Thank you for standing by. This is the conference Operator. Welcome to the Great-West Lifeco 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 for analysts to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an Operator by pressing star, then zero. I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead.
Thank you, Ariel. Good morning, and welcome to Great-West Lifeco's first quarter 2023 conference call. Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. 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, Reinsurance, and Corporate Development; Jeff Macoun, President and COO, Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO of Putnam Investments. Today, we'll share two presentations. The first is an IFRS 17 comparative period analysis. We will then share our quarterly results presentation. Following this, we will take questions on both presentations. 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 cautionary notes also appear on slide two of our quarterly results presentation and apply to the information we will discuss later in this call. Please turn to slide four. We've adopted and successfully transitioned to IFRS 17, marking the culmination of a significant multi-year enterprise-wide initiative. We are reporting Q1 2023 financial performance under the new standard for the first time. This first presentation provides insight into the impact of IFRS 17 by illustrating quarterly comparative results for the year ended December 31, 2022. Recognizing this represents a significant change from IFRS 4 reporting, we believe the new regime offers greater visibility into the strengths, underlying economics, and diversification of Lifeco's portfolio. As we shared with you pre-implementation, these new standards do not have a material impact on our operating company's business strategies or the underlying economics of their businesses.
Moreover, our overall Great-West Lifeco strategies are not impacted by the transition to IFRS 17. We will continue to focus on building and sustaining market leadership positions across our diversified businesses. There are three primary changes you will observe as we unpack our comparative financial performance for 2022. First, under IFRS 17, there are some changes to the timing of earnings recognition on medium and longer-term insurance products, generally smoothing out certain items which were recorded as upfront gains under IFRS 4. However, when we combine this smoothing with the pickup from amortizing the opening contractual service margin or CSM, the transition to IFRS 17 only resulted in a 2% reduction in the level of base earnings during the 2022 comparative period. This reduction has been more than offset by a 4% positive impact from an updated definition of base earnings going forward.
To sum up, we expect little change to the future direct trajectory of base earnings. Garry will cover this in more detail in his upcoming comments. The second impact relates to the delinking of asset and liability discount rates, which creates greater volatility in net earnings, but with base earnings much less impacted. Garry will also cover this in greater detail. Thirdly, from a balance sheet perspective, Shareholders equity and book value have decreased by 12% and 14%, respectively. This is in line with previous estimates and is largely driven by the creation of the new CSM. Our financial strength is unaffected by the transition to IFRS 17, and our LICAT ratio increased by 10 points. As Garry will describe, we have purposefully allowed for additional net earnings volatility around interest rates as a trade-off to gain greater LICAT stability.
Given these impacts and with our business strategies unchanged, we are confirming our medium-term financial objectives for base EPS growth and our target dividend payout ratio are unchanged but are increasing our ROE objectives. I will cover these points in a few moments. Please turn to slide five. We're enhancing our reporting and disclosures to provide greater clarity and transparency into how the company is creating value for Shareholders. The transition to IFRS 17 and IFRS 9 naturally allow for this change. This slide illustrates our three value creation drivers: workplace solutions, wealth and asset management, and insurance and risk solutions. It also outlines the IFRS 17 impact for the businesses associated with each driver. Looking at Lifeco's portfolio, over 70% of our base earnings saw limited or no impact from the transition to the IFRS 17.
Primarily, the businesses that represent stronger growth areas for Lifeco. This includes workplace solutions, which represent our group life and health and our group retirement businesses like the Empower Defined Contribution business, and wealth and asset management, which represent asset management and individual wealth businesses like Empower Personal Wealth and our segregated fund business in Canada. As illustrated on the page, insurance and risk solutions is more impacted by the transition to IFRS 17, with individual insurance and longevity businesses most impacted. In contrast, the structured and P&C reinsurance businesses saw a limited impact. Please turn to slide 6. This slide highlights our medium-term financial objectives. As noted earlier, we're maintaining our medium-term objective of 8%-10% base EPS growth, given the modest impact of IFRS 17 on base earnings.
Our base ROE objective is changing as a result of the creation of the CSM and resulting reduction in Shareholder equity. The medium-term base ROE objective increases to a range of 16%-17%, an increase of 2% from the current objective. Base ROE will continue to be supported by strong and stable returns from a diversified portfolio of businesses and our increased focus on capital light business growth. Our target dividend payout ratio of 45%-55% of base earnings remains unchanged given the limited impact on the level of base earnings and with the highly cash generative nature of our businesses. I'll now turn the call over to Garry to get into more detail. Garry?
Thank you, Paul. Please turn to slide 8. This slide depicts how the insurance contract liability changes from IFRS 4 to 17 and highlights the two main differences in regimes. The best estimate liability under IFRS 4 essentially becomes the present value of future cash flows under IFRS 17. However, the liability cash flows are valued using market consistent discount rate rather than being tied directly to the backing assets. This is referred to as delinking of the assets and liabilities under IFRS 17, which is one of the main changes of the move, and it impacts both base and net earnings. With the delinking, provisions for financial risks such as interest rate mismatch are no longer required.
The risk adjustment, on the other hand, is very similar to the current insurance PfADs, but the risk adjustment allows explicitly for diversification and therefore will be lower than PfADs, especially for companies like ours with a well-diversified portfolio of business. The other main change under IFRS 17 is the creation of the contractual service margin or CSM. The CSM is a new liability that reflects deferred profits are released into earnings over time. The CSM has implications to both the balance sheet and the timing of earnings recognition. Turning to slide nine. On transition to IFRS 17 and 9, we saw a reduction of 12% in Shareholders equity and 14% for book value per share. This is a result of the net reduction in retained earnings, driven primarily by establishing a CSM on the in-force business.
As communicated previously, our base ROE objective is increased by 2%. Our financial leverage ratio calculation reflects the inclusion of the CSM related to our Non-participating, Non-segregated fund insurance business on an after-tax basis. We saw a modest improvement in this metric on this basis. While our approach aligns to how we anticipate certain rating agencies will view this, others have been less clear on exactly how they will adjust to the new regime. The agencies have all indicated in general terms, they don't see the accounting changes as having a big impact on leverage nor affecting ratings. For LICAT, we saw an improvement in our ratio, largely due to OSFI including the CSM as available capital, which offset the retained earnings reduction, and also due to removing the 1.05 scaler on required capital.
Notwithstanding heightened market related earnings volatility in 2022 under the new regime, we saw a more stable LICAT ratio due to asset liability management and accounting choices, which we'll discuss later. Please turn to slide 10. As noted earlier, there are two main changes with the move to IFRS 17, the introduction of the CSM and the delinking of assets and liabilities. The CSM mechanism effectively defers the earnings impact of certain business experience or activities such as new business gains, certain trading activity and insurance experience, and non-financial assumption changes. These impacts will be recognized into earnings over time rather than immediately. Overall, given the mix of business and relative sizes of new business volumes in in-force CSM, the implication of this is only a modest change in base earnings for our IFRS 17 business.
We've also noticed there can be differences in how different types of insurance experience are reflected in earnings. For example, mortality experience gains and loss on life insurance tend to be recognized into earnings immediately, whereas longevity experience on paid annuities would tend to be deferred via the CSM and recognized into earnings over the life of the remaining contracts. This leads to an earnings recognition timing issue. We saw this directly in our Q1 results. We experienced a very similar size to almost completely offsetting results from mortality and longevity, with mortality losses coming through the P&L and longevity gains coming through as a CSM adjustment. Since the CSM is included as available capital within LICAT ratio, the impact on regulatory capital is more neutral, which is aligned with the overall economics. The delinking of assets and liabilities leads to greater potential net earnings volatility.
