Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco fourth quarter 2022 results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity for analysts to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead, sir.
Thank you, Carl. Good afternoon and welcome to Great-West Lifeco's fourth quarter 2022 conference call. Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer, and together, we will deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and COO, Europe; Arshil Jamal, President and Group Head, Strategy, Investment, and Reinsurance; Jeff Macoun, President and COO, Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO, Putnam Investments. Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-GAAP financial measures and ratios on slide two. These apply to today's discussion and the presentation materials. Please turn to slide four.
Great-West Lifeco delivered a solid performance in 2022, with full-year base earnings of CAD 3.2 billion and base EPS of CAD 3.46. These steady results were achieved against a backdrop of economic and market uncertainty and driven by the strength and diversification of our businesses. We closed out the year with a strong fourth quarter with base EPS of CAD 0.96, which Garry and I will cover in our comments. The company's fundamentals remain strong, and we continue to reduce our post-acquisition leverage ratios and build up cash and capital. Yesterday, we announced a 6% increase in the common share dividend. This announcement and our long track record of raising the dividend highlight the strong capital generation of the Lifeco portfolio and our confidence in the future.
The strength of the company's market-leading franchises provide stable growth in earnings and liquidity to support our investments in future growth. In the last few years, we've deployed significant resources on three transformative acquisitions to accelerate growth at Empower. We've made strong progress in 2022, adding new capabilities and welcoming millions of new customers to the Empower platform. We completed the MassMutual integration in December, achieving our cost synergy target of $160 million and exceeding our objective for client and asset and revenue retention. We're using the same disciplined approach with Prudential, and we'll start migrating its four million participants to the Empower platform in March. The acquired Prudential business is performing in line with our expectations.
Run rate cost synergies of $43 million have been achieved to date, and the business has contributed CAD 171 million to the Lifeco base earnings since we closed the transaction in April. Together, the MassMutual, Prudential, and Personal Capital acquisitions position Empower with the tools, capabilities, and customer relationships required to build a wealth management growth engine alongside its market-leading defined contribution retirement business. To this end, we launched Empower Personal Wealth in January of this year, integrating Empower's IRA business and Personal Capital's hybrid digital wealth business. We will begin reporting the DC business results and the Personal Wealth results businesses separately starting in Q1. Given this change, we're planning an investor education session to introduce this new reporting approach ahead of our Q1 results reporting.
There is a lot going on at Empower. Later in the presentation, I'll provide some color on 2023 growth that management is targeting for the Empower business and the key drivers behind this target. This, of course, is the last quarter which we'll report under IFRS 4 before transitioning to IFRS 17 and IFRS 9 in Q1. We're nearing the finish line of our preparations and are well positioned for the transition. We have provided a condensed opening balance sheet as of January 1, 2022 in our disclosures today and updated the expected impacts we shared with the market in June, which remain largely in line with previous disclosures. In addition to moving forward with our business priorities and getting ready for IFRS 17, we're also advancing our corporate purpose and social impact agenda.
Over the last 18 months, we've taken action in three areas of focus: introducing a commitment to net zero carbon, establishing enterprise diversity goals, and deepening our commitment to reconciliation. We've aligned the organization and our board around these three focus areas and look forward to sharing more on this with you at our annual meeting in May. Please turn to slide five. This slide shows our medium-term financial objectives: 8%-10% base EPS growth, a base ROE of 14%-15%, and a target dividend payout ratio of 45%-55% of base earnings. Notwithstanding the headwinds that held back 2022 performance, we're tracking to our base EPS growth objective with five-year growth of just under 9%. This reflects solid organic growth and strong contributions from acquisitions.
It also reflects our operational discipline, including how we manage our investment portfolio, underwrite and price new business, and manage expenses. With these same 22 headwinds, while they had a dampening impact on base ROE, we remain confident in meeting this objective over the medium term. With respect to our dividend payout ratio, this is a medium term target and our goal is to work into this range over the next few years. Please turn to slide six. Our fourth quarter saw strong overall results with base earnings of $892 million and base EPS of $0.96, up 8% year-over-year. Net earnings were over $1 billion or $1.10 per quarter, up 34% year-over-year. Garry will cover the financial drivers in more detail. Please turn to slide 7.
Our Canadian business saw an improving trend in insurance and wealth sales to close out the year. While group insurance sales were lower year-over-year due to fewer large case sales, persistency was strong and Canada Life led the market in sales in the fourth quarter. Strong individual insurance sales results were driven by participating life sales. Group retirement sales had strong sequential growth with gains in our core defined contribution and NextStep asset rollover businesses. On the individual wealth side, sales also improved sequentially and were in line with industry trends. These results are supported by Canada Life's continuing improvement in technology enabled customer and advisor experience. Please turn to slide eight. In Europe, business performance was steady as economic conditions improved and the political environment in the U.K. stabilized. Insurance sales were down from a year ago while individual annuity sales increased sequentially.
While the U.K. bulk annuity market demand remained strong, we did not write any large cases as we maintained strong pricing discipline. We resumed selling equity release mortgages in December and are seeing solid traction in an overall market that has somewhat lower new business activity due to higher interest rates. While Europe wealth sales were down from a year ago, Q4 sales were up sequentially with positive net cash flows in both individual and group. The stability in these European results reflects business models focused on financial necessities like pension savings, retirement income solutions, and group protection. Please turn to slide nine. Putnam's AUM was impacted by market declines and ended the quarter at $165 billion.
Net outflows of $1.5 billion showed continuative improvement compared to the last three quarters and were primarily in Putnam's lower fee fixed income products. Notably, Putnam delivered positive equity flows in 2022 in a period when equity sales across the market declined by over 10% year-over-year. These flows are supported by Putnam's excellence in investment performance for clients with 40 funds rated four or five stars by Morningstar. 96% of equity assets with four or five star Morningstar ratings, and 83% of total assets with four or five star Morningstar ratings. These ratings reflect Putnam's track record of strong performance over five and 10 years. Please turn to slide 10. Empower's DC business continues to experience strong momentum with sales up 8% year-over-year and client retention at 97%.
This is a testament to the excellence in service our Empower colleagues have continued to deliver to clients despite the heavy integration activities over the past year. As noted, the MassMutual integration is now complete. Targeted pre-tax cost synergies of $160 million were achieved, and asset, participant, and revenue retention outperformed our original expectations. The Prudential integration is on track. $43 million of realized pre-tax cost synergies are unchanged from last quarter. As we noted with MassMutual, cost synergies are typically front and back end loaded. In Prudential's case, we expect the remaining $137 million of annualized cost synergies to be realized when client conversions are complete and redundant systems and services are decommissioned after Q1 2024.
