new fund management company. We expect the transaction to close and the new fund management company to begin operations in Q4 2020, subject to regulatory approval. Under Canada Life's new fund management company, we'll have greater control of product and pricing while leveraging Mackenzie's asset management and fund administration capabilities. Our goal is to strengthen our overall wealth offering for our customers going forward. I'd note that earnings impacts will be different between Lifeco and IGM because of synergies and other accounting considerations. Lifeco expects to record a gain on sale upon closing, and the ongoing earnings impact to Lifeco is expected to be a decrease in the single-digit CAD millions range.
Moving to slide 19, we'll briefly review Empower's acquisition of Personal Capital. As noted on our June analyst call unveiling this deal, the acquisition of Personal Capital aligns with our strategic growth objectives for Empower. Empower has grown to become the second largest defined contribution record keeper in the U.S., with $667 billion of assets under administration and 9.7 million participants. As you recall, we've also been building out our IRA business. Bringing together these highly complementary businesses supports our long-term growth objectives in the U.S. On its own, Personal Capital is a compelling hybrid wealth management model that can create shareholder value. Working with Empower, we believe the addition of Personal Capital will accelerate our IRA rollover business and increase our capture of participants' out-of-plan assets. In summary, the transaction will position Empower with a new standalone high growth platform.
It will accelerate Empower's growth plans in defined contribution focused retail advice and wealth management, and it will enhance Empower's already successful DC record-keeping business. The acquisition includes upfront consideration of $825 million and a deferred consideration of up to $175 million U.S., subject to achievement of target net new asset growth objectives. Beyond this transaction, Empower continues to be well positioned to participate in consolidation of the U.S. DC record-keeping space. Finally, on slide 20, we'll take a look at what's ahead. Before we open the line to your questions, I'd like to note that while some countries and economies have begun to reopen, we recognize there's uncertainty ahead as the pandemic is evolving day to day. For that reason, we continue to put the safety and security of our employees, advisors, and customers first as jurisdictions change or enact new pandemic measures.
It's through our intense focus on leveraging digital tools and technology that we can continue to support and improve customer and business outcomes, even while employees work from home. Our digital footprint will continue to grow and adapt, not just to fit our customers' changing needs, but the changing times that we live in. We remain laser focused on advancing our strategic priorities in Canada, the U.S., and Europe. As I mentioned earlier, while the COVID-19 environment presents challenges, it can also present attractive acquisition opportunities. We remain actively engaged in assessing opportunities to scale and extend our businesses. In closing, Lifeco remains well-positioned to fuel business growth and shareholder value creation through differentiation and disciplined deployment of capital while responding to the challenges presented by the pandemic. I'll ask the operator to please go ahead and open the line to questions.
Thank you. We will now begin the question-and-answer. Press star then two. We will pause for a moment as callers join the queue. Our first question comes from Steve Theriault of Eight Capital. Please go ahead.
Thanks very much. For starters, I wanted to ask a question on Canada. In the materials, you talked about premium reduction being phased out July. Just on deferrals, how smoothly has that gone? Can you talk about any trends in lapsation? Is there deferrals into August and beyond? Like how much, to what extent there's been extensions?
Yeah. Thanks, Steve. I'm going to actually turn that one over to Jeff Macoun to respond. Jeff?
Great. Thanks, Paul. Thank you for the question, Steve. A couple things in there. How has it gone? As Paul indicated, the deferrals stopped in June, and we'll continue to monitor the situation. We do see dental offices, paramedical services opening up, and so we'll continue to monitor it as we move through the fall here. If things change, of course, we will react and proact to that. It's gone very well with customers and working with advisors across Canada. Surprisingly, we've seen very little reduction in terms of participants across Canada with plan members, and the terminations with clients have been a lot less than we expected. Overall, it's gone well, and we'll continue to monitor the situation.
Okay. I want to ask a question on Europe as well. Can you just give a little bit of detail around the elevated strain in Europe and the outlook for the second half? Meaning, have you put some measures in place to moderate strain in half two or is it going to take a little bit longer given the environment?
I'll first refer that one on to Garry because as you know, Steve, sometimes the strain we take on is because there's a great business opportunity that has a bit of strain early on in the transaction, but is obviously, ultimately going to create value long term. We need to differentiate between that sometimes when we're taking on business of that nature. Garry, maybe you can respond to that and you might refer it on to David Harney after that.
Sure. Yeah, when it comes to Europe, I'd just note a couple of things. First off, as Paul was mentioning, a fair chunk of the strain in Europe would come from some of the businesses that Irish Life, where they're more investment contract style, you can't defer the upfront acquisition expenses the way you can on some of the insurance contracts. Those like at Empower, those tend to have a bit of strain associated with them, that's what we'd call good strain because obviously we're pricing and writing good business there. The other thing I'd note is that often in the past, we have had new business gains from bulk annuities, particularly U.K. bulk annuities, we didn't have that. Whereas this quarter last year, we actually had quite significant new business gains in the U.K. In this quarter, there just weren't any.
