Great-West Lifeco Inc

Thank you, Rita. Good afternoon and welcome to the Great-West Lifeco's first quarter 2015 conference call.

Joining me today and presenting to discuss our results are Garry MacNicholas, Executive Vice President and Chief Financial Officer, Lifeco; Dave Johnston, President and Chief Operating Officer, Canada; Bob Reynolds, President and Chief Executive Officer, Great-West Lifeco U.S.; and Arshil Jamal, President and Chief Operating Officer, Europe. We also have a number of other senior officers available on the call to respond to questions as required.

Before I start, I'll draw your attention to the cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to the discussion you will hear this afternoon, as well as to the presentation material that we have provided.

Earlier today, Lifeco reported its first quarter earnings and also declared a quarterly dividend on its common shares of $0.326 per share. As we turn to our financial highlights on Slide 4 you will note that Lifeco has had an excellent start to 2015.

Our operating earnings hit $700 million for the first time, $0.70 per share and up 19% year-over-year. Earnings were very good despite an increase in expenses that reflected the Empower Retirement integration, as well as ongoing investment in technology, business processes, and new products.

A 36% increase in sales reflected strong organic growth, new sales momentum under the Empower Retirement brand, the addition of Equitable Life annuity business, and positive currency impacts. Moving to Slide 5, assets under administration reached nearly $1.2 trillion.

Adjusting for the acquisitions of J.P. Morgan Retirement Plan Services and the Equitable Life Annuity business, organic growth in AUA was 23% in the U.S.

and 11% in Europe. Great-West Life's consolidated MCCSR was 222%, a 2 point decrease from December 31, 2014, reflecting lower interest rates.

As a reminder, this calculation does not include the almost $900 million of holding company cash, which at March 31, would add approximately 13 points to the MCCSR ratio. Our capital position remains strong as demonstrated by our regulatory capital ratios and the level of Holdco cash.

This provides the solid base for future growth and capital deployment. Turning to Slide 6 I mentioned last quarter that in 2015 we would be making significant investments in technology, processes, and product development.

In Canada, our focus is on digital services and interactive technologies. We launched the new version of smartPATH which is our interactive online retirement education, planning, and savings program, for group retirement plan members and the public.

In our U.S. business we are building on a strong foundation to better serve the retirement needs of Americans.

This quarter we made great strides with the Empower Retirement brand, and enjoyed very good sales results. Putnam's funds continue to win prestigious awards.

Irish Life continues to deliver excellent results, contributing $80 million to Lifeco this quarter. We also announced two bolt-on acquisitions in Europe to further enrich and strengthen our product offering and our scale.

We have lots going on in 2015, the business leaders will provide more color and more detail on these developments. So now I will turn it over to Garry MacNicholas, to review Lifeco's financial results.

Garry?

Thank you, Paul. Starting with Slide 8 in Q1 operating earnings increased in all regions on a year-over-year basis, the most pronounced growth was in our U.S.

segment driven by investment activity, strong fee income, and the appreciation of the U.S. dollar.

Turning to the source of earnings display on Slide 9 I note that the U.S. segment now includes Putnam's results within the pretax categories.

Fees, net of expenses, drive the expected profit number and non-deferrable sales cost show up in the impact of new business. For those of you tracking us more closely, we have recalculated the total Lifeco and U.S.

segment source of earnings for the prior seven quarters on this same basis. This history is contained at the back of the Supplemental Information Package.

Focusing on the pretax figures shown in the upper part of the table, expected profit is up $28 million or 5% higher than the first quarter of 2014, driven by higher expected net fee income on the wealth management asset base, and favorable currency movement, partly offset by higher pension costs and investments being made in the business. The new business strain of $62 million, an increase of $7 million from the fourth quarter of 2014, largely reflects growth in business concluded with Empower, partly offset by lower seasonal sales caused at Irish Life.

Experienced gains rebounded to $244 million in the first quarter after unusually low results in Q4 of 2014. Strong investment trading results in Canada and the U.S.

and favorable in-quarter market movements in Europe were the primary contributors, partially offset by the impact of portfolio rebalancing and ratings downgrade in Europe. We also experienced favorable morbidity gains in Canada and Europe and expense gains in the United States.