We reviewed our asset liability management accounting policy choices to align with the underlying economics of the business and to have a greater focus on supporting a more stable LICAT ratio with the trade-off against additional net earnings volatility. Please turn to slide 11 as we expand on this. As noted at our IFRS 17 information session last June, we intend to use the yields on our own assets, net of an allowance for credit risk, to set the IFRS 17 liability discount rate. We chose this option because it reflects the underlying economics, aligns with our general matching approach to asset liability management, and it reduces net earnings volatility. When setting our IFRS 17 liability discount rate, there are two variations. For certain portfolios, our own fixed income assets are very representative of the duration and liquidity characteristics of liabilities without adjustments.
For these portfolios, trading activity will impact the portfolio yield, which drives the discount rate used in the IFRS 17 liabilities and results in an immediate earnings impact. For portfolios with very long dated liabilities, for example, Canadian Universal Life products, it can be difficult to source assets with similar duration liquidity characteristics. For these portfolios, we use the yields on our own assets plus an illiquidity adjustment to set the IFRS 17 liability discount rate. That leads to the earnings impact being recognized over time rather than immediately. Within the 2022 comparative period, the impact of trading activity reflected immediately within earnings reduced by about half compared to the prior regime.
The underlying economics of the trading activity is the same. The remaining half of this impact will emerge into earnings over time. Turning to slide 12. This shows a visual depiction of the balance sheet, our ALM choices and accounting choices, and the resulting outcomes. With the move to IFRS 17, we had a strong focus on ensuring the underlying economics of the business were appropriately reflected, maintaining our financial strength via a stable LICAT ratio and book value while accepting modest net earnings sensitivity. Best estimate liabilities are largely backed by fixed income with good duration match, and electing these on fair value through profit or loss aligns with the fair value impacts on both assets and liabilities, creating minimal earnings and capital volatility. We have viewed the risk adjustment CSM differently. Both count as regulatory capital.
The CSM is not interest rate sensitive since the interest is locked in when established. This works well with LICAT solvency requirements that are also set using a stable interest rate. The risk adjustment calculation is interest rate sensitive, although one could argue that it may not have the same interest rate sensitivity as best estimate liabilities. We've generally backed these amounts with assets that are not directly interest rate sensitive, such as Non-fixed income, fixed income assets or fixed income assets measured at amortized cost. This allows us to maximize risk-adjusted returns while limiting LICAT ratio volatility due to interest rate movements. Within our surplus segment, we've chosen to largely use shorter-term fixed income assets to ensure strong liquidity position to support our dividend payout ratio and provide flexibility. These assets are measured at fair value through OCI, where possible, to limit earnings volatility.
The result of these ALM and accounting choices is a more stable balance sheet exposure to interest rates, as highlighted by limited sensitivities to a 50 basis point change in interest rates. Turning to slide 13. 2022 was certainly a good year to road test these choices in a volatile macro environment. In Canada, we saw back-to-back quarters of greater than 50 basis points long-term rate increases in 2022. We also saw material increases in interest rates in other geographies where we operate, particularly within the U.K., where risk-free rates increased by more than 3% over the first 3 quarters of 2022. In the first part of the year, we saw higher net earnings under IFRS 17. The increase in interest rates reduced the value of our liabilities, which for the most part was offset by reduced asset values.
However, for the portion backed by non-fixed income or amortized cost assets, the asset fair values did not reduce to the same extent as the liabilities, leading to a positive earnings impact. This helped offset formulaic LICAT ratio declines as rates increased. Also in 2022, we experienced adverse non-fixed income experience, largely driven by poor Canadian public equity performance in Q2 and poor U.K. real estate fair value performance in Q4, and this flowed directly into earnings. Despite all this market volatility, as shown across the bottom of the slide, our LICAT ratio, as shown on a pro forma IFRS 17 basis, was very stable. Turning to slide 14. This shows the comparison of base earnings on IFRS 4 and 17 on a quarterly basis for 2022. This is a much more stable pattern than net earnings on the prior slide.
The relative impact of switching regimes varies by quarter, largely due to the type of business activity and experience results in each quarter. The comparisons by quarter are very much impacted by the specifics. For example, which portfolios had trading activity, the extent of new business gains, and which type and direction of insurance experience gains and losses, mortality, longevity, and policyholder behavior. Overall, these impacts balanced out across the year, resulting in the modest impact we had originally anticipated. Turning to slide 15. As noted in our previous disclosures, we were expecting a modest reduction in base earnings due to the transition to IFRS 17. The results of our 2022 comparative came in aligned with that expectation, with a decrease in base earnings of just under 2% before the definition changes.
The key drivers of the change reflect the two impacts I spoke to earlier, the dynamics of the CSM and the delinking of assets and liabilities. For the CSM related impacts, we saw a slight improvement to base earnings as the benefit of CSM amortization outweighed the reduction due to deferring new business profit. The delinking of assets and liabilities led to a decrease in the immediate earnings benefit of trading activity. Even though CSM is not involved, these benefits are deferred and the higher spread emerges as earned over time. As noted on the far right, we also updated our base earnings definition to exclude the amortization of acquisition related finite life intangible assets. This improved base earnings by CAD 129 million or 4%. Turning to slide 16, the impact on base earnings across regions also showed limited to modest impacts with the transition.
We have included a visual to give a sense of proportion of business impacted by IFRS 17 within each region. For Canada, roughly 70% of business had limited no impacts, and within the rest there were largely offsetting impacts as CSM in force runoff versus new business deferral and experience impacts were a positive versus IFRS 4. This offset the impact of deferring the benefits of trading activity. For the U.S., in the most part, has fairly limited impacts due to IFRS 17, IFRS 9. The main impact was an improvement in base earnings due to the updated definition that removes amortization of acquisition related intangibles which have increased in recent years given the significant M&A activity.
In Europe, roughly 60% of the business has limited no impacts, and the decrease in base earnings was driven by the deferral of real estate lease extension benefits or yield enhancement on the real estate, with 2022 having had a higher volume of these than historically. The CSM impacts largely balanced out. Finally, Capital Risk Solutions saw an improvement to their results as the transition CSM runoff was greater than the deferral of new business gains. New business growth within reinsurance was largely in their structured and P&C products, which are more short term business and no CSM, resulting in very similar earnings between IFRS 4 and 17. Turning to slide 17. In conclusion, we view the transition to IFRS 17 as very successful, and we look forward to describing our results going forward under the new regime.
I'm sure there will be a settling in period with all the new disclosures and metrics. We look forward to working with you as we all get comfortable and conversant with the new regime. Back to you, Paul.
Thank you, Garry. As a reminder, we're now going to move to the other presentation of our quarterly results, so I'll give people a minute to turn to that presentation. Please turn to slide four. We delivered a solid performance in the first quarter of 2023 with base EPS of CAD 0.87 per share, up 14% over the same quarter last year, and a LICAT ratio of 127%. The continued strength in our results reflect organic growth, the benefits of recent strategic acquisitions, and our track record of disciplined capital deployment. I'm pleased to report that our diversified portfolio continues to provide stability and strength in the face of a challenging macro environment.
Among the highlights in the first quarter of 2023 include Empower launching Empower Personal Wealth, a new division focused on making wealth management simpler, clearer, and more accessible. Empower helps bring together everything a client owns and owes in one comprehensive dashboard, from credit cards and cash to loans, investments, and retirement accounts. The dashboard, paired with Advisor Insights, makes it easier than ever for clients to take control of their personal wealth. In Ireland, we consolidated the businesses of Invesco, Acumen & Trust, and APT into a new entity called Unio Wealth Management. This work is underpinned by the market-leading digital platform. Unio will provide personalized client advice and investment solutions to a growing and underserved population. In April, we announced Canada Life's intention to acquire Investment Planning Counsel, a leading independent wealth management firm.
