Great-West Lifeco Inc.

Thank you for standing by. This is the conference operator. Welcome to the Great West Life Co. Third 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 will 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 0. 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, Ashya. Good morning and welcome to Great West Life Co.' 's third quarter 2023 conference call. Joining me on today's call is Gary McNicholas, Executive Vice President and Chief Financial Officer, and together we will deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and COO of Europe, Arshil Jamal, President and Group Head Strategy Investments, Reinsurance and Corporate Development, Jeff McCowan, President and COO of Canada, Ed Murphy, President and CEO of Empower, and Bob Reynolds, President and CEO, Putnam Investments. I'd also like to take this opportunity to formally introduce John Nielsen, who joined LifeCo in September. John was appointed CFO designate and will assume the CFO role when Gary retires next year. Welcome, John. Before we turn to the business of the day, I want to acknowledge the terrible loss of life and hardship related to current geopolitical conflicts. Our companies have made a donation for humanitarian aid, and our hearts go out to all of the people, families, and communities impacted. I'll now 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 will discuss during the call. Please turn to slide four. The company delivered excellent financial performance in the third quarter of 2023 with base earnings per share of $1.02, up 17% from last year. This represents a record quarter for base earnings base EPS, and the first time LIFCO reported base earnings above a dollar per share. These results reflect solid contributions across all segments and continue the company's strong earnings growth trajectory this year. We remain focused on disciplined capital allocation and execution of our growth strategies. Our earnings reflect the benefits of recent strategic transactions as well as operational improvements across our businesses. These results also reflect the smooth transition to IFRS 17 and are supported by disciplined expense management as we focus on efficiency and effectiveness. During the quarter, we continue to advance our well-focused strategies. In Canada, we completed the acquisition of Value Partners and are on track to complete the acquisition of IPC by the end of the year. In the U.S., we're on track to complete the sale of Putnam, and we continue to unlock value from the Prudential integration. In late October, 1.4 million Prudential clients and 100 billion of assets were successfully migrated to the Empower platform in our largest integration wave to date. Net earnings per share from continuing operations were $1.01. Unlike last quarter, there was no significant difference between base and net EPS. Given IFRS 17 dynamics and current economic conditions, market experience relative to expectations was positive, with some offsetting reduction in UK real estate asset valuations. We've expanded our disclosures on property-related investments in the appendix to include greater detail on our exposure to office and UK mortgages given heightened interest in these asset classes. These disclosures highlight the diversified and high-quality nature of our portfolio. We've taken steps to reduce risk over the past few years in our real estate portfolio, and it remains resilient to stresses in property markets. Our exposure to direct office properties is relatively low, and these holdings remain high-quality. Gary will unpack these and other items excluded from base, including changes in assumptions, later in his remarks. On a year-to-date basis, the company performed strongly against our medium-term financial objectives. Base EPS exceeded our target, and base ROE and dividend payout ratios were within our target ranges. Finally, our LICAT ratio remained strong, growing to 128% on the back of strong earnings in the quarter and up two points relative to last quarter. Please turn to slide 5. In Canada, our workplace businesses remain on an area of particular strength. Group life and health premiums were up by 23% year-over-year due to strong new sales, organic growth in the existing book, and the addition of the public service health care plan. We've enrolled over 1.68 million of the 1.7 million individuals covered under this public sector health plan, and a large majority are accessing their benefits without issue. That being said, you may have seen reports about others who've experienced challenges receiving timely service. The underlying cause of these service disruptions relates to the public sector's requirement that each member re-enroll, as well as changes they made to benefits coverage for their plan members. Regardless of the cause of these disruptions, we're working hard to resolve the remaining challenges for these important customers. We're working with the government to make excellent progress towards our target service levels. Moving on to group retirement, we saw solid growth over last year with some softness in sales this quarter. We remain focused on strategies to enable capital-light growth, including continued improvement in plan member rollover asset retention. In our individual wealth business, mutual fund net flows were positive, but we continued to experience seg fund outflows. While this is consistent with industry experience, We believe that this fund execution of our recently communicated wealth strategy will position these businesses for stronger growth and performance going forward. As noted, we completed the value partners acquisition in the quarter, and IPC is on track to close before the end of the year. These two strategic transactions are advancing our goal to be the leading full-service wealth and insurance platform for independent advisors in Canada. Finally, our CSM in Canada declined year over year, largely due to amortization of insurance experience. As we previously noted, we continue to approach non-participating insurance with a focus on customer value balanced with pricing discipline. CSM is not a key growth metric at LifeCode. Capital generation from our enforced business is a better indicator, and we plan to share more on these measures in future quarters. Please turn to slide six. Across Europe, our businesses maintain solid momentum in the quarter despite economic uncertainty. As I've noted in the past, much of our business in Europe is tied to financial necessities like benefits and retirement savings. These products have actually seen a lift in revenue driven by strong employment and wage inflation. In workplace, we experience strong organic growth in group life and health in both UK and Ireland and strong pension sales at Irish Life. We achieve steady growth in wealth, which is reflected in positive net flows for the quarter. This is in part driven by the successful execution of our wealth strategy in Ireland under the Unio brand. We're also advancing our wealth-focused joint venture with Allied Irish Bank. This includes the November 1st portfolio transfer of SEG funds with a carrying value of almost €2 billion from Irish Life into that business. We expect to recognize a gain related to this transaction in the fourth quarter of 2023. Within insurance and risk solutions, we saw strong bulk and individual annuity sales in the UK supported by higher interest rates. These sales helped drive growth in CSM in Europe. While recognized in sales in a prior quarter, Irish Life completed the onboarding of a €133 million bulk annuity transaction, the largest bulk annuity deal to take place in the Irish market so far this year. Please turn to slide 7. Empower delivered another strong quarter as we advanced our strategy, focused on workplace retirement and personal wealth. In workplace solutions, we achieved strong organic growth with DC plan participants up 4% year-over-year and DC assets under administration up 14%. In-quarter net outflows reflect seasonality as well as a modest impact from prudential deconversions. Empower's execution of the prudential integration program is going well with client retention ahead of target and annualized run rate synergies of US $66 million achieved to date. In-quarter net outflows reflect fewer large plan sales, rollover of assets to empower retail, and normal seasonality, as well as a modest impact from prudential deconversions. I would also note that on a year-to-date basis, the DC business has achieved net inflows. Empower's execution of the prudential integration program is going well, with client retention ahead of target and annualized run rate synergies of U.S. $66 million achieved to date. Empower Personal Wealth is also maintaining excellent momentum, with AUA up 30% year-over-year, supported by strong growth in sales and higher markets. Sales effectiveness and a powerful digital dashboard are generating money-in-motion opportunities and increased new asset inflows from the DC business by over 50% relative to last year. Lastly, with the previously announced sale of Putnam Investments to Franklin Resources, The results of Putnam Investments are now classified as discontinued operations. As I mentioned earlier, this transaction remains on track to close by the end of the year. Please turn to slide 8. Our capital and risk solutions business continues to play an important role in diversification of risk across the portfolio while also delivering growth and cash generation. Earnings on short-term business increased 23% year-over-year, reflecting growth in structured business. Note this business is accounted for on the PAA basis, which does not involve CSM. Sales on longer-term business were relatively soft this quarter, reflecting the bespoke nature of these transactions and our disciplined approach to underwriting and pricing. While the third quarter is seasonally slower, CRS continues to see solid new business momentum and will maintain discipline as we leverage our strong capabilities for the remainder of the year. With that, I'll now turn the call over to Gary to review the financial results.