Mortality was higher than expectations producing a gain in payout annuities, partially offset by higher claims in life insurance. Management actions and assumption changes added $98 million pretax in the quarter almost completely in Europe, reflecting a refinement in annuity longevity assumptions, and updated asset cash flow assumptions.

This was somewhat offset by a strengthening of tax provisions down in the tax line below. Others reflect restructuring and other cost related to Irish Life and J.P.

Morgan Retirement Plan Services acquisitions, while higher OCI realized gains in Europe capitalizing on lower interest rates drove the bulk of the increase in earnings on surplus over last year. Turning to Slide 10 ROE Lifeco's trailing four quarters operating ROE was 16%, up from year-end.

The improvement was most notable in the U.S. segment where the combined ROE increased from 7.1% last quarter to 8.3% in Q1, 2015.

Within the total 8.3% Putnam is minus 0.7% and Great-West Financial's ROE was 16%. Now to Slide 11 sales.

Sales increased by 36% year-over-year, driven by organic growth, the successful launch of the Empower brand and the resulting quick quarterly sales figures from that, as well as by the acquisition of Equitable Life Annuity business in the UK and I'll defer to the business just to give additional details on sales. Turning to Slide 12 fee income was up strongly across all geographies consistent with the robust growth in assets under management and administration.

The year-over-year growth in the U.S. reflected a step-up in administrative fees in Q4 resulting from the J.P.

Morgan RPS acquisition. Lastly, the currency impact contributed 5% to fee income growth.

On Slide 13 we show our operating expenses. Expenses were up 15% which also included the 5% impact from currency.

The 10% increase in expenses on a constant currency basis includes the increased pension cost noted earlier, as well as the ongoing investment in technology in Canada, building up the Empower brand in the U.S., and a higher level of project spend in Europe that is partly offset by expense synergies achieved at Irish Life. Turning to Slide 14 assets under administration were up 46% reflecting the positive inflows in mutual and segregated funds, strong investment performance, the addition of the J.P.

Morgan RPS business, as well as currency impacts. Paul that concludes my remarks.

Thanks, Garry. I'll now turn it over to Dave Johnston to speak to the Canadian results.

Dave?

Thank you, Paul. If we turn to Slide 16 overall insurance sales of $239 million declined versus Q1 of 2014, and we're flat with the prior quarter.

Lower individual insurance sales were driven by continued service issues we are experiencing. These issues relate to above normal application backlog which we are working to clear.

And while the backlog continues to reduce, we expect it to be fully eliminated in July of this year, and we will see a return to normal service levels in Q3. Group insurance sales declined 14%.

However this was driven entirely by lower group creditor sales which can be quite volatile. Our group insurance sales to planned sponsors were up 8% in the quarter and we have a very strong pipeline for new sales over the next couple of quarters.

Turning to wealth management, we continue to experience strong growth in individual, segregated, and mutual fund sales, which increased 9%. Group retirement services sales were however considerably lower in the quarter driven by substantial reductions in our single premium group annuity and investment only sales.

We also observed reduced market activity due in part we believe to the ongoing discussions and uncertainty regarding the proposed Ontario registered pension plan. Turning to Slide 17 fee income grew 4% in the quarter.

The vast majority of our fee income comes from wealth management, in particular, segregated and mutual funds, group insurance reflects ASO or administrative services only fees and the corporate category is generally quite small. Turning to Slide 18 we did see above normal expense growth in the quarter versus Q1 of 2014.

Changes in pension expense was the primary driver. Q1 of 2014 included a significant pension expense credit, and Q1 of this year includes increased pension expense due to lower interest rates.

We had some one-time items. However this result also reflects increased ongoing investments in our digital and IT areas.

Adjusting for the one-time items in the 2014 pension expense credit, expenses grew in the 7% range. Moving to Slide 19 first quarter results for Canada reflect strong performance in our core business operations with increased earnings driven by higher fee income and higher investment gains, as well as very good morbidity and mortality results.

Within our group insurance business unit, at the bottom, we had solid long-term disability results in the quarter with LTD morbidity gains up 70% versus our 2014 Q1 result. This was however offset by higher than expected death claims in the first quarter.