This acquisition accelerates our strategy of building the leading wealth platform for independent advisors in Canada. On close, the addition of IPC will make Canada Life one of the largest non-bank wealth providers in the country. Please turn to slide five. As we advanced our business strategy, we're advancing our reporting and disclosures to provide greater clarity and transparency into how the company is advancing our businesses to create Shareholder value. This slide shows our three key value drivers: workplace solutions, wealth and asset management, and insurance and risk solutions. The company is providing enhanced disclosures at both the portfolio and segment levels to show how our businesses are organized against these value drivers with a better view of the scope, scale, and growth opportunity in each. Please turn to slide 6.
In Canada, we delivered strong performance in our group life and health and group retirement businesses in quarter, both part of the workplace solutions value driver. In late March, we began digital enrollment for members of the Public Service Health Care Plan. Members are being enrolled in waves with over 750,000 invites issued to date and 1.5 million by July 1, 2023, when we'll begin administering coverage. To date, over 300,000 members have already enrolled, with over 90% of those registered digitally on My Canada Life at Work and over 90% electing electronic fund transfers for claims payments. We had strong participating life insurance sales this quarter. We also launched My Par Gift, a first of its kind participating life insurance product designed specifically for the charitable giving market.
This new innovation aligns with our values in supporting customers and the community, and the initial response has been very positive. Turning to individual wealth, where we've experienced net outflows in quarter similar to the industry, we look forward to closing the IPC transaction with our sights set on growing this business. Please turn to slide seven. We saw strong performance and growth across all of our value drivers in the European segment. Irish Life announced an important strategic move to advance its personal wealth strategy with the launch of Unio. This new firm is well positioned to foster intergenerational wealth continuity with enhanced advisory, investment, and client solutions. Please turn to slide eight. Empower is continuing to build momentum in its workplace solutions business through strong organic growth and its successful integration of recent acquisitions.
The Prudential integration is going well with high client retention levels and is on track to deliver its remaining synergies in early 2024. As mentioned earlier, Empower recently launched Empower Personal Wealth, combining the Empower IRA business with Personal Capital. Through a compelling new national marketing campaign and a market-leading offering, Empower Personal Wealth is working to make money management simpler, clearer, and more accessible for its customers. Please turn to slide nine. Putnam saw a reduction in outflows compared to the same quarter in 2022. In quarter outflows were primarily in lower fee fixed income, with flows into higher margin fundamental equity products positive year-to-date.
Putnam also continued strong investment performance with 76% and 81% of fund assets performing at levels above Lipper median on a three and five year basis, and 35 funds with four and five s tar ratings by Morningstar. Please turn to slide 10. In Capital and Risk Solutions, we continued to deliver solid results led by growth in our structured reinsurance businesses. From a new business perspective, we've been focused on expanding our international presence in select new markets and on developing new products in our core markets. We also had a favorable catastrophe renewal season and continue to use a disciplined underwriting and pricing approach for mortality and longevity new business. Please turn to slide 11. We shared with you earlier the impact on our medium term financial objectives from the transition to IFRS 17.
As a reminder, the only change is the increase to our base return on equity objective to reflect the creation of the CSM and resulting reduction in Shareholders' equity. We remain confident in our ability to achieve our medium-term objectives due to our strong and consistent performance supported by our diversified and resilient portfolio. With that, I'll turn the call over to Garry. Garry?
Thank you, Paul. Base EPS of CAD 0.87 was up 14% from Q1 2022, notwithstanding the lower market levels this quarter compared to Q1 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 0.64 is down 55% from last year, as higher base earnings were more than offset by the large swing in excluded items year-over-year, which were primarily market experience related. Q1 2022 saw significant market related gains under IFRS 17, primarily due to rapidly rising interest rates at the time.
In Canada, base earnings of CAD 278 million were up 24%, primarily due to group life and health, where the challenging LTD experience in the prior year did not repeat, and we continue to demonstrate strong pricing discipline on this business. This was partially offset by lower insurance and annuities results due to elevated mortality claims. The diversifying impact of annuity business now rises mainly in the CSM, not in earnings. In the U.S., Empower base earnings of $251 million includes $69 million from the addition of the Prudential retirement business. Excluding Prudential, results are up about 20% year-over-year due primarily to improved investment spreads in the general account via organic growth and a stronger U.S. dollar, partly offset by market impacts on fees driven by the lower average market levels year-over-year.
Recall close to 50% of net revenues at Empower are asset based, the impact of lower markets on asset based fee revenues continues to be a headwind. This comparative period markets issue is expected to start to dissipate in Q2 2023 based on market performance so far this year. That said, business fundamentals such as top line growth, customer retention, and retail expansion remain strong. While there has been very little revenue attrition from the Prudential business to date, some is expected in 2023 as part of the integration process, 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 for this transaction.
We also expect the full benefit of expense synergies, U.S. $180 million annualized, to emerge once the integration is complete early in 2024. While we have achieved run rate synergies of U.S. $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 Q1 last year, primarily due to lower asset base fees, given the lower average market levels for equity and fixed income this year compared to last and net outflows during 2022. This was partially offset by higher earnings on seed capital. In Europe, base earnings were up modestly, primarily due to discount rate impacts from trading activity in the portfolios within U.K. and Ireland, partially offset by higher mortality claims experience in Ireland.
The Capital and Risk Solutions segment, which is primarily the reinsurance business unit, saw lower base earnings as higher mortality claims on the U.S. traditional life business offset strong business and margin growth on their structured and P&C portfolios. Turning to slide 14. This table shows the reconciliation for base to net earnings. Net earnings were $595 million this quarter, negatively impacted by market experience. As noted earlier on the call, we expect some increased net earnings volatility due to the delinking of assets and liabilities. Although this has a more limited impact on our LICAT ratio when driven by interest rate movements. Within the quarter, the negative market experience is driven by decreases in interest rates and a decline in property fair values within our U.K. real estate portfolio.
The remaining items are predominantly acquisition and integration related costs and the removal of acquisition related finite life intangibles in line with our updated base earnings definition. Turning to slide 15. This slide looks at the new Drivers of Earnings view from a base earnings perspective. In working with our peers as part of the preparation for the move to IFRS 17, we developed an industry consistent view of describing the key components of earnings. This reporting naturally aligns with the IFRS 17 income statement and shows results by insurance results, investment results, followed by remaining earnings items such as fee income expenses and taxes. It's important to note which businesses will tend to fall in which sections, in particular, noting the insurance service results also include segregated fund businesses with guarantees and the equivalent insured wealth businesses in Europe.
Our insurance service result of CAD 649 million was up 2% year-over-year. As expected, the CSM amortization risk adjustment release were quite steady year-over-year. The increase was primarily driven by improvements in earnings on short-term business, which grew by 19%, largely due to the improved group life and health results in Canada and growth within our structured and P&C businesses within reinsurance. This was mostly offset by poor life mortality experience in all of Canada, reinsurance and Ireland. We did see the expected diversification impact of favorable longevity experience, but not in earnings. Recall there is an earnings recognition difference since these longevity gains were deferred via the CSM and will come into earnings over time. The net investment result of CAD 578 million was up 80% year-over-year.
This was mainly driven by the Empower general account business, including the addition of Prudential Financial business in Q2 last year. We also saw higher earnings on surplus driven by increases in interest rates and positive seed capital returns in Putnam. Our fee income of $1.637 billion was up 13% primarily due to the addition of Prudential Financial and also pick up in currency, with business growth largely being offset by lower average market levels. Non-directly attributable and other expenses were up largely due again to the addition of Prudential Financial. Excluding Prudential Financial, the growth in expenses reflects currency movements and investments in growing our businesses. Within Canada Life, we incurred higher expenses due to the onboarding of the Public Service Health Care Plan, setting a strong foundation for continued growth of our group life and health business.
