Great-West Lifeco Inc

Thank you, Michael. Good afternoon and welcome to Great-West Lifeco’s third quarter 2017 call.

With me on the call today are Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, 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. There are also a number of other senior officers available to respond to questions as required.

Before we start, I’ll draw your attention to our cautionary notes regarding forward looking information and non-IFRS financial measures on Slide two. These cautionary notes will apply to today’s discussion as well as to the presentation material we’ve distributed.

I will provide an overview of Lifeco’s third quarter results including headlines from our Canadian, U.S. and European businesses, and Garry will then provide a more detailed financial review.

After our prepared remarks, we’ll open the line for your questions. The company saw solid operating performances across all of its businesses in the third quarter notwithstanding the impact of the previously announced reinsurance losses on results.

Excluding these losses, third quarter adjusted earnings were up 10% year-over-year with strong results in the U.S. and Europe, healthy fee income growth in all geographies and good expense performance overall.

I will speak briefly to the reinsurance losses. As reported last week, we incurred losses of $175 million after tax for estimated claims related to Hurricanes Harvey, Irma and Maria.

These losses impacted the property catastrophe division only and excluding that, reinsurance earnings were $134 million in the third quarter, up from $54 million last year. We remain committed to the reinsurance business, which provides diversification for Lifeco and generates strong earnings and an attractive ROE.

Turning to Canada, our business transformation continues to progress on plan. We saw a positive impact on expenses again this quarter with the realization of $95 million pretax in annualized reductions to-date.

We remain on track to achieve $200 million of annualized reductions by the end of Q1 2019. In addition to cost savings, we’re seeing other benefits of the transformation start to emerge.

When we realigned our operations last year, 1 of the goals was to enhance collaboration between our businesses to foster innovation and a more holistic view of the customer. Last week we announced a pilot for a new retirement savings program for graduates.

The program will allow retirement plan sponsors to match the number of student loan payments with the corresponding contribution to their group retirement savings plan. This innovative solution is the first of its kind in Canada and the result of collaboration between our innovation group customer and digital teams.

We are continuing to invest in digital technologies to extend customer reach and broaden customer relationships in a cost effective manner. You may recall we launched the Wayfinder pilot in our group retirement business in the fall of last year.

Wayfinder is a digital aggregation tool that allows plan participants to get a complete picture of their holdings across financial institutions. We just passed the one year mark of the pilot and results have been encouraging.

We intend to roll-out Wayfinder to additional plan sponsors in the coming months and development work continues to accommodate more diverse plan types. Turning to the U.S., Empower Retirement had a strong showing, excellent momentum post integration.

Earnings in the third quarter increased 41% year-over-year with higher fee income and lower expenses. Revenue per participant is growing.

Core sales were up 10% year-over-year and the pipeline remains strong across all segments. With 8.3 million participants and over 500 billion in AUM, Empower maintains the number two position in a still fragmented DC record keeping market.

With the JPMorgan Retirement Plan Services integration behind us and a robust and scalable technology platform in place, we’re actively assessing consolidation opportunities in the market with a particular interest in the core states. Moving to Europe, the adjusted earnings ex-catastrophe losses grew 10% year-over-year with strong performances across most regions and businesses.

The third quarter also saw us announce the acquisition of Retirement Advantage in the UK This acquisition reinforces our already strong position in UK tailed annuities and adds a new retirement income solutions, equity release mortgages to our product suite. We expect to close this transaction in the first quarter of 2018.

Finally, our capital strength enables us to act on organic and inorganic growth opportunities. We completed the acquisition of Financial Horizons Group in the third quarter giving us ownership of the leading MGA in Canada and an important stake in the independent advice channel.

So, now I would ask you to please turn to Slide 5. Adjusted earnings this quarter were $582 million, down 16% year-over-year.

As noted, the company incurred catastrophe reinsurance losses of $175 million after-tax in the quarter. Excluding these losses, adjusted earnings were $757 million, up 10% year-over-year.

Lifeco maintained a strong capital position with Great West Life’s MCCSR ratio at 233% compared with 239% last quarter. This sequential decline reflects the combined impact of the purchase of Financial Horizons Group and the reinsurance losses.

Lifeco cash was 0.9 billion at quarter end and it is not included in this MCCSR ratio. Moving to Slide 6.

Canadian sales decreased by 6% year-over-year with higher individual wealth and group insurance sales more than offset by lower group wealth sales and a decline in participating individual insurance sales compared to Q3 2016. This decline in part sales reflects the new business surge we experienced in the back half of 2016 and in Q1 2017 due to changes in life insurance taxation.

As such, we expect to see a similar dynamic for the next few quarters. U.S.

sales were down 8%. Empower Retirement sales were relatively flat year-over-year while Putnam saw lower institutional sales, which were only partially offset by higher mutual fund sales.

