Great-West Lifeco Inc.

Thank you for standing by. This is the conference operator. Welcome to the Great West LifeCo's second quarter 2023 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity for analysts to ask questions. To join the question queue, you may press star then 1 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 Mann, President and CEO of Great West Life Co. Please go ahead.

Thank you, Gaylene. Good morning, everyone, and welcome to Great West Life Co.' 's second quarter 2023 conference call. Joining me on today's call is Gary McNicholas, Executive Vice President and Chief Financial Officer. Together, we'll deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and COO of Europe, Arshil Jamal, President and Group Head of Strategy, Investments, Reinsurance, and Corporate Development, Jeff McCown, President and COO of Canada, Ed Murphy, President and CEO of Empower, and Bob Reynolds, President and CEO of 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 cautionary notes apply to the information we'll discuss during this call. Please turn to slide four. The company delivered strong results in the second quarter of 2023 with base earnings per share of $0.99, up 2% from last year, and up 11% from the prior quarter. This performance reflects disciplined execution of our strategy, which is driving momentum across our businesses. In each of our operating companies, we continue to make organic investments and take strategic actions that will help us deliver on our value creation objectives. During the quarter, we initiated several transactions to advance our workplace and wealth growth strategies. We announced the sale of Putnam Investments to Franklin Resources, unlocking shareholder value and reinforcing our focus on the highly attractive U.S. retirement and personal wealth markets through Empower. We announced the acquisitions of IPC and Value Partners in Canada, which will help advance our goal to be the leading Canadian full-service wealth and insurance platform for independent advisors and their clients. In the UK, we announced the sale of our individual protection business, where we did not see a clear path to sustainable scale and leadership. And at Irish Life, we announced our new joint venture with AIB, Ireland's leading bank, diversifying our wealth and insurance distribution reach in Ireland. In addition to these actions, we continue to successfully integrate acquisitions at Empower, including a faster realization of synergies from credential than originally forecast. Net earnings per share were 53 cents in the quarter, which included losses of 30 cents per share related to two categories of costs that will position LIFCO for continued growth and stability. First were 17 cents per share of transaction costs related to recent strategic transactions, including the announced sales of Putnam Investments and the UK individual protection business. Second was a 13 cent per share impact of realized OCI losses from surplus asset rebalancing in the UK. This action shortens the asset duration to capitalize on higher short-term rates, improves our LICAT ratio, and reduces future LICAT sensitivity. Excluding these items, net EPS would have been 83 cents per share, reflecting more typical non-based earnings items, such as market impacts and ongoing integration costs. And finally, our LICAP ratio remains strong at 126%. Please turn to slide five. In Canada, we delivered strong results in our workplace solutions business. In group life and health, we've grown premiums by $1 billion over the last year. And this does not include the federal health plan, which will be reported in the third quarter. On July 1, we went live providing benefits under this plan, known as the Public Service Health Care Plan. While we successfully enrolled over 85% of plan members before this date, we experienced some transition issues with paper-based enrollments for retirees. We've worked with the government to address these challenges and are seeing the situation improve. Overall, the implementation has been a success with hundreds of thousands of claims already paid. We were also recently awarded the public service dental care plan representing approximately $550 million of annual paid claims. This is a great win as we will be serving the same plan member base for benefits and dental, allowing for service enhancements and better plan economics. Our individual wealth business experience somewhat weaker flows. While not inconsistent with the overall market, we are taking action to reposition our Canadian wealth business for stronger growth and performance. More specifically, the Investment Planning Council and Value Partners acquisitions will enhance our offerings and position us as one of the largest non-bank wealth firms in Canada. Both acquisitions remain on track for regulatory approval by the end of this year. And finally, we saw our CSM in Canada decline year over year, largely due to actuarial basis changes reported last year. Given our focus in Canada on workplace and wealth, including participating insurance solutions, we approach non-participating insurance with a focus on