The U.S. growth of 2% on a constant currency basis, excluding Pru, is relatively flat as the benefits of the MassMutual synergies were largely offset by investments in personal wealth. The effective tax rate this quarter was 11% on Shareholder base earnings, reflecting the jurisdictional mix of earnings and certain non-taxable investment income. Overall, it was a strong first quarter with a successful transition to IFRS 17 and base earnings growth of over 13%. Turning to slide 16, the book value, LICAT ratio, return on equity and financial numbers are shown on an IFRS 17 basis, unless stated otherwise. Q1 2023 book value per share of CAD 22.45 was up 8% year-over-year, driven by strong retained earnings over the past four quarters.
The Q1 LICAT ratio of 127% is the first calculated under the new OSFI LICAT guideline that incorporates IFRS 17. In order to give context to the new regime and movements in period, we have provided pro forma quarterly estimates of LICAT on this new IFRS 17 basis for 2022, including Q4 2022, which was estimated at 130%. The Q1 2023 3-point decrease from this figure was primarily driven by additional dividends from Canada Life to Lifeco and capital requirements from strong new business activity in reinsurance. Lifeco cash, which is not included in the LICAT ratio, ended the quarter at CAD 1.3 billion, reflecting the additional dividends from Canada Life.
Subsequent to the first quarter, we repaid EUR 500 million of senior bonds, which had been funded in Q4 2022. The base return on equity increased by 1.1% to 15.8%, largely driven by lower average equity due to the full reflection of IFRS 17. Financial leverage also decreased slightly, although you don't see it in the rounding, to a further repayment on the short-term debt used as part of the Prudential funding, Prudential acquisition funding. Leverage is expected to decline further in Q2 as a result of the EUR 500 million repayment noted earlier. With that, I'll turn the call over to Paul for closing comments.
Thank you, Garry. Before we open the call for questions, I would like to acknowledge and thank our teams across the globe for their tireless work and dedication to delivering on our successful transition to IFRS 17. While this was a significant effort for multiple years, we were able to do this while at the same time making strategic moves that have positioned our portfolio to deliver even greater value for clients, advisors and Shareholders. In the coming year, we will continue to advance our businesses with focus and discipline. We will leverage our risk disciplines and expertise, advice-centered solutions, and digital capabilities to drive responsible growth across our portfolio. Our goal is to deliver for our customers while creating sustainable long-term value for Shareholders.
Before we move to the Q&A, I just wanted to take a moment to announce that Great-West Lifeco will be hosting an in-person investor day on June 20th in Toronto. The event will focus on our wealth and asset management businesses across the company, and I hope you will be able to join us. Now we'll move on to the Q&A. Recognizing there's a lot of new information to take in and interpret, we will try to cover as much as we can today. However, we would be pleased to connect with analysts and investors in the days ahead to answer additional questions. With that, I will turn the call back over 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 are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We will pause for a moment as callers join the queue. Our first question comes from Meny Grauman of Scotiabank. Please go ahead.
Hi, good morning, and thanks for providing that additional disclosure up front and explanations. In terms of my first question, it was about the CSM balance in Canada specifically. It jumped out to me that it was down on a year-over-year basis. I see that in Q3, there is an insurance experience loss there that is impacting it. I'm just wondering, you know, more broadly, the expectation for CSM balance growth for Canada specifically as you look forward. Is this a balance that we should expect to grow over time? How do we think about this in particular?
Thanks, Meny. I'll start off at a high level and just point out, as I was outlining, if you think about the overall profile of our business, over 70% of our business and a lot of our real growth areas in the businesses will not have a meaningful or any impact on CSM. If you think about our wealth businesses, our group businesses, these are businesses that are seeing strong growth, and you can actually see that in our results. Having said that, CSM is impacted by a number of factors. I think we saw some policyholder behavior impacts, and I'll turn it over to Garry maybe to provide a little bit more context. Garry?
The policyholder behavior, we did have an actual assumption review in Q3 last year, and it would have been called out in our Q3 materials, and it was a fairly sizable reduction. That's what you're seeing really driving the CSM down in Canada year-over-year. The other thing I would note when looking at the depending on which of the displays you're looking at, the CSM will have some of the insurance businesses which would be affected by that. At CSM, when it's all been participating, can also include the segregated funds, those will be affected by market movements up and down.
You have to be make sure you're looking at the segregated funds and the insurance CSMs with those in mind. We would, I think over time, to answer your question on the what we'd be looking at, I think a lot of our focus is on the, you know, in Canada, a lot of our insurance focus is on the participating side. That's not in the non-participating CSM. That's something to bear in mind. Obviously, we had a fairly sizable CSM on transition on the non-par from our older book.
I think in Canada, for the non-participating insurance, excluding the seg funds, you'd see that would be fairly flat, given the size of the in-force book and the new business volumes and the focus on par. I do think we'd be looking to grow certainly on the segregated fund side.
Thanks for that. Maybe as a related question, just in terms of the overall CSM balance, I don't think you've provided a growth target, and some of your peers have. Is there a growth target you have for overall CSM balance for the company as a whole?
Meny, it's Paul. No. I would say we are not in a place where we're going to make that sort of projection. The reality is, as I've stated, we're very much focused on growing our wealth businesses. As you can see, our workplace businesses, both group benefits and retirement, are in very high strong growth mode. As we look at our insurance businesses, we view those as good diversifiers across the portfolio. I would, you know, potentially there's some stability in that, but really our business focus is on growing those other businesses. As we've noted on a year-over-year basis, there's a lot of moving parts in the CSM, we're not gonna provide projections on growth there.
Understood. Second question I had was just on the European segment. If I look at the DOE, you talked about the year-over-year performance, which is relatively stable. We see a step down sequentially, and it looks like it's coming from expected investment earnings. I'm just wondering if you could provide a little bit more insight there. Is there anything credit related going through that line in particular, anything related to real estate? Just some additional clarification there from a sequential point of view.
I'll let Garry start on that one, and then he may pass that on to David Harney or Raman.
Sure. Yeah. I think what you're seeing there, we use the term the Expected Investment Result. That does include the trading activity that would affect the discount rate, so the what you'd have known as Yield Enhancement in the past. That's still a feature in Europe. You may recall in Q4 that we did call out some sizable Yield Enhancement gains in Europe, primarily in U.K., but also in Ireland in Q4. That's the big driver sequentially, 'cause, you know, while we had some steady Yield Enhancement this quarter, there was very substantial change there. I don't know if there are other factors that you'd call out, David.
Yeah. I think yield enhancement is certainly one of the factors. I suppose the other issue in Europe is, I suppose under IFRS 4, we would have booked, you know, new business gains, particularly in the U.K. and Germany, and they will flow through in CSM now. I think you will see for Europe, lower IFRS 17 earnings versus IFRS 4, and that'll be replaced then by growth in the CSM.
Thanks for that.
Thanks, Meny.
Our next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Hi. Good morning. I'll try to keep the CSM question, I guess, more high level. Yeah, the decline sequentially looked like obviously there was some pressure in the par business to be excluded. It sequentially looks like it was up more 1.5% or so. I guess related to the par impact, I just want to clarify, like that has no implications for the Shareholder account. I know there is some profit sharing across, but I just wanted to understand like what drove the hit to the par business on the CSM side, and I just want to clarify that there's no implications for Shareholders.
thanks, Doug. I'll pass that one on to Garry.