I would note that the Empower pipeline for future sales is strong supported by our market leading offering. In Europe, sales increased 15% year-over-year with higher bulk annuity sales in the UK and strong pension sales in Ireland and in Germany.

Turning to Slide 7. Fee income for Lifeco increased 7% year-over-year and was up 10% on a constant currency basis.

Looking at the segment results. Canada’s fee income increased by 9% due to higher average assets under management driven by higher average equity market levels and positive net cash flows.

In the U.S., fees at Empower increased with positive net cash flows and higher average equity market levels. At Putnam, fee income increased 11% year-over-year in U.S.

dollar terms driven by performance fees from a closed portfolio and higher average AUM. Overall U.S.

fee income was up 7% year-over-year and up 12% on a constant currency basis, a strong result. In Europe, fee income was up 6% due to higher asset management fees in Ireland and Germany and higher other income in Ireland.

Referring to Slide 8, adjusted expenses for Lifeco declined 4% year-over-year. As a reminder, we define adjusted as excluding restructuring charges.

In Canada, adjusted expense growth was modest, up 1% year-over-year reflecting savings related to our business transformation initiatives. As noted, we have achieved CAD 95 million of pretax annualized reductions to date and remain on track to achieve CAD 200 million of annualized reductions by the end of Q1 2019.

In the U.S., expenses were down 12% year-over-year reflecting lower expenses post the Empower integration and Putnam restructuring. And in Europe, adjusted expenses increased 5% mainly due to the addition of the cost base of Irish Life Health following last year’s third quarter acquisitions.

I will now turn the call over to Garry to give us some insight into the numbers. Garry?

Thank you, Paul. Turning to Slide 10, adjusted net earnings in the quarter were $582 million, down 16% year-over-year equating to $0.59 per share.

As noted, results included reinsurance losses of $175 million or $0.177. Excluding these, adjusted EPS was $0.766 per share, up 10% year-over-year .

In Canada, earnings increased 2% year-over-year. Individual customer results reflected higher fee income and lower new business stream partly offset by lower experience gains.

The increase in group customer results is primarily due to higher contributions from investment and mortality experience. In the U.S., adjusted earnings were up 38% from the prior year driven by growth in fee income and lower expenses from both Empower Retirement and Putnam.

As Paul noted earlier, Empower results were strong with earnings of $31 million compared to $22 million last year. Putnam’s results in the quarter also included one-time performance fees from a closed portfolio.

However, last year had a similar sized one-time expense benefit so the $10 million improvement you see year-over-year does reflect the underlying economics. Europe’s adjusted earnings declined 43% year-over-year primarily due to the catastrophe reinsurance losses.

Excluding these, adjusted earnings in Europe were up 10% year-over-year with higher earnings in Ireland and Germany partially offset by lower UK earnings. Turning to Slide 11, and as a reminder, the source of earnings categories above the line are shown pretax.

Lifeco’s expected profit increased CAD 21 million or 3% from the same quarter in 2016 and was up 5% year-over-year on a constant currency basis. This result reflects an increase in Putnam’s expected profits due to higher AUM and lower expenses as well as growth in Europe partially offset by currency movements.

Expected profit was flat compared to last quarter. Higher expected profit in Canada reflected expense benefits from the transformation while adverse currency movements impacted both U.S.

and Europe results. New business strain was significantly improved this quarter due to gains on new longevity sales in reinsurance as well as improved profitability on individual customer sales in Canada.

This was a result of repricing actions and transformation related expense benefits. Experience gains and losses were a net loss of 91 million this quarter due to the hurricane related reinsurance losses.

Excluding those, experience was positive in the quarter reflecting trading gains in Canada, higher fee income in Canada and in Empower, one-time performance fees apartment and positive mortality experience mainly in reinsurance. Assumption updates and other management actions contributed CAD 152 million this quarter, primarily due to updates for U.K.

and U.S. in longevity assumptions and economic assumptions including asset default provisions.

This was offset by a strengthening in policyholder behavior assumptions for Canada and reinsurance. I would note that we did not early adopt the upcoming Q4 changes to Canadian Actuarial Standards and we do not anticipate a material impact when it does come in the next quarter.

The earnings on surplus of negative CAD 16 million were CAD 50 million lower than last year mainly due to the gain related to the acquisition of Global Health last year and lower realized gains on sales of surplus assets. There is a one-time tax gain in reinsurance of CAD 30 million, which led to an unusual tax positive contribution to earnings in Europe.

Turning to slide 12, Lifeco’s uncommitted cash position remained strong at $900 million. Our book value per share was $90.92, up 4% year-over-year.

Adjusted return on equity was 13.3% or 14.2% excluding the catastrophe reinsurance losses. Reported ROE was 12.4% reflecting restructuring charges taken in prior quarters and this year’s reinsurance losses.