customer value and pricing discipline, and we do not emphasize non-par CSM as a growth metric. Capital generation from our in-force business is an important consideration, and we're looking to further develop measures for this in coming quarters. Please turn to slide six. Our UK and European businesses continue to demonstrate resiliency despite the high impacts of inflation. Our workplace businesses experience strong sales and organic growth, driving a 12% increase in group life and health book premium. We also achieved steady growth across our retirement and wealth businesses, both of which experienced positive net flows in the quarter. This is in part driven by the successful execution of our wealth strategy in Ireland under the Unio brand. And as I mentioned earlier, we officially launched a new joint venture with AIB to diversify our wealth and insurance distribution capabilities in Ireland. With insurance and risk solutions, we continue to see increased demand for individual payout annuities in the UK given higher interest rates, and this is supporting a growing CSM in Europe. We also saw an active pipeline of bulk annuity opportunities, although we did not see significant sales in the quarter. Please turn to slide seven. At Empower, we saw another quarter of strong growth as we continue to execute on our strategies in workplace retirement and personal wealth. This includes the continued delivery of acquisition benefits through disciplined execution of integration programs. In workplace solutions, we achieved strong organic growth with DC plan participants up 4% year-over-year and DC assets under administration up 13%. Empower Personal Wealth continued to see strong momentum. AUA was up 30% over the prior year, with two-thirds of that growth coming from new sales. Rollover rates for Empower's DC business are increasing with improved sales effectiveness supported by enhanced hybrid digital advice. Finally, I would note that with the announced sale of Putnam Investments to Franklin Resources, the results of Putnam have been classified as discontinued operations. Please turn to slide 8. Our capital and risk solutions business, or CRS, continued to play an important role in diversifying our portfolio and supporting our continued growth. CRS had strong new business and margin growth this quarter, which is appearing in our shorter duration in fee-based businesses. Growth was largely in structured businesses with several transactions in core markets, as well as expansion into new markets, including Italy. Note this business is accounted for on a PAA basis, which does not involve CSM. Sales in other areas, such as longevity and asset-intensive reinsurance, were relatively softer this quarter, reflecting the nature of this business, which is largely bespoke transactions that don't have regular frequencies. The absence of these larger long-term transactions this quarter resulted in a small decline in our CSM balance from the prior quarter, although the balance was up from last year given longevity-related actuarial basis changes in 2022. With that, I'll now turn the call over to Gary to review the financial results. Gary? Thank you, Paul.

Please turn to slide 10. Q2 marks just our second quarter under IFRS 17. The teams have successfully continued our IFRS 17 implementation journey, with most processes being transitioned to a business-as-usual state. We appreciate there's a lot of change and adjustment to adapt to the new regime. Over time, though, we believe stakeholders will have greater visibility into the strengths, underlying economics, and diversification of LifeCoast portfolio. As part of that journey, we've introduced several enhancements to our disclosures this quarter, based on internal reviews and external feedback. These changes were made to provide a clearer articulation of our business performance and to better align with emerging industry practices. The drivers of earnings, or DOE, display has been enhanced in a couple of areas. First, on short-term insurance business, we have separated the expected earnings versus experience gains and losses. so that users can better understand the expected earnings growth versus period-to-period fluctuations in experience for those insurance businesses. As you'll see in year-over-year results, even in a diversified business such as ours, there can be noticeable swings in experience period-to-period. Another change to the DOE was combining the reporting of our fee and spread business with the associated expenses. This provides for a clearer articulation of the performance of this business, particularly for our Empower business, which is the dominant driver of this line item within the DOE. It also brings our presentation more in line with industry peers. The contractual service margin, or CSM, roll forwards have been improved to provide more granularity and differentiate what we call organic CSM movements, which are conceptually the CSM equivalent of base earnings. from other movements such as actuarial assumption changes. So organic movements would include regular items like new business, CSM interest accretion and amortization, and