Yeah. The main impact on the par CSM sequentially will be the decline in rates, decline in interest rates, which has an impact on the cost of guarantees. This is the cost of guarantees liability in IFRS 17 is quite interest rate sensitive. Obviously we've got a large CSM that absorbs that. It doesn't have an impact on the, it's a very tiny, you know, knock on impact down the road. It has very little impact, it's not completely minimal impact on Shareholder earnings. The CSM does count for capital, like at capital is something to keep in mind.
It is part of when we look at our ALM choices and we're looking to balance interest rate movements, impacts, this is one of the factors we considered.
Okay. I think I get that. Just obviously commercial real estate is extremely topical. You have exposure to that. You took some marks in U.K. real estate. Can you dig a little bit into, you know, why you took the marks or what drove the marks this quarter? Do you foresee further marks on your real estate book as we move through this year? Can you provide a little bit more outlook and any other details you can provide on that exposure would be much appreciated.
Thanks, Doug. I'll pass that over to Raman, who will comment on that.
Yeah. Thanks, Doug, for your question. A few things to note. I think what we saw in Q1, as you mentioned, was declines in fair value in U.K. real estate. If you remember back to last year, you know, rates were moving up significantly, and that does eventually flow through to valuation. What we did see is a moderation in that decline from, you know, Q1 versus what we saw in Q4. As rates have stabilized, you know, the expectation is fair value should be correlated to that. It's tough to say, you know, as you go quarter to quarter down the road, you know, depend a lot on what happens in markets.
The other things I'll note on the real estate side is, you know, cash flow generation continues to remain strong. We see rents increasing, good demand for our properties there. I would just remind you, like, if you think about our overall book, it is quite well diversified. You know, this, we've talked about this in prior calls, you know, diversified by sector and by type. We remain, you know, happy with that diversification. I think that'll support us over the coming quarters.
Just to clarify the fair value impact, that was, you know, relative to your expectations. Did you actually mark down the values, or was it just that your return was less than what you anticipated, but the fair values didn't actually get marked down? Just trying to understand that.
Yeah. There was a slight decline in the quarter in the overall values of the properties.
Okay. Just lastly, credit. You know, we're trying to kind of tease out where we kind of find the moving pieces on credit. You talk about, Garry, CAD 2 million, I think in the MD&A being negative impact because of corporate bond. I mean, that's de minimis, it's not really material. You know, is there other areas where, you know, that credit is kind of incorporated in terms of the unwind of the discount rate on the risk adjustment, or is that built into your expectations? Like, or is that CAD 2 million that you talked about on credit, is that the full picture?
Yeah, sure. The CAD 2 million is the, so I call the absolute impact of credit. It's not sort of offset against release of provision or anything like that. CAD 2 million was the absolute impact, which obviously is a very good result. In terms of where the, as you say, the discount rate unwind or the credit sort of allowance in the discount rate would come through, that would be in the expected investment result. That's where that unwind would be. That would contribute positively because it's a higher yield on our assets than on the liability. It is, it unwinds positively through there.
The CAD 2 million is the absolute impact, which is of course, very benign this quarter.
Have you disclosed what that positive unwind was or what we should expect it to be?
No, we haven't had that separately. It's, we have to pick apart all the portfolios.
Okay. Okay. I could keep going on, but I will leave it at that for now. Thank you very much.
Thanks, Doug.
Our next question comes from Paul Holden of CIBC. Please go ahead.
Yeah, thank you. Good morning. First question is maybe continuing the discussion a little bit more on the CRE exposure. Maybe you can broaden it out beyond the U.K., 'cause I think you do have exposure outside the U.K.. Maybe you can talk a little bit about, you know, the fair value marks on that portion of the book, as well as sort of, you know, the cash flow, experience you're seeing, there.
Thanks, Paul. I'm gonna pass that one over to Raman.
Thanks, Paul. I think I'd say a couple things. One is the themes are generally consistent across our property exposure where we hold it. We hold it in the U.K. We do have exposure in Canada as well. You know, the themes are again, you know, related to interest rates. That's been a, you know, that's interest rate increase that's been prevalent everywhere that's been affecting properties. Again, more so in Q4, that's true in regions everywhere, but less so in Q1. That's true in regions everywhere. The general trends by sector also are consistent. We've seen bigger declines in office and retail, say, versus industrial. I'd say there's nothing too different between Canada and the U.K. The themes are broadly similar.
Slightly larger declines in the U.K. in Q1, versus what we saw in Canada.
Yeah, Raman, I just might also add in, it's themes that we've talked about in the past is we've been actively managing the book of real estate, trading out, for example, of, you know, direct retail into things like distribution warehouses. Over time, we've seen some office conversions into multifamily residential. We actively manage this portfolio with an idea to sustaining strong value creation, you know, into the future.
Okay. That's helpful. Thanks. In terms of the Capital and Risk Solutions business, was a little bit surprised to see the negative experience on mortality this quarter. I think, you know, industry data for the broad population would show lower mortality rates in Q1, and I think most U.S. insurance companies would have shown the same. Just curious what it was in terms of your exposure that would have resulted in negative mortality experience in Q1.
I'm gonna pass that one over to Garry, but I think, you know, the information and insights we have is that, what we're seeing happening across our book of business on the mortality side is pretty consistent with what's going on externally. The other thing to note, again, is that, you know, while we see the mortality decline flowing through the P&L, the offsetting impact of on longevity is flowing through CSM. You see that, you know, in under IFRS 4, those would have been offsetting. We would have seen probably almost across the book, almost a full diversification, but that's not occurring now under IFRS 17. Garry, do you want to provide a bit more insight on that?
Just, we actually saw elevated mortality in pretty much all the jurisdictions where we're doing business. I think one of the things I'd caution on is comparing mortality to Q1 2022 is not the same as comparing it to expectations. I haven't seen specific reports on that, but I wouldn't be surprised at all based on what we see in our book. When we're measuring our experience here, it's against what we would have expected in a more normal environment, and we are seeing elevated mortality claims.
Some of the last year, when we were discussing our results, we wouldn't have seen it as much for a couple of reasons. One is we would have been talking about the offsets with longevity. Both would have gone through earnings. Also we would have had some pandemic related provisions that we were utilizing against the adverse experience in early 2022 that we wouldn't have at this time. This is a straight measuring against expectations. Yeah. The other point I'd make, Garry, is that if you think about our Capital and Risk Solutions traditional life reinsurance business, that is actually a bellwether for the U.S. industry. We're actually seeing evidence of U.S. insurers having excess mortality over what would be expected under normal conditions.
Okay. That's helpful. Thanks for that. Then just last one for me in sticking with the CRS business. If we look at sort of that run rate picture you provide in your presentation deck, it would suggest year-over-year growth is trending around 5.5%. You know, since you label this as run rate, do you think that's a good growth expectation? Or based on sort of you mentioning strong pipeline and business expansion, it could accelerate to something higher if you're able to realize on that strong pipeline.
I think it would be fair to say that, you know, 5%-6% is broadly in line with what our, you know, perspectives would be. Having said that, the key in this business is really to balance opportunity with discipline. If there's the right opportunities for, you know, strong, you know, earnings emergence and growth, we will obviously consider that, but it's all about discipline. I think Arshil can provide a bit more context around that.
Yeah. I think the longer term trends or whatever I think are right on what you're saying. In the near term, there are some opportunities for us. If there are larger longevity transactions that we manage to close or larger asset intensive transactions, we'll be talking about those or whatever, and that might potentially add to that run rate. You're absolutely right over the last few quarters or whatever in the last few years and, in the near term going forward or whatever, sort of that 4%, 5%, 6% kind of growth rate is what we expect to deliver.