And finally, on slide 13, assets under administration were CAD 1.3 trillion, up CAD 66 billion or 5% year-over-year driven by market performance and overall business growth. That concludes my formal remarks.

Back to you, Paul.

Thanks very much, Garry. Michael, we will now open the line for analyst questions.

If I can start with the tax gains in Europe, I think you said it was $30 million, is that -- did I hear that right?

Yes, it’s $30 million in the reinsurance segment.

And so if we adjust that $30 million on the tax line and add back the reinsurance loss, the tax rate in Europe still seems on the low side. Is that really just a source of earnings within Europe this quarter?

For me it’s something around 3%, does that seem reasonable?

Yes. I would caution with the tax loss from the hurricane, would have been at a very low tax rate.

So that adding that back, it would get distorted a bit. But also the overall tax rate for the company in the quarter was actually just over 13%, which isn’t that unusual a rate.

The Europe rate was a bit lower and that’s just where the earnings rose, which jurisdictions they arose this quarter.

So, net $30 million benefit at the top of the house?

Yes.

And then my second question just on the new business gains in Europe, a big improvement, I think you called out some longevity gains. Can you just parse out maybe what the year-over-year improvement, how much was from that and is this sort of a sustainable level?

The gain -- so there are two fairly large reinsurance transactions that happened to close both in the quarter. They had been, we locked in pricing some time ago at a favorable rate and so there was an initial gain recorded on those.

If I had to say, that was probably $30 million on those from those new contracts in terms of that pricing gain. It’s not unusual to see a gain on annuity type business.

We do that from time to time with the U.K. paired annuities as well.

We didn’t see that on U.K. paired annuities this quarter.

So while it was unusual that it was in reinsurance and they have to both be in the same quarter, we do see those from time to time. They can be a bit lumpy in large reinsurance transactions.

It was a good result.

Okay. So, $30 million pre-tax benefit this quarter relative to last year?

For those two longevity deals, but again not unusual to have annuity or longevity gains if we get the right pricing [Indiscernible].

I would note that we’re writing these sort of deals on the reinsurance side and we also are looking at bulk annuity so there’s opportunities like that, but it’s not a steady state thing. It will be a bit lumpy.

Okay. And then just my last question.

With the updates on U.S. tax reform today, could you provide some sensitivity on what a reduction in U.S.

corporates would to your earnings and your DTAs and DTLs? Is there any sensitivity you can provide on that?

I’ll turn it over to Garry in a minute, but it’s an early read, it’s not enacted yet. We’re getting through the 400-page document and interpreting and while there is some impact on the balance sheet, we actually view it if enacted as defined so far, the positive impacts of lower corporate taxes will outweigh any impacts we would see on balance sheet.

But I’ll let Garry speak to the sensitivity.

On those two points, if we are to look at the impact on the balance sheet beyond the net of the deferred tax assets and deferred tax liabilities and so we ballpark that at CAD10 million to CAD11 million per 1% reduction in the tax rate. So if it is a 15% tax rate, that’s 150 million to 165 million onetime hit net reduction.

Then I turn around to the annual benefit and again using our current earnings on some sort of normalized basis, you look at the [Indiscernible] you’re looking $4 million to $4.5 million positive impact to earnings per year per 1% tax reduction. So again, you multiply that by 50 and you’re going to get $60 million to $70 million of annual benefit as -- and that grows as earnings grow over time.

So, it’s probably sort of two to three year payback and [Indiscernible], then it’s a onetime hit. That give you some guideline, could be some guideline?

Just going back to the hurricane reinsurance charges, the press release from last week or the week before suggested that the 175 was an estimate and could change. So I’m wondering how we should think about that is -- have you gone in and put the -- is the 175 your maximum loss based on the threshold you had and potentially it could come in a bit better and then it’s early or could that number ultimately go higher from here?

What sort of visibility do you have there?

I’d start off by saying just for context, we’re talking about three events. So, it gets a bit more complicated as you’re going through that.

I would say that we put in what we believe is a good sound conservative estimate of what our exposure is. But the reality is not all of the reinsurers that we support have fully reported at this stage.

So it’s early days, but we think this is a good conservative estimate of our exposure.

Okay. That’s helpful.

And second question for Stefan. I really look at this, but I noticed that part sales are down quite significantly in the last couple of quarter.

So, wondering if there is any sort of de-emphasis of the product? If we think of the product, how you’re selling the product or maybe something else going on here that we can’t see on the relatively limited disclosure on the [indiscernible].

In Paul’s opening comments, he did allude to it. There was a tax change effective January 1, which really drove a surge business through the latter part of 2016 and into 2017.