Individual insurance earnings were driven by higher investment gains and improved disability and critical illness, morbidity results, as well as improved life mortality as well. Wealth management has solid operating earnings reflecting strong investment activity as well as mortality gain.

Overall we were very pleased with the earnings as they reflect strong growth in our core business operations and this concludes my remark.

Thanks, Dave. I'll now turn it over to Bob Reynolds, who will speak to our U.S.

operations results.

Thank you very much, Paul. Just a reminder to everyone that as I review the results of our U.S.

businesses, I will be quoting everything in U.S. dollars.

Great-West Financial sales among Slide 21 Great-West Financial sales increased 156% driven by increase in sales of $4.7 billion in the Empower Retirement. Empower sales included several large-plan sales, increased IRA sales, and an increased number of small-plan sales.

The decrease in individual market sales was primarily due to the movement of the IRA rollover business to Empower in 2015 to reflect the consolidation of retirement offerings to the client. The Putnam full service defined contribution business was integrated into Empower as of January 1 of this year and wave one of the J.P.

Morgan RPS transition was successfully completed in early April. The Empower sales pipeline remains very, very strong.

Turning to Slide 22 Putnam mutual fund sales in quarter were $5.6 billion and net inflows were $400 million. It was a solid quarter but below the recent high performance due to the redemption in the equity side and the movement toward index type products.

Putnam institutional net outflows were $400 million driven by one-time redemption of $500 million from a low fee sovereign mandate. This was an improvement of nearly $1 billion from a year ago, and $1.5 billion from the prior quarter.

Jeff Gould joined us in December of this year and we're experiencing a lot of momentum in the institution pipeline, Jeff Gould heads up the institutional business. Putnam continues to build momentum and its supply and contribution investment only channel as a full service business moved out.

We continue to move across different carriers to sell Putnam product. Five of Putnam's mutual funds received 2015 Lipper Fund Awards to honor their consistent, strong, risk adjusted performance, relative to their peers for the peers of three years and more.

As of March 31, 2015, approximately 88% and 77% of Putnam's fund assets performed at levels above the Lipper medium on a three-year and five-year basis respectively. In April, Putnam's retail distribution professionals were named Advisory Solutions Manager team of the year by the Money Management Institute.

Turning to Slide 23 fee income of $462 million, is an increase of 21% from the same period a year ago. Putnam's fee income in quarter track with the growth in managed assets, and the transfer of the DC full service business to Empower.

There is some variability versus the fourth quarter due to the seasonality stronger performance fees in that period and two fewer days on which to earn fees this quarter. Empower grow $218 million of fees in the quarter, an increase of $71 million.

Approximately 80% of the increase in fees resulted from the J.P. Morgan RPS business and Putnam transitions.

Increased average asset levels driven by equity market levels and positive cash flows also contributed to the growth in fee income. Turning to Slide 24 total expenses of $394 million was an increase of 9% from a year ago, driven by acquisition and growth in business.

The reduction in Putnam expenses includes one-time expense recoveries of $9 million in the quarter, and expenses in Q1 of 2014, a $24 million related to share-based compensation mark-to-market and $6 million of mutual fund proxy cost that do not repeat. The increase in Empower expenses primarily relates to the impact of the RPS acquisition, the integration efforts, as well as organic growth in the business.

Turning to Slide 25 U.S. operating earnings were $99 million in quarter, an increase of $62 million from the same period last year.

Putnam's contribution of a positive $2 million was an improvement of $50 million from the year ago period. This change was driven by improvements in fee income, the impact of the DC transfer, and the previously mentioned expense items.

Net earnings from Great-West Financial of $97 million, increased by $12 million from the prior year, primarily due to higher contributions from investment experience, partially offset by increased business development expenses related to Empower of $6 million and the impact of the Putnam DC business transfer. Turning to Slide 26 we wanted to provide a perspective on Putnam's core operations including margin.

Putnam's pretax core income in the quarter was $12 million, an increase of $25 million from the year ago period, including the impact of higher fees and income, the DC transition, and the previously mentioned one-time item. Putnam's pretax core margin continues to improve and reach 9% this quarter and comparable to the Q4 2014, which have the benefit of seasonally high performance fees.

This concludes my remarks, Paul.

Thanks very much, Bob. I'll now turn it over to our Arshil Jamal, who will speak to the Europe and reinsurance results.