Thank you, Paul. Please turn to slide 10. Base earnings per share of $1.02 was up 17% from Q3 2022, driven by strong performance across all segments, particularly the U.S., which was up over 20%. As shown by the top two rows in the chart on the right, this balanced performance across segments was a continuation of what we saw in Q2. Quarter over quarter, the base earnings increase was 3%, primarily a result of more favorable insurance experience partially offset by lower trading activity contribution in the investment results. The comparative period from 2022 had a number of larger items, both positive and negative, in Canada, Europe, and capital and risk solutions, which makes the year-over-year comparisons by segment a bit more challenging. In Canada, base earnings of $296 million were down 13%, primarily due to beneficial tax impacts that occurred in Q3 2022. Base earnings before tax actually showed an increase of 3% as a result of higher earnings on surplus driven by higher interest rates and continued growth within the group life and health business, including favorable mortality and morbidity experience. In the U.S., base earnings of $262 million were up $48 million, or 22%, primarily due to strong organic growth at Empower. on the revenue side there was growth in asset-based fee income from higher average equity markets and increases in other participant and transaction-based fee income based on growth and volume on the expense side results now include the full mass mutual synergies and we remain on track to deliver the targeted synergies on the prudential business by the end of q1 2024. this strong expense discipline and effective execution of our mass mutual and prudential acquisitions has allowed us to strategically invest in the business to continue Empower's strong organic growth trajectory. In Europe, base earnings were comparable to last year, although down 9% in constant currency. Improvements in insurance experience and the benefits from FX were largely offset by lower trading gains than the prior year. Q3 2022 benefited from above-average trading gains in the investment results, whereas this quarter, newly sourced spread assets were deployed against strong individual and bulk annuity sales. This new business contributes to CSM growth in Europe, which Paul noted earlier, and the CSM growth is amortized into earnings over time rather than an earnings gain in quarter. The capital risk solution segment had another strong quarter. The year-over-year growth is distorted by a charge related to hurricane claims in Q3 2022. However, excluding this, base earnings are still up a strong 8% due to organic business growth, particularly in the structured reinsurance portfolio. Overall, looking at this on a net earnings basis, the net EPS from continuing operations was $1.01, almost the same as the base earnings per share. Net EPS was down 5% last year as higher base earnings were offset by the year-over-year change in items excluded from base, which I'll cover on the next slide. So turning to slide 11, this table shows the reconciliation from base to net earnings. Net earnings from continuing operations were $936 million, or $1.01 a share. While overall excluded items have a small impact this quarter, there are two items I'd like to highlight. The first is market experience. As noted on our Q2 2023 call, these are typically items that we would expect to oscillate around zero over longer periods, although they will vary quarter to quarter. This quarter, the positive market experience is primarily driven by increases in interest rates in Canada, partially offset by lower non-fixed income returns, primarily lower real estate valuations in the UK property portfolio. The positive earnings impact from interest rates helped offset pressure on LICAT capital that comes from higher rates. This offset is given our ALM approach. The second item relates to assumption changes. The annual review of actuarial assumptions led to an overall positive impact to the balance sheet and LICAT ratio as a result of updating mortality and longevity assumptions to begin to recognize pandemic impacts. There is an important presentational point to note within IFRS 17, as basis change impacts appear in two places. The impact on the CSM is calculated at original locked-in discount rates. This is the amount that's being amortized into earnings in future periods. But given that rates have risen so much since the opening balance sheet transition on January 1, 2022, the CSM amounts are larger than the current fair value of the basis change. The difference goes into earnings in the period when the change is made, and that was a negative this period, even though the assumption change overall is a favorable impact. Also recall that certain basis changes for financial assumptions or where there is no CSM go straight into earnings, positive or negative. Given the CSM and earnings impacts are both included in LICAT capital, the presentational approach has little impact. We still get the positive impact on LICAT and on future earnings. The remaining items excluded for base 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 12, as noted on our Q2 2023 call, we improved the drivers of earnings view of earnings to improve the articulation of our results and align us with our peers. One change was to provide a clearer view of the insurance result by differentiating between expected versus experienced impacts. The expected provides insight into the underlying growth of the business, whereas we typically see period-to-period swings in the experienced results. In the top row of the table, you can see the expected insurance earnings of $732 million, or up 8% year-over-year, due to business growth, particularly in the shorter-duration renewable contracts like group insurance, plus some currency tailwind in Europe. The overall insurance result of $786 million was up 26% year-over-year, driven by the non-recurrence of the charge related to hurricane claims in Q3 2022, which was the driver of last year's experience loss. This quarter, we had favorable insurance experience, driven mostly by mortality and morbidity gains in Canada, which contributed to this overall result. The net investment result of $222 million was up 6% year-over-year, This was mainly driven by higher earnings on surplus due to increases in interest rates, partially offset by lower trading activity impacts, particularly in Europe. This is an area where we plan to expand disclosure further in future periods. Similar to insurance, this would benefit from separating the expected investment earnings, as the label says, from the in-period investment experience. Net fee and spread income related to our non-insurance businesses were up 13% year-over-year. Most of this result is driven by our Empower business. As noted earlier, we benefited from our asset-based and transaction-based fee streams for this business while also benefiting from the realization of acquisition-related synergies through strong expense management. Non-directly attributable and other expenses were up 5% relative to prior year due to business growth and the currency impacts in Europe. The effective tax rate this quarter was 13% on base shareholder earnings, reflecting the jurisdictional mix of earnings, including the growing U.S. contribution and the limited impact of one-time tax items. Overall, we had record base earnings of $950 million, a reflection of the strong results across all the segments. Turning to slide 13. The book value, LICAT ratio, return on equity, and financial leverage numbers are shown on IFRS 17 basis, unless specifically stated otherwise. The Q3 2023 book value per share is back above $24 at 24.01. This was up 5% year-over-year and 3% from last quarter, driven by the growth in retained earnings plus currency translation gains in other comprehensive income. It is worth noting that the book value per share is well on the way to reaching the $24.71 level pre-transition to IFRS 17. And at the same time, ROE has risen from the mid-14% in 2021 to 16.4% currently, better than fitting from higher base earnings that we are now reporting. The LICAP ratio of 128% was comparable to the prior year and up from the prior quarter results. The two-point increase from Q2 2023 was primarily driven by lower capital requirements. And as a reminder, the IPC transaction that's expected to close in Q4, as Paul mentioned, will reduce the ratio by about three points. The base return on equity figures shown on this slide are all IFRS 17 basis. The result for Q1 2023 is shown rather than Q3 last year, since this is a rolling four-quarter average, and we did not have all the information for Q3 2022 on an IFRS 17 basis. The base ROE began the year at around 16%, but has improved to 16.4% this quarter, reflecting the strong earnings results recently. Financial leverage remained at 31%. We made $100 million repayment on the short-term debt used as part of financial funding, which leaves a remaining balance on this debt facility of $100 million, which we expect to pay down in Q4, which should lower the leverage to about 30%. And with that, I'll turn the call back to Paul.