So from a planning perspective, we expected to see a sharp decline. And quite frankly, we would expect to see this particular pattern year-over-year persist for the next couple of quarters.

So it’s not a reflection of a fundamental change, this was a reflection of a skewing of the sales cycle more than anything.

And just an update -- the Q1 number was high because you were closing the year-end business in Q1, I guess?

Correct. It was, the legislation and the regulations allowed us to place the business in the first quarter.

And the last thing for me, maybe you covered this, but the U.S. corporate and other division at 17 million of earnings, I’m not sure if we’ve linked that back to any of the items you mentioned so far on the call.

It looks like a reversal of expenses maybe, if you could just get a bit of color on that.

I’ll let Garry comment on that one.

Yes, that was a one-time benefit from a pension curtailment gain, it’s to do with the pension plan at one of the U.S. subsidiaries.

I guess first question, and you mentioned this, Paul or Garry, I think maybe it was Garry. You didn’t make the change, the ASB updates of the URR and the mortality.

I think last quarter, you indicated that you would be adopting in Q3, so it’s not going to be Q4. Just wanted to understand why the change.

I’ll let Garry speak to that. I mean, that’s the [indiscernible] actuarial files through the year, but Garry?

Yes, we have to [indiscernible] Q3, it’s not a material item for us. And we just found, as we’re looking at implementing some of the -- not the URR part, but some of the other modeling changes within our U.S.

or European, so it’s restricted to U.S., it’s just taking a little longer than we’d expected to actually just complete the work. We’re not expecting material change inside URR, could be in a sort of 50 million or less range.

And then cautiously optimistic that some of the other elements will actually net out to be a little bit [indiscernible] offset that. So overall, we’re just not expecting it to be material.

So we’ll come in Q4 when the actual standards come in, but we are quite ready to early adopt.

Second, the hurricane loss, 175 million, I know you indicated that the tax rate wasn’t large on that. Do you know the pre-tax impact from that?

I think it’s a couple of percent higher. It’s really is -- the tax rate in most of that is written are under 5%.

So it’s just a couple of percent higher now. I don’t have it right in front of me.

So, is it fair to say 180, 190?

180 million is not a bad number. Yes.

And then you indicated in the previous question, answer to your previous question, there was 30 million pre-tax gains on two reinsurance contracts and annuities. That went through the reinsurance division, not the annuity division, is that correct?

Yes, it’s in our -- if they were reinsurance transactions, longevity transactions. So it’s in the Europe segment, which includes insurance and new lease, which is UK, Ireland and the reinsurance, it’s all in the Europe segment.

But it was connected to reinsurance transaction.

So, is it in the reinsurance division or the annuity?

Reinsurance division.

And then in Putnam there was, I believe a one-time gain of $11 million after tax or there was a gain related to performance fees and other items, I don’t think Garry, you mentioned that. But in the MD&A, there is also mention of $7 million gain from the sale of previously impaired investment products, is that -- so I just wanted to clarify if that $7 million is included in the $11 million after tax or are those two separate items?

The $7 million is -- it is the same item.

It is the same item? Okay.

The impact on fees was the $7 million after tax. And there was a one-time expense gain in 2016, this quarter, which was $8 million.

So it’s -- that’s why I made the comment that comparable -- they were comparable sizes for those two items over the year-over-year comparisons.

And then just lastly on Putnam, I guess this quarter you indicated year-to-date you’ve taken out $53 million run rate of cost that’s US dollars. That’s the same as at the end for us for Q2.

So it seems like the cost reduction, because I think the target $55 million, correct me if I’m wrong, it seems like it’s stalled, or is there a pause here or when should we see the full $65 million cost saves?

I’ll let Garry will speak to that one. Garry?

There’s really a couple of pieces to this. First of all, there were a couple of timed actions, you mentioned the word stalled, I’d say they were more the timed actions that were tied to the Department of Labor changes.

So that’s been deferred. But it’s -- we’ll review that as those regulations unfold.

The second element was, some of the estimated savings were down on average compensation and for a full year of employment. But the actual 2016 comparables do reflect some early departures in 2016 and below average comp for those that last as part of the restructuring.

So we did take the actions as planned and obviously we’ll be saving those costs going forward, but the comparables are a little off and so that will remain, those comparables would remain a bit off. I would note also, this issue doesn’t [indiscernible] candidate for something usually more to the time of the year and the Putnam situation.

So that’s Canadian transformation issue, but it did effect the comparables for Putnam year-over-year.

So I guess we shouldn’t think $65 million, what’s the number we should think or...?

Yes, I think it’s going to be more -- just following on those for the timed actions, of course this is setting aside any future access we may or may not take as the business unfolds, but just -- it would be more in the mid 50s.