There was not an offset, and often in a quarter, we have an offset. That may be why it looked a little higher this quarter, but nothing really unusual.
Yeah, Steve, Oh, we're getting an echo there. We would characterize that as kind of negative strain when you book an upfront gain on that. What you're seeing here is the lack of that negative strain offsetting just the natural flow of the business.
Okay. The bulk annuity sales that were, I guess, lumpy to the downside this quarter, that'll just continue to be the case in sort of normal fashion? There's no sort of indication that the bulk annuity sales will be sustainably low through the pandemic or anything like that?
No, as a matter of fact, I'll turn that one to David Harney, who can speak to sort of the activity we're seeing in the bulk annuity space in Europe and U.K. in particular. David?
Yeah. There was a slowdown in the first six months, all right, but we have seen activity pick back up just over the summer. We expect the second half of the year to be at more normal levels. There's a good pipeline of business. With one case, we actually won around the start of quarter two that was withdrawn because of the virus, and that's come back, and we've won that case again, we expect to close that in the second half. That's just a good example of how the market is picking back up again.
That's very helpful. Sorry, just to finish up, are you able to size the gain from the GLC sale?
Garry, I'll let you respond to that one.
Sure. Yeah, in terms of the gain, we haven't finalized the accounting at this stage, but I'd expect a gain in the ballpark of CAD 100 million. It could be a little more.
That'd be after tax?
Yes.
Okay. Thank you so much.
Our next question comes from Meny Grauman of Scotiabank. Please go ahead.
Hi, good afternoon. In Q1, you disclosed that the COVID-19 impact on base earnings was CAD 65 million after tax. I'm wondering what the equivalent would be this quarter, if you have that.
Yeah, Meny, I'll turn that to Garry, as I think he was saying, when you look at some of the mortality, it's hard to unpack how much of shifting changes in mortality is directly related to COVID. Garry, perhaps, that's one example of where to get precise is not that easy. Garry, I'll let you respond to that.
Sure. I might just refer back to slide 14 when I was going through the presentation. What we tried to do here, as time goes on, in Q1, it was fairly easy to point very directly to the market fallout from COVID in March. It was very clear. As the quarter unfolded, as the next quarter unfolded, you've got all sorts of factors that are driving results. Some are COVID related. Is the market recovery COVID or not COVID? It's those types. What we did instead was just try to, when we did the earnings reconciliation, we just tried to show here is Q1 and Q2 broken into base and non-base, and just call out some of the things that move between them.
An example would be, we had seed capital losses recorded in Q1, I think it was in the order of CAD 30 million, say, at Putnam, and these 80% reversed in Q2. You could call that COVID related, but we didn't do a tally up and have a COVID slide for that because it was just not possible to really accurately separate the two out going forward.
Yeah, I guess I'd add to that, Garry, that in a lot of ways, because of the market recovery, other aspects of COVID-related challenges. For instance, we referred to the bond portfolio of CAD 18 million, we referred to a little bit of invested property challenge. Those things were, frankly, a lot of it was broadly offset by the market recovery, but it was really kind of taking back some of the equity market losses, almost the mark-to-market losses that incurred in Q1. It's hard to measure. It's really kind of getting a sense of what's the momentum here. The momentum because of the strong equity market returns has really been a dampening of any implicit COVID impact in quarter.
Fair enough. I guess that's what I'm trying to get at in terms to understand in part how the impact of COVID is playing out relative to your expectations. I guess it would seem that it's playing out better. I just wanted to confirm that and then just see if there are any aspects in the business that are actually having a harder time than what you expected.
If you go back to the slides that we laid out earlier in the presentation, I think it's seven and eight. I guess the way I would characterize that, yes, slide six, seven, eight, is that at this stage, I would say the impacts have been a bit more moderate than we would have expected. To a large extent, again, that we saw the good recovery in equity markets. I think what we found for the most part is that our business model is very resilient. If you go to thinking about what's happening with the business, we start off with a strong and conservatively managed balance sheet when you think about our invested assets portfolio.
I guess our expectation has always been with the diversification we've got, with the conservatism we've got, there's obviously going to be downside related to economic impacts, but we always believe they'll be moderated because of our risk stance there. Secondarily, think about the businesses, and as we've outlined, we're starting to see reasonable recoveries in sales activities in markets where some of the limitations on physical distancing have been lifted. We like the underlying kind of trajectory of the businesses, but we can't really estimate what will happen in the external environment. Right now, to date, the external environment, we've seen the moderating impact of equity markets coming back. You can't project what will happen with equity markets into future quarters.