Thanks, Gary. We'll now turn the call back to Shia, who will get us set up for the Q&A portion of the call.

Thank you. We will now begin the analyst question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Manny Grauman with Scotiabank. Please go ahead.

Hi, good morning. Gary, in Q2, you talked about evaluating improvements around metrics tied to capital generation, and I'm wondering if there's anything you can update us on that, or is that coming in Q4?

Yeah, Gary wanted to speak to that.

Yeah, we are still working on the capital generation metrics. We want to make sure we get that right. I would make a couple of notes. First off, the base earnings are a good proxy for 75% of our business that haven't really been materially impacted by IFRS 17. And then obviously for the remaining 25%, the introduction of CSM does introduce some complexity there. So we are looking to get this out, whether it will be in the first part of 2024, whether it's with our Q4 results or our Q1 results is not yet finalized, but it will be one or the other. We're definitely keen to get that out. But as I say, the base earnings, I think a high percentage of those base earnings would be a good proxy in the period while you're waiting.

Thanks for that. And then just wanted to talk about – your expanded disclosure on your real estate exposure. So thanks for that. Specifically, slide 23 in the appendix, the office mortgage exposure by maturity. Just wanted to better understand how to interpret this particular slide. It looks like if you look out to next year, to 2024, there is a little bit of an increase in office maturity. So just wondering if Is that something we should be concerned about, just broadly how to interpret this particular disclosure?