Arshil?

Thank you, Paul. Sales increased in Europe by 27% from the first quarter of 2014 with higher sales in the UK, partially offset by a reduction in Ireland.

In the UK, sales this quarter included $1.6 billion of reinsurance premiums, reflecting our acquisition of a block of UK payout annuities form the Equitable Life via an indemnity reinsurance arrangement. We will directly assume these liabilities early next year after we receive the necessary court and other approvals.

In the interim, our investment management activities are constrained to an extent by the terms of the reinsurance agreement. Underlying UK payout annuity sales decreased by 82% from the first quarter of 2014, and by 41% compared to the fourth quarter of 2014, reflecting the continuing impact of retirement income changes that took full effect on April 6, 2015.

UK payout annuity sales started the year slowly but the run rate improved modestly as the first quarter progressed consistent with the expectation of a market wide 75% reduction in sales compared to the run rates prior to the UK budget announcements. In April, we launched a new suite of retirement product in the UK under the Can Retire banner that enables clients to take full advantage of the new flexibility that is now available in retirement.

We have a strong sales quarter in Germany, with strong growth compared to the first quarter of 2014, and we also had strong sales in each of our Irish Retail, Irish Corporate, and Irish Investment Management Businesses, although sales did decrease from Q4 as a result of seasonal impacts. Turning to Page 29 fee income grew strongly supported by strong growth in assets under management which benefited from strong market value gains.

On Page 30, the growth in operating expenses reflects the higher level of project spend, including Solvency II items, and the various business development initiatives, including the Equitable payout annuity acquisition, and the acquisition of legal and general offshore wealth management business, which we expect to close in the coming months. We also recorded a higher level of pension expense which continues to be impacted by the low level of interest rates.

These expense increases were partially offset by the continuation of expense synergies at Irish Life, where we are on track to conclude our integration activities in the coming weeks, having achieved higher than expected expense synergies, combined with the lower than planned level of integration cost. Europe operating earnings on Page 31 up $286 million are up 10% from the first quarter of 2014, and up 4% from the fourth quarter result.

Earnings benefited from the strong growth in fee income, particularly at Irish Life, and we also benefited from favorable annuitant mortality experience relative to our best estimate assumptions and this added to income in the UK division and in the reinsurance division. We had less of a contribution from investment experience particularly compared to Q1 2014 reflecting ratings downgrade activity during the quarter, as well as the impact of some asset sales from our investment portfolio.

Partially offsetting this, we reported realized OCI gains within our European surplus investment accounts. And finally this quarter's earnings also included actuarial liability basis change releases, primarily related to refinements to our UK annuitant mortality improvement rate assumption, and also due to revisions within our calm asset liability cash flows.

These actuarial liability basis change release added to operating earnings in both the UK and reinsurance division. This concludes my remarks.

Paul.

Thank you very much, Arshil. I will now turn over to the operator so we can take questions.

Well, thanks very much. May be to start for Arshil, since we have you here, I didn't see in the disclosure -- so I apologize if I missed it -- the contribution from Irish Life this quarter versus I think my number's CAD52 million last year.

Yes, the last year number is correct and this quarter we did disclose in MD&A at $80 million contribution in Canadian dollars from Irish Life.

Okay. Great.

And you mentioned your new launch. Was there anything you can tell us from the first month?

I know it's early, but any sense of pent-up demand or any early sense of how successful it may look like?

Certainly for us we're getting -- the key for us is to continue to maintain momentum on the payout annuity line and to see some growth there in the coming quarters compared to the -- weaker than we would have liked result in Q1. For the other products I would say that the run -- that the amount of time before we get a meaningful contribution, runs into the number of quarters not just the immediate quarters.

While we've launched the products to meet the April deadline, there is a significant technology initiative that we have underway that won't complete until late this year or early next. So it will only be next year where we think we will have a product from both a product and technology perspective that will stand up against everything that’s been offered in the market place.

Okay. That's helpful.

And then lastly, for Bob Reynolds, Bob, I noted on Slide 10 of the deck, you've combined Putnam with the rest of the U.S. in terms of disclosing the ROE now as well, the 8.3% last 12 months.