I would say overall, we're seeing strength of a resilient business model, strength of a conservative invested asset portfolio, and that in part has kind of moderated the downside for us to date. You don't know what will happen with the economy going forward.
Thank you very much.
Our next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
Hi. Good morning. Afternoon, sorry. A quick one on the premium refunds in Group. Is that part of the fee non-market negative experience on that sources earnings slide, the CAD 42 million after tax, or is that something else?
Yeah. In terms of geography of that, Gabriel, Garry made reference to ASO fees. Bottom line is the way we receive fees on that is based on actual transactions. It'd be the number of dental transactions. People weren't going to the dentist. There was no transactions, so no fees. You get a drag on that. It can be a bit of a drag on your overhead as well because that obviously covers the cost of overhead. That's the geography of that. Anything I've missed on that, Garry?
No, I think I said the premium refunds weren't part of that line. That's more of the other factors, yeah.
That's a group item, and you talk about it in MD&A, and you're also saying that'll be much, much lower, all else equal going forward?
Yeah, I think the transaction volumes are picking up. We'd expect the fees will pick up with the volumes, yeah.
Okay. Can you quantify any of the morbidity in Canadian Group experience this quarter?
Perhaps, Garry, you can start off with the quantification, and then I think it would be good if Jeff provided some insight into the action plan there on Group LTD.
Yeah, while we're getting other people to talk about it, maybe not just what happened in the quarter, but in the MD&A, you're talking about physical distancing and self-isolation requirements. It sounds like mental health stuff the way I read it, and that's something that you're assessing on how to price on renewals as experience emerges. What happened in the quarter and what the outlook is for this particular issue?
Okay. Garry, why don't you start off with the quantification, and then Jeff can speak to what we're doing from an operational perspective.
Sure. Of the overall morbidity and longevity and mortality, which, as we noted earlier, largely nets out the Canada morbidity, across all the various lines of business there was modest. I think it's -14 is the number. It's quite modest as a contributor to that. Plus there's a minus within that.
Got you.
Jeff, do you want to speak to the actions we're taking and a bit of insight into kind of the way we're, whether it's on the pricing or on the claims management side?
Perfect. Yes. Thank you, Paul. As you're aware that this is a one-year renewable business. We took action in January, a rate adjustment that is flowing through the system. This business, it takes about a year to get through the system, so we're halfway through there and a bulk of our renewals would be at the start of the year. We're very pleased with that. That we'll start to see some dividends there. We took some further action in the mid part of the year in June on additional pricing actions to get at this. That'll also begin to flow through. The other action that we took from a management perspective is that we've increased our disability management complement significantly. We began doing that early in the year.
We are at full complement now, and we've added some extra specialization to get at, as you referenced, on the mental health side. Those are two key issues that we've been dealing with, and we feel very comfortable will help us to get ahead of the disability situation.
My last one is on the management action. It looks like you got a CAD 65 million post-tax reserve release from updated equity and real estate return assumption in Canada. The real estate return assumptions were lowered, and it was a CAD 33 million strengthening, but a CAD 90 million release from equity market return assumptions. I'm just reading the MD&A, and it sounded like an in-quarter equity market recoveries, and you saw that happen and you released reserves. The way I look at reserve releases or assumption changes is that those are for long-term assumptions, not something that would have happened in the quarter that would have spurred that. Is something else going on?
It's Garry. Paul, do you want me to take that one? I'll take that. Yeah, you're right, we did both. The CAD 90 million, the best way to think it as a reversal of what occurred in Q1, where our assumptions were also impacted by the maximums under the Canadian Institute Actuaries Standards. You've got the interaction of the standards with our assumptions as well, which is why it went down sharply in Q1 and then back up sharply in Q2. That's what was happening on the equity side, whereas the real estate side was just a lower growth assumption going forward.
You can have a reserve assumption change just on one quarter of the equity market. Granted, big ones, but just seems at odds with how I understood it worked.
Yeah. Typically, there is a potential for buffering. That's over the last number of years, you've had a bit of that, which has really moderated that. As you run up against the thresholds in the actuarial standards, you tend to get more of a straight to the bottom line with the assumptions both ways, up and down. You don't have as much buffering.
Maybe I'll follow up on that one. Thanks.
Okay, sure.
Our next question comes from Doug Young of Desjardins. Please go ahead.
Hi. Good afternoon. Garry, just maybe kind of sticking with you and on that topic. I think it was CAD 98 million that was released related to equity markets and management actions and assumption changes. I was of the view that you did kind of the corridor approach, and so you always had a buffer, and so you didn't mark to market. I assume this is for equities that are backing long-term liabilities, but it doesn't seem like you have that buffer anymore. So is this just essentially a mark to market of that portfolio, as we would see with some of the other insurers? Is that what we should expect going forward?
Garry, you might as well get right at that one.