So, Manny, I'll turn that one over to Raman in a moment. But just suffice it to say, we've been very disciplined with this portfolio. We've been looking at the overall exposure, reducing where it made sense. So I think as we kind of go into a period of some volatility here, we're feeling pretty confident about the portfolio. But I'll let Raman speak to the 2024 maturities. Raman?

Yeah, thanks, Paul. And thanks, Manny, for the question. So we do try and provide a lot more detail and disclosure in the appendix on the real estate portfolio. Page 24, the point of this and the details here are to give you a sense of the balance we have across the upcoming years. So in other words, There's no one particular year that stands out as a big risk in terms of rollover. This is a, you know, a gradually maturing portfolio. While it's going to ebb and flow, but you can see, you know, the bigger bars there are in 2026, 2027, and then out 2030 and beyond. So the purpose of this page is just to give you a sense of, you know, the strength we have in the LTVs, the high debt service coverage ratios, and the fact that we're not particularly exposed to any one year in terms of rollover risk.

Yeah, so I guess, Manny, I just follow on what Raman was saying, is that we're not particularly concerned about 2024 in particular, although we are in a volatile time, but you'll see that, you know, there's strong debt service coverage there. We've got, you know, we've structured these mortgages in a way that we've got, you know, good confidence, but, you know, you need conservatism if you want to weather, you know, more difficult times like this.

Thanks, Paul.

The next question comes from Gabriel Deschenet with National Bank Financial. Please go ahead.

I'd like to keep going on the CRE topic, the detailed disclosure on makeup. I just want to make sure I'm getting this right. If I look at office in particular, 60% of it is allocated to power accounts. So from a mark-to-market standpoint, there's no real concern, I guess, for the equity holders.

Gabe, that would be correct.

Okay. And you did mention there were some adjustments to that UK portfolio. Could you quantify that?

I'll let Raman speak to that. Are you referring to the fact that we've been managing the portfolio and the overall exposure? I just want to clarify your question.

No, no, no. That we've covered before. I just want to get the number if there was any negative mark. mark-to-market adjustment on that particular portfolio this quarter?

I think Gary can take that one. Yeah.

Yeah, the returns were down about 3% in the quarter in terms of market. And, again, a lot of this is just reflecting the higher interest rates. So we're getting the benefit of the higher interest rates in other places in our results. And, obviously, you saw that in the overall market impacts. But it is bringing the valuations down. So, yeah, they were marked down about 3%, which is – And you can see the size of the portfolio, so that gives you an idea. And that's, we often, in our excluded items, we are doing the amount relative to our expectations. So we would expect in a given quarter that you might have, you know, a growth of in the order of 1%, you know, a modest growth during the year to each quarter of that. So I think the gap from expectations was about 4% in the quarter.

Can I apply that to the entire portfolio or just office?

That implies that that was for the entire UK portfolio.

Okay, got it.

It was less in Canada.

All right, perfect. Well, speaking of the higher rate stuff, just want to drill down a little tiny bit in the Empower, or the U.S., rather. Looks like almost the entirety of the growth of earnings in the U.S. was rate-related. I mean, there's a little bit from synergies, but, I mean, a big increase in earnings on surplus and then the – What is it, the fee income? To the extent it was earnings on surplus related, are we at a run rate now? Were there not that much more upside to be seen from that line item in the U.S.? ?

I'm going to let Gary take that one, Gary.

Yeah, I think that's right. I think most of the portfolios, there are some longer bonds that would not have matured, but most of the portfolio has turned over. So you're seeing the impact of the current rates. And we had some smaller contributions, some good results in some of our alternative investments, but it'd be single-digit. So I think it's a reasonable indication.

Okay, and just, I don't know, you probably won't want to give me specifics, I get that, but just from a, you know, ballpark standpoint, what would be the duration of your surplus portfolio? How much would be in, you know, short-term cash, and then how much would be, you know, would the rest be about two, three-year duration? Maybe you can shed some light on that.

Gary, do you have a bit of color on that?

Sure.

Yeah, I'm just at a high level. A lot of the portfolio is quite short in Canada. And you might recall, we shortened the portfolio in Q2. We had an OCI reclassification, recycling into the P&L as we took some older long-term assets and moved them short-term. That's actually helped in Europe this period. So, yeah, Europe would probably be, the U.K. is probably in that one to two years. The U.S. has a slightly longer duration, probably more in the three to five-year range. And then Canada is actually quite short, probably closer to a year.

Okay, great. Thanks for that. And then lastly, on the group business, last quarter, the message was that, you know, incidence rates and claims trends overall had been, you know, they regained, I guess, a pre-pandemic pattern. And here we have a quarter where experience gains are quite positive. It's great. I'm just wondering, was that against your expectations or the seasonal factor and things are still expected to be relatively modest from an experience standpoint going forward?

I guess, Manny, I'll start off. Pardon me, Gabe. I'll start off and I'll hand it to Jeff to provide a bit of context. But the reality is we run this particular business with a ton of discipline in terms of our pricing and our underwriting. And so, you know, over the long term, we see this as a differentiator, as a positive contributor, and I think you're just seeing the benefits of that discipline. I'll let Jeff speak to, you know, the particulars of the quarter, though. Jeff?

