Great-West Lifeco Inc.

Thank you, Steven. Good morning and welcome to Great-West Lifeco's second quarter 2015 conference call.

Joining me today to discuss our results are Garry MacNicholas, Executive Vice President and Chief Financial Officer for Lifeco, Dave Johnston, President and Chief Operating Officer of Canada, Bob Reynolds, President and CEO of Great-West Lifeco US, and Arshil Jamal, President and Chief Operating Officer for our European operations. We also have a number of other senior officers available on the call to respond to any specific questions.

Before we start I'll draw your attention to the cautionary notes regarding forward-looking information and non-IFRS financial measures on slide 2. This cautionary notes will apply to the discussion you'll hear today as well as the presentation material that we've provided.

Yesterday, Lifeco reported second quarter earnings and also declared a quarterly dividend on its common shares of CAD0.326 per share. Turning to slide 4, Lifeco's operating earnings were CAD659 million in the second quarter, CAD0.66 per share and up 7% year-over-year.

Operating earnings for the first six months of the year were up 13% compared to the same period in 2014. While Lifeco's underlying earnings power remains solid, results continue to be impacted by a heightened level of strategic investment in business that I've noted in recent quarters.

In addition, on a quarter-over-quarter basis, experienced gains were down from a very strong Q1 2015. Experience gains can fluctuate from quarter-to-quarter, but have tended to average out positively over longer periods.

Sales growth in Q2 was very strong in all segments, driven by the US Empower Retirement specifically and by Europe. Now turning to slide 5, assets under administration were CAD1.1 trillion at the end of Q2.

Compared to Q1 2015 levels, assets under administration were down slightly, largely due to currency and lower market values on both equity and fixed income assets driven by lower equity market levels and in increasing interest rates. Great-West Lifeco's consolidated MCCSR was 229%, a 7-point increase from March 31, 2015.

As a reminder, this calculation does not include more than CAD900 million of holding company cash which at June 30 would have added approximately 14 points to this ratio. Our strong capital position provides a solid foundation as well as flexibility for future growth.

Growth that we expect will be fueled organically and through acquisitions. To support this growth we have a number of initiatives focused on building superior technology and processes.

We've highlighted these initiatives over the next two slides. On slide 6 in Canada, one recent initiative is the development of a new business unit dedicated to building out enhanced organizational capabilities in the areas of digital services, customer segmentation, innovation, and data analytics.

In Europe, we successfully completed the Irish Life Group integration, realizing EUR48 million of annualized synergies. This is 20% higher than our original target.

Irish Life had another strong quarter, generating CAD60 million in earnings. We've continued to invest in Europe to support our new product development and other initiatives.

And Putnam recently renewed its strategic alliance with Nissay Asset Management, the asset management arm of Nippon Life Insurance Company. Continuing to slide 7, in the US we're investing heavily in Empower Retirement.

A multi-year project is underway to both integrate three legacy businesses and transform the platform for planned sponsors and participants. This project is expected to drive future sales, increased market share across all segments and improve unit costs.

I would note that part of our recent Empower sales success is driven by the significant enhancements being made to that platform. The total project investment is about $150 million with expected earnings impact spread over the next few years.

In addition, new products are being developed including an enhanced rollover option for leaving participants in a full range of proprietary and non-proprietary investment options. I will now turn the call over to Garry MacNicholas to review Lifeco's financial results.

Thank you, Paul. Starting with slide 9, operating earnings in Q2 increased by CAD44 million or 7% year-over-year to CAD659 million.

This was primarily driven by strong growth in the European segment with Irish Life results contributing well despite the decline in the euro and the UK benefiting from further annuity longevity improvement basis change. When compared to Q1, operating earnings were down 6% as the very strong experience gains achieved in Q1 did not continue at that level in Q2.

Operating earnings for the first half of the year were 13% higher than last year at CAD1.36 billion. Turning to slide 10, the source of earnings display, as previously noted, now includes Putnam.

And as a reminder their fees and their expenses drive expected profit while non-deferrable sales costs show up in the impact of new business. Lifeco's year-over-year expected profit increased CAD31 million or 5%.

This was as a result of higher expected net fee income and wealth management asset base and positive stable local currency movements, partially offset by higher pension costs and increased strategic investments in the businesses. New business stream [ph] increased by CAD28 million, largely due to lower UK annuity volumes and less favorable business mix in Europe combined with lower sales and higher acquisition costs in the Canadian individual insurance business.

Experience gains and changes in assumptions taken together were CAD154 million, which is CAD10 million lower year-over-year. Experience gains of CAD64 million, while a positive contributor were below the very strong CAD244 million reported in Q1 and below our historic averages.

Trading gains continued to contribute positively across all regions although not at the same levels as Q1. However, non-trading experience swung to a negative in quarter with headwinds in Canada on group disability and drug claims as well as individual policyholder behavior and there were a number of ratings downgrades in Europe.

Assumption updates and other management actions resulted in the release of CAD19 million compared to CAD36 million in the prior period and CAD98 million in Q1 prior year period. Principle contributors for refinements to annuity and longevity assumptions and model refinements in Europe combined with updated and critical assumptions in Canada.