We're excited about the prospects for continued growth in Empower Personal Wealth with our enhanced customer experience now available across the combined Empower and MassMutual participant base. We're seeing good early momentum with sales growth up 15% over Q3. Please turn to slide 11. Capital and Risk Solutions expected profit increased 7% year-over-year. Other margins and fees were up 20%, with growth in structured and longevity reinsurance and improved pricing in the P&C business more than offsetting slightly lower actuarial PfAD releases. The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on our core businesses in the U.S. and Europe, we continue to pursue expansion opportunities in select new markets. With that, I'll now turn the call over to Garry to review the financial results. Garry?
Thank you, Paul. Base EPS of CAD 0.96 was up 8% from Q4 2021, notwithstanding the lower market levels this quarter compared to Q4 last year. All four segments contributed to the strong performance, which also included the acquired Prudential retirement business that was not in last year's results. Net EPS of CAD 1.10 is up 34% from last year, reflecting the higher base earnings as well as favorable excluded items which were primarily actuarial and tax related.
In Canada, base earnings of CAD 295 million were down 7% from a strong Q4 last year, primarily due to market related fee income pressure and lower yield enhancement contributions, partially offset by strong group life and health insurance results. In the U.S., Empower base earnings of $155 million included $47 million from the addition of Prudential retirement business. Excluding Prudential, the results are down 8% in U.S. dollar terms year-over-year, due primarily to market impacts on fees and the anticipated integration shock loss in the MassMutual block, partly offset by strong organic growth in the business and improved spreads in the general account. Recall over 50% of net revenues at Empower are asset-based, the impact of lower markets on asset-based fee revenues continues to be a headwind, especially against the market levels in Q4 2021.
This comparative period markets issue is expected to continue into Q1 2023 based on market performance so far this quarter. That said, business fundamentals such as top line organic growth, customer retention, and retail expansion remain strong. As noted on the last call, in Q4, we completed the final conversions for the MassMutual business. Through the integration, we have met our expense synergy targets of $160 million on an annualized run rate basis, and we have exceeded the original customer revenue retention targets. Excellent achievements by the U.S. team. A similar integration revenue loss pattern is expected on the Prudential business. While there has been very little revenue attrition to date, some is expected in 2023 as part of the integration process, and that will begin to impact year-over-year comparisons as we progress through 2023.
We remain confident in hitting the customer and revenue retention targets we set out for this transaction. We also expect the benefit of full expense synergies, $180 million annualized, to emerge once the integration is complete early in 2024. While we have achieved run rate synergies of $43 million to date, we do not expect to see much additional synergy benefit to arise until 2024. Turning to Putnam, earnings were down from Q4 last year, largely impacted by two factors. First, lower asset-based fees as expected, given sharply lower average market levels for both equity and fixed income this year compared to last. Second, there was a negative swing of $33 million from one-time tax items, a negative $16 million this quarter opposite a positive $17 million in Q4 2021.
The Europe segment posted a particularly strong quarter with solid business fundamentals and results across Ireland, Germany, and the U.K.. There were elevated yield enhancement benefits in the U.K. and favorable tax impacts. The Capital and Risk Solutions segment, which is primarily the reinsurance business unit, saw earnings continue to benefit from steady new business success. U.S. life claims experience continues to improve from the elevated COVID-related claims experienced at the height of the pandemic. Turning to slide 14. This table shows the reconciliation from base to net earnings. Net earnings were over CAD 1 billion this quarter. In addition to the strong base earnings across the segments, there were positive actuarial assumption changes, management actions, and market related impacts on liabilities. The previously announced tax increase on Canadian financial institutions was substantially enacted this quarter.
While the additional 1.5% tax will modestly impact future earnings, the revaluation of deferred tax attributes resulted in a one-time positive impact this quarter. The remaining items are predominantly acquisition and integration related costs. Turning to slides 15 and 16. These next two slides highlight the source of earnings, first from a base earnings perspective and then net earnings. I'll focus my comments on slide 15, the base earnings SOE, with a reminder the amounts above the line are pre-tax. Expected profit was up 2% year-over-year. The increase is primarily due to the additional Prudential, plus business growth in Capital and Risk Solutions, and improved margins in both Canada Group customer and the Empower general account. This was largely offset by lower expected fee income due to the sharp market downturns experienced during 2022 in each of the regions.
Experience gains are the other notable item I'd call out, largely driven by yield enhancement in the U.K. mentioned earlier. The improvement from last quarter's experience loss needs to be viewed in the context of the CAD 130 million impact of Hurricane Ian provisions taken in Q3. Earnings on surplus of -CAD 24 million improved CAD 12 million from last year, with the benefit of higher interest rates partly offset by the impact of additional financing costs related to the Prudential business acquisition. The effective tax rate on base earnings this quarter was 11%, reflecting the jurisdictional mix of earnings and certain non-taxable investment income. Skipping ahead to slide 17. These tables expand on the experience results as well as the management actions basis and changes in assumptions to highlight various items in the quarter, most of which we've touched on already.
As shown in the chart on the left, yield enhancement continued to contribute positively, primarily in the U.K. this quarter. The elevated U.K. gains were in part due to having secured attractive assets earlier in the year that could either be used to support new business or enforce liabilities. Given the absence of large bulk annuity deals recently, the assets were allocated to the in-force block, resulting in a yield enhancement pickup rather than new business gains that we've seen in the past. The net impact of mortality, longevity, and morbidity was neutral this quarter, with some pluses and minuses across a diversified book of insurance risks. Credit was a small positive gain relative to expected credit loss impacts, as our high-quality investment portfolio continues to perform well. The table on the right highlights modest basis change impacts this quarter, plus the actuarial portion of the corporate tax rate change.
There are only a few smaller year-end assumption updates and refinements as the bulk of the actuarial reviews were completed in Q3. Moving to slide 18. This slide highlights operating expenses by segment. Expenses are up year-over-year, That was to be expected given the increase in business and the addition of the Prudential business. Adjusting for Prudential and currency movements, expenses overall are up 3%, demonstrating strong expense discipline. Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future, this is an area we'll monitor closely, We'll look to achieve productivity gains in our operations and adjust pricing if appropriate. The overall message here, consistent across the segments, is we continue to manage our expenses closely, balanced against the need to continue to invest for future growth. Please turn to slide 19.
The Q4 book value per share of CAD 26.60 was up 8% year-over-year. About three-quarters of that, or 6% growth, was driven by strong retained earnings over the past four quarters. In addition, currency translation was a positive this year, led by a stronger U.S. dollar. The LICAT ratio at Canada Life remains strong, improving two points to 120%. Earnings net of dividends and the continued smoothing in of the scenario switch benefit drove the increase. Lifeco cash, which is not included in the LICAT ratio, ended the quarter at CAD 1 billion. The increase from last quarter primarily reflects the EUR 500 million debt raise in Q4 in advance of a EUR 500 million maturity in April.