Then there is a subtle shift going on in terms of the mix or whatever, and we're seeing sort of, you know, slightly faster growth in some of our shorter tail businesses, that renew whatever, that have very little CSM. I just encourage you to look at both our CSM growth and then that display that shows the shorter term businesses and the run rate earnings that come from the shorter term businesses or whatever. Those are all the key metrics that we're tracking internally. That's the right frame of mind influenced by some larger transaction opportunities, if we're successful.
As Paul indicated, if the return profile isn't something that we're comfortable with, then we'll pass on those larger transactions, and continue to grow sort of in a very diversified way, continue to expand our geographic footprint a little bit or whatever, and have a good, solid diversified book of business. That's really our ambition.
Okay. I'll leave the questions there. Thanks for your time.
Thank you.
Our next question comes from Mario Mendonca of TD Securities. Please go ahead.
Good morning. Can we go to the U.S. segment? I just wanna understand some of the dynamics you're referring to, particularly as it relates to participants. Clearly, there'd be some organic growth in this book. We've seen already. We've seen that over the last couple of quarters. Paul, I think you mentioned that there'd be some risk of attrition. Could you help us think about how participant growth and participants should migrate over the next, say, 12 months-24 months? Would you expect to be able to grow participants, or would the attrition overwhelm any of the organic growth that you plan for?
I'm going to take that question and pass it right over to Ed, who can provide some context.
Sure. First on organic growth, what I would say is, you know, we're running somewhere between 5% to 6% organic growth on the book of business, which measured against the market, the market's generally growing net 2%. We're growing at 2.5 times the rate of the market organically. When I look at the Prudential business, we expect to execute on that client migration effort by the end of Q1 2024. If you, if you think about what we've built into our models and what our expectations are for client retention, asset retention, participant retention, we're on target to exceed all those metrics.
You're gonna continue to see strong organic growth in the business, and then you're gonna see a very, very strong, successful transition of the Prudential business onto the Empower platform.
Yeah. I think, Ed, if we were to net those out, you know, the offsetting impact of some of the client attrition, and by the way, you'll remember that we participate in the sort of mid to upper eighties in terms of retention on the MassMutual transaction. We have similar aspirations on this one. You consider that organic growth, you know, it's broadly could offset or it could slow a little bit, but I think our expectation is net growth over the period.
Yeah. Net growth.
I mean, we're talking about organic growth over a broad population versus attrition over a smaller population. It's just a bit of a slowing of the growth during that period, but creating a lot of value. We're really excited about it.
Just a reminder, that let's say that 15% attrition off of a smaller base, 'cause I understand the math you were offering there. The participants added by the Prudential deal, am I right in saying that was about $4 million?
Yes.
Fifteen percent of $4 million and then 5% or 6% growth, otherwise. That's helpful. Maybe the... A sort of related question then, and we're all gonna slice and dice these numbers to try to make them make sense to us. One way I'm trying to look at your results is looking at the net insurance result, the non-insurance result, the expenses, and just excluding anything to do with the investment result. I'm gonna try to look at this in a sort of cleaned up way where the net investment result is something I look at sort of after the fact. In the U.S. business, if you look at it that way, excluding the net investment result, the business is running at a loss, and it's running at a loss largely because the expenses are high.
Would it be your expectation that this business can be at least neutral to earnings before investment, the contribution from investment income as the expense synergies unfold? Is that a reasonable expectation for this business longer term?
I'll start off at a high level, Meny, Mario,
Okay.
I can turn to Garry. You know, if you think about where we're at, and we disclosed, we're in the process of investing quite heavily in the retail expansion right now, and we noted that. Ultimately, though, when you get to sort of a stable environment, it will look a little bit different, but we're in growth mode. I'm gonna turn over to Garry to provide some context.
Yeah. I think Mario, where you might find insights, especially when it comes to the Empower, and I'll focus on the Defined Contribution. I think we show it for wealth, but Defined Contribution is the bulk of it. If you go into the supplementary package, we've tried to outline this more clearly than we perhaps have in the past. This is on page 20. We outlined there the net revenue sources for Empower, and that would be the net investment real effects would be spread on the general account savings options, which are just there tend to be an allocation for, you know, millions of participants would have a modest allocation to the general account that's...
Probably 5%, 6%, 7% of our overall assets on the Empower platform. It's a. We have a spread on that. We have the asset-based fee income, and then we have the other fees like plan record-keeping fees, transaction fees, and so on. Those revenues add up. They're, they're, you know, nearly $650 million, and the expenses around $440 million. You do have good profitability on that Empower book. I think that's the way to think about those. I think when you go up a level into the US segment, Drivers of Earnings, now you're adding in investment from this, but also from the Putnam business. You're getting more of mix. I'd really, for Empower, I'd focus on that supplementary disclosure we've tried to add for exactly this reason.
Are you suggesting then, Garry, that excluding the because of the importance of the spread business, that excluding the net investment result is not an appropriate way to look at the profitability of the segment? Is that the message?
Correct. That's the message.
Okay, thank you.
Our next question comes from Tom MacKinnon of BMO Capital. Please go ahead.
Yeah, thanks very much, and good morning. Just a question with respect to yield enhancements in Europe. Just remind us why you get those again under IFRS 17, what the amount was in the quarter. Any guide as to, you know, what you expect this to be or what drives it going forward? Then I have a follow-up. Thanks.
Okay. Thank you, Tom. I'm gonna turn that one to Garry.
Sure. The yield enhancement, this is for those portfolios that I mentioned earlier, where we have really good match. Unadjusted, we're using our own assets, a top-down own assets approach to the discount rates. What happens there, Tom, is when we have some trading and we enhance the yield on those, on those assets, we're using that yield, and it'll have, it'll have a very, a, you know, the credit adjustment that won't really come into it. It'll come down for credit, but that yield will go up. The discount rate on the liabilities goes up. The liabilities values obviously drop and that pickup there by the by the lower liability values from the higher discount rate, that's what's flowing into income. That's.
It's in the, I think in this quarter it was in the EUR 35 million range for Europe, just to give you a ballpark of what that would have been, this quarter.
In a flat interest rate with no change in credit spreads, how would that be, well, lower than 35?
The interest rate would have gone up, the yield would have gone up very modestly in the portfolio. There would have been no change to our view of credit on the portfolio from this. The credit adjustment would have been the same. The yield pickup would have just shown up as an increased discount rate. Obviously, if there were different assets that changed the credit, we'd adjust for that. This was very similar assets, no noticeable change in the credit outlook. This is the extra yield on top of there might have been a modest extra credit and a modest extra yield. This would be the net difference between the two. Does go into that discount rate.
It's very similar to how yield enhancement would have happened in the past. It's just a different mechanism with IFRS 17 with the top-down own assets.
Right. Okay. Is it best to think about a run rate of 35 a quarter going forward? How should we be thinking about that?
Yeah, I think it will definitely vary quarter to quarter. I don't think this was an unusual quarter in any sense, but I caution it will vary. Depends on the opportunities, depends on spreads in the market. There's a number of factors. It wasn't particularly unusual one way or the other.
One other question maybe for Paul here. Putnam continuing to be weak, negative margins again in the quarter. Was there anything particular that in this quarter that contributed to the negative margins in that business? What can you do to fix this stuff up?
I don't think there was anything significant other than the really the significant drop if you think about from Q1 last year to Q1 this year, the overall asset levels driven by market levels. That's the primary driver of it. We're seeing less fee income coming through as a result of that. You know, market impacts, you know, are really the primary driver of that. Garry, anything else to that?