I'm wondering whether you could share with us a bit your thoughts on where you think this combined ROE will get to over the next few years. Are we looking for low double-digit?

Could we be in the teens, or more realistically when you think of your two, three, four-year plan, does it -- does that stay single-digit?

I’m going to suggest that Garry may be speak to that from the standpoint of ROE because we're talking about mixing both the asset management and the insurance business.

That's right.

Okay.

In terms of -- I think I’ve noted earlier that Great-West Financial's part of this is at 16% already. So that would encompass primarily the Empower brand that's already in a strong spot.

Putnam at minus 0.7 is obviously that's been turning around and the trend is quite strong. Obviously Bob would be looking for quite some strong success there in Putnam as well.

And so that right now that 0.7, the equity is fairly evenly split between the two. So that 0.7 is what's minus 0.7 is driving this average down.

But as Putnam continues its turnaround, we would expect to see this ROE rising but all based on the turnaround.

Can you tell us what the markets are going to do?

I wish I could, Bob. Garry, just before I let you go, and then the yield enhancement impact, can you quantify that for me in terms of dollars and in terms of geography?

Yes, the yield enhancement impact overall for our investment gains overall within the experienced gain lines which is primarily yield enhancement would have been about $140 million of the $244 million total you're seeing there for experienced gains. And most of the investment gains, the yield enhancement, actually in Canada this time with a good contribution from the UK, sorry from the U.S.

from the United States so its -- I would say three quarters of a gain were in Canada, may be a quarter in the U.S.

Okay. Thanks very much.

Hi, morning, or hi, morning -- afternoon. Let's carry on that yield enhancement discussion a little bit or just the experience gains overall.

We've seen these quite a bit or quite frequently from Great-West over the last few years. But this quarter's got to feel somewhat exception, as in high.

Like, the -- what's your expectation for experience gains? Do you always expect to get them?

And if so, what's a reasonable number?

I'll take this one.

Garry, you can start.

I'll -- first off, we’re obviously very pleased with the results when you see the strong business fundamentals coming through our experienced gain. So we do like to see those gains.

I'm not going to try and get into predicting number that can move around a bit this was a very good quarter. A couple of reasons, one is we mentioned the yield enhancement, investment gains were up a bit.

We typically have strong investment gains but they were a bit higher than we've seen with just some good opportunities particularly in Canada we took advantage of. But also note those over $100 million of the gains were not related to the investment side, they were related to just core business fundamental such as mortality gains, expense gains, morbidity that's our disability critical illness gains.

So we're seeing that. And of course the policyholder behavior actually behaved.

So we found that overall we're very pleased the results felt, we’re running on all cylinders that drove a strong result and we would obviously look forward to our business carrying on strong results but these things will fluctuate.

Yes, no, I -- that's the -- it should reflect some conservatism in your assumptions that you're getting these experience gains. But it seems very elevated this quarter.

Is there anything we can tie into this, like, the investment gains in particular, the byproduct of your weaker payout annuity sales in the UK? So as your global origination machine keeps humming along and there's not as much new premium dollars coming in from that business, you're able to replace assets that are suboptimal in other areas?

Is that part of it?

No, I think the, what we're seeing on the yield enhancement gain, there were opportunities in Canada but we're strong this quarter. But we're also; in the UK we didn't have as much activity we have seen.

But, again, partly that's the [indiscernible] focus in bringing on the Equitable Life acquisition where we didn't -- we're not really in position yet to move to our target asset mix that will come over a period of time once the full court process is completed. So I think we expect we'd see yield enhancement opportunities continuing but obviously those will depend on market conditions and our matching positions in our funds.

Garry, I would just echo your reference to the experience gains being quite diversified, they’re diversified across mortality, morbidity expense, and on the investment side. And if you go to mortality side we had a weak long-term disability mortality a year ago, we had better than expected mortality this quarter, and we’re just seeing the strengths of the underlying business sort of on fronts and it was a strong quarter.

And I think to the point that was made we do approach the business in a very conservative way with conservative assumptions. And then, as the business performs, and in relative terms outperforms, I don’t get too, I don’t get as fuzzed about the geography of those results whether it’s in expected profit there its overall returns based on quality underwriting and quality investment selection.

Okay. Then just some housekeeping on Putnam.