Yeah, Gabriel, I mean, just to build on Paul's point, it has been and continues to be a continuous of our offering on the workplace and the group life and health. And I think as we've mentioned in the past, we spend a lot of time on our pricing and looking at trends in the marketplace. So we believe we're well ahead on an ongoing basis. So much of the actions you would have seen in quarter and they're flowing out are actions we would have taken a year, year and a half ago in terms of looking at the future. So it is a continued process. area of strength for us within the organization. And I would say that, you know, we're not surprised on the results in quarter, and it continues to be a strong differentiator in the marketplace in terms of our value to customers and members in the market.

I might just finish by saying that I think with really good pricing and underwriting discipline, we would kind of expect some modest experience gains over time just by having that same discipline staying on top of it. And obviously, we're going to go through cycles over time. You go through economic cycles. But if you stay on pricing and you stay on your underwriting disciplines, we would be seeking to outperform, you know, modestly over time.

All right. Thank you.

The next question comes from Doug Young. Doug Young with Desjardins Capital Markets. Please go ahead.

Hi, good morning. Just maybe continuing on with the insurance experience. I guess at the top of house, it was $56 million. I guess I assume that most of that $47 million in Canada relates to the group experience that we just talked about, if you can clarify. But I guess in Europe, there's $28 million in

positive can you kind of delve into what drove that and then obviously there's some negatives elsewhere maybe you can flush that out a little bit yeah thanks Doug for sure that in Canada the majority is that that group performance and I'll let Gary speak to what we're seeing in Europe Gary

Yeah, I think in Europe, again, we had favorable mortality, and the morbidity was actually a bit weaker. It was improved from prior periods, so that's helping with that. And then we do have some expense fluctuations that go through this line. So in Canada, they were actually a bit behind on the expenses, so that was a bit of an impaired drag, whereas Europe was actually a bit ahead.

So those are some of the trends we'd be seeing.

And then there's a big decline in expected investment earnings. It's mostly out of Europe. I don't think that was the trading gains going down, but maybe I'm wrong. Can you flush that out a little bit? Gary, over to you.

Yeah, sure. And I think right up front, I should just acknowledge that the label for the line that you're looking at, expected investment earnings, is not really clear, because this includes both the normal or run rate expected earnings, as well as any in-period investment experience. And that's really, there's really two types of investment experience, and that's that you'd see here regularly, which is trading activity impacts. the contribution for trading activity. And then you'd also see credit impacts go through this line as well. So if we look at compared to the prior year, the majority of the decline was really around the trading activity. And that was quite elevated in the UK in both Q3 and Q4 last year. And last year, we had low individual and bulk annuity sales. And so the spread assets were allocated to the enforced portfolio. But this quarter, with the strong sales growth, with the spread assets, went more towards supporting new business. So that value goes into the CSM, which obviously will come into earnings over time. So it really is year over year. It's mostly the trading activity. Quarter over quarter, it's probably two-thirds is the lower benefits of trading activity, and about a third of it is a little more, again, modest credit impacts, but there are really none in Q2, and there is a small credit impact in Q3. So those are the numbers that are driving.

And you walked to my next question is credit. And so I know credit goes through that line item, but you know, we don't have great visibility. Um, can, can you talk a bit about, you know, the, the ECL on the AOCI assets, but also, you know, what the credit, can you quantify what the credit move was elsewhere and, and what you're seeing from a credit perspective and how, how we should think engage from the outside looking in, um, you know, the credit impacts for your fixed income portfolio.

Gary, why don't you start with that, and then you could pass on to Raman.

Yeah, so, I mean, overall, the credit impacts are overall very modest this quarter. I think probably in the $20 million range pre-tax, so it's modest. There's The ECL, it really would only come up on the UK mortgages held at amortized cost. That would be a single-digit impact. So it wasn't much there. And actually, it actually is a bit of doubling up on the ratings downgrade. So it is, I think, where, and Raman could comment, I think where we saw the ratings downgrade was on just a couple of the UK commercial mortgage holdings.

Yeah, that's right. So the impact was from the UK commercial mortgages. It was modest. I think on the bond side, you know, what you should expect is, you know, it's been actually more upgrades than downgrades in general over the past few quarters. You know, if the economy turns, you know, that could shift. You know, I just point you back to the fact that we have a high-quality portfolio. You know, 99% of our book is in investment grade, and the vast majority of that single layer are better. So if we do get into a credit cycle that turns, you know, the impacts are more muted at the higher rating levels. So that's just something to keep in mind.

And the rating upgrade downgrade and how you kind of flow that through credit, you look at that every single quarter. That's not an annual review. That's something that you dig into each and every quarter. So there wouldn't be a true up at the end of the year or anything like that.

Is that correct? That is an ongoing process, ongoing discipline we have quarter to quarter.

Perfect. Great. Thank you very much. Thank you.

Once again, if you have a question, please press star, then 1. The next question comes from Tom McKinnon with VMO Capital Markets. Please go ahead.

Yeah, thanks. Good morning, and thanks for taking my question. Just continuing on Doug's thread here, I guess what you were trying to maybe explain was these trading gains, are this normally your yield enhancements that you get? So would you be able to quantify the yield enhancements in this quarter and maybe what they were last quarter or one year ago?

Yeah, Gary, you can take that one.