Yes, like I would say that we continue on with the business and we’re focused kind of on three things, making sure that we’ve got strong performance and we saw performance continuing the trend upwards and that’s a fundamental positive. We’re continuing to look at costs and trying to think about efficiencies and how we drive forward with greater efficiencies.

So it’s not end of game for us. And finally, we’re selective on the acquisition front, we’ve got a couple of files in play right now, where we’re assessing.

So, it’s not the end of game, that’s the 65 in the same way that in any of our businesses after we do restructuring, we’re still trying to think about efficiencies moving forward.

Well, actually I’ll ask about the M&A comment you just made there. You’ve got a couple files in play, I mean if there like to maybe expand a bit on that that will be...?

So Gabriel, as we’ve said before, our focus is on getting Putnam to scale, to profitable scale. So you can do that through a means of different things.

This performance is going to drive flows, we saw some positive flows in retail this past quarter, continued discipline on expenses is going to help getting you to profitable scale and obviously adding AUM is going to get you to profitable scale. So I would say we’ve always -- I don’t think there’s been a quarter in the last couple of years when we haven’t had some files that we were closed out looking on [indiscernible] an assessment.

And we’re very active on this, it’s finding the right acquisition. So it’s a level of discipline, but we’re not -- there is no pending announcements, but we are very active.

So when you say finding the right acquisition, if I look at the original one, it was a greenfield expansion. Next one, and you’ve been pretty candid with this thing that you’re targeting something of a certain size that looks like Putnam.

So the next deal will have a much, I guess more important synergy component to it, if I’m reading it right.

But clearly, we’re focused on trying to achieve synergies, I mean the reality is Putnam can take on significant incremental scale on assets without taking on a lot of incremental expense. And so that is an area of focus for us.

The other item here, just the tax item, there was only $30 million in the reinsurance business. And I guess, I thought maybe it was a reserve estimate adjustment and that was what went through the management actions lines, because the Europe business had what, $89 million of reserve releases there and total company, $152 million, two pretty big number, can you remind me what happened in all there -- in all of that?

I think that one’s for Garry that speaks [indiscernible] management actions.

Yes, I think the question was partly on the tax, the management actions, Q3, $152 million pre-tax, not that unusual an amount, I mean, it does move up and down. Some of those might -- I think we had some positives and negatives.

I think fortuitously, I think some of the negatives arose in -- meaning strengthening reserves, charges running through the higher tax jurisdiction and so [indiscernible] bit of a change in tax rate. The $30 million provision you asked about, this was a [indiscernible] established from a transaction many years ago, and it went [indiscernible] bargaining, not subject to further challenge, the issue in the third quarter.

So we released the provision we held as a precautionary provision to change that, that’s a fairly -- very specific item for that $30 million.

But that went through the tax line, not the management...

That went through the tax line, correct.

Were there any big items that went through that management actions line?

I think call -- perhaps the largest of them went through as you said, the largest would have been the annuity and longevity assumptions continuing to see a slowing down of mortality improvement in the U.K. population in our own data, so we’ve had a couple of those in last few years and we had another one this year.

Bigger picture question here, wrapping it up for me anyway. So we’ve got LICAT coming couple of quarters, I’m sure you’re excited about that.

I just want to know, will LICAT have, I mean you said that’s not going to be a major deal for your regulatory capital position. But I’m wondering how that might affect your investment policies in the future, if you’re anticipating maybe shifting to more capital-light type investments, lower risk, less real estate, perhaps?

No, I would say, at the highest level, if I think about LICAT, number one, we’re well prepared, we’ve been on this for long time. We understand the implications on both the asset investment side and on the product side.

And we don’t actually see a significant material impact on our products. I think we can work within our current products and offering and continue to offer competitive products within the capital framework.

Overtime, we’re always shifting our asset management or investment management thesis based on availability of assets, where are yields at and for sure there is some repositioning of capital in relation to different asset classes in terms of their risk. So we’ll have to adjust, but again we’re not sitting with a great level of worry.

I mean we’ve got fairly deep asset pools, we look -- we don’t just think about Canadian assets, about Canadian liabilities we rely on sourcing assets, whether it’s through the U.K. and the U.S.

and at the end of the day, we’re not concerned about that. But we’ll obviously have to make sure that we’re optimizing our investment strategies taking into account economic capital, obviously always and then we have to think about statutory capital and we have to think about returns too and good pricing to our policyholders.

So we’re comfortable and we believe we can manage through it. Garry, anything you’d add?

No, I think you summed it up.

Is that a reflection on the rules of the written or of your capital position as it is today and under LICAT, but you expect the capital requirements for certain investment, of course it’s going to go up, but you’re -- you got enough capital buffers to absorb what maybe an incremental change in...?

Well, I would say it’s a reflection of where we are today in terms of having taken a very conservative posture on our underwriting of investments, in our underwriting of new business and this is a function of our business mix. So we are actually quite comfortable with it.