You mentioned a $9 million expense recovery. And correct me if I'm wrong.

It sounded like the DC business that was embedded in Putnam got shifted out of Putnam into the Empower segment. So as I look to Putnam's expenses, there was like $241 million.

Add $9 million. That's $250 million.

And that's like a pretty steep increase year-over-year if we adjust for some of the one-timers last year. I would have thought it would have gone down overall.

Can you, was that business not how much expense attached to it or am I way off right, here?

Just on the first off there were obviously there were some one-time issues there are also some one-timers last year. So you got a bit of noise in both of those quarters.

The DC full service business just again for comparison purposes, I believe this was in the MD&A. This was a $15 million expense item that would be pretax expense item would have transferred with that business from Putnam to Empower that's the Q1 2014 expenses.

Going forward we're running the Empower brand as an integrated operation. So we can’t really separate out the full service this quarter but we know what the equivalent run rate of the expenses would have been in the same quarter last year at $15 million.

Okay. Is that business, that $15 million of expenses attached to that business, like how analogous is it to what you've already got going in Empower?

Is it something we can expect to be completely gone in a year's time, that expense base?

Yes, one of the keys for the retirement business is scale, because you have considerable amount of fixed cost and by bringing in RPS the J.P. Morgan business the Putnam business with the Great-West financial business we see significant benefits from doing that to cost savings.

And so I think you have to look at it that it is a scale business every participant you add on the platform benefits the business. And we added 2.5 million participants and we have close to 800,000 new participants coming on in the platform this year from sales.

Hi, good afternoon. I don't want to kind of harp on the experience items, but if I go back six years and do a quarterly average, I guess the experience was CAD69 million positive versus CAD244 million.

So I'm just -- and I get everything that could go right seems like went right. And I just wondered, are we at a new level here from the experience side that we should be changing our expectations in what you can really produce on the experience side, or would you -- or is this just abnormally good quarter?

So I'm just trying to get a sense.

It’s Garry again. I would note a couple of things.

First of all going back six years our business has grown quite substantially since then so you would expect a rising trend, I think of the Irish Life business has come on board it’s been very profitable. So certainly the business growth will drive that trend.

As noted earlier the fact that we take a relatively cautious approach in our assumption to go into our expected profit, we leave ourselves with a good chance almost being equal of seeing some experienced gains as we manage our business well. We continue to manage our business well.

So I guess things were favorable this quarter but again I can’t predict what the future will bring. But we are certainly feeling very pleased with the results we got this quarter.

Okay. Then just I guess management actions and assumption changes, and I think maybe -- I don't know if this is for Garry or for Arshil.

But I think it sounds like most of that came from Europe. And -- if I'm right.

And that was related to I think basis changes. Can you quantify the amount that related to the annuitant mortality update and then the calm cash flow update?

It was about two-thirds the annuitant mortality and one-third the asset cash flow updates.

And that's the -- and that kind of goes to the CAD101 million that you show on the SOE.

Yes that ties into the CAD101 million pretax that's in the SOE. There were couple of other smaller items but those are the two big once that were calling out in our comments today.

Okay. And then just a few number questions.

The $2 million for Putnam, that includes the $9 million expense recovery? So, if we wanted to think it back, one-time items, we would take the $2 million minus the $9 million.

Is that correct, or does that $2 million exclude the $9 million recovery?

The $2 million is an all-in figure and I just cost -- the $9 million recovery would be pretax expenses.

The $9 million. Okay.

$9 million pretax. Yes.

Perfect. And then the -- you talked about the transfer.

Did you talk about -- sorry, did you quantify the DC impact on earnings at Putnam, the movement? I know you talked about the expense, but the actual earnings impact from pulling the DC business out of Putnam?

Yes, we do describe that in the MD&A. It's the after-tax impact is approximately $5 million in Q1 2014 and it would have been about $19 million to $20 million after-tax throughout 2014.

So it's about $5 million a quarter.

And that's a $5 million roughly drag on earnings, right?

It would be a drag on Empower and a boost to Putnam, yes.

Yes. Okay.

Perfect. And then just lastly or so, the Empower integration, did you break out what the integration cost was for Empower?