OSFI released its 2023 LICAT guideline in Q3, setting out the adjustments to accommodate the transition to IFRS 17. The first LICAT ratio under the new guideline will be reported as part of the Q1 2023 results, we are currently estimating a positive impact of approximately 10 points on transition. Note the actual impact will be dependent on market conditions at the time, including the level of interest rates, given different sensitivities between IFRS 4 and IFRS 17. Turning to slide 20. This slide provides an updated view of the anticipated impacts as we move to IFRS 17 and is very much in line with the information we provided last June. Note too, in the year-end consolidated financial statements contains summarized opening balance sheet information on the transition to IFRS 17 and IFRS 9.
As expected, there is a reduction to shareholders equity, which we had flagged in June as being in the 10%-15% range. This is a result of a net reduction to retained earnings, driven primarily by the creation under IFRS 17 of a new deferred profits liability, the contractual service margin, which basically represents unearned expected future profits. The resulting reduction is 12% for shareholders equity and 14% for book value per share in line with original estimates. The contractual service margin is included in regulatory capital, and as noted earlier, we are expecting approximately 10 points improvement in the LICAT ratio on transition based on current estimates and conditions. I should note we have only recently begun to work on the IFRS 17 comparative Q4 results as we wrapped up IFRS 4 reporting this week.
Also, we are still analyzing the comparative results from previous quarters, particularly in relation to investment results, given the large equity and interest rate movements during 2022. We will be looking to share information on comparative 2022 earnings under IFRS 17 and 9 at the Q1 call in May. We continue to expect modest base earnings impact overall, although of course that will vary by segment given the different business mixes, and we continue to target 8%-10% base EPS growth over the medium term. Back to you, Paul.
Thanks, Garry. Please turn to slide 21. As Garry outlined, we remain confident in delivering on Lifeco's objective of 8%-10% base EPS growth per annum over the medium term. For 2023, we expect a low single digit offset to this growth as a result of the transition to IFRS 17. As a reminder, this is an accounting change that impacts the timing of earnings, not the economics of the business. We will report our Q1 financial results in May under the new IFRS 17 and IFRS 9 standards, including results for the comparative quarters in 2022. As part of our new reporting, we will be providing more insight into Empower financial results by splitting out Empower's core DC business from Empower Personal Wealth, previously referred to as Retail.
We're planning an education session for analysts and investors in the spring where we will outline our new reporting for Empower. In advance of that, given the multiple Empower transactions over the last two years and with much of the Prudential integration still to come, we wanted to provide more detailed perspectives on the drivers of Empower performance as we move into 2023. Management is targeting annual base earnings growth between 15% and 20% from 2022 to 2023 for Empower. This growth assumes long-term average equity market growth and stable interest rates throughout 2023. It includes Prudential expense synergies of $43 million already captured, but does not include the remaining targeted synergies of $137 million, with the majority of those coming in early 2024 when client conversions are complete and redundant systems and services are retired.
It also reflects expected Prudential revenue losses associated with clients not retained. To date, we've retained approximately 94% of Prudential revenues and are targeting ultimate revenue retention in the low to mid 80% range. We expect to see most of these terminations and associated revenue losses in the latter parts of 2023 or early parts of 2024. Finally, it reflects the continuing growth of our Empower Personal Wealth business, which is beginning to see solid traction following the integration of Personal Capital capabilities into the Empower participant and IRA rollover experience. As I noted, we're providing this additional information from Empower because of the multiple acquisitions impacting Empower's financial results year-over-year. We do not plan to provide this type of information for our other segments, where we'll be focusing on providing insights into the impacts of IFRS 17 for 2023.
With that, I would like to turn the call back to the operator to open the line for questions.
Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Meny Grauman of Scotiabank. Please go ahead.
Hi, good afternoon. I just wanted to follow up. Paul, you were talking about retention rate assumptions for Prudential. If my notes are correct, MassMutual retention was over 85% when all was said and done. I want to make sure I have that right and then compare it to the guidance of low to mid 80%. The question is just, why do you think that the retention rate for Prudential will come in lower than for MassMutual? What's driving that assumption?
Thanks for the question, Meny. I'll start out, but I'm going to turn it over to Ed, who can provide a bit more color. The reality is we had set a low mid-80s target for MassMutual, and we outperformed it. If you actually look at precedent transactions in the market, that was a kind of a market-leading level of performance. The strong performance is one we're very proud of, but maybe Ed can provide a little bit more color on the target, the targets we've set for Prudential. Ed?
Sure. Thanks, Paul. You're correct, Meny. The performance on MassMutual was 85%. Actually, a little north of 85%. You know, there's obviously a lot of moving parts with these transitions. Prudential has about 3,000 clients. MassMutual had 26,000 clients. The level of complexity with the Prudential clients is far greater. That said, we feel very confident that we'll come in, you know, well within that range that we, that we shared with on MassMutual, as Paul referenced, we had a target in the 82%-83% range. You know, we feel very confident we'll hit that range if not exceed it.
Thanks. Then just a question on the dividend. Just wondering, we haven't seen a dividend increase since mid-2021. I'm wondering if you could just help us understand the expected cadence of dividend increases from here and with the move that was announced today, is it a reflection of something in the outlook that's changed or is it just a function of the payout ratio? I'm just curious about that.
Meny, taking it back to last year, we actually increased our dividend in Q4 last year. We kind of did a two-part increase, and the overall increase was actually 12% last year. That was after having stepped away from dividend increases for a year during, you know, COVID. If you actually look at the track record, we've kind of been focused on Q4 increases. If you go back and look at it historically, generally it's been in around the 6% range, and this would be a continuation of that. I would say it's reflective of our view on, you know, the strength of the business, our liquidity, and it's about trajectory.
Having said that, we've outlined that obviously there'll be a bit of softening in our EPS growth because of the one-time impact of IFRS 17 transition. We do view this dividend as indicative of our view as we think about, you know, our medium-term growth, and we like our prospects for medium-term growth.
Thanks, Paul.
The next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
Hey, good afternoon. The after-tax yield enhancement number was about $135 million, which is good number, but quite a bit higher than the run rate, and I got the explanation on all that. I was wondering if you can tell me what that number would look like, if it happened in Q1 of next year under IFRS 17.
Gabe, thanks for the question. I'm gonna turn that one over to Garry. Garry?
Yeah. I think we will be doing our Q4 comparative work. You know, as I mentioned, that'll be coming up and we'll be sharing the comparative quarters when we get to the Q1 reporting. We might have an opportunity to discuss what it looks like between the two different regimes then, if we're in at that level of detail. I'll just make a couple of comments. I think, and we've noted in the past that, you know, some of the yield enhancements will fade away under IFRS 17 and others will stay. There's different mechanisms, but they'll stay impacting our results in the base earnings. I just wanted to point out that all of that has been factored into our... when we say, you know, a lower.