Yes. Our current portfolio is, I mean, it obviously, the nature of the changes would depend -- the impact would depend very much on the nature of your portfolio.

For us it’s certainly very manageable, the transition from one to the other, so it’s not as big of an impact and going forward, as Paul mentioned, we would -- the capital impact -- the capital strain of an investment is one of the factors, certainly for certain categories, run rate and investments will have to look at is there a better way to go after those investments but now develop overtime as people get used to the framework.

So just to continue the discussion on that point, is it possible then that LICAT may be somewhat mitigates your ability to benefit from investment experience from quarter-to-quarter, i.e., pick up those yield enhancing opportunities now that there may be a higher capital requirement associated with those yields enhancers?

Yes, Paul, I would not say that features in our thinking right now. When we look at yield and that’s been obviously some of the strong yield enhancement we’ve had historically is trading out of governments into other ones, where you get yield pickup.

And so that hasn’t featured in our thinking at this stage. Again, we look at LICAT, we look at transition, and we actually don’t see it as having a material impact on our go-forward business, we will manage our business in the context of that framework in the same way as we shifted from solvency I to solvency II in the UK, there were significant changes there, but we were able to manage and always use reinsurance in some situations to try and address some of the changes in capital but we’re actually quite comfortable.

Garry, anything?

Yes, I’d just add that some of the investments where we’ve particularly successful with the yield enhancement, it’s some of the longer-term plays, I know it often attracts insurance company investment long-tail liabilities that have illiquid liabilities, I should say compared to annuities. And so we had expected given the insurance of the [indiscernible] space that over time, the pricing of those investment opportunities develop, so reflects the capital charges to the extent we’re expecting Canada where there’s a major Canadian insurer.

So there would be some other changes, not a static situation.

I have two questions on the reinsurance business and that’s more from the perspective of how you think about capital allocation to that business, and it’s particularly the P&C reinsurance. So the first part of the question is, if you can give us some kind of indication of what kind of growth you’ve seen in that business over the last, say 10, 12 years, so what has been your appetite for growth in that business from a capital allocation perspective?

And then, two is what kind of ROE would you expect or earn off of that business, say over a full cat loaded cycle?

I will start off with that, first of all, the way we think about the reinsurance business is we’ve tended to manage it as well. I will get into the specifics of capital allocation but it has represented 10% plus or minus a small margin of overall Lifeco earnings over time and thus Lifeco earnings have grown, so how reinsurance earnings grown and for context P&C is represented about 15% of that 10%.

So this is kind of the way we think about the business, we like that, it’s a good way to spread out of risk in the business we like. As we think about returns, we remain disciplined on returns and one of the thing, a good example of being disciplined on returns is making sure that you don’t get too far ahead of yourself as returns get [indiscernible] but you don’t get to worried of returns or starting to compress a little bit and one of the things that we see that will feature following these hurricanes, we expect to see a significant jump in rates and premiums associated with P&C, but that doesn’t mean that we’re going to jump ahead in the market.

We like the fact that we’ve maintained that around the amount of exposure we’re going to have. We like the diversification but it’s part of our business, it’s not the core of our business.

Arshil, anything you would add?

No, just to give you that little bit more color on stand-alone undiversified basis, so whatever our reinsurance business, we expect to earn returns in excess of 15% and P&C is no difference, but as Paul indicated, there will be points in the cycle where some [indiscernible] whatever but we think over the medium term, there is every opportunity to earn at least 15% return, and if you allow for even a modest level of diversification given that we’re not in general insurance in the rest of our businesses and yes, putting that into the capital calculation and the returns easily are about 20%, which is what we try to earn across all of our reinsurance businesses.

Last question is with respect to the expense reductions in Canada, as you’ve highlighted a number of times, made great progress there to date. So my question is, is there a threshold you might reach in terms of the cost reductions where it will start to hit the bottom line versus simply reducing the expense growth in that segment?

I’m going to turn that one to Garry.

So we recorded -- I think we reported that we’ve hit $25 million annualized and I hope that’s probably $69 million, $70 million -- $95 million annualized and there will be -- and probably that’d be $69 million $70 million non-par. In quarter, we probably had closer to $20 million actually went to the bottom line of which about, I think $50 million to $60 million would be non-participating.

So we are seeing those benefits. Yes, in terms of cat, the overall expense was up, I think a couple of million.

There were some one-time gains last year but obviously not this year. So we are already starting to seeing some real techniques coming to the in-periods earnings as well as just hitting the run rate.

And I think we’ll see that accelerate in future quarters as we continue to realize these benefits.

Yes, Paul, I would add that if you looked at Canadian, I mean obviously Canadian earnings are going to be a function of a lot of different moving parts. But our expense growth and the levels were significantly higher over the past couple of years.