Yeah. I was just going to say it's a follow on. That's really what I was trying to provide earlier. It is very similar to that corridor approach that some have used. However, when you get up against the actuarial threshold, you don't have room in your "corridor" anymore, and so it is more of a mark to market. You don't have that buffering, and that's the situation we found ourselves in Q1 and Q2. Really, I think going forward, to the extent there's continued recovery, then that will likely be buffered. It was really the very sharp drop in Q1 and the sharp recovery which made it move more like a mark to market. That's a good description.
Yeah. You could have reset the corridor, but you chose not to. Why wouldn't you have reset the corridor and reset the buffer, or is that not the way it works?
That's not the way we've gone about it in the past. It wouldn't have been consistent with how we've gone about it in the past. S tayed with that. It's just we hadn't, in the past, bumped up against the actuarial thresholds the same way.
Okay. Just on the credit side, you quote in slide 16 a CAD 14 million after-tax impact. When I look at the MD&A on page 14, you talk about CAD 27 million after-tax impact from credit. I'm just wondering what the difference is between the two numbers. What's the 14 and the 27?
Yeah. Sorry, you want me to carry on with that, Paul?
Yeah, please.
Yeah. I think it will depend on what we've put in which category between the two in terms of what we've put in. The one thing I would note about, and I don't know if it's all of the difference, but I imagine it's the majority of the differences. We do assume a certain amount of credit activity in our expected profit. In other words, we assume some downgrades, for example, in our expected profit. In the experience gains, we're talking about credit impacts above and beyond what we'd already, quote unquote, "put in expected profit." Whereas the MD&A, I believe, is talking about the absolute quantity in the quarter. That's going to be a difference there.
Okay. That makes sense because you had the release of your asset default provision, and then the net impact would go through, like your best estimate. Your PfAD would go through expected profit, and your best estimate would go through experience. Is that right?
Yeah.
Okay.
It's along those lines. In other words, you anticipate some downgrades are already baked into your expected profit. If you don't get any, you have a gain. If you have exactly the amount, it's neutral. If you have more downgrades, then the extra downgrades are what is in the experience loss line.
Okay. I think I get that. Just lastly, on the LICAT, I just want to make sure I understand this because thank you very much for giving the sensitivities, the equity markets and interest rates. You also talked about the shift in the rate scenario, and that I think that shift in that scenario would've impacted the ratio by 5.5 points. That's actually going to be phased in, I think, over six quarters. Is that the way? There's that smoothing mechanism coming in. If it was an immediate impact, it would be 5.5 points, but there is that smoothing mechanism that's going to put that through unless the rate scenario goes back to what it was before. Do I have that roughly right?
I'd just point out one thing. We didn't actually have any shift in the scenarios this quarter. This is just flagging, and I believe some of our major peers have also flagged the same issue that can arise with LICAT, where you can get a bit of a discontinuity. OSFI recognized that this year and is putting this smoothing. We're just saying that if it did happen to us, then that would be the impact, and it would be smoothed over six quarters.
Okay, great. Thank you very much.
Thanks, Doug.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Thank you. Paul, you made a few comments regarding credit risk in your prepared remarks, which were helpful. However, when I look at the credit rating agencies and the number of downgrades as well as credit spreads, those kind of factors point to me that credit risk, if anything, is dissipating. Yet your prepared remarks were relatively cautious. I get some unknowns with COVID. Just wondering, are you seeing anything in particular in credit trends that concerns you, or why the cautious tone?
Well, I think you're saying that I was being maybe positive about it as opposed to cautious. Our views are that we do believe that we're in the middle of this credit cycle, and there's more to come, and we recognize that. I would say my more positive stance would be the fact that we do have a high-quality credit book in terms of invested assets, significant quality, a significant percentage A-rated or stronger. That said, we can't predict or project how long the credit cycle will play out. I would say that we remain diligent on ensuring that we manage our credit. At the same time, we're comfortable and confident that we've done the necessary de-risking and taken actions to limit our exposures there. Raman, anything you'd like to add to that?
Sure. Yeah, I'd just add, I guess you're right, the market has recovered quite a bit. Spreads are in. Obviously, equities has done well. I think part of the reason we're cautious is you look at the agencies, by and large, most sectors remain on negative watch. We do expect more downgrades. As Paul said, there is uncertainty as fiscal stimulus comes off as to what the response will be in the market. We tend just to view it cautiously. If you look at our exposure, as Paul was mentioning, where it begins to bite on the downgrade side is when you cross into high yield.
Given that we have v ery little in below investment grade and also very little in the triple B minus category. That should buffer it. Those are the reasons to be cautious, is the amount of sectors on negative watch and the uncertainty as fiscal stimulus fades.