Yeah, sure. I mean, this quarter, I think the number gained pre-tax is mainly $13 million. So it's very modest. Last quarter, we had something that was around $50 million. I think last year it was around the $75 million range. These are all pre-tax numbers just for presentation. So, that's what that driver is year over year.

Yeah, and just to bring that back, Tom, You know, you recall last year those flowed through. They were applied against the enforced books. So, you know, you saw the benefit of that. We've actually leveraged the quality assets we had in new business opportunities here. So we're building strength in the CSM, which will flow into earnings in the future.

Yeah, okay. And I guess the normal run rate or the – What you get in that line other than yield enhancements would be your kind of normal run rate less than your finance costs. And the normal run rate, obviously on the bonds, is easy. On the mortgages, they're all amortized costs. What about on your equity release mortgages? Don't those kind of fluctuate around with interest rates? And would that have any impact as a result of interest rates going up?

Gary, do you want to start that one?

Yeah, sure. I mean, a couple of things. One is the financing charges aren't going through this line. They don't go through this line here. What you will see here is the allowance for credit just comes through the expected – the the regular allowance for credit um that would just run off the liabilities um you get a little bit of an uplift here uh from the non-fixed income relative to the liability rates so we have a long-term uh some non-fixed income of uh you know that uh uh long-term returns But that's really been a – it's actually quite a small contribution there now because rates of – liability rates have risen. So that's probably less than 5% of our base earnings. So there's not much of a contribution coming from that, but there is some there. Yeah, those are the main drivers. They're really just the additional rates there. Because, again, most of – something like equity or lease mortgages, those are backing liabilities. So it's all in the discount rates.

You don't see it here. Okay. Go ahead, Tom.

Yeah, and then I guess the question with respect to Empower, you know, participants didn't really grow quarter over quarter, and I think I kind of look at you every year, they're only up about three or four percent. How should we be thinking about a run rate here for participant growth, and why hasn't it been, you know, higher than... three to four percent over the last 12 months.

Well, I'm going to turn that one over to Ed.

Ed, do you want to speak to the momentum you see in the business? Ed, if you're on mute, you should take yourself off mute.

Oh, sorry, I was on mute. Thank you. Thanks for the question, Tom. Yeah, if you look at organic growth in the business, participant growth year over year, it's up about five percent. you have to adjust about 1% for Prudential because we had some terminations on Prudential that are in line with expectation. As we've shared with you in the past, in terms of the Prudential results, we're running well ahead of our internal plan in terms of participant retention, asset retention, revenue retention. But if you look at the market, Tom, we're growing organically. Our net participant growth is about 2x the market. So the market's going to grow roughly 2%. We're consistently growing between 4% and 6% a year if you look at the last few years, excluding acquisitions. So we're feeling really good about the growth. And if you look at the small end of the market, which is the under $50 million space, we'll have the best year in the history of the company this year, both in terms of the number of plans sold and total assets. We'll exceed $10 billion this year. And our pipeline is $2 trillion. So we feel really good about the overall growth trajectory of the business, workplace business.

To that point, there's no doubt that when we talk about the mega and the large case market, they tend to be a bit volatile. They'll happen when they happen, not in particular this quarter. But the overall, Tom, we continue to like the overall momentum of the business. I mean, we've got a value proposition where we're winning more than we're losing out in the market. And I think that bodes well for looking forward. Thanks.

Yeah, I would just add on the plan flows. I want to reinforce Paul's point that in the large end of the market, you have the timing issue of large mandates. These are nine, 12-month mandates that we're pursuing. So you'll see quarters where you'll have large mandates that will hit. You'll see some where there'll be a termination. So you'll continue to see that play out over the course of the year. because it tends to be a little bit choppier when you're going after these multibillion-dollar mandates.

Thanks, Ed.

Sure. Once again, if you have a question, please press star, then 1. The next question comes from Paul Holden with CIBC. Please go ahead.

Thanks. Good morning. Good morning. So first question is just the point of clarification on something Gary had mentioned, and that's related to the equity release mortgages. I know in the past they were used as a yield enhancement vehicle. Is that still the case? Is that still how it flows through under IFRS 17, or has that changed?

I'll turn that one to Gary. I think we have used it historically as an asset to back liabilities. I think that would be more the way I would characterize it, but I'll let Gary speak to that. Gary?

Yeah, we would have used it in both Canada and the U.K. in prior years. There's a couple of things I'd note. First off, with the rise in rates, what we're seeing is we're getting a lot of interest interest in individual annuities and in that for people, but we're seeing a lot lower interest in equity-release mortgages, new originations. So the volumes are down. Historically, a lot of those would have gone into the, well, Canada and the UK. I think they both had good shares. And so a lot of those yield enhancement gains would have been in Canada from those. And we're not going to be seeing those going forward. Canada, we have an illiquidity premium, so any yield pickup would be offset by an illiquidity premium adjustment, and you wouldn't see the impact. They still add a lot of value when we add them, but you wouldn't see an in-period yield enhancement. And then in the UK, you could still see that, but we just haven't had much volume. So it's really not been a big feature, but we would have had a bit.

Yeah. And I might add, Paul, that, you know, I like the diversification of the payout annuity and equity release mortgage book. In a high interest rate environment, we see payout annuities are actually, you know, people are looking for that certainty of income. They like the underlying return, and we're really seeing solid momentum there. You see some softening in equity release mortgages, and if we get into a different interest rate environment, we've got that nice diversification of product where we can help people with their retirement needs, and it's good for us from an economic perspective.