While combined experience gains and change assumptions have consistently contributed to the bottom line, historically there can be significant inter-quarter fluctuation as we have seen between Q1 and Q2. The category other reflects restructuring and other costs related to Irish Life and JPMorgan retirement plan service acquisitions and finally the effective tax rate benefited this quarter from the jurisdictional mix of earnings, as well as the release of provisions related to progress closing out all tax years in Canada.

Turning to slide 11, Lifeco's trailing four quarters operating return on equity was 15.7%. This was in line with the full year 2014 and the slight decrease from the 16% reported in Q1 as the US reported ROE of 7.7%, down from 8.3%.

Within the US ROE numbers, Putnam's ROE minus 0.4% and Great-West Financial's was 15%. Now to slide 12, sales.

Total sales were 52% ahead year-over-year of which 12% reflected currency movements. On a constant currency basis, the 40% growth reflected particular an increase in large plan sales in Empower Retirement and higher sales across all product lines in Ireland and Germany combined with good organic growth in Canada.

The business leaders will provide additional detail on sales. Turning to slide 13, fee income was 10% higher or 6% on a constant currency basis, reflecting growth in assets under management and administration driven by higher average market levels and positive net cash inflows and the impact of the RPS acquisition in the US.

On slide 14, we show our operating expenses. Operating expenses were 13% higher than in Q2 2014 on a constant currency basis.

Growth in the US primarily reflects the consolidation of the RPS expense space along with integration and strategic expenditures while the growth in Canada and Europe is due to strategic investments in technology and solvency due to implementation costs, respectively as well as higher pension costs in both regions. Finally, turning to slide 15, assets under administration, 43% higher than one year ago, reflecting positive net cash inflows, strong investment performance, the addition of the RPS business and positive currency impacts.

Paul, that concludes my remarks.

Thanks, Garry. And I'll now turn it over the Dave Johnston, who will speak to Canadian second quarter results.

Dave?

Thank you, Paul. Turning to slide 17, we see overall insurance sales were up 12% to CAD259 million.

Solid growth for individual insurance was driven by a continued strong participating life insurance sales. Very good progress has been made on the application backlog issues noted in our previous two quarters and we expect to see a return to normal service levels in Q3.

Group insurance sales increased 14%, driven in part by improved creditor sales this quarter. We have solid sales increases in our small and mid-sized markets which were up 7% in the quarter and we continue to have a very good pipeline for new sales over the next several quarters.

Wealth management on the right hand side outlines continued growth and individual segregated and mutual fund sales, which increased 7%. Group retirement services sales were lower in the quarter, driven primarily by lower invest-only sales which tend to be larger sales and therefore do fluctuate somewhat quarter-to-quarter.

We did have a strong quarter of single premium annuity sales and the quarter generally ended on an upward trend with a strong pipeline that will carry into the second half of this year. Overall wealth management investment funds experienced positive net cash flows of CAD159 million for the quarter and this was our 19th consecutive quarter of positive cash flows.

Over to slide 18, fee income grew 3% year-over-year, and as you all know, the vast majority of our fee income comes from the wealth management and group businesses. Both grew in the 3% to 4% range and this reflects assets and ASO or administrative services only claims growth for the two segments respectively.

Turning to expenses on slide 19, expense growth was 8% for the quarter, excluding pension costs, our core business operating expense growth was 6%. This is slightly higher than our historical expense growth numbers and reflects continued growth in strategic investments into the Canadian business, in particular, as Paul noted, into the digital areas.

We also experienced a number of one-time costs as we continued to reduce our individual insurance application backlog. You can see the impact of these one-time costs in the individual insurance year-over-year expense growth.

Moving to slide 20, Q2 results for Canada reflect consistent performance in our core business operations. Overall, earnings kept pace with the strong result last year.

Within our group insurance business unit, we saw some continued but declining headwinds on morbidity gains in the health line in particular. New hepatitis C drugs are still having a negative impact on the industry and our sales.

However, these high costs should start to taper off with many of the provincial PharmaCare programs now having added these drugs on to their formularies. As well, many patients are now reaching the end of the prescription drug treatments and this will moderate the rate of increased claims going forward.

Long-term disability results were down in the quarter, however they have improved on a year-to-date basis significantly. Mortality results continue to be very strong.

Individual insurance earnings were down 9% in the quarter, driven primarily by the impact of lower new business gains compared to the same quarter in 2014. This was due in large part to the one-time expense levels related to the work reducing the application backlog noted a moment ago.

Morbidity and policy holder experience were also lower this quarter and individual insurance earnings were up 14% compared to the first quarter of this year. And finally, wealth management once again had a solid operating earnings result, up to 8% reflecting consistent ongoing growth in this business segment.

Wealth management results were right in line with our expectations and we continue to have a positive outlook on continued earnings growth in this line. And these conclude my remarks, Paul.

Thanks very much, Dave. I'll turn it over to Bob Reynolds who will speak to our US operations, including Putnam and Great-West Financial, which includes Empower Retirement.

Bob?

Thank you very much, Paul. Just a reminder to everyone that as I review the results of our US businesses I will be quoting US dollars.

Starting with slide 22, Great-West Financial sales increased 250% compared to the same period a year ago, driven by an increase in sales of $5.8 billion in Empower Retirement. Empower sales were higher across all business segments and the Empower sales pipeline remains strong with several large plan sales expected in the second half of the year.