Yeah, yeah.
Single-digit impact, it's all factored into that on a pro forma basis. Any one quarter, it's a bit up and down, but we just looked across the year and said, "What's a typical year?"
Well, that's what I meant. I figured that you could at least provide a ballpark because that, low single digits earning impact would have factored that in, as you say. Is there any way you can ballpark it?
No, I wouldn't.
Or, or alter-
Yeah.
You know, annualize. Let's say, you're running around CAD 50 million-CAD 100 million of yield enhancement gains under IFRS 4, what's the comparative under seventeen?
Yeah. I think the things I'd point out is when you look into a specific quarter, even just the year half, the impact on switching from one to the other will depend on the nature and the location, which portfolio is the yield enhancement in, and the nature of what drives the yield enhancement. You know, in terms of a quarter like this, it's probably more 50/50. It's, you know, it really does vary quarter to quarter.
Yeah. Gabe, as Garry said, rough estimate this quarter 50/50. If the jurisdiction of earnings were different in another quarter, it could be a different weighting.
Yeah.
Okay. No, that's good enough. Just on, you know, U.K., I guess, I was expecting to see some, you know, action on the real estate front there. We're seeing other companies, you know, getting their appraisals and marking down their real estate holdings. I know you've got a different portfolio than other companies and went through an experience in, you know, the post-Brexit period that maybe made you adjust the portfolio a little bit. I'm wondering, you know, what your outlook is there for, you know, valuation on the, on the, well, broader real estate portfolio, the CAD 7 billion and the third of that that's in the U.K..
Yeah. Thanks, Gabe. I'll start off at the high level, and then I will pass it to Raman Srivastava. The reality is we've been staying totally on top of appraisals, the discipline we've always had. I will say that if you think about, the, you know, the journey from financial crisis to now, we've been very, very disciplined in terms of managing our real estate portfolio, staying on top of it, staying on top of valuations, quality, and the like. We come into what you could say is, you know, some market dislocation with a strong portfolio. I'll let Raman speak to what we saw in quarter and actually what flowed through the income statement in quarter. Raman?
Yeah. Thanks. Thanks, Paul. Gabe, you're right, it was a challenging quarter for sure for real estate in the U.K. and other areas. You know, we didn't come through unscathed. If you looked at the details that are embedded within the SOE on the market-related impacts on page 17, embedded within that, there's roughly a pre-tax number of about CAD -30 million associated with the the impacts over quarter.
What I'd say is, you know, it comes through on the property side, ours is skewed more to industrial than it is to office or retail. That's one thing. Then, you know, we've talked in the past about the mortgage book, and there's a lot of detail on the back as well of the, of the analyst slides on page 38. You would have seen some deterioration. Like if you looked at the LTVs, for example, a year ago versus today, you know, today they're at 54%, a year ago they were at 51. There has been some deterioration in the, in the credit quality, but I'd say the starting point is still strong. You know, we think if this weakness in the property sector continues, there may be some headwinds for us, but they're manageable, you know, given our starting point and then diversified nature of the portfolio.
Just, I mean, it's been a while since we talked about U.K. property. Last time, you know, in 2016, the portfolio was, you know, just under CAD 3 billion. Today, it's a little over CAD 2 billion. I guess you have been shrinking it for the past several years. I didn't notice. I apologize, but, you know, maybe you can walk us through that a little bit.
I mean, we're continuing to reposition. I think we've been, you know, we haven't been adding a lot to the U.K. property over the past number of years. We've been judiciously disposing of assets where it made sense, where the values, you know, made sense. You know, our mortgage book, we had talked about before some of the impacts years ago were in the pre-financial crisis mortgages. That's dwindled down to just a few hundred million now. It is quite a different composition now on that side than it was, say, four or five years ago. There has been some gradual. You wouldn't have noticed any one quarter, but gradual transition.
Raman, Gabe, I would say, you know, and Raman probably doesn't want to toot his horn, but the reality I've seen is teams have worked really hard at, you know, managing down the risk. If you thought of as we went into the financial crisis, what was the shape and nature of the invested asset portfolio, and particularly if I was thinking about the U.K. versus where we're at today, and it has a very, very different shape. As you recall, we, you know, got through that crisis period, you know, with relatively little damage. At this stage, we will, like everyone else, will see some challenges along the way, but our starting point is strong.
Got it. Have a good evening. Afternoon.
Thanks very much, Gabe.
The next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Hi, good afternoon. Just wanted to go back to Empower. I guess my question is, you know, what is the ROE for this business? Where should the ROE be? How quickly can you get there? You've talked a bit about synergies and early termination pressures and market pressures. Bigger picture, just kind of taking a step back, like what is the ROE? Where should it be? How quickly can you get there? Because I think of this business as having low capital requirements, low margin, but high ROE, especially for those that have scale. I think you've got scale. So just trying to understand that side of it.
Yeah. I guess I'll start, I'll start off at the high level, Doug, and turn it to Garry. If you think in terms of the Empower business, we actually deployed capital to acquire that business. Obviously our model and our view was that these were accretive, strong transactions with lots of expense and revenue synergy potential. Ultimately, and growth from, you know, once fully synergized, would have a good solid ROE, and then forward business would be very, very capital light or limited capital applied to it, so very high ROE growth beyond, you know, post-transaction, post getting the synergies in place. Garry, that's kind of the construct. Garry, maybe you can speak to where we're at in that process.
Yeah. I, we do actually have the ROEs in the MD&A. You'll see that the U.S. Financial Services, basically the Empower business, is in the low double digits right now. And again, that reflects making all the capital investments, all the E, but without yet getting the R fully synergized. As the R picks up, and then the organic growth, as Paul mentioned, the organic growth is very capital light, so you should be seeing these ROEs, you know, we would expect these ROEs to be going into the upper teens, as the business develops in the coming years.
I thought that financial service would include Putnam. Is that incorrect?
We have the U.S. Financial Services, which is the Empower business, and then we have the U.S. Asset Management, which is Putnam.
Okay.
We break out both in the ROEs.
Okay. The idea is like 11%, 10%, 11% getting to the upper teens. How long does that take? Is that a two-year journey, five-year journey? Just curious.
Yeah. You know, I would say getting ourselves into the mid-teens is gonna be a function of booking the remaining synergies, client retention, and then you're kind of into, you know, getting at where our targeted rates are right now in the, you know, pre-IFRS 17. After that, it's all about organic growth, and it's capital light organic growth, and that's both, you know, adding DC record-keeping clients. You know, just remind you that we've been, you know, growing at a good clip there at sort of twice or more than twice the market, and that's relatively capital light growth. The retail or what we call the Empower Personal Wealth, that will be fundamentally capital light business. That's serving individuals who, you know, IRA rollover individuals and the like.