Got it. Okay. That all makes sense. Thanks for that. Second question. Going back to the direct real estate holdings in UK and Canada, are you able to give us how much you've changed cap rates in 2023?

Raman, can you provide some color on that?

So they've risen more in the UK than they've risen in Canada. I'd say from the Over the past year, it's been over 100 basis points in the U.K. in terms of rise in cap rates. It's probably closer to 70 or 80 basis points year-to-date. It's different by sector, so you've seen a higher rise in office versus, say, industrial. But in general, we've seen over 100 basis points rise over the past 12 months or so in cap rates.

Okay. And just to be completely clear and following up on what Gabe asked before – if cap rates change on Canadian property, for the most part, that doesn't flow through your earnings because that's related to par product.

Yeah. For the assets that are backing par, that is correct. And then there'd be a modest amount of assets backing non-par, and then you would see some impact there.

Got it. Yeah. Okay. That makes sense. Thanks for that. And then last question is related to MPower. And I think what people are trying to figure out is, There's some attrition expected in the business as you roll over the last of the prudential customers. But at the same time, you have some additional cost synergies to roll through the earnings. So forget about the changes in asset levels and AUA. But net of those two factors, is there additional earnings upside related to this business?

Gary, do you want to start with that and then turn it to Ed?

Yeah, I think I'd just start with a small comment. I think Ed can do the strategic side. Just on the small side, just on the synergies, we are still, as I mentioned, on track for $180 million, and it's U.S. and it's pre-tax. And we've recorded a run rate of 66 to date. So you've got that gap there. I should do the math in my head. It's around 114, I think. I'm doing it right. But you've got that there. And we should be at that run rate, the full run rate of those synergies starting in Q2 next year. So there is certainly some upside on the expense, just that small point.

Ed, why don't you talk about your perspectives on earnings growth in that business? And I would say, you know, Paul, one of the things that I know Ed will speak to this is that there's kind of two businesses we have here. We've got the record-keeping workplace business, and then we've got the retail business. And one of the dynamics we see is we are retaining more and more of those record-keeping assets as they roll to retail, and we're seeing growth in retail. So you've got to look at it as an overall business, and I'll let Ed speak to that. Ed, over to you.

Sure. Thanks, Paul. yeah i would say to answer your question specifically on the revenue side as we bring those clients over to the empower platform and as was noted in the presentation we brought one 1.4 million participants over uh the third week of october and we have a remaining 2.2 million participants that will come over in the first quarter and then we'll be done with the prudential integration and uh you know one of the opportunities for us is to deepen relationships with those existing participants so That comes in the form of other products and services that we offer within Empower that wasn't necessarily offered, frankly, in the legacy Prudential Book of Business. So if you just look at it from a workplace perspective, the short answer is yes, there are certainly revenue opportunities within the workplace services area, things like managed accounts and other services. that participants will adopt over time. And then in addition to that, as Paul mentioned, you know, oftentimes we see outflow.

If you have job changers, you have retirements, increasingly we're capturing more of that outflow into the improper supply.

Yeah. Ed, your line is breaking up there. I'm not sure what's going on, but I think you'll have picked up on that, Paul, but I'll just sort of reiterate what Ed was saying is that Increasingly, we've improved our technology, our contact rate, and the key for us is that capture of the roughly $80 billion in money that's in motion every year rolling out of the D.C. book and what's our capture rate. I think in my speaking notes I noted there that our year-over-year improvement in that is significant. So, again, I go back to I think there's some good underlying growth, and I'll call it true organic growth as we penetrate that client base more while they're in plan. But it's that opportunity, really. It's at that rollover rate where we can capture those assets and then, you know, think about it more from a lifetime value perspective.

Understood. Thanks for that. I'll leave it there. Thank you.

The next question comes from Mario Mendonca with TD Securities. Please go ahead.

Good morning. Could we go back to the U.S. and Empower specifically? You referred in your, I think, your opening remarks or in your MD&A to the $6.6 billion in outflows, and I think you referred to it as deconversion. So maybe just help me understand what does that mean. That just means that folks that didn't convert to your system

on that conversion date essentially the assets left the company is that is that what we're looking at yeah yeah and um the conversion is you know we've often talked about in uh and when you do a group acquisition you're expecting to retain you know in in the case of empower i think we retained well into the mid 80s on on the mass mutual and and uh we had similar targets on prue we expect you know at this stage we're outperforming those targets but when Certain clients choose to, you know, go elsewhere. We would call it a deconversion. So we would have a little bit of deconversion in quarter. But, you know, the other dynamics in quarter would have been money that was moving out of retirement accounts and people were, you know, either leaving one at a time, leaving the employer, moving into retirement. And our job is to actually capture those assets and retain them in our other business, the other pool, which is retail. So that would have been a dynamic. And then the other dynamic in quarter would have been some seasonality where you tend to see people a little bit lower growth in participant account sizes in the third quarter. It's just a dynamic we see. It's driven by tax planning and things like that. So those are the dynamics. Ed, let's see how your line is, whether you're breaking up and there's anything else you want to add to that.