The decrease in individual market sales was primarily due to lower sales of our bank distributed life product as well as the movement of the IRA rollover business into Empower starting in 2015. Turning to slide 23, for Putnam, in quarter average assets under management increased by nearly $6 billion compared to Q2 a year ago.

Putnam mutual fund gross sales in quarter were $4.5 billion but net outflows were about $1 billion which is reflective of the declining flows in our segment of the market during the second quarter in the US. Putnam institutional net outflows were $800 million.

This is an improvement of nearly $700 million from a year ago and the pipeline here looks very, very strong going forward. Putnam also continues to build momentum in the defined contribution investment only channel.

As of June 30, 2015 approximately 93% and 78% of Putnam's fund assets performed at levels above the Lipper median on a three-year and five-year basis respectively. Additionally, approximately 81% of Putnam's fund assets performed at levels in the Lipper top quartile on a three-year basis.

During the quarter, Putnam agreed to continue a strategic alliance through 2020 as Paul mentioned earlier with Nissay Asset Management known as NAM, the asset management arm of Nippon Life Insurance Company. Putnam will continue to hold a 10% ownership stake in NAM, serve as sub-advisor to the retail funds, and act as an investment advisor for their pension fund clients.

Turn to slide 24, fee income of $470 million is an increase of 18% from the same period a year ago. Putnam's fee income in quarter tracked with the growth in managed assets and the transfer of the DC full service business to Empower.

Empower drove $220 million of fees in the quarter, an increase of $70 million from a year ago. Approximately 80% or $55 million of that increase in fees resulted from the acquisitions of the RPS and Putnam businesses.

The remaining increase was due to increased average asset levels driven by higher equity markets as well as organic growth. Now on slide 25, total expenses increased by 20% to $414 million from a year ago, driven by higher business development expenses and growth in the business.

For Putnam, without the impact of the DC legacy block of business of $17 million, expenses were flat in the same period a year ago. Great-West Financial's increase in expenses was driven by higher Empower expenses of $87 million.

Approximately 70% of that increase is attributable to the ongoing expenses related to RPS and Putnam businesses while another $12 million is due to transition costs and business development costs incurred to integrate the businesses. The remainder of the increase was primarily driven by organic growth in the business.

Including restructuring costs, Great-West incurred $15 million of integration expenses in the quarter. Turning to slide 26, US operating earnings were $56 million in quarter, a decrease of $7 million from the same period last year.

Putnam's operating loss of $2 million was an improvement of $6 million from the year ago period. This change was driven by improvements in fee income and the impact of the DC transfer to Empower.

Net earnings from Great-West Financial of $58 million decreased by $13 million from the prior year, primarily due to higher integration expenses related to Empower of $8 million as well as the impact of the Putnam DC business transfer. Turning to slide 27, on an after-tax basis and excluding the impact of the DC business, Putnam's fee revenue increased $5 million from the year-ago quarter while expenses remain relatively unchanged.

Net investment income decreased by $9 million from the prior year quarter due to gains of $5 million in the prior year from the liquidation of seed capital positions from successfully launched products and lower mark-to-market on seed capital. Putnam after-tax income in the quarter was $8 million, an increase of $4 million from a year ago.

Excluding the recent impact of one-time items, Putnam's pre-tax core margin continues to improve and reached 6.6% this quarter, an improvement of 2.4% over Q2 of 2014. That concludes my remarks, Paul.

Thanks very much, Bob. I'll now ask Arshil Jamal to speak to our European Reinsurance results.

Arshil?

Thank you, Paul. Sales increased in Europe by 21% from the second quarter of 2014 with a strong sales result across our Irish retail, corporate, and investment businesses and also in Germany.

In the UK, sales increased modestly from the level that we reported in the first quarter after adjusting for the sales impact of the CAD1.6 billion Equitable Life payout annuity acquisition. Sales decreased compared to the second quarter of 2014 broadly in line with the market wide 75% reduction in payout annuity sales.

Our UK payout annuity sales increased from GBP50 million in the first quarter to GBP67 million in the second quarter and we also recorded over EUR100 million of Irish payout annuity sales during the second quarter, including a large pension buyout sale. Turning to page 30, fee income decreased by 11% from the second quarter of 2014 despite strong growth in assets under management, which benefited from the high level of group sales and strong market gains.

The decline in fee income reflects the adverse impact of currency exchange rates and the run-off of legacy fee income business in the UK and reinsurance. The level of fee income was also adversely impacted by the level of income that we record on a legacy Irish unit linked block of businesses where fee income is geared to the market value at the start and end of the quarter.

The net impact of this change in Ireland is muted due to the offsetting impact of hedging activity on other legacy Irish businesses. On page 31, the growth in operating expenses reflects the continuation of a higher level of spend in the UK on regulatory and business development initiatives.

We also recorded a higher level of pension expense in the UK and in Ireland in 2015 as compared to 2014. Finally, I would note that the increase in reinsurance expenses largely reflects the increase in the value of the US dollar and Canadian dollar terms.