That will kind of build, and it'll build from year to year to year, as that becomes a larger part of the portfolio. I can't kind of say when we would hit, you know, 18 or 19 or any of those things, but that's, that's the vision and that's the goal.
No, that makes a lot of sense. Just moving to the U.K., it looks like you've exited the individual protection market in November. I'm just curious why. How big was this business? Like, will there be any bumps as a result of that? How quickly does that book roll off?
Well, thanks, Doug. Good question. I will turn that one over to David Harney to provide context around the scale of that and whether it has really an operational impact in the business. David?
Yeah, no. It's a small business. That's a market we entered a few years ago, you know, just from a zero position. Like our protection business in the U.K. is our group risk business, and we're the leader there. We had a go at adding on individual protection to that. It's a very competitive market and we've struggled the last number of years, so we've decided to take it out of it. It won't have any meaningful impact on the U.K. results going forward.
Okay. Fair enough. Last quarter, I think you had CAD 300 million of cash at the holdco. This quarter you've got CAD 1 billion. You know, I don't think this was moved up from the Canadian or Canada Life sub. Maybe it came up from the U.S. sub. Just curious, you know, how, you know, where that cash came from and how much cash would be left down in the U.S. sub? I don't think we have the visibility, or if we do, you can point me to something to take a look at that.
Yeah, yeah. Garry can speak to that. Doug?
Yeah. It's actually fairly straightforward. It's the real jump is the fact that we raised EUR 500 million in Q4. That's which we've got sitting at Lifeco, and that's in anticipation of a maturity that's coming in April. We de-risked the refinancing of that maturity back in following the Q3 results presentation. In early, sort of midway through Q4. That's what the cash is.
Awesome. Okay. Thank you very much.
The next question comes from Tom MacKinnon of BMO Capital. Please go ahead.
Thanks very much. Good afternoon. The question's really looking at the source of earnings on the base earnings. Experience gains and losses in the U.S. of $82 million. Just wondering what those are. I think the majority of the experience gains and losses that you had for the entire company were on a base earnings basis were yield enhancements. What was this $82 million in the U.S.?
Garry, is that something we've got, visibility into or is that something you want?
Yeah, I'm.
Give us one minute here, Tom.
Yeah, I think the one thing I know right off the top was the improvement in interest rates would have been a pickup there. They would have also had relative to the expectations going into the start of the quarter on the fees. We would have had a low starting point for market. I think there was about a CAD 20 million pickup on the market related side. There'd be another, as I mentioned, the interest rates being up. I think there was another CAD 30 million pickup versus what we got going into the quarter that would have come through on the spreads. They had, again, expenses were positive relative to expectations in the quarter. I don't remember the details of why they were positive, but. Those three categories were really what was driving it.
Yeah. Garry, Tom, it kind of reflects our methodology that when we go into the quarter, we set the expectation market levels, interest rate levels, expense levels that are anticipated. To the extent that, you know, markets kind of outperform, that goes into, you know.
I think the expenses are probably tied to a budget. As you go through it.
Yeah
T here was a lag in updating that. I think it wasn't the yield enhancement. I think that's really what you're getting. We didn't have the yield enhancement there.
Yeah. I mean, yield enhancements were 90% of the experienced gains and losses on a base earning or more than 100%. I think of the CAD 148, there's pre-tax CAD 161 from yield enhancements for the entire company. I don't know how this and there's no market impact or market related impact on liabilities associated with that because this is on base earnings and not reported earnings. It'd be curious to see what this CAD 82 here is. You're suggesting none of it is related to yield enhancements. I guess what I'm looking at, if it was this largely in Empower? I think it was largely in Empower.
Yeah.
Something happened in Empower that was better than you would have thought. That even drove the numbers to be still weaker than what I think the street was looking for. What was it that happened in Empower that was better than you thought in the quarter that drove this CAD 82 experience gain?
Yeah, I think it was the three factors I mentioned earlier, but you know, happy to do a follow-up right after this, Tom, just go through and maybe we just go through that in a little more detail.
Yeah.
It's just those same three factors.
Yeah. Tom, it just frankly, it's three relatively more modest factors that add up to 82. If you think about it, market levels improved a bit. We ended up with the income slightly ahead of what we would have locked in as sort of the expectation. Interest rates moved a bit. We would have seen maybe some widening margins.
Yeah.
Finally, Ed and his team actually did take some expense actions in quarter, and if you add those three things up, they add up to the CAD 82. What I suggest is, Garry, could help you out offline on that one.
Okay. thanks so much then. That'd be perfect. There, there's absolutely nothing with respect to yield enhancements ever associated with this block. Is that what you're trying to suggest?
Well, in terms of this quarter, there were no yield enhancements. I think in the past we've probably had some yield enhancements in the past in the U.S. block, there aren't any at the moment going through. I don't see this as one where we aren't going to see yield enhancements in this block going forward either under IFRS 17. I think it's I'm sure there have been some in the past. I can remember some, there aren't, that was not the factor this quarter.
Okay, thanks.
Thanks, Tom.
The next question comes from Paul Holden of CIBC. Please go ahead.
First question is regarding the date on LICAT pro forma IFRS 17 obviously gives you a lot more regulatory capital. I'm just wondering how you're thinking about that, A, in terms of how much of that is actually deployable capital, and then, B, to the extent a portion of it is deployable capital, what are your capital deployment priorities?
There's that's kind of a two-parter, Paul. Maybe I'll let Garry walk you through, you know, where we're seeing the strengthening of LICAT as we contemplate transition, and then I can maybe take the second part as to, as we think about deployable capital, what are the priorities. Over to you, Garry, for part one.
Yeah, sure. I think, in terms of the 10-point, approximately 10-point, rise that we're expecting, that's, again, driven by the new OSFI rules, plus, just the way IFRS 17 and IFRS 4 moved, differently during 2022. That made it a larger jump than we might have anticipated, early in 2022. I'd say over the longer term, I wouldn't expect us to be holding more capital. We typically run in the 120s or in the lower 120s. That's used to be the top end of our old range. I don't see us holding more.
In that sense, I think this, the fact it's another 10 points over 130%, there's gonna be some more deployable capital there. I think that's the longer term. Yes, our sensitivities have reduced a bit. Interest rate and sensitivities have reduced somewhat, a little more NFI sensitivity in IFRS 17, but we're not seeing that changing our targets. I think we will once we've gone through this we're being very measured right now in the near term, just given the transition and the macro environment. I think over time, there's more deployable, and maybe Paul can.
Yeah.
If you would like to spend it.