the insurance experience such as longevity that does not go through the P&L. And lastly, we restated the results for Putnam, and they're included in discontinued operations reflecting the announced sale of Putnam. We are continuing to evaluate improvements in our metrics around capital generation and expect to share something later this year. This will help provide additional insights into the underlying performance and overall contributions of certain businesses within our portfolio. The other important context for this quarter's results is in the excluded items, the difference between base and net earnings. Base earnings were strong this quarter and did not include many notable or unusual items either up or down. Net earnings, on the other hand, included a couple of notable items, And I would look at, as I look at it, I'd look at these excluded items in a couple of different categories. One category is items that you'd expect to see most quarters, such as the impact of market movements, ongoing integration costs, and the amortization of acquisition intangible. The other category is items that you wouldn't regularly see. As Paul noted earlier, there were two such items within the quarter. The first was transaction costs related to divestiture actions, including the sale of Putnam, the sale of the UK protection business, and a provision for indemnities on the sale of US individual markets business to protective a number of years ago. The second was the realization of other comprehensive income losses through net earnings as we shorten the duration of our UK surplus portfolio. This has no impact to book value as the OCI impacts are already recognized on the balance sheet, and it should lead to a modest pickup in future earnings as we capitalize on higher, shorter duration rates given the inverted yield curve. The shorter duration reduces our LICAT requirements, improving the ratio, and reduces LICAT ratio sensitivity to interest rates going forward. This action did change the geography of our losses. moving them from other comprehensive income into the reported net earnings. Within the market movement component, for non-fixed income, it's important to remember this is not an absolute gain or loss experience. It is an amount relative to long-term expectations that are included in base earnings. So within this quarter, we experienced approximately break-even UK real estate returns and positive returns in our Canadian public equity and real estate portfolio, but the returns were lower than expected. There are largely offsetting interest rate impacts as negative impacts in Canada from the further yield curve inversion were offset by gains from higher overall rates within the UK. As noted at our Q1 earnings call, we expected some increased net earnings volatility due to de-linking of asset liabilities under IFRS 17 and combined with our asset liability management accounting policy choices, although these impacts should oscillate around zero over time. Overall, we continue to maintain excellent financial strength and a stable balance sheet, despite the macroeconomic volatility that has been experienced. Turning to slide 11, base EPS of 99 cents was up 2% from Q2 2022, notwithstanding the strong comparative results in the prior year, which had been driven by favorable insurance experience gains. In the drivers of earnings, the change to differentiate between expected versus experience on short-term business allows this impact to be seen more clearly. And the DOE highlights that in Q2 2022, had very favorable experience gains of $91 million, which you'll see when we get to slide 13. Quarter over quarter, base earnings were up 11%, driven by strong business growth and improved insurance experience. Recall Q1 saw heavy mortality in a number of segments, and this did not repeat this quarter. The strong base earnings results were broad-based, with all four segments showing growth over the prior quarter, although the larger increases were in the U.S. and capital risk solution segments. Net EPS of 53 cents is down 40 percent from last year, as the higher base earnings were more than offset by the year-over-year change in items excluded from the from base that I described earlier. In Canada, looking at Canada specifically, base earnings were 283 million, down 17%, primarily due to very favorable insurance experience in Q2 2022, primarily lower health claims in group life and health, which returned to more normal levels this quarter. In the U.S., base earnings of 265 million were up 101 million, or 62%, primarily due to strong organic growth at Empower. This is the first quarter where the impact of Prudential is included in the prior year comparison, so the improvement reflects how the combined business is performing. While the DOE display shows the total, just the totals in net fee income and spread business, we've continued to show the breakdown of revenue sources and expenses for empowered defined contribution and empower personal wealth business in the supplemental information package. On the revenue side, we saw growth in asset-based fee income from higher markets, growth in spread