These expense increases were partially offset by the realization of further Irish Life expense synergies. The last of our policy migration activities were successfully concluded in June and we now expect to realize EUR48 million of annualized expense synergies well in excess of our initial EUR40 million target.

Europe operating earnings of CAD289 million are up 17% from the second quarter of 2014 and up 1% from the first quarter of this year, reflecting strong overall business performance. This quarter's earnings included actuarial liability basis change releases in the UK and in reinsurance, primarily due to refinements to our annuitant’s mortality improvement rate assumption and other modeling changes.

The reinsurance results also benefited from changes to certain income tax estimates. Partially offsetting these favorable actuarial and tax items, we had a lower level of mortality and morbidity experience gains and a higher level of asset downgrade activity compared to the second quarter of 2014.

On a year-to-date basis, Europe net earnings were CAD575 million, a 14% increase from the first six months of 2014.

Thanks very much, Arshil. Steven, we will now happily take questions.

Thanks very much. First question for Arshil on Irish Life.

Arshil, I was a bit surprised to see earnings decline to CAD60 million from CAD80 million in Q1 especially given the currency tailwinds that I think were present this quarter. Are you feeling like you should get good earnings growth still?

I think you talked about this at the end of last year, the beginning of this year. Do you still think you can get good earnings growth off the CAD260 million we had last year?

Or are you starting to see a little bit of deceleration after some much better than planned numbers for a good stretch of time there?

Certainly in Q1 the result benefited from very strong market performance and we also had some releases out of balance sheet items that were set up in the opening balance sheet. So, normalizing for those, I think the Q2 results is a respectable result and we do see the opportunity to drive the earnings forward, and in future quarters, we would expect to realize some further balance sheet strength.

So, I think we had a good operating performance. It just turned out in Q2 that the notable items around reserve basis changes and tax fell to the UK result and to the reinsurance result and not into the Irish results.

But I'd encourage you to look through some of those items because they can pop up in different parts of the businesses and overall we're quite comfortable with where Irish Life is today, particularly with the exceptionally strong sales growth and eventually that sales growth plus our expense discipline will drive through to profitability.

Okay. That's helpful.

Thanks. And then, second question on the Empower initiative integration, how much of the 150 has already been spent I guess in the first half of this year?

I think someone mentioned – maybe Bob mentioned a $12 million level? And then separately but related, how quickly do you expect to see or could we see top line benefit cost saves as a result of this program?

Is there any way to put any numbers around that?

I'm going to turn that to Garry MacNicholas.

I'll do the first part and then maybe on the down the road growth, Bob will talk a bit to that. A couple of notes.

Rather than to think about what's been expensed so far of the $150 million, because some of it is capitalized and amortized, but what has been expensed so far is $25 million, this is pre-tax numbers, $25 million in the first half of 2015 but I'd also note that we expensed $23 million in the back half of 2014. So, we've already spent about a third of $150 million.

And that may not have come clear on the slides. So, just to keep that in mind.

And then, Bob, perhaps you could talk on the future growth benefit?

The reception of Empower in the marketplace has been outstanding and obviously our focus is on getting the RPS business over to the Empower platform as quick as possible. But even with that going on, this year we will add approximately 1 million new participants on the system and this comes from sales across the spectrum from small plans to mega plans to our position in the government market.

So, the reception in the marketplace for what Empower is doing and the vision that's been laid out has been very well received and that would continue to go on.

I would add to that the integration of RPS and Putnam into the Empower platform is a complex transaction and the key there is that we're investing heavily in the infrastructure and the platform there and that occurs over -- will continue to occur right through 2016 and the key there is putting in place all of the functionality you need to bring over and to secure the clients that we've acquired through the RPS acquisition but also allowing for us to get the market wins we've got for example with Apple who will join in November this year. At the end of the day once that's built, the pay back is sort of three-fold from my perspective.

We will have benefits of scale. So, that's going to drive down our costs per participant and that drives through the bottom line.

The sale of assets prevents the significant potential for AUM penetration and the last one obviously is the scale participant really is the foundation of us building out retirement rollover business where we're investing quite heavily in products and services. So, our view of this is that we need to be very focused on making this a very successful acquisition which it is now under Bob's leadership and along with the team he has in place and then the way forward, there's tons of opportunity there.

Thanks for that color.

Hi, good morning. Garry, a couple of questions for you I guess.

One of them is on the tax rate where the effective tax rate seemed a bit on the low side this quarter. The MD&A called out low tax jurisdictions.

It also called out some other things. I know Arshil has mentioned a couple of times that it had an impact in Europe.

Can you give us a little bit of color in terms of what was moving that tax rate this quarter? And perhaps the difference between just business mix and what might have been some changes in assumptions?

Sure. The tax rate that really benefited -- the jurisdictional mix probably worth close to 4% on the effective tax rate.

That's quite a swing and again if you look where we're making our most significant strategic investments in the US in a high tax jurisdiction. We had very strong results in Ireland reinsurance, again which are in lower tax jurisdictions generally.

So, we did benefit from the mix, 3% or 4%. We did have a really good progress clearing up some old tax years in Canada, which contributed to a release of provisions there and you could see the Canadian tax rates down a bit.