Yes, we did that. We had both restructuring that we called out specifically which was basically $1 million, and then we had integration cost on top of that which should be the developing going forward of $9 million.

$9 million. Okay.

And then just lastly, is there excess cash down in the U.S. subsidiary?

And if so, can you quantify -- because I know you talk about the amount of cash you have at the Holdco, the MCCSR. Is there excess cash also down at the U.S.

sub?

No, we have the U.S. subsidiary capitalized appropriately for where we would like to position ourselves in the market there.

It's well capitalized but it's where we would like to position ourselves with our various competitors and with our clients in the U.S. market.

So I wouldn’t refer to it as excess.

Just I think a quick question to understand expected profit. The additional expenses this quarter, whether it's the pension expenses or the additional expenses led to the digital or what have you, did that go through -- did that have the effect of reducing expected profit in the quarter, or were those more experience items?

Those additional expenses reduced expected profit.

And would it be appropriate to suggest that that's an ongoing thing, at least for the remainder of 2015, that you'd expect your expense levels to be elevated for the remainder of 2013 -- 2015?

Certainly for the pension cost that's -- those are set each year may run through the year. So those we would expect to carry on.

I would pass it they're worse than one-time items that occurred in quarters the one-time differentials year-over-year. But if you look to the increased cost of pension costs in both the UK and in Canada, when you look to the elevated investment in systems, technology, digital, and then when you look to the Empower platform build out which is really, Bob, we've got another 18 months to go really in terms of the waves of integrations.

Correct.

We'll be having greater investment in the business during that time period. Though we think this is a -- you look at the growth in assets under administration, which our objective is to gather as much of that as we possibly can into assets under management.

We're investing in the business for growth. That’s what this is about.

Yes, a couple questions. Dave, I was wondering if you can talk about the magnitude of the pension expense hit in the first quarter of this year and the size of the pension expense credit in the first quarter of 2014 because, obviously, these two items had an impact on what looked to be smaller year-over-year growth for the Canadian division.

Right, the ongoing impact for this year is about in growth terms about 2% and the impact from Q1 2014, it was I believe CAD7.7 million as a credit.

That's correct.

So that’s what gets to this down when I mentioned and you see 12% year-over-year growth, we would like at removing the one-time pension credit from 2014 as well as the one-time, just one or two one-timers in the quarter. I guess it's down to 7% but the 7% includes the ongoing 2015 increased pension costs.

Okay. So it'd be 7% if we excluded the CAD8 million in the first quarter of 2014.

Is that what you're talking about in terms of earnings growth?

7% and some one-time items that occurred in the first quarter of 2015.

Yes, like exceptional experience gains, or what are those one-time items?

We had -- we mentioned that we had service issues with our individual insurance application situation got this backlog. So we're working off that backlog.

We will have it worked off pretty much by the end of Q2 in July, beginning of Q3. Well, we have incurred additional expenses.

We have brought in contract underwriters. We have incurred quite a bit of additional expense that will not be in our run rate expense.

So that’s one of the one-timers in there.

Okay. And Rob Reynolds, you had talked about the Empower sales pipeline before?

Yes.

Can you share with us what the pipeline might look like now?

As I said, it is very, very strong and right now, it looks like we're on track with commitments in place so that in 800,000 participants a share.

In terms of AUA?

I don’t have that number in front of me.

Okay. And then one final question for Garry.

The -- it looks like you had -- when you rejigged your source of earnings stuff to include Putnam in the U.S. segment, you -- it looks like the impact has not only changed expected profit and strain, as you mentioned, but it -- for some reason, it seems to have changed experience gains and earnings on surplus.

So how do you get a fund company that -- I would've thought there -- it wouldn't have any experience gains. Like, you just -- whatever you make, you make.

Yes, and I didn’t go into the full gory details during the opening comments but you are correct, Tom. Experience gains, what we see there is for example, this quarter those one-time expense lines we mentioned that $9 million they would show up in experience gains because they're not part of the normal expected, either expected prof value business or your new business investment.

And your earnings on surplus, what you'll see there, two main items: one is the cost of financing and any capital reallocations we do in order to balance or leverage when we're calculating our ROE's by segment, those go through there. In addition, investments on C capital show up as earnings on surplus as well.