You actually, you stole my words, Garry, which would be in the near term, if you. I would kind of characterize that as we think about the balance of 2023, we're probably not gonna be looking to sort of unwind that through deployment in the short term, because we will be in transition, and we'll all be learning and going forward. Having said that, as Garry said, the new regime for us does actually reduce some of the sensitivity we would have otherwise had. It's not as though we have to set ourselves up with more, you know, more strength to deal with volatility. We're not too concerned about that. Having said that, it's a risky environment. It's a point of transition. I think what we'll do is we'll, you know, maintain good discipline.
Having said that, the reality is we're also not taking our eye off the ball in terms of opportunities to grow the organization and to put our capital to work. You know, we're always looking for opportunities in the market, and if the right opportunity came along, we would figure out ways to finance it. Having said that, again, Empower still has, you know, hard work ahead on the Prudential integration, and that will be a big, big focus for us in 2023. We'll continue to look across markets for opportunities where we think we can strengthen the business, and as I said, with some caution, though, given the kind of the risk-on environment.
Second question is related to Capital and Risk Solutions. I mean, there's a number of, I think, positive business drivers that you've articulated. May I just be helpful for me to understand, if you can sort of to what extent each of those drivers sort of matters for the business? If I think about, you know, the increase in P&C retrocession rates as an example, how much does it actually matter to future growth versus, say, the growing demand for pension risk transfer versus the, you know, improved mortality trends in life reinsurance? I guess getting a better sense of or characterization of how much of each of those drivers sort of matter to future growth might be helpful or would be helpful.
Yeah. Oh, Yeah, great question, Paul. You actually are sort of helping with the answer and appreciate it because when you think about it's a very diversified business that we've got, and the only factor that we didn't talk about there was structured solutions where there continue to be, you know, market participants who are looking for, you know, capital effective, capital solutions in our structured solutions. It really is about diversification, where there's opportunity in each of those categories, and maybe Arshil can provide a little bit of color on that. Arshil?
Yeah, thank you for your question. You've highlighted sort of the three or four areas that we are really focused on. You know, over the last eight quarters or so, we've probably achieved something like 7% underlying expected profit growth, and that's really the metric that we're focusing on for our reinsurance business. We have opportunities in all of the business lines. There's slightly different pressures and slightly different outlooks. On the P&C catastrophe, which is where you started, our focus there really is on risk reduction as opposed to driving up the margin. You know, pricing in the marketplace has moved quite a bit, and we're not focused on increasing our margin, but we're moving further away from the risk.
We're trying to preserve the historic margin that we've made but get a little bit further away from the risk. Whereas on the asset intensive side and on the longevity side, we see really strong market opportunities. We're being very cautious in an elevated risk on environment, but we're working closely with our investment colleagues. We did those large transactions in Japan when we could get very low cost of funds and put the money to work. When we see opportunities like that, we really try to capitalize on those. Lots of opportunities on the asset intensive and longevity side. We were talking a little bit about excess capital and using some of that to drive organic growth in CRS and some of our other business lines is also a place that we can deploy some capital.
Then finally, we have our structured solutions business. Geographically, that business really has sort of, as its core, the U.S. marketplace. Beyond the focus that we've had in the U.S. and continued growth that we're seeing in the U.S., we've expanded that into a number of European markets, and we have quite a good position there. Now very cautiously, we're thinking about other geographies and whether we can take some of those structures that we have on capital relief for client companies and apply them in other regimes. We've had some success doing that in places like Israel and Australia, and we're thinking about some other markets. You know, very measured, always a trade-off between margins and returns and risk, and good sort of measured growth or whatever.
The key metric for us is really that expected profit growth. We've been delivering sort of that 7% expected growth. In a slightly more stable environment, that's something that we target. In a riskier environment, it might be a little bit less because we put a little bit more focus on risk reduction as opposed to margin growth. That's kind of the context across the three or four businesses there.
Helpful. Thank you. Thank you for that. I'm gonna sneak in, one more. Paul, I appreciate your comments as you address, slide five, which I think is, an interesting one. Just sort of as I was looking at slide five and saw that decline in base earnings this year and then the ROE, you know, the market impacts are obvious, and you highlighted it. I can't help but think, you know, are there any areas where maybe the company identified Maybe you could have done better in 2022? Is there room for action improvement? You know, the Canada segment might be one area that comes to mind for me in terms of getting more sustainable earnings growth there. Paul, interested to hear your thoughts if there are any kind of areas you've identified where you think the company can do a little bit better.
Yeah, it's a good question, it's, you know, it's absolutely a question that we talk amongst ourselves and talk with our board about because, you know, it's not just about M&A and growing capital, it's about growing your businesses organically and making sure you're making the right decisions from a capital deployment perspective. I mean, organic capital deployment as we invest in systems and capabilities to participate in, you know, markets where you really think you can, you know, get traction and growth. Having said that, if you really look at the thing that was the drag in year is markets. When you think about the impact of markets, that's sort of the most fundamental drag. Having said that, we are looking at businesses.
For example, I know Jeff and his team are actively working through opportunities to expand the group business in Canada with our Freedom channel, I'll let him speak to that. When we look at the individual business, real discipline around, you know, pricing and making sure that we've got the right products in the right markets, and we're not getting exposed to ones that where we don't feel like there's the right margins. Then we look to wealth management in Canada, where we think we've got a big opportunity with our affiliated channels. Maybe a little bit of color. That Canada's one, all markets. Ireland, where we've launched our, you know, a lot of digital capabilities in Ireland. We're extending through the Allied Irish Bank business that we've launched in partnership with AIB.
We're constantly thinking about, you know, how do you actually drive growth? Then backing all of those things is efficiency. We do it. We're very, very minded to efficiency. Maybe just as a bit of color, I'll let Jeff speak to where we're looking for growth and also the way he's thinking about efficiency. Jeff.
Thank you, Paul. You mentioned, you know, some of the fundamentals already, but I would just say that we continue to believe that the business fundamentals in Canada are very strong. If I pointed to some examples of that, if you look at 2022, we're very pleased with our top line growth. As an example, on the life and health side, in the quarter, we were number one for sales. Our retention of business, our persistency, our margins, are very strong. We're delighted on our growth of our group wealth business. As you recall, at this table a couple of years ago, we talked about our investments in that area. We see good growth in that top line and also net growth, and we see an opportunity to grow into other markets.
Paul touched on the retail wealth side. I think there's an opportunity for us as we look to expand on that area. Just on our membership that we have, the participants we have, close to four million Canadians, we are expanding our Freedom experience, which we would call it. Those opportunities to work with Canadians as their plan members, whether that be individual insurance, whether that be NextStep, our retirement business, et cetera. We continue to spend dollars wisely and invest on the technology side in areas where we see big growth opportunities. We're quite bullish on it. We have an aggressive plan, and we think that there's great growth areas in all of our four key areas. Life, individual wealth, group wealth, and the life and health side.