I would note though that in the first quarter we didn't really talk much about it, but we had strength in provisions for certain tax matters in Europe. And again, if I look at the two quarters together, the effective tax rate for the first half of the year is pretty much in line with historic, especially given that we have a slightly favorable mix of jurisdictions.

So, nothing that unusual.

So, given that the investments are being made in the United States, is it fair then to assume that perhaps a lower effective tax rate going forward than what you might have had previously is the right way to look at this? Like some of that, 3 to 4 percentage points you called out may be sustainable?

I'd look at it a couple of ways. All of those investments are being at a higher tax rate, but clearly we're making these investments for growth in the US segment and so overtime as that segment grows, I'm not sure we'll see the drop in average tax rate because we'll be generating much higher earnings from the US segment.

Okay. And just a quick housekeeping one I guess, presumably the Irish Life integration charges and even the JPMorgan acquisition charges are now going to zero and the higher Empower spending will replace that?

Is that the way to think about those expenses?

I think the Irish Life is pretty much wrapped up. There may be a small tail to that.

There's a couple of policies that aren't connected right through the policy migration, but just some of the financial changes. So there is a very small tail that’s on the Irish Life.

And the JPMorgan, those restructuring charges and they are quite modest of the overall integration spend, the one that for -- specific for restructuring for our purposes, they'll continue on for a few more quarters.

Okay, thank you.

Good afternoon, I guess. I just have a follow up on this investment initiative at Empower.

I don't think we got an answer on the expected benefit as far as quantifying it. If you could help with that at all, it would be very appreciative.

Also if you can talk about the timing and the composition, so how long do you expect it to start to come to fruition? How many years that could take?

And by composition I hear scale, I hear AUM penetration, and rollover business. So Two out of three are revenue synergies, if you will, where one is more of an expense.

Whatever benefit it is, is that going to be like a third expense and two-thirds revenue type of uplift?

I'll take a first crack at that. Certainly, I think you've listed some of the benefits quite well.

We're not at this stage, we don't have a simple metric that we can throw [ph], here's the metric. Where you will see benefit, you will see the growth in participants.

It will be quite strong and obviously that's going to bring in revenue per participant, which is a key metric. In terms of the sales activity, again we've seen strong sales results, there's a very strong pipeline with committed sales that are to fund later in the year.

So, we're seeing strong revenue signs and again the synergies will come -- the operating efficiencies will come over time. But there's no simple metric like a cost per participant because that's very much mix of business and what not.

So, there's no simple metric. But you will see the growth in revenue and obviously we're looking to improve bottom line results in the coming years once we're over this hump of expense this year.

Bob? Is there anything you want to add to that?

Yeah. I mean, obviously the scale helps you and you touched on this, Paul, with the cost per participant, which is a driver on the expense side.

The revenue side is something that you get through different products like managed accounts where we have two product offerings, the proprietary fund to some advised funds, things like that. And then the whole rollover business where we've been in single-digits, we look to get that up in the 25% plus rollover area.

So, all those are revenue for the business and obviously cost management and most of the business is important to success.

If I could just sort of close on that, Gabriel, the key issue here is there's a large book of RPS business that we're bringing over and the cost per participant that we land on is going to be dependent on us securing those and this is a long two-year integration process that we're in the midst of. So, it's highly dependent on the businesses there that we secure and win and we're having a good win rate there.

It's also highly dependent on our wins out in the market and our mix. So, quoting a cost per participant right now at this stage when we've still got well over a year of integration in front of us, probably closer to 18 months wouldn't be prudent.

We just know that making this investment allows us to secure the scale. We will end up with a lower unit cost across that business.

So, that will be one contributor and as we go through this, then we drive forward we're trying to get AUM penetration and continue to build out a lot of our rollover products including the payout annuity platform, which is another investment we're making. So, at this stage, it's early days for us to actually start quantifying those things, but we'll be able to give you more color as we get into next year.

I appreciate that there are a lot of moving pieces but when you announce a big $150 million investment initiative, that number is easily quantifiable but internally I imagine you have to have some kind of IRR hurdle on that type of investment. Why can't you give us some sense on that?

What we're saying right now, Gabriel, is we have a sense of what our goals are but the goals are going to be met through a number of different things. They'll be met through again securing integration wins, securing growth in the market, and driving on efficiencies.

At this stage we're providing you with some insight into the investment we're making and as we secure the business and get it online we'll be able to provide more color. We've had -- right now we've had just the first of our migrations.

We have a second major migration that's happening in Q3 and we'll provide more color as we gain greater insight into that.

All right. And something I've noted in your commentaries since taking over as CEO and you've telegraphed it very clearly the greater need to make internal investments at Great-West and we've seen this in the US now quantified.

What about Canada? Is there a chance we see a similar type of initiative at some point in the future?

I know you're expanding your high net worth fund business and maybe doing a few more things on the group side? Would we expect to see that or are you just going to build that into your normal run rate?

You're actually seeing right now I think Dave Johnston talked about the slightly elevated expense level right now at 8%. Now, some of that's driven by pension.

I think Dave netted that to about 6%. And underlying that is reflective of the investment we're making in Canada.

But one of the things we have the benefit of is we have a large scale mature platform there where we're also having continuous improvement initiatives that are driving out expense savings that we're reinvesting in the overall Canadian platform. So, the investments that we're making in Canada, we're making right now.