That's the jog that we've used, and I've realized some other companies have put them in different spots but we felt financing and C capital went together.

So the experience gains is really -- as it relates to putting in Putnam, really just relates to expense items, and it's not like you made more at Putnam than you would've thought or anything like that.

No.

The fee income and things like that, right?

That’s correct. Where we'd be looking for generally speaking, just the unusual items and we'd expect those to be expense related.

Okay. So you could have actually -- for the 67, I think you're showing in the first quarter for the U.S.

segment there, that would've been even higher if you backed out the additional expenses, right? That would've had the $9 million Putnam expense in there.

Those in the expenses were a pickup a gain for expenses, it was a positive number.

Pardon me; you're correct, yeah, I'm sorry. Okay, thanks for that.

Thank you, Operator.

Just before the buzzer. Thanks for squeezing me in.

Just wanted to go back to the question on -- or the conversation on expected profit and make sure I'm understanding this correctly. So when I compare the trend in average assets under management for the company and compare that to expected profit so I think your AUM was up about 13%.

And the expected profit was about 5%. That -- those comments on expenses and the sustainability of the expense line in 2015, is it reasonable in your view to suggest or to expect on our end that there will be a wide difference between the growth in assets, especially as you grow the Empower business, and what we actually end up seeing in expected profit on enforce?

I'll just a couple of comments on that. First off, in the expected profits certainly the contribution of fees from the fee-based business was one of the strong contributors but by no means that they may be the only contributors.

In the expected profit we have the margins coming off these the longer-term liability business, the insurances, the annuities, our various disability business so they're all in there as well as all the expected margins on your group insurance businesses so expected profit goes beyond just the fee businesses. And then again, these are scale businesses.

So Bob was mentioning the U.S. so we would be looking as the business grows and obviously we'll see what actually happens in the future but we'd be looking as we grow the business that the fees would be growing more rapidly than the underlying expense base and that would show up as a pickup in expected profit.

So they are related but you can just do a simple math between the two.

It's Paul here. In the near-term we do have the situation with some elevated investment in the business that will put us in a position to harvest that higher asset penetration, assets under management penetration.

So that’s a key focus. And in the near-term, we're investing in the Canadian business.

At the end of the day we're investing in growth. That’s really what this is about and it is having a moderating impact on expected profit increases now but it's all with the intent of driving future growth in the business.

Okay. So there's -- maybe the lines aren't going to match up as well this year, but it's something we'll see benefit you down the road.

Absolutely. We wouldn’t being do it if we didn’t have an intent to drive higher growth.

And then just to make sure I understood the flows conversation as far as Putnam is concerned, the retail side or the mutual fund business being back in redemptions this quarter, just wanted to -- I think it was something I missed there in terms of --

Mutual funds business had positive flow this quarter.

Positive flows this quarter. So it's institutional that you were pointing to in your prepared remarks as being an area that --

Yes.

Yes, I would note though on the institutional front, as Bob mentioned, we saw actually far higher institutional outflows in the fourth quarter last year and in the first quarter last year, and we saw a moderation in those. So in total, we saw a moderation in the retail flows but it was still positive but the institutional outflows were far lower than they have been historically and we got a strong pipeline.

Okay. Yes, I don't want to get hung up on quarter-to-quarter movements here.

But it seemed like the business had a pretty good trend going for a few quarters. And the last two in aggregate, there's been some moderation.

And just want to make sure I'm not missing anything.

Yes, it's interesting the gross sales have stayed fairly consistent. What is growing and this is an industry issue also is the amount of redemption has grown, and is primarily money moving out of equity but because we've had good performance across all asset categories we're still able to participate in most areas due to the performance.

So we did have positive $400 million gross sales versus $5.6 billion which is again consistent with where we've been but there's just greater redemptions in the industry and we're not exempt from it.

Thank you very much, Operator. Thank you analyst for your participation today.

You will note that our prepared comments were considerably shorter this time around. We timed our comments in Q4 last year and noted that they were stretching on to 35 reporting minutes and we wanted to make more time available for Q&A.

So you can expect in future quarters that will be through our prepared comments in about 20 minutes and ready to interact with you folks, and we do appreciate it. So we look forward to connecting with you again in a quarter's time for our second quarter 2015 conference call.

Thank you very much.