Paul, I guess maybe to put it another way, you saw what we experienced in quarter relative to our current invested assets book, and it was relatively modest. We don't see anything startling on the horizon, but we can't speak to what the future holds. I think we remain cautious, but we also remain reasonably optimistic because we have a very conservatively invested asset portfolio. I think we're better to remain cautious and make sure that we're vigilant in managing and monitoring in a very close way.
Okay, that's helpful. Second question is also related to investment risk, but it may be on your real estate and mortgage holdings. You provided some useful details on payment deferrals. I was just wondering how you're thinking about the potential for revaluation risk. Obviously, you updated your return assumptions in the quarter. Generally, real estate portfolios are getting marked down. How are you thinking about that, whether you categorize it as an impairment or simply a revaluation risk?
I'll let Raman speak to that because that's obviously something that we're thinking about. In particular, you'll be aware that when you look at our real estate funds in Canada, we've put a stop on any cash flows in or out of those with that very purpose, because it's hard to lock down on values at this point in time. Raman, maybe you can provide a bit more color on our perspectives there.
Sure. I guess maybe echoing a little bit of the same themes that we were mentioning around credit viscerally. We've seen stability in certain sectors of the property market, I think cross-regionally. If you look at some of the detail on the back of the slides that we've put in, what we have seen is more stability, say, for example, in the industrial space or in the office space from multi-family versus retail. We do recognize that it's early, and like I was saying before, as stimulus comes off, we have to be cognizant of the risks there. I guess the other thing I'd say is within retail, obviously, it's not all the same. If you look at some of the detail, again, we have in the very back, which breaks out our retail exposure in more detail.
We've definitely seen more stability in areas like distribution warehouses or grocery-anchored retail versus department stores or shopping malls. We take some comfort in the fact that our exposure in department stores and shopping malls is lower. Particularly in the mortgage side in the pre-financial crisis, we've highlighted that in the past. That's where we've had some issues in the past. That's down to about CAD 99 million today, that exposure. Again, just cautious on the uncertainty that exists in this space going forward. Again, given where we're starting from, we think the risks are manageable.
Yeah, I think, Raman, I might put it that we're cautious on the external environment because we don't know exactly how this will play out. We feel confident in the steps we've taken to de-risk the portfolio since the 2008 financial crisis, including shifting to things like warehouse and distribution centers, more needs-based retail, as opposed to traditional shopping malls. We like what we've done internally, and we remain cautiously optimistic, I'll say, not knowing exactly where the external environment will go.
Okay, one more question, if that's okay. I guess the GLC Asset Management transaction makes a lot of sense to me. Just kind of curious on the formation of the new Canada Life Investment Management division. What's kind of the real thinking behind that if you're going to sell off GLC?
Yeah. I'll provide a bit of context, but I'll turn it over to Jeff. As we think about wealth management and asset management and how they play together, in the context of wealth management, it's key for a wealth manager to be intimately engaged with customers and advisors who need understanding what are their needs, what are the product solutions they need, whether it's portfolio solutions and the like. That's critically important that we have control and an understanding of that. What we need is we need strengths of inputs into those wealth management solutions. We want to have partnerships and relationships with strong, sustainable, and competitive asset managers who will provide those inputs. The creation of a fund management complex positions us with all the tools and capabilities to build solutions.
The partnership and the relationship and the move of combining GLC with Mackenzie creates a stronger asset management partner to provide us with inputs. It's higher scale, more diversified, and therefore you have greater opportunities for performance and at-scale mandates. We like the idea of controlling the shelf and the solutions for customers, but then have a real strong partnership with a highly competitive asset manager. That's kind of the backdrop. Perhaps Jeff can provide a bit of context as to how this is kind of playing out and what the market reaction has been.
Thanks, Paul. Perhaps a couple of comments, perhaps, too, on top of what you said. First of all, I participated in a number of calls both last night with wholesale and today. The reaction from advisors and our wholesalers has been overwhelmingly positive. This really speaks to our ability to strengthen our wealth strategy in Canada, as Paul mentioned. It really allows us to focus and grow our wealth management business, which is key to our overall strategy in Canada. In addition to this, I would say it really allows us to sharpen our focus on developing best-in-class product solutions. At the same time, it gives us access to industry-leading investment management capabilities, as Paul's mentioned, and support our strong distribution channels both on individual and group business. We're very bullish about this.
It really gives us best of breed in both areas and allows us to take charge and ownership on products and innovation and pricing in a very fast market.
Thank you. That's it for me. Thank you.
Thanks, Paul.
Our next question comes from Tom MacKinnon of BMO Capital. Please go ahead.
Thanks very much. Good afternoon. I noticed that the investment gains and particularly yield gains in earnings on surplus were generally higher than what I would have thought. In terms of yield enhancements, what was it that allowed you in this quarter to really have these yield enhancements? Did you specifically term out or maybe a little bit of detail there? With respect to the earnings on surplus, what drove that? Did you harvest probably higher than normal gains in the quarter as a result of movements in spreads? Just a little bit of color there, and if you could close by saying how should we be thinking about both yield enhancements and earnings on surplus going forward. Thanks.