The Canadian leadership team under Stefan’s leadership have really taken action here, doing a good job. And I think we are seeing it’s [indiscernible] bottom line and that was our expectation.

A couple of questions that are probably for Garry to start. First off, on the management actions line, I believe you mentioned that one of the areas that drove the uptick was asset default provisions.

So I just want to make sure, is this is as simple as credit quality in your fixed income holdings, fixed income portfolio has been very strong, and you’ve been able to release some provisions or rethink the loss assumptions, is that -- what drives that, if that’s the case, how often is that reviewed?

I’ll turn that to Garry.

So the asset default [indiscernible] much like we do for mortality or some of the other assumptions. We do an experience study on this every year.

And so it’s been a very benign credit cycle recently. So we are seeing both in the industry studies and in our own experience, favorable experiences, and so we added another year of favorable experiences to our study and that resulted in a reduction in the provisions we’re expecting to see in our portfolio going forward.

So it is an annual review.

I mean -- and your point there, you kind of hit on what I was thinking. It feels like on [indiscernible] what as I say, it feels like it’s been a benign credit environment for quite some time.

So I’m surprised that you call in advance stage of the credit cycle that you’re still seeing benefits from default provisions. Was that one of the larger components of the management change?

We have a couple, we also improved -- we had a more simplified approach on some of our commercial mortgages in the past, it was probably a little bit conservative. And so we made an improvement there, it’s a rating reflex of the rating of it in the term.

And so that was part of the pick up as well. And we do -- just to put your mind somewhat at ease, when we’re looking at these -- weather it’s industry or our own experience, we are going back 30, 40, 50 years in these studies, we’re not just looking at the current cycle and getting too carried away.

We are keeping a degree of caution. But every year, when other benign cycle does gives us some confidence.

And the second point of clarification numbers wise for you Garry was around that commentary you offered on U.S. tax reform.

So if I just keep the numbers really simple here, I think you said something like $5 million per 1% cut in the stat rate. When I look at your U.S.

segment and specifically, using the source of earnings, there has been some volatility in annual tax levels and I think some of that’s going to relate to where Putnam comes in. In your opinion, what is the run rate tax rate for TWO in the U.S.

specifically that if we’re now thinking about 20% as a potential level, where do you stand right now as a run rate tax level?

Yes, actually, I think for the U.S. operations, vast majority of our U.S.

segment earnings actually rise in the U.S. and so they are subject to the 35% corporate rate which could be dropping down to [indiscernible] goes ahead, something more like the 20%.

So when I think of U.S. earnings, I typically think of 35%.

I know we’ve have some noise with the various aspects over time with the Putnam financing and then some of those, but just on the business earnings. I do think, whether it’s a 35% dropping to 20%.

And I’ll say this, I mean, if I look at the last 2 fiscal years, ‘15 and ‘16, you were significantly below that level. But I take your point that if Empower and Putnam gets stronger from a profit perspective, I think what you’re telling me is that the underlying tax rate we’d see for the business would be closer to the state level and that’s where the benefit would arise?

Correct.

Last one is probably for Paul, and it goes to Empower. Profitability and especially on the expense side continue to trend well.

One of the things that we had talked about in the past in thinking about the top line here was what you had called proprietary penetration and how you felt that industry leaders in this segment had something like 40% to 50% participation. I don’t think -- I never heard you say where exactly does Empower stand on that measure and what’s been the success rate on being able to drive further growth through your own product channel?

I’ll start off with that Sumit, and then I’ll pass that on to Bob to provide a little bit more color. So as a starting point, large part of our book of business is the acquired JPMorgan retirement fund services along with Great-West Financial.

And Great-West Financial did not have a large proprietary asset manager behind it. When we acquired the JPMorgan business, you’re acquiring the record-keeping, but obviously you don’t have your own proprietary assets there.

So our penetration will be considerably lower than that. We’ve actually had a strategy that’s more focused on an open architecture offering for the plan.

And by that, I mean if you consider a plan who has a fiduciary sponsor, as the fiduciary accountability to their members, they have to be thinking about providing a broad range of assets management solutions and that would include things like target date funds, it will be included managed accounts and the like, but making sure that they’re giving them that broad range of products. So our goal is to grow proprietary penetration, but it’s to do it in a way that is going to align with whether it’s DOL rules, or other fiduciary rules and we think there’s upside there.

But we actually don’t think that the proprietary levels that some of our competitors have are sustainable over the long term in the evolving and emerging regulatory environment. I know that Bob speak to sort of where we’re at right now and sort of where we see the upside though.

Because notwithstanding that, we continue to try and drive through our managed account solutions, our general account solutions, proprietary products to leverage Putnam, but I’ll let Bob to speak what the potential is. Bob?