Thanks, Paul.
Thanks for your question or thanks for your answer.
The next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good afternoon. Could we just go back to Capital and Risk Solutions? Maybe Arshil might be best positioned to address this. A business like this, I often think of being helpful from a tax AR perspective or regulatory arb. Then also just there's a good business case for it as well, which is risk reduction. When you think of your business in the context of that, like tax, regulatory, and risk reduction, do you see any vulnerabilities in the near future related to new business? Are there any sort of changes on the horizon that could impact demand for the products?
I think Arshil is best positioned, but I think I'll just say at a general level, we've got a very expert team that remains very connected with their clients globally. You know, Arshil talked about a solution that, you know, that we, you know, tapped into in Japan and then more recently doing things in Israel. There are opportunities that, you know, exist really globally. We just need to make sure they're disciplined in finding the right ones. I'll let Arshil speak to that.
I would start a little bit just by reframing a little bit. You know, there isn't really tax arbitrage or regulatory arbitrage. There is risk transfer and making sure that the risks ends up into the party that's best able to absorb that risk. A number of the things that we do in our reinsurance business are very diversifying from a Lifeco perspective, including the property catastrophe cat business. There, we're exposed, we're taking on risk, but we're doing it in a way that doesn't correlate with the rest of our balance sheet, doesn't have equity market risk or credit risk. It's more tied to natural perils. We're well able to bear that volatility, and that's kind of our approach and mindset. Then on the longevity and asset intensive side, that's full risk transfer to us.
We use our investment expertise. We use our actuarial pricing and underwriting expertise. We make a judgment and assessment, and then we're good long-term holders of that risk. You're absolutely right to note in all of those businesses.
Once we decide that we're a good holder of it, we try to operate with, in a tax-efficient way and in a capital-efficient way, fully respecting all of OSFI's LICAT rules. Certainly tax over time is a potential exposure for us to be managed. I don't think it would threaten the underlying business, but how we conduct it, our business and how we price our business potentially would be impacted by tax over time. Finally, we have our structured financial solutions business where we're typically taking on tail risk exposure for our clients, and they're entering into these arrangements to improve their capital position and effectively paying us the cost of capital.
They're very interestingly, with higher interest rates, some of the solutions that we have and the cost becomes even more cost competitive relative to raising debt and other forms of capital in a higher interest rate environment. I think it's a very balanced portfolio that we have, with risk that we're appropriately able to bear on our balance sheet. I wouldn't be describing it as sort of regulatory arbitrage or tax arbitrage, but we are absolutely tax and capital efficient in how we try to operate our reinsurance business, as are every other reinsurer, because that's a key part of the success that reinsurers have relative to direct companies. I hope that also delivers.
Yeah, I think I understand, and I appreciate the nuance and the distinction you're making, too. It doesn't sound like there's anything imminent on the tax or regulatory front that would impact how Great-West Lifeco deals with it or demand for the product. I appreciate that color. One other quick question. The contractual service margin. I'm coming to understand that there are some companies in 2023 where we're going to pay a lot of attention to the evolution of the contractual service margin. There are companies, and I put Great-West Lifeco in this camp, where there are plenty of businesses that drive long-term earnings growth without having a contractual service margin attached to it. With that being said, like, I wanna demonstrate that I understand that distinction.
How do you think the contracts margin for this company evolves over a year? Would it be fair to say that every year it would grow by a certain percentage, or is it conceivable that it could shrink over time?
Oh, Garry, why don't you take that one?
Sure. Yeah. I think, you're right. There are, there are businesses where the contractual service margin will be an important part of the, of the description and the value creation story for business, and we'll have some of those. You know, if I look at, say, our, you know, bulk annuities in the U.K. would be an example. The German business is another one that comes right to mind. If I look at across Lifeco overall, I would not say that the contractual service margin and how it develops will be a big part of our narrative. I think for us, it'll be more focused on the businesses where it really helps understand the value creation in that business and the growth trajectory of it.
A lot of our businesses in Empower, a lot of the Canadian business, whether it's the wealth side, the group businesses, you're not gonna have a CSM. It's, you're just not gonna see that. We've got some in force. We, you know, just, based on, you know, mix of business. Where we've been growing and focusing in a lot of our businesses, you won't see as much on the CSM. There will certainly be pockets where we'll be calling it out where it makes sense.
No, no, that was precisely what I was getting at in my preamble, that I know that for Great-West Lifeco, the contractual service margin doesn't necessarily play a big role. That was the point I was making. The contractual service margin itself for this company, will it grow every year, or do you think there are years when it could shrink? I'm thinking of the total company contractual service margin.
It'll very much depend on the mix of business that we're writing in that year, because that's gonna be a big driver. As I say, it's, you know, I mentioned the U.K. bulk annuities is a really good example. A bumper year of that is gonna change the growth trajectory, a quiet year, it will go, it could be a lot flatter. It really will depend on the mix business.
I would say on a relative basis, our non, you know, contractual service margin businesses, I would expect would be growing faster than those that are exposed to the CSM. The CSM would feature as, you know, less of a driver of growth in earnings, as opposed to the other areas where we see growth.
Yeah. I appreciate that that's our responsibility as analysts and investors to find ways to compare companies even though they present in a, in a pretty different way. I appreciate your guidance in that respect.
Good. Thanks, Mario.
The next question comes from Nigel D'Souza of Veritas Investment Research. Please go ahead.
Thanks for that. Thanks for, guys taking my questions. I just two quick follow-ups for you. The first was just how you think about the dividend as a point of clarification. You know, you mentioned the positive impact of LICAT on transition and gonna be a healthy buffer to your internal targets. When you think about dividend increase in the future, you know, what's the calculus between the payout ratio and the LICAT level? Is the LICAT coming to play and you're willing to pass on dividend increases and, like, let base earnings catch up? Is it purely, you know, a payout ratio that's gonna drive your decision-making going forward?
I'll let Garry take that one.
Just to clarify, the LICAT ratio is for Canada Life. That's the insurance, the consolidated insurance operations with Canada, Europe, and most of the CRS business. That's what's, you know, there's the LICAT ratio. The LICAT ratio has an impact on the dividend Canada Life would send up to Lifeco. The payout ratio, that's measuring Lifeco's common dividends relative to its earnings. It's not directly impacted by LICAT other than that liquidity related comment. Given the cash generative nature of our businesses, the strong LICAT position, it's not really a factor in our dividends or a payout ratio at this stage.