And, Dave, I'm not sure if you want to sort of add anything there?

I think the current run rate of expense growth you'll probably see for the next few quarters into 2016 and that will reflect our strategic investment increase. As Paul notes, we do have a concurrent continuous improvement initiative.

We set a target of about CAD100 million of savings in that program of 2017. And we've sourced about 90% of that.

It's not all realized. It will be realized fully over the next couple of years, but we've sourced the initiative.

So, in part we're internally funding that and in part we're seeing a slight elevated increase in our expense levels that will carry on likely for another year or so. But I don't think you'll see higher levels of expense growth than what you're seeing from us today.

And I would just add that at the end of the day what we're doing is we're investing in the business. This is about the investments we're making today to drive forward the business for the next five to ten years and we think these are foundational and fundamentally important.

Okay, just a last one. The group business in Canada, you talk about -- could you quantify the negative experience on the drug costs and the long-term disability and could you roll that into what repricing initiatives or other actions you're taking to fix that and what the timing is of that?

Yeah, our morbidity results in the quarter was below our expectations. On the health side it was the drugs and in particularly the suite of hepatitis C drugs, I think that's impacting the industry as I noted.

We did see the monthly claims level peak in the March-April period and it's starting to decline. As I mentioned in my comments, PharmaCare provinces are now including it in their formularies.

And so we see a steady decline. We have taken pricing action in our full-line [ph] charges, that's the vehicle that we applied to these large claims.

The impact for the first half of the year was about CAD25 million in claims related to hepatitis C. But as I noted, it's declining.

So, the combination of the declining claim trend and the increasing pricing and as you know in group pricing takes one to two years to work through to revenue. So, we'll see.

I don't think we'll see this deteriorate anymore from the current levels and you'll see improvement there. On the long-term disability, it does bounce around and the second quarter was again below our expectations.

When we look at the full year, our non-refund LTD results are actually almost double the result we had in 2014. So, we sort of view that when we look on a rolling quarter basis, we look at our non-refund LTD as an improving trend.

We continue to put in pricing action in particular in the mid-to-larger segment of the business. So, it was a bit disappointing in the quarter, but when we look year-to-date it's certainly improved and we expect that improvement trend to continue.

Thank you.

Thanks. Good afternoon.

Question for Bob Reynolds with respect to the Department of Labor and their proposals to expand the definition of fiduciary as it applies to risk plans and IRAs, maybe you can comment on this? I know, it's early days, but what do you think this proposal could potentially do to fees as it relates to Empower and your ability to sell proprietary funds within Empower as well?

So any comments on that would be certainly welcome.

Yeah, obviously there's been a proposal and it's been out for comments, there's going to be hearings in August and there have been, what, 2,500 plus comment letters. So, I think it has a ways to go and it -- I think the impact on the industry is it hurts the smaller investor, which I think was not the intent at the Department of Labor because it will make the cost of the advice that much more expensive.

And then I think it also hurts small plants. It's one thing -- we have a large small plan business, but it's the regulatory -- cost of regulations and the burden of it that keep small companies from establishing these plans.

And one of the goals of this administration, this Department of Labor was coverage, to provide more coverage to more people. So, I think both of those issues are a problem under this proposed rule and as it relates to Empower I think as you know, the plan sponsor is the one that decides what investment vehicles go in the plan.

And it's not Empower itself. So, the plan sponsor who is already a fiduciary to the participants, I don't think much will change there.

It's unclear about phone reps and people that are providing information to retirement investors, which is critically needed in a self-directed system where this all ends up. But we're watching it very closely, we've been very active in the whole process and I think there will be something coming out of the Department of Labor, but what it looks like I think remains to be seen because some of the things they're trying to accomplish are not accomplished by the initial rule that was put out.

And so the fact that the plan sponsor is the one who decides, has a fiduciary responsibility and is the one that decides what funds go on the platform, you don't see it as impacting your ability to sell proprietary funds?

Obviously there's big investment only business. I think the plan sponsor selects the funds.

I think then it becomes a question of what can phone reps say, not say about proprietary products. But the funds themselves chosen for the plan are under the fiduciary responsibility already of the plan sponsor usually working with an advisor, and I think we'll have to wait and see how that plays out.

Okay, thanks for that color. And one question for Paul.

You guys file the shelf every two years, seem to be about CAD5 billion and I think the last one you just filed was CAD8 billion. How should we read into that?

I would kind of read into that as sort of the time value of money and we were sort of at that CAD5 billion level for quite a while and we were just sort of moving forward. We were thinking in terms of just making sure that we had flexibility.

Garry, I'll let you add any additional color. There's no sort of underlying message there.

But, Garry?

We typically take a look at the various finance activity we have coming up the next couple of years and we wanted to give ourselves, as Paul says, room for flexibility.

Okay. Thank you.

Yeah. A question for Bob Reynolds.

You mentioned strong performance at Putnam in terms of just returns and kind of what struck me in contrast is just the fund outflows, particularly on the retail. What's happening in your market that's causing that?

Well, there's been an extraordinary move towards indexed funds and ETFs in the space, active management, especially on the equity side has been in outflows, significant outflows this year. One is a risk off type mentality after a six plus year bull market.