No, I think that's it. That's it, Paul. I, the funds, I mean, we had some net outflows during. When you're doing a quarter-over-quarter, like from last year, you had the net outflows last year. I think it was about in total in the order of CAD 4 billion last year in net net outflows. But the market impacts were probably CAD 14 billion-CAD 15 billion last year. It's that was really a big driver year-over-year. The expenses, I mean, they run a tight ship there, so the expenses can't really absorb that sort of market movement. You got a lot of leverage to the market levels in there.
Yeah. Tom, you know, more strategically, it's a question of scale, right? Because if you look to what Putnam is doing for its client base, and its client base actually includes a lot of our clients across Canada Life and in Europe and including their, the positions that they want on the Empower platform. Very strong performing asset manager. If you look to the presentation slides, you know, the, if not the leading one of the top fund performers during 2022. If you look at the actual fund performance over short, medium, and long-term. Our perspective remains that, you know, scaling the business through transaction is going to be the greatest opportunity for us. I think Putnam represents, you know, excellence in a lot of products, a lot of capabilities and performance.
I think there's a lot of potential value there to unlock and remain focused on that.
Okay. Thank you.
Our next question comes from Nigel D'Souza of Veritas. Please go ahead.
Thank you. Good morning. I have two questions for you. The first, just a quick follow-up on IPC and the expected impact to base earnings. I think you mentioned you expect it to be modestly accretive after two years. Just want to confirm that, you know, the near term, fair to say that you don't expect a material impact to base earnings from IPC.
Thanks, Nigel. I think the starting point is that IPC is, you know, we've announced the transaction, but we're not expecting a close until sort of the end of this calendar year is what we would be targeting. You wouldn't see anything any impact flowing through during the 2023 calendar year. As we bring it on board, you know, what we're doing is we're building the foundation of a wealth platform. As we've stated, when you combine it with our existing wealth platforms in Canada, you know, will position us as one of the largest platforms for independent advisors. Jeff, do you want to add to that?
Yeah, good morning. I think Paul said that well, and, you know, we think it'll close towards the end of the year. Since we've announced, the feedback in the marketplace as being overwhelmingly positive and primarily from the advisors we work with, both on the IPC side and on the Canada Life side, and also feedback from customers. We're, as we move forward, we see big opportunities to grow this business.
Is it too early to size the expected benefit to Base earnings, a few years out, or any color you have on that business?
Yeah, yeah. Nigel, I'm not going to unpack that now, but I did mention the fact that we're looking to a presentation in June where we're going to provide greater insight into our wealth management businesses, and that'll focus on, you know, what's our wealth strategy in Canada as we bring together these businesses? What does the Empower Personal Wealth business look like? What about this Unio business in Ireland? You know, if you think about those value drivers we talked about in our business, wealth would be our smallest value driver, but the one that has the highest growth potential. We'll provide greater insight into that at the Investor Day we're planning for June 20th, and I hope you can join us.
Okay, that makes sense. The last question I had for you was, again, circling back to experience gains and losses. Under IFRS 4, you provided a breakout of the components, and now some of those components are embedded in different line items. Yield enhancement, credit experience, that's now under expected investment earnings. Just wondering if in the future you'd consider providing breakout of those components again, just so we can better get a sense of what's driving any quarterly volatility or changes in some of these line items.
Nigel, that's a good question. That's something we'll take away, because obviously we want, especially as we transition here, you know, from sort of old world to new world, we do want to make it easier for you and other users of our financials. Garry, anything you'd add to that?
No, I think it's good to call out. We would, we'd want to think in doing that we would look at not just the P&L side, but also the CSM side because of that diversification mentioned earlier. We'll give that some thought as to how to best come at that.
Yeah. Nigel, I think the complexity in all this is the geography of all the pieces. They nicely all flow, you know, flow together in a calm accounting methodology. Now with this, you know, elements flowing into CSM and others going through the P&L, it would be a bit of an overlay. It wouldn't be something that you would naturally see. It would be an overlay, but I think it's fair to challenge us to provide that insight.
Yeah.
Yes, appreciate that. That's it for me. Yeah.
Thanks, Nigel.
Our next question comes from Joo Ho Kim of Credit Suisse. Please go ahead.
Hi. Thanks. Good morning. Just wanted to go back to Europe, base earnings of CAD 178 million there. There were some mentions of favorable reinsurance settlement gains and tax change impact. I'm just wondering if these were, these were material in any way and whether you could, quantify them.
Okay. I'll turn that one over to Garry.
Yeah. These were the two impacts that were mentioned. They're both very modest in that sort of CAD 10 million range. Obviously it's that sort of level. They're very modest in each of them. The flip side is obviously we had the higher mortality claims that would have been, again, in that sort of CAD 10 million size. There's not. When you net it all out, it wasn't that unusual a quarter overall.
Got it. Thanks. Just last one for me, just the leverage ratio was 33% for the quarter. You mentioned some redemptions in Q2 that should be favorable for that ratio. I'm just curious if you have a medium-term target out there on where this leverage ratio could go. Any sense on timing for how quick we could get to that sort of target range. Put another way, I guess, what do you see as Great-West ability to organically lower our leverage ratio going forward? Thanks.
Well, that's absolutely our goal, to organically lower. We've been actively doing that, including, you know, retiring a lot of the short-term financing associated with transactions. I'll let Garry provide a bit more color.
Yeah. Obviously we should see a drop from.
The EUR 500 million got to be EUR 740 million or so, okay. I can't remember the exact number, but it's something like that. That'll bring it down, probably round down next quarter. If all else being equal, it should round down. We don't have a specific publicly stated target, although we've typically set in various investor forums that we'd like to be seeing that number under the 30% range, and that would still be our goal. I think we can get there, you know, relatively, probably we've got a little bit more of the short-term debt from the Prudential acquisition that we're planning. We've said before, we're planning on completing that repayment over the next couple of quarters with this other debt.
With the growth in our business, again, it's on a strong footing here. Then a growth in our business that we should see that leverage come down, you know, quite smartly over the next couple of years, back into that 30% or lower range.
Got it. Thank you. That's it for me.
Thank you.
Once again, if you have a question, please press star then 1. Our next question comes from Darko Mihelic of RBC Capital Markets. Please go ahead.
Hi. Thank you. I just have two questions. They're both modeling related. I wanted to ask Garry, maybe if we step back for a moment and we look at the expected investment earnings, and we think about that number, it's been a little volatile in the last year, and I don't want to spend too much time on last year. You probably weren't managing towards it. Thinking about now going forward, if this is an expected investment earnings, you must have an expectation of what you could earn with these. Are you willing to share, if, for example, if I take this quarter's entire investment earnings, I deduct the CAD 35 million from yield enhancement, is that a good run rate? Is that how I should think about it?
What might be a better way to think of, expected investment earnings?
Garry, that's definitely for you.
Yeah. It is. You're right. We weren't modeling this back through the four quarters, so we can't go back through last year. I would note that it does include, and you're right, it does include the yield enhancement, as we called out earlier, and that did move around a fair bit last year, particularly in Europe, where we see the yield enhanced benefit. There's really not much in Canada. Then the other side is that this also has, you know, at the top of the house, this is going to have your Putnam business in it. It's going to have your Empower general account business in it. I think I'd take a good look at it by segment.
We do show that in the supplementary deck. But you're right. It shouldn't, you know, setting aside the, some of those, like you could see the Putnam and Empower, setting those aside, the rest of it does move more steadily other than the yield enhancement which we called out. I think you're looking at it correctly. But I just want to remind you the component parts when you roll it up at the top. Because you're rolling it up at the top, you also have to watch currency.
Okay. Yeah. No.
By the segment one tends to not be a factor, if that helps.
Yeah. No, I figured the currency impact. I guess the another way of asking the question is why not share expected investment number for the analyst community? What would your expected investment earnings be for 2023?
Well, it's going to very much change with the discount rates as well on these.