Yeah. Nigel, I would say broadly, as we think about dividends, we will use our payout ratio range as a guide as we think about considering what we do in a given quarter. You know, the other major consideration is our perspective on forward growth. We would use those as the key drivers. As Garry said, we have, you know, highly cash generative businesses. Liquidity wouldn't tend to be a constraint. It would be a function of, as I, as I said in my previous comments, we're looking to, you know, manage down within that range of 45%-55%. We're a bit over it now, and our intention is to manage down over the next number of business cycles. With that in mind, we'll be thinking about forward growth as we think about growth and dividends.
Okay. That's helpful. The quick last question is, again, on yield enhancement follow-up. Just trying to get a sense of, you know, if you could expand on what drives that. You've had healthy yield enhancement gains this year and pretty healthy yield enhancement gains in 2021 as well. Is that driven by a certain set of market conditions that are more accommodative to it, or is it just idiosyncratic pickup in yields and spreads and how do you think about the run rate going forward, irrespective of the transition?
Garry, do you wanna speak to. There's a two-parter there.
It's a two-parter on the first part, what drives the yield enhancement pickup is effectively the additional spread that we're able to take by trading assets. We come out of lower yielding assets, say government bonds is an easy example, into spread assets, we would capitalize that spread. 2022, we would have had good success. We had quite a good pipeline of ERMs that were attractive spreads. In general, in the market, I'm looking at Raman and I see him nodding, that corporate spreads were in general wider in 2022. That combination gave us good opportunities for yield enhancement. It is just capitalizing the spreads, you know, net of appropriate, you know, credit risk charges, asset default charges. That's really what drives it. That's the first part.
I think your second part was what's the outlook and, you know, on transit. Yeah.
Yeah. Sure. On the investment side, I think that's really, I mean, obviously, you know, credit spreads have narrowed somewhat in the back end of the year, but that ebbs and flows over time. I think we will remain active. We've got a very good investment shop, and, we'll remain active in that. As I said earlier, under IFRS 17, depending on the portfolios and the nature of the underlying investments, you might get a, you know, slightly different presentation of it, but the underlying value created by trading into attractive assets on a, you know, a diversified and a high-quality, portfolio basis, that will still remain regardless of the accounting regime.
Okay. That's it for me. Thank you.
Thanks, Nigel.
The next question comes from Darko Mihelic of RBC Capital Markets. Please go ahead.
Hi. Thank you very much for taking my questions. I know it's a little bit late, so I really appreciate you taking the time. I just have two questions. The first is, I wanted to just follow up, Paul, on what you said earlier with respect to Empower. You know, when I look at the CAD 710 million of base earnings in 2022 and suggesting that that will grow by, or you're targeting 15%-20% in 2023, and that's all well and good. I think I have that conceptually in place in my mind. At the same time in the U.S., you know, we saw the corporate go from a loss in 2021 to, you know, earning money in 2022.
Are there any other puts and takes that we should be thinking about in 2023 with the rest of the U.S. business in terms of earnings power? Also maybe if you can just throw in the answer to that, I noticed that you did a large reinsurance, or you did a reinsurance and demi reinsurance at the end of the year. Does that factor into earnings power in any way or shape or form in 2023? That's my first question.
Okay. Whoa, that's a, that's a full question. Garry, do you want to start out there?
Yeah, sure. I think the first part was just the corporate segment in the U.S., and that often picks up, you know, miscellaneous things. Could be plus or minuses. They're generally not that large, and they do move around. They are not directly tied to the underlying businesses. We wouldn't be anticipating that necessarily, but it. You know, obviously things can arise positive or negative in a year, but that's, so that's not really a factor in our. We were, you correctly surmised that we were talking about Empower and, as say the corporate can just move around a bit, but it tends to be just one-offs. The second part. I had a great answer to the second part. I'm just trying to remember what the question was on the second part.
The reinsurance.
Oh, the reinsurance. Yes. I knew it was another unusual question. That's good. No, the reinsurance. In terms of this is primarily for us, it's primarily focused on capital relief. It was part of our planning and financing of the Prudential acquisition that we would, you know, potentially utilize external reinsurance as a part of the support for the RBC relief. There is a fee we pay, but it's modest in the overall picture of this. We would expect under normal business conditions to keep the economics of the business. It really is just a capital relief i n some ways similar to the business that we actually provide for others through our CRS business unit. This is one that we've done with an external party to help support the RBC ratios in the U.S.
Okay, great. Understood. My second question is similar to Mario's question with respect to IFRS 17 and the contractual service margin. I'm gonna ask it a little differently though. When I look at the presentation of the balance sheet under IFRS, the opening presentation, I see that you've established a CAD 6.8 billion contractual service margin. What surprised me was all of the puts and takes in terms of reclassifying some insurance contract liabilities to investment contract liabilities. You know, some pretty big movements there. At the end of the day, net-net, your insurance contract liabilities are actually down about CAD 10.8 billion, and that's about 5%.
Conceptually, I think of that as your long-tail insurance businesses actually having a little bit less earnings power under IFRS 17 because before your PfADs apparently look larger than your contractual service margin and your risk adjustment. Can you correct my thinking on that or am I missing something pretty critical in that thought process?
Over to Garry.
Yeah. I think the probably the one piece that wouldn't necessarily leap off the page is one of the big contract classification changes with some of our U.S. businesses that were within Empower. While they would have been insurance contracts under IFRS 4 are actually IFRS 9 contracts in the new regime rather than IFRS 17. That's what's driving a lot of that shift. That's the big one that would come to mind. You have taken it right that the risk adjustments under IFRS 17 are lower than the actuarial provisions for adverse deviation, the PfADs that we'd have today. That's because the risk adjustment does factor in diversification, whereas the actual PfADs tend to be standalone margins on each assumption.
There is a natural reduction there as you move from the PfADs to the risk adjustment. I think those are the two biggest ones you called out. Again, we'd be happy to follow up afterwards if there's a, you know, a chance to step through it more. Those are the two things I'd note right off the top. We can certainly have a follow-up call.
Yeah, I'd love to follow up on the IFRS 9 reclassification of Empower because I didn't think it impacted Empower's earnings capability. Therefore, I'm still stuck on the, on the thought process that overall the embedded earnings power on your insurance contract liabilities is lower under IFRS 17. Yes, absolutely. Let's do a follow-up call. That's great.
Yes. You are correct that it doesn't impact Empower's earnings power, that shift. That's one where the shift between the two didn't affect the earnings power. Let's have a follow-up call. That'd be super.
Okay. Thank you very much. Appreciate that.
Okay. Thanks, Darko.
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. As we close the call, I'd like to thank all of you for attending. I'll also thank the analysts for their questions. As noted, we're planning an education session on Empower's new reporting. We'll communicate the date when we've locked it down. In the meantime, we wish you a good start to the year and look forward to reconnecting on our next call. Take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.