Okay. I'll let Garry start off on a bit of context around the earnings on surplus and yield, and he might turn to Raman to provide a bit of insight into kind of the geography of assets. I'll let Garry start off on that one. Garry?
Sure. Yeah. Maybe I'll start with the surplus gains. They were a little higher this quarter than they have been in a number of quarters in the past, part of that was opportunities arising in response to sharply lower interest rates is creating greater unrealized gains that we were able to realize those gains. Part of that opportunity going forward will depend on the direction of interest rates, but that was what was driving that this quarter in particular. I think the number was in the, I think I mentioned it was 50+ range, and that is a bit higher than typical. On the yield enhancement side, the number, the just over CAD 100 million pre-tax number, not that unusual in a historical context. I think 80-100 is typical, although it does vary quite a bit by quarter to quarter, depending on the opportunities.
I wouldn't have said it was an unusual amount. Most of it was in Canada this time around. I think a couple of things, and maybe this is where Raman can add color. I think we had some attractive yields early in the quarter because spreads were quite wide. Then we did, notwithstanding some disruption to the origination of equity release mortgages from our U.K. office, we were able to yield enhance some of our assets and take advantage of attractive spreads on equity release mortgages as well. Maybe if Raman has something to add to that.
Yeah. No, I think you covered it well, Garry. I guess the only thing I would add on the bond side, if you remember, Tom, back especially early in the quarter, we saw just a tremendous amount of issuance after the Fed and other central banks came in and provided some comfort to the market. We were able to benefit from some of those assets that came to market, and I think that was part of what fueled the yield enhancement as well.
Okay, thanks for that. If I could just squeeze one more in with respect to the bulk annuity market in the U.K. To what extent is this market impacted by low rates? How do low rates impact this? Do they impact it in terms of sales or in terms of margins? Look for the color around that. Thanks.
I think that's a good question for David Harney to start with. Perhaps Arshil Jamal might add a little color if David likes. David?
Yeah. Well, I think rates have been low in Europe for a while now, albeit just they've come in a little bit lower. It really doesn't have that much impact because most of the bulk annuity market is transfer of liabilities from pension schemes, and those pension schemes themselves would be backing those liabilities with fixed income assets. As interest rates come down, the pension schemes would see assets backing those liabilities increasing, and it's those assets that they would be using to buy our securities. Low rates really don't impact the market.
Would they impact the amount of capital you have to hold against them?
The capital may be a little bit higher, all right, but then that would go back into the pricing. The capital is typically about 10% of purchase price, and maybe that's gone up a little bit, but it hasn't moved materially.
Okay, thanks for that.
Thanks, Tom.
Our next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon. I'll try to be quick with some of these. The gains on the sale of GLC. Garry, you referred to CAD 100 million after tax. Would I be correct in saying that that would be treated as non-base earnings? Industrial Alliance talked about a potential URR charge or a change in URR, some reduction from 3.05% in 2021. Do you share that view that we're likely going to see some kind of URR charge? What quarter do you figure we'll see that reported, in 2021 or in 2020?
Garry, do you have a perspective on that?
Yeah. We have heard there are some discussions about the Actuarial Standards Board has a process for deliberating on URR changes. I have heard that there are discussions underway. I understand that if it does go ahead, it would be 2021, not 2020. Typically, those type of changes are effective on October 15th, and that's so that they fit in line for year-ends for both bank-owned insurers and for life insurers. Typically, companies have the ability to adopt early. If something came in in 2021, and I think that's an if, depending on the Actuarial Standards Board process. If it does come in, and I certainly wouldn't bet against it, I think it would be in Q3 next year is likely when we'd recognize it.
Okay. Real quickly on the sensitivity to markets. I think you disclosed that a 20% decline in markets would impact your earnings by CAD 163 million after tax. That was in last quarter's MD&A. What I'm interested in understanding is this quarter, the effect of market, the amount that was treated as non-core was about CAD 35 million. What I'm trying to understand is, that CAD 163 million, is that a good proxy for what would be treated as non-base, or is that the total impact of equity markets on your earnings?
Garry, to you.
Yeah, I think a lot of the impacts are going to be in the non-base. There's not much that's picked up through that. The disclosure, the sensitivity disclosures are the point in time, and I think those are almost all non-base. The only one I'm hesitating on off the top of my head is the seed capital. Other than that, all the rest would be the typical things you've seen going through the non-base.
Okay. Well, that's what sort of threw me off a little bit this quarter because based on the sensitivity disclosed, you would have expected a much greater gain in your non-base gain this quarter because the S&P/TSX was up about 16%. I guess what I'm getting at is why was the non-base gain of CAD 35 million so modest given what happened with equity markets?