Focus on base earnings.
Yeah. That's... No, I just thinking in terms of, you know, we have, our non-fixed income, that, we've got those in there as well. I think really if you want to get a sense of the pieces, if you go back to the base earnings by each of the segments, I think that's really what will, gives us a sense of it. Trying to pull together the pieces for the different, contract classifications on this is more difficult.
It also-
I focus on the pieces. As I say, you've got Putnam in, you've got Empower in, you've got our insurance businesses. If you go through the segments, look at the base earnings, I think you'll get a better indication for modeling.
Okay. There's no real accountability to be had against. I mean, there's obviously the net result, which is a function of all the mark to market and so on and the delinked, but there's no real expected investment earnings that we could hold you accountable to.
I just want to be clear. The expected earnings that are in the Drivers of Earnings are their Base earnings contributors. They're not the mark to markets. Those are in the excluded items.
Okay. Yep. Noted.
They are in the base earnings. It all rolls into the base earnings. It's just a geography on the, on the new.
I wonder if we can do a follow-up.
Yeah.
I think we'd be better to do a follow-up. maybe we could take it offline, walk you through each of the various businesses, where those components are. it's something we can reflect on there, Darko. you know, it's a little bit like sort of saying what will happen with CSM moving in different directions depending on the profile of the business. trying to come up with a, kind of a global number, I think is a bit dangerous from the standpoint that it, you know, it's a bit of a blunt instrument, where you've got multiple moving parts coming into it. I think we could walk you through this, and we can reflect on whether there is, you know, something broadly we could guide to.
I think I certainly wouldn't want to do it in flight right now because it is a lot of moving parts, and we're all kind of learning as we go here.
Okay, fair enough. The similar question then is in earnings and surplus, which presumably you have, since you have the OCI option chosen for that, when I look at it should be relatively stable. Even if I look at it on a segmented basis, what I see today should be very similar to next quarter. Is that a fair assessment of the earnings and surplus modeling effort here, Garry?
Yeah, I think the thing you have to keep in mind as you look at the trend over the thing is it will reflect the movement in interest rates. Obviously, we saw a pickup last year because of the higher rates. Yeah, it no longer has, we no longer have the financing charges in there. We don't have the capital reallocation in there, so that takes some of the noise out. I think you're on the right track.
Okay. That's helpful. Thank you very much.
Thanks, Darko.
Our next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
Good morning. It's a busy one. I just wanna ask you a question about the, you know, the LICAT stability under IFRS 17, which is great and all. One statement you made in the release, "Additional net earnings volatility offsets other LICAT impacts, leading to greater LICAT stability." Doesn't make sense to the layman, like me. Just wondering if you could, you know, illustrate what, you know, what other LICAT impacts are that generate that outcome?
Thanks, Gabe. I'm gonna turn that over to the non-layman, Garry.
There you go.
Yeah, sure. I think the primary thing we're referring to there is, we did call this out last year a couple of times as rates rose very rapidly. One of the components of LICAT, the surplus allowance is interest rate sensitive to design on a fair value basis, whereas the requirements for LICAT are under stable interest rates. It's obviously fixed. What we found is because the surplus balances at fair value, as rates rose, your LICAT ratio comes under a lot of pressure formulaically. Even though economics of the business other would say otherwise, the LICAT ratio came under pressure.
What you'll see if you look at our material is that, under an IFRS 17 basis, when rates rose, we had a strong net earnings gain.
Mm-hmm.
we have some of our assets we purposely chose to do at amortized cost, so they would stay constant while the liability values fell. That drove a large gain, and that gain really offset the LICAT impact. You had net earnings improving, but you had your surplus allowance in the LICAT formula declining, and that's what gives you that nice stable LICAT. That's in a nutshell what we're getting at. Hope that helps.
I might need to revisit that one. Are we talking about the gain-
Yeah.
The gain-
No, I get that. Gabe, let's take that one offline.
Yeah. Yeah. Okay. I agree.
You're, you're frankly looking at two moving things that are offsetting one another.
Yeah.
Should be able to do that over a range of various market conditions. I think we can walk you through that for sure.
Okay. Then just on the investment, impact this quarter, you know, CAD 170 million or so. Is it possible to break down the impact of rates, non-fixed income and U.K. property? 'Cause, you know, going forward, we just kind a wanna tie in, or I do anyway, what actually happened in the quarter with rates and whatever else to try to, you know, use that going forward as a, as a proxy to try to get a better handle on this particular line item.
Garry?
Yeah. Going back to the earlier suggestion, some of the experience items, could we have a little more color on that? This is in that same camp. What I could say at a high level is about half of the impact would have been related to the interest rates, and the other half would have been more on the real estate side. That's primarily U.K. property, that fair value adjustment there. You got a balance of some interest rate declines and.
Okay.
Let's say about half and half.
Okay.
At a high level.
The UK real estate was like GBP 60 million-GBP 70 million then?
Yeah.
Okay.
A little higher on a pre-tax basis, these are measuring. I also want to remind you that the excluded items are measuring the GAAP from the expected. If we expected a modest increase and we got a modest decrease, it's the change from expected it's measuring, not the absolute in the excluded items.
I'm sorry if I missed this. I was, you know, multitasking, which I'm not very good at. Mortality it hit you in Canada, in Europe, or in the CRS.
Yeah.
Capital resolutions business. Did you quantify a number? How did that, you know, it seemed to be a pretty big number overall? Is there any interconnectivity there, in terms of the exposures you have that led to all 3 segments getting hit by mortality?
Yeah. I'll start off. Just to repeat one of the things that we saw in quarter was we did see some higher than expected mortality in each of those three areas that you described. Interestingly, our reinsurance business in the U.S., you know, traditional life reinsurance is kind of a bellwether to the fact that other insurers are seeing the same thing in the U.S. All of those things moved. As we've noted, I think about six times now, is that the offsetting diversification-
Right.
We would get from longevity didn't flow through. In terms of the overall scale of that impact, maybe Garry MacNicholas can provide that.
Sure. There was another question there on, are they connected? They're not directly connected. There's nothing to connect them. It's just each of those regions in the businesses we had, which are reasonable indications, each of those, because Ireland, we're a very dominant player there as well. Each of those regions had elevated mortality. I put it at in pre-tax terms, it was in the CAD 60 million of mortality impacts and about CAD 60 million worth of CSM pickup in longevity. They were very balanced.
Yeah.
What's that? Maybe, CAD 50 million post-tax and I'm ballparking it. It's different jurisdictions, but it'd be in that sort of range.
You know, Gabe, there's lots of theories out there, you know, whether flu season this year was worse off because, you know, people have stayed home for a few years or the other one there is there sort of a trailing impact of, you know, COVID.
COVID.
I mean, the reality... lots going on, we're seeing kind of that consistent. As Garry said, we're also seeing the consistent diversification benefit. The overall economics are one where our overall economic position was nicely diversified. Just the P&L impact's a little different.
Yeah, Garry asked my question, like the offset that went through CSM, they pretty much matched, right?
Yeah. Yeah.
Okay, cool. appreciate the extra long call and lots to chew through this year. Have a good one.
Thank you very much.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Mann for any closing remarks.
Thank you, Operator. I would like to thank everyone for taking the time with us today. As noted, this was an extra long call. There's a lot of information we put at you. You know, we're clearly going to unpack this over the coming quarters. Having said that, we are totally ready and willing to take calls, you know, so you can work through your interpretation and your modeling. I'd also like to reiterate that we are planning an investor day for June 20th in Toronto. The event, as I said, will focus on our wealth and asset management businesses across the company, and I hope you'll be able to join us. With that, thank you very much for taking time with us today. Take care.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.