Yes, thank you, Paul. Yes, one of the initiatives we’ve been working very, very hard on is to build out of Great-West investments.

And there are proprietary products where we are the manager of the five-star [Indiscernible] products but we also have a front line up that is sub-advised and there is a lot of work being done on that area. Paul mentioned managed account, we have a managed account offering, two options to offer people.

So the build-out is an opportunity for us. Right now, we have approximately 11% on the platform that is what I would consider proprietary, which includes the products I mentioned.

Given fiduciary rule and some of the pressures in the plan sponsor, this is at a very low level with the industry. So we think there is a lot of potential there obviously it’s the quality of product and the quality of service offering.

But we’re working very, very hard because we do think that is an opportunity to generate revenue per participant and the Empower channel.

So to summarize that from a number’s perspective, and I’ll stop here. You’re at 11 Bob, the industry leaders are north of 40 as Paul said, maybe with some of the regulatory shifts that the leaders may come down, but you certainly have the capacity for your channel or your participation to move higher.

That is exactly right.

Yes. Thanks very much.

Just want to follow-up again on Empower. Both Paul and Bob Reynolds had mentioned revenue per participant.

And if you kind of look at revenue and the shift you’ve, where you’ve got regarding premium income and net investment income and fee and other income for the Empower segment, we actually find that revenue per participant is actually down year-over-year. So how should we be looking at the key drivers here with respect to that?

Is there a different way that you’re defining revenue here than what would traditionally be defined as revenue? Is this business driven more by participant or AUMA?

Just looking for a little bit of help here in terms of determining really the key drivers with respect to that. And also, if that seems to be a bit more of a processing business in terms of record-keeping, but all these other elements in here like you’re paying premiums -- you’re collecting premiums and then you’re paying benefits to policyholders and beneficiaries.

So what are those lines represent in an income statement for primarily a record keeping type business?

Yes. Well, I’m going to let Garry look through the detail, I know you’ve been looking to the details there, and what we might do at some point is get this offline, so we can go into the details with you.

But from the standpoint of the drivers across, I’ll let Bob fill this out a bit more. The business at its highest level is how do you drive down your cost per participant and how do you increase your revenue per participant.

And then beyond that, you’re going to get into your mix of business because your relative cost of revenue per participant will be quite different in say a core plan that is relying on say, target date funds and your managed accounts versus you might have a Fortune 100 plan that comes in with an actuarial consultant do [indiscernible] defining a different product shelf where you don’t have the same level of influence over what that revenue stream would be. So I think as you look at the average across those things, there is a lot of detail behind that.

But I’m going to let Bob speak to some of the drivers of profitability. Bob?

Yes Paul, you’re exactly right. It is a very [indiscernible] business and obviously, every plan has a fixed cost and then there are variable costs.

And the larger the plan, the more the fixed costs spread over a number of participants. So your cost per participant for, let’s say, a mega plan and that’s above 500 million.

The cost is much lower than a core plan, which is under 50 million. So the revenue goes the same way.

Obviously, you don’t need the revenue stream on the mega AUM that you will work on the core plan to support to profitability. So it is a very segmental structure and managed accordingly.

Garry? Garry was going to add something?

Garry?

Yes, I would just add, I think this would be a good one, first just to take offline with Tom, and go through the slides. I think what we’re talking about the revenue and just in Bob’s commentary, it’s about the margins, so the margins are thinner, like the fees are thinner.

The revenues that shown in this is really -- it’s leveraged the deposits. It’s using the same -- what looks like the same terminology to mean two different things.

So I think we should take that offline and go through that. I’m sure we [indiscernible] the answer to your questions, I think that’s part of what you’re saying.

I think the best way, just present it the way you guys manage it. If you’re managing on a margin basis, present this as on a margin basis and not into this kind of life insurance type income statement.

And I think that would be...

That’s the fair change that I’ve heard before, so we won’t take that up and look for your input as well.

Thank you, Michael. In closing, we’re pleased with the momentum we’re seeing in our businesses and areas of strategic focus.

I’d note that Empower is firing on all cylinders. We’re executing on our strip strategies to protect and extend our strong positions in Canada and Europe and you can see that through the Retirement Advantage and the Financial Horizon’s acquisitions.

And I would say during -- as a focus of our Canadian transformation and restructuring, we’re focused on the businesses more broadly, including controlling expenses. Going forward, we’ll continue to focus on innovation and investing in technologies to drive efficiencies and extend our customer reach.

We’re going to do this while maintaining a watchful eye on our costs and maintaining the same discipline we’ve had over time but also disciplined with targeted acquisitions. So with that I going to thank you for joining our call for this quarter.

Please contact our Investor Relations team if you have any follow-up questions and we look for connecting with you at the end of the next quarter. Take care.

Bye-bye.