I would note that if you look at the 35, you're not picking up the updated equity return assumptions are also driven from the market. That's we talked about earlier on the call with the equity, the CAD 98 million from the equity. That's probably the difference.
Yeah, I didn't piece that together. Just the final question. It looks like the company's building up quite a lot of cash up at the holdco level, perhaps as much as CAD 1.7 billion now. I know that there's a maturity coming up, but there's also another issue coming up. What I'm getting at is why is the company building up so much cash up at the holdco level? Is it a defensive posture? Is it offensive? Is there some change in your thinking that's causing you to build up that much cash at the holdco level?
Garry, I'll start on that one. If you look at our posture in quarter, we actually have been proactive on M&A, on repositioning the book, on strengthening the portfolio. We announced the acquisition of Personal Capital. Obviously, we're doing the GLC transaction, and we'll be recovering some capital or we'll be having a gain there. Suffice it to say, we like a strong capital position. I guess in part because you want to have a degree of downside protection, but we also remain active looking at opportunities to scale and extend our businesses. As we've said in the past, we've seen great performance at Putnam from the standpoint of delivering for customers. We're seeing great discipline with that management team in terms of getting at cost. We also believe that scaling that business through M&A can unlock a lot of value. We look to Empower now.
We've built a very strong business, a strong and scaled business. We're going to couple it with Empower. We look to the future and we say we still fundamentally believe that the 401 recordkeeping or the DC recordkeeping market will ultimately consolidate, and we believe that Empower can and should participate in that consolidation. We look to Europe, and we look to opportunities to deploy capital either by scaling some of those businesses or extending some of those businesses. We've got a great retirement-led wealth platform, but you could really benefit from having a stake in a wealth manager in the U.K. We've got a team that's very active looking at opportunities. Because of the dislocation in the market, some things slow down, but sometimes opportunities arise as well.
I think having lots of capacity on hand is a wise thing to do in this environment.
Paul, I'd just add that part of it was taking advantage of very attractive conditions for us to write the 30-year debenture at a very attractive all-in coupon just right around the 3% mark for 30-year senior debt was a very attractive opportunity to position us for these strategies going forward.
Okay. That helps. Thank you.
Once again, if you have a question, please press star, then one. Our next question comes from Darko Mihelic of RBC Capital Markets. Please go ahead.
Hi. Thank you. All of my questions relate to the Capital and Risk Solutions group. I might refer to some of the supplemental slides just to get a better idea of what's happening here. The strong growth that we saw year-over-year makes a number of references to business growth. A couple of questions around that. First, within the supplemental, the only place that I can see strong growth is in risk-based revenue premiums. The first question is, when I look at this business, I do apologize, I don't have that much of a great history with this business. I've only got three quarters of source of earnings. I'm trying to better calibrate my model, especially for the expected profit and the impact of new business. When I look at risk-based revenue premiums, can you just give me an idea of what the trend is there?
Should I be driving or should I be having a follow-on impact on the expected profit on in-force for this business segment? The second question is: If we have such strong business growth, why is the impact of new business so small? It was only CAD 4 million positive this quarter and negative CAD 2 last quarter. That doesn't necessarily connect, so maybe you can educate me a little bit on bringing or impact of new business for this business segment.
Good question, Darko. You know what I'll do? I'm going to turn that to Garry MacNicholas. I think Arshil Jamal can provide some good color. It's a very diversified business with lots of different sub-segments in it that each have a different earnings trajectory and profit signature. I'll let Garry start off maybe at a high level, and then Arshil can add some color. Garry?
Yeah, sure. I'll just make a couple of quick comments. One is, it's really more on the source of earnings side, and then Arshil can cover off the business growth. Two things I know. One is the new business gain in the quarter is not a particularly good measure of the longer-term contribution of a business. It's very much a one quarter point in time, just as you set up the initial actuarial reserves and whether you've got a little bit of a gain you're expecting up front or not. What really drives the business, and it's very true in reinsurance, is the growth in expected profit. You could have a bit of strain one quarter. We had a small gain this quarter. That just really depends on the characteristics of a particular transaction.
What we really focus on there for that business and a lot of our business is the growth in expected profit. That's been very strong in the reinsurance business. I believe we're up 20% year-over-year, Arshil, you might have more detail there and a little more color.
Focusing on that expected profit number, this quarter we had CAD 155 million of expected profit. In the quarter a year ago, the expected profit was CAD 125 million. We've seen CAD 30 million of expected profit growth year-over-year in this segment. Towards the end of last year, we closed a number of financial solutions transactions both in the U.S. and in Europe. Since then, we've been growing our longevity business, and all of that is contributing to that expected profit growth. As Garry indicated, the impact of new business is not really a good measure of the lifetime profitability. It just reflects the profit margins on the transaction in-period relative to the margins that we put into the reserves.