And I think it's the asset manager, but asset management has not fruition – has not come to fruition with these type of close [ph] numbers. As you know, over the last six years we've rolled out 26 new products and they do have significant flows in them but the environment itself is not really conducive to active managers.

Now, I believe, and I think time will bear it out, that this is a cyclical point in time that we're in and this will change. If you look at over the last 6.5 years as we restructured our whole investment group, 71% of our assets are in top quartile over the last 6.5 years, but even more impressive 42% of our assets are in the top-decile.

And that is of significant importance because most of them have outperformed their benchmarks and with that type of performance continuing, I think we're in great shape going forward.

No, I think the question at least I know some of my clients have is at what point do you sort of say we've got to adapt our strategy, we've got to change our strategy at Putnam to react to this new environment or maybe the demand for a great actively managed product just isn't there and we need to restructure our strategy and our operations. At what point do you make that decision?

I think we're always looking at it. The challenge you have is as you know the index business is controlled in the US by three providers.

So, to enter that business would literally be a waste of time. That being said there have been periods of time throughout the market cycle where indexes are very hard to beat and I think indexes have performed very well versus active managers, which is why you see flows the way they are.

That will not always be the case because index funds are momentum funds and they are cap weighted, so they have a bias to them that when that's in favor it's hard to beat, but when that's not in favor it's not hard to beat. So, again, I think you sit there and the biggest mistake anyone can make in the investment business, and I think John Templeton said this, and Ned Johnson always used to say it -- the biggest mistake you make is to say this time it's different.

To me, this is part of the cycle we're in and just keep doing a great job and this will turn.

All right, thanks for a very clear answer. Garry, quick question.

I'm having a devil of a time forecasting earnings on surplus just at the aggregate level, very volatile over the past two years. Can you explain what's driving that volatility, particularly in the US segment, which seems to be where a lot of it's coming from.

Just a couple of comments maybe year-over-year and just the two quarters. First of all, we had a very strong quarter in Q1 on several things coming out.

Some of that we had harvested a number of gains on – several, the OCI gains and that opportunity diminished in the second quarter as rates were rising. So, there's just less scope for that.

And that has been 35 million, 36 million [indiscernible] Q2, so that's a period that dropped for over a quarter. If I look to another aspect that sometimes gets overlooked is we have investments in capital and this effected Putnam where we had gains in seed capital of CAD8 million in Q2 2014, impacted probably post-tax and then a minus CAD3 million in the quarter this year.

They were mark-to-market at the end of the second quarter. And there was a steep climb.

So, that's a swing of -- I think it was post-tax, probably closer to CAD15 million pre-tax. There's another one of those that can move quarter-to-quarter.

So, you will see that, the volatility, mark-to-market, our real estate holdings is another aspect that moves around quarter-to-quarter. So there are numbers that just do move around.

And then you've got underlying yield on surplus, which is more modest in this rate environment.

I just noticed that up until about first half of 2014 there was some -- it was easier to predict. There was more stability in the results.

What's changed over the last four quarters? Or has anything fundamentally changed in how you're managing your surplus that might be driving that volatility?

Nothing's fundamentally changed. Just the way the quarters have fallen.

Okay. All right, thanks very much.

Hi, good afternoon. Just first maybe, Garry?

You talked about the integration so far for Empower, I think it was $25 million in the first half of this year, $23 million in the second half. That's part of the -- I just want to confirm that that's part of -- that $48 million is part of the $150 million that you disclosed that's already taken place.

Is that correct?

That's correct. The $23 million was in the second half of 2014.

So, 2014? Okay.

So, that $48 million has already gone through expense, pre-tax numbers -- that's the $150 million, but that's gone through the expenses already.

Okay, perfect. And then just wanted to focus on Canada and I guess where I'm struggling is in this quarter we saw 4% year-over-year increase in expected profit, you saw 1% increase in earnings.

And I understand that there was pension costs, morbidity was less than expected, you had the backlog costs, but you also had the tax rate gain. So, I'm trying to understand is has the fundamental growth trajectory for Canada changed?

And if so, why, and if not, like what is the normalized growth rates for your Canadian business? That's what I'm trying to get a sense of.

Well, I would say we view the Canadian market growing in the mid-single digits. That will vary by business segment.

The wealth business will grow upper-single digits and the individual insurance is at the lower-end and group's probably in the middle. I would say that's the view we have for the market growth.

And certainly our view is that we will maintain our share if not improve our share, but the point of our investments is to increase our share. But that will occur over time.

But I don't see anything fundamentally different in our view of the earnings growth expectations for the Canadian business. But I think our business would reflect where we see the industry growing.

We're going to see higher growth in our wealth management business versus the individual side and group will be in between there. But it will be somewhat variable quarter-to-quarter, in particular you get [indiscernible] morbidity results and you can get variations in business changes that occur on the individual side of the business.

But I don't think we see this quarter as altering our view on our full year expectations or our longer-term activities.

Dave, I might add the fact that with the productivity and the process improvement work that Dave is leading in Canada, you have options with those resources that come up with that. You could deploy those into immediate impact on earnings growth where you can deploy those into investing in the business such that we can have a higher sustainable future growth rate and that's what we're doing, we're investing.