income from higher interest rates, and increases in other participant and transaction-based fee income from growth in volume. Empower-based earnings also benefited from continued expense synergies, where we have fully realized expense synergies on the mass mutual business and delivered additional prudential synergies this quarter. We remain on track to deliver the targeted 180 million of annualized synergies on the prudential business on a run rate basis by the end of Q1 2024. In Europe, base earnings were down 14% from last year, and similar to Canada, this is primarily due to the non-recurrence of strong morbidity and health gains in Q2 2022, which you can again see in the updated DOE disclosures. The capital and risk solution segment, which is primarily the reinsurance business unit, recorded higher base earnings as well. Strong business growth, particularly in the structured reinsurance portfolio, can be seen in the growth in expected earnings on shorter-term insurance contracts. This was partly offset by higher mortality claims on U.S. traditional life business than in Q2 2022. However, the mortality experience has improved from Q1. Turning to slide 12. This table shows the reconciliation for base to net earnings, most of which I've already covered. Net earnings of $498 million, or $0.53 a share, were down $0.46 a share from base. The main difference from base earnings is $0.30 from the combination of those acquisition and terrestrial costs, given all the activity in Q2, and the realization of OCI losses described earlier. There was also the negative market experience relative to expectation, that over time we'd expect to average out around zero. The remaining items are predominantly related to integration costs, which will continue for a few more quarters, and the amortization of acquisition-related finite life intangibles, which will continue over a longer period. Turning to slide 13, drivers of earnings, and as noted earlier, our enhancements to the DOE view of earnings aligns us with our peers and provides a clearer description of our results. This is useful as we look at the insurance service result. In the top row of the table, expected insurance earnings of $739 million were up 6.5% year-over-year from a combination of business growth, particularly in the shorter-term insurance contracts, or PAA contracts as they're accounted for, and some currency tailwinds, whereas the overall result of $711 million was down 9% year-over-year. And the dominant drivers noted earlier, was a very favorable insurance gain of $91 million in Q2 2022 against the modest experience lost this period. The net investment result of $279 million was up 41% year-over-year. This is mainly due to higher earnings on surplus driven largely by increases in interest rates. Net fee and spread income related to our non-insurance businesses was up 56% year-over-year, and most of this result was driven by the growth at Empower. As noted earlier on the call, we benefited from improvements across all revenue streams from this business, while also recording lower expenses, mainly due to the realization of acquisition-related synergies. The effective tax rate this quarter was just under 16% on base shareholder earnings, and that reflected the jurisdictional mix of earnings, including a growing U.S. contribution and the absence of notable one-time items that we've often seen in the past. Overall, it was a very strong quarter with solid base earnings across the segments. Turning to slide 14, the book value, LICAT ratio, return on equity, and financial leverage numbers on this page are showing an eye for a 17 basis unless stated otherwise. Q2 2023 book value per share of $23.22 was up 5% year over year, driven by growth in retained earnings over the past four quarters plus currency translation gains and other comprehensive income. In quarter, in addition to the impact of the divestiture costs on the net earnings, there was a giveback of just over 1% from currency translation, which accounts for the modest book value decrease. The LICAT ratio of 126% was comparable to prior year and prior quarter results. The one-point decrease from Q1 2023 was partly driven by interest rate movements, but also by increased capital requirements from the strong new business activity in reinsurance, which has led to growth in our expected run rate earnings. This is a higher ROV business that tends to return capital quickly. The base return on equity figures shown in this slide are all on IFRS 17 basis, and so the result for Q4 2022 is shown rather than Q2 2022, since Q4 is the earliest date that we can show this metric on an IFRS 17 basis with four quarters of results. The base ROE has been stable at around 16% over this period. Financial leverage decreased by 2%, down to 31%, and that's due to the 500 million Euro repayment in April, which had been previously refinanced, and 150 million U.S. dollar repayment on the short-term debt that was used as part of the financial deal financing. These debt repayments are also what led to the reduction in LIFO cash from $1.3 billion last quarter to $0.5 billion at the end of the quarter.