Sometimes that's a negative, like it was a year ago, where we had a new business loss, and sometimes it's a positive, like this quarter, where we had a small new business gain. What we're really focused on is driving expected profit growth. I do acknowledge that it is difficult because on those two product lines, both the longevity swap line and on the financial solutions line, the premium or the revenue number with the P&L is not very representative. We have very many of our financial solutions transactions where we get very little premium revenue or alternatively, we get a very large premium revenue number with a very small impact on net income.
That is a less useful measure for us. It's included in the formal financial statements, but we typically don't comment on that in our investor material or in the analyst slide. We focus much more on the expected profit.
Similarly then along those same lines, if I look at page 65 of your supplemental to quarterly information package, when I look at the actual contract liabilities, they're actually down year-over-year. Is there any useful trend analysis that I can use there to help guide me with expected profit as well? Is that too much currency in there? Maybe you can just help me understand why the reserves would be lower, significantly lower year-over-year.
Yeah. Again, the structured business and the longevity business, that doesn't generate meaningful reserves, and those are the businesses that are growing. In the past, we've done some longevity transactions with assets, and those transactions are running down. The new business that we're writing in the other areas is contributing more, so expected profit is going up. The asset balances are falling as those asset-based longevity transactions continue to pay out over their life as expected.
Is it then that within those insurance contract liabilities, your PfADs are actually growing as a proportion of them? Is that how I should think about that?
Yes. When we track that internally on the longevity swaps, we are seeing material increases to our PfADs in there. We do track internally lifetime profits. We have not disclosed externally either for the reinsurance line or for our other lines, PfAD movements from period to period. We can certainly think about that and other disclosures that might help you model this business a little bit better.
Yeah. I guess just to wrap up on this whole segment, I guess we're seeing very strong growth out of it. The question is any sort of help on what you're expecting for the back half of this year and into next year from this group would be very helpful. Trying to model it is really difficult. Mind, we've only had a couple quarters of doing it, I'm already sensing that there could be some pretty big swings relative to my expectations.
Yeah. Darko, I would say this is a business that we like the business, we like its diversification. As you've pointed out, it's harder to get a profit signature here. It's a business that we do see a lot of growth potential in. What we'll do is we'll take this away and think about what some supporting information we could provide to make it a bit easier. I think that's a good takeaway for us.
Great. Thanks very much. Appreciate that. Cheers.
Thanks, Darko.
Our next question comes from Scott Chan of Canaccord Genuity. Please go ahead.
Good afternoon. Apologies, I hopped on late. My question is on Putnam. Obviously a stark reversal on that outflows. What kind of drove the positive net sales? Was it a specific asset class or product that resonated in the quarter, or was it more the market rebound and the mystery fund flows?
Yeah. Thanks, Scott. I'm going to turn that one over to Bob Reynolds, who can provide some context around the strong swing in sales and flows. Bob?
Yeah. We had positive flows in all our channels. Retail business, institutional, distribution, only. It was across the board. It was a combination of asset classes. As Paul mentioned earlier, our performance across the board has been strong, so we've been able to take advantage of that. We now have 25 four and five-star funds as rated by Morningstar. It's a good story, and one we look to keep going.
Yeah.
Were you trying to-
Oh, sorry, Scott, if you were going to, this is not sort of a single fund where we're seeing takeoff here. This is fairly diversified across channels and products. There's a fair bit of diversification there. Sorry, I interrupted you. Go ahead, Scott.
I was going to say if you're kind of thinking about modeling out future forecasts and sales, I don't know if you've seen anything quarter to date or an off-ramp thing to help us kind of gauge on the retail institutional side just to think about.
You're always challenged to sort of forecast when you see the level of equity market and volatility that we've seen over the last six months. The reality is, I'll let Bob add to this, but I think we like our momentum. We like the momentum we see in terms of flows and sales that are happening on the retail side. We like the momentum that we're seeing on the institutional side. We've had strong institutional flows quarter after quarter. We like the momentum, but it's hard to predict what will happen with markets and whether we'll see any further dislocation. Anything else you'd add on that, Bob?
Yeah, I would say when you look at the first half of the year, obviously with the sell-off in the first quarter, that hurt from an asset standpoint. Most of the redemptions in the short duration, ultra short duration income, which had a liquidity problem in middle to late March. When the Fed stepped up, it really bought that asset category. Again, throughout the year, we've had relatively or very good flows. Except for that one point, it was predominantly one asset class.
Got it. Very helpful. Thank you very much.
Okay. Thank you very much, Scott.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mahon for any closing remarks.
Thank you very much, Ariel. I'd like to thank everyone for joining today's call. As always, please feel free to reach out to our investor relations team for any follow-up questions. I will wish all of you well as we manage through an unusual summer. Hopefully you can get some time with family, and we'll talk to you post our Q3 quarter end. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.