Yeah, thank you, Paul. No, I think you handled that well. If you look at across our defined contribution business, we have about a 97% to 98% plan retention. So invariably, every year, there's 2% to 3% of our plan sponsors that are leaving us. Either they've gone bankrupt, it's a business failure, or they've converted to another provider, and we characterize that as a deconversion. And then the other comments that Paul was making were more around plan flows and participant flows, which I think we've spoken to that in terms of what drives that.

Would it be appropriate to suggest that in the early days, because the conversion has just been done, In the early days, you could see some net outflows maybe for the next couple of quarters before that starts to grow again. Is that a reasonable thing to suggest?

With respect to the plans that may not choose to come with us, the potential plans that we're referring to?

If you look at the roll forward of your AUA for Empower defined contribution, this was the first quarter where I saw any meaningful outflows. Admittedly, there's not a lot of data to look at right now. But is this something we can see play out over the next few quarters, some outflows, some net asset flows out as we see more and more deconversions? Or essentially, is it done in this quarter?

Well, as we said earlier, if you look at plan flows, if you look at on a full year basis, we're $8 billion positive. But in any given quarter, based on large plan sales and terminations in that quarter, you can get some volatility. And that's what you saw in Q3. On a net basis, it was $2 billion negative in the quarter, $8 billion positive year-to-date.

Yeah.

Mario, let me add this. So I think what Ed is pointing out is the overall dynamic of the book. Your question is whether there will be additional crude deconversions in in Q4 and in Q1, and there will be some. Put it this way, maybe there won't be, but the reality is we'd be well ahead of our target there if that were to occur. So we should probably anticipate some of that. Having said that, those will be offset by growth in sales. And so this particular quarter, we didn't have any mega sales. We had some deconversions and we had What we view as a really good story flows moving off of the DC platform into the retirement space. Add it all together, you get a bit of a negative. We could see a quarter where if we were to book some large case sales or mega sales in that quarter, it could overcome the deconversion. So we'll just have to look out. But there will be, in our overall flow dynamics in the next two quarters, the remaining approved deconversions. That's fair to say, right, Ed? Yes.

So looking beyond just the assets and the flows, markets obviously pretty weak. That took a nice chunk out of the asset base as well this quarter, which was different from what we saw in previous quarters. So is it fair to say that this business, the dynamics in this business, at least in the near term, are also impacted by what happens with markets, what happens with rates? Like declining rates could actually eat into the spread income a little bit. I just want to know, I want a flavor for the dynamics that could drive the margins in this business as we look at markets and rates.

Well, it is an asset-based business. I mean, if you look at our revenue, a large percent of it is asset-based. And to your point, when you see volatility in the market, you'll see that play out on the revenue line. And if you look at this quarter on the DC side, we did increase crediting rates at the beginning of the quarter. And so we have to be competitive in the marketplace. So from time to time, we in a rising interest rate environment, we will raise the crediting rates to our participants.

So some volatility certainly possible in the near term, but your long-term outlook for earnings growth in this segment would still be in the sort of double digits. It seems like such a promising business.

Yes. Is that appropriate? Yes, absolutely. Okay. Mario, that was really well said. That's exactly the way we think about it. There will be some volatility with markets, but our long-term view is double-digit growth.

Got it. Thank you.

The next question comes from Tom McKinnon with BMO Capital Markets. Please go ahead.

Yeah, thanks for taking my follow-up. I'm just wondering if you might be able to split the $153 million that happened as a result of marks on your non-fixed income publicly traded stocks and bonds as well that wasn't in the base earnings. I wonder if you can split that for me between what it was related to interest rate changes and what it was related to changes in stock values and then what it was related to changes in your non-fixed income asset values. So, into those three buckets, if you could, please.

Gary, you could start. That's a fair bit of detail, Tom, but Gary, why don't you start off, and if we need to, we can take that offline as well.

Yeah, I think we might well do a follow-up, but just for the benefit of all those on the call, you know, I'll use round numbers. Again, these are pre-tax. The interest rates probably contribute about $300 million, and then the non-fixed income return, so that's mostly the UK real estate, but also some below expectations on some of the equities, is about $150,000 going the other way. So that's where you get your $150,000 net. So round numbers, that's pretty much what's happening.

And the big gain in the bond stuff is really just because – is that because the liabilities are – your assets are much shorter than your liabilities there. Is that what's driving that much higher than expected interest rate impact?

Actually, Tom, it's more to do with the fact that some of our liabilities are backed by non-fixed income. And so when interest rates move, all of the liabilities have a lower discount rate, but not all the assets move at the same time. So you end up with a pickup. So it's not that we're mismatched per se. It's not a duration and fixed income mismatch. It's more that some of our liabilities are in non-fixed income, and they aren't moving with the interest rates, whereas the full impact goes through liability.

So happy to take this offline. Okay. Thanks. Thanks, Tom.

This concludes the question and answer session. I would like to turn the conference back over to Mr. Mann for any closing remarks. Please go ahead.

Thank you very much, Asha. So to close, I really want to highlight that we remain confident in the strength and resilience of our businesses to deliver on our medium-term financial objectives. And with that, you know, we're kind of pushing into Q4 now. So I really want to thank you all for your participation, for those who participated and listened in. And I also want to wish all of you a peaceful and happy holiday season. And we look forward to reconnecting in the new year when we'll report on our fourth quarter results. Have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.