This is not a -- harvest those expense improvements and then drop them into the bottom line immediately. It's how can we invest so that when we think about a mid-single digit growth rate how can we grow faster than that in the future?

That's what it's all about.

I would add on the expected profit of 4% year-over-year, the pension is muting that by 2% [indiscernible] and the incremental technology, strategic spend to establish this new unit is probably another 2% to 3%. So, again our underlying business would've been more in that 8% or 9%, but we turned certain investments, obviously the pension has been at zero and that's a result of the industry falls in 2014 that our pension cost cuts are higher.

We'll see how that goes.

And 2014 was a sale window on the pension side as well, so they moved various things. Nothing fundamental other than our strategic intent to make sure that we can grow better than market rates into the future.

So, you're going through a transition where you need to invest in your business in order to continue to grow at the level that you've grown at or you foresee the ability to grow at. How long does this level of investment take?

Is this a one year kind of investment cycle or is this something that lasts longer?

It certainly lasts longer than one year, I'd say we initiated a year or so ago, mid-year last year starting to build out some of the new capabilities, to start to build out. But I think you'd be looking at it in a two to three-year timeframe, more for the major part of the investment.

I would just note that we did a -- in terms of the actual growth rate in expense. As I said earlier, you're seeing 6% to 8%, excluding pension, 8% with pension.

We all expect that will be elevated from those levels in the next few years because we're going to offset it with the continuous improvement initiatives. I think the market's growing at five.

As Paul says, our strategic vision is to grow faster than the market and we're investing.

Okay. Great.

Thanks very much.

Thanks. Good afternoon.

Just to go back to Bob Reynolds, I appreciate your answer to Peter, but when I think about your performance on the mutual fund side, some of the issues that you discussed as perhaps effecting your flows were I would say longer-term, bigger picture and systemic changes for the industry in nature. But you've actually had very good performance up until this quarter on the mutual fund side in terms of net flows.

So, from a shorter-term perspective, was there anything unusual or very specific to this particular quarter that seemed to stop the momentum that you were having both on a gross and net basis only on the retail mutual fund side?

Yeah, starting really we had very good positive flows last year, but starting the fourth quarter --

By the way, Bob, I can't hear you that well actually. I don't know if there's anything you can do with your line?

A - Bob Reynolds Starting in the fourth quarter of last year, flows started slowing down, we had a very good positive year last year and thus far this year again equity flows, redemptions are significantly higher than they've ever been on the active side. And also what we're seeing in the marketplace is cash held by individuals is at all-time highs.

In fact, it's higher than pre-Lehman. So, people are risk averse right now for, number one, you've had a bull market in equities for six plus years now and also the fear that a rise in interest rates, what will that do to bond funds and it’s just -- I think everyone has gone risk off.

I think it's the environment we're in right now. But we will come out of this.

Can I read into that -- I don't want to put words in your mouth here, but this shift of redemptions on the retail side that you experienced this quarter, it sounds like from your tone that might have some legs, is that fair?

It's hard to say. This quarter we had a -- what's going to happen to China, what's going to happen to Greece, a lot of uncertainty, which you could say that's still in the marketplace, but also the Fed saying that they may raise interest rates and again a lot of these things, the market always surprises you the other way.

In other words, short selling is way up, cash is way up, and that's usually a bullish side to the market. So, we think we're well poised.

Also on the bond side, we had a negative bent on rates. In other words we thought rates were going up sooner than they did and our bond funds didn't do quite as well, but it's something we're very comfortable with.

And I do think this will change and it will always surprise you on the upside.

Thanks for that. Lastly for Paul, I wanted to end on capital.

So 229% on the MCCSR, you mentioned the Holdco cash. Your leverage ratio has moved nicely lower over the past year.

I'm just hoping you can give us an update. When you and your management team think about deployment of capital at Great-West, I think you're doing just a little bit on the buyback.

So, just get an update from you, is that something that we can see the company doing more of or is it more likely to be acquisitions in which this excess capital position gets deployed?

I'll let Garry first speak to the more tactical issue of buybacks and sort of where we're at with that and then I'll speak more broadly to thinking about the various options we have with capital.

The NCIB program this year runs up to 8 million for 2015. We're 3 million as of the end of July.

Sorry, Garry. You cut out a bit now too.

The NCIB program is up to 8 million shares this year. We've bought back about 3 million to the end of July.

But we stated that -- continued intention to close [indiscernible] programs expected to carry on running this course obviously subject to whatever circumstances.

So, we've got a plan obviously on the share buyback and we don't see that as sort of the single use that we have for capital. As always, we're always on the hunt and thinking about growing through acquisitions.

So, we're active on that. We're active on various files as we would always be.

We also look to the fact that we have to think about capital in terms of retirement of various capital instruments into the next couple of years. So, we want to have the flexibility there.

And clearly, we also want to have strength of capital. But there's good comfort with strong capital in place because it gives you flexibility for outside opportunity and for downside risk.

So, from our perspective, we're well positioned to think about how we want to best invest to grow and we'll be continuing to look for opportunities, but we'll also being moving forward with share buyback and considering all options as we do each quarter.

Thanks for your time.