Great-West Lifeco Inc.

Thank you very much, Vincent. Good afternoon, and welcome to Great-West Lifeco's First Quarter 2017 Conference Call.

With me on the call today are Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, President and Chief Operating Officer of Canada; Bob Reynolds, President and Chief Executive Officer, Great-West Lifeco U.S.; and Arshil Jamal, President and Chief Operating Officer, Europe. There's also a number of senior officers available on the call to respond to questions as required.

Before we start, I will draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to today's discussion as well as to the presentation material we've distributed.

I'll review the highlights of Lifeco's first quarter results, including headlines from our Canadian, U.S. and European businesses.

Garry MacNicholas will then provide a more detailed financial review. And after our prepared remarks, we'll open the line for questions.

Before we move into the detailed review of results, I would like to acknowledge that this was a soft quarter in terms of reported earnings due to the impacts of currency and restructuring charges. While Garry and I will get at the specific areas of in-quarter challenge in our comments, I want to position these results from 2 perspectives.

Firstly, we're actually quite pleased with the underlying momentum in the business that will drive results in the short to medium term; and second, we believe we're taking the right strategic steps across Lifeco by targeted investments in the businesses balanced with cost management to drive long-term sustainable growth. As we communicated last week, we're transforming our Canadian operations to reduce costs and strengthen our competitive position in a market where customer needs and expectations are evolving rapidly.

We noted that our transformation will include a restructuring charge in the second quarter as well as workforce reductions and other changes that will deliver significant cost savings over the next 2 years. These savings will benefit earnings and ensure we remain competitive as we continue to make investments in digital services, data analytics and innovations to improve customer and advisor experiences.

In addition to the business transformation in Canada, we've been making great strides in delivering on our strategic objectives in our U.S. and European operations.

In the U.S., at Empower, we've completed integration of the JPMorgan Retirement Plan Services business, improving the participant experience and taking first steps to streamline back-office processes. We've achieved annualized synergies of $34 million to date through this integration, combined with scale-driven cost improvements.

With the integration complete and an enhanced platform in place, we are well positioned to increase market share in the U.S. Retirement Services space through organic growth and targeted acquisitions.

At Putnam, as you know, we embarked on a $65 million expense reduction program late last year. And by the end of the first quarter 2017, had achieved over $50 million in annualized reductions.

While there have been challenges at Putnam, we're encouraged by strong investment performance over the last year, continued strength in the institutional business, improving mutual fund net sales and our progress in lowering expenses. We remain committed to building a profitable asset management business in the U.S.

In Europe, we launched the Irish Life Health business last year, further diversifying our operations in Ireland and making us a top 3 player in the Irish health insurance market. We've achieved €5 million of annualized synergies to date and remained on track to achieve annual cost savings target of €16 million pretax within the next nine months.

We have the financial strength and flexibility to support these strategies and our capital deployment priorities remain unchanged. We will continue to invest in organic growth, including new tools and technologies to meet the changing needs and expectations of our customers and advisors.

We also look at -- we will also look at targeted acquisitions. We previously communicated our appetite to build scale through acquisition in the U.S.

asset management and Retirement Services spaces. These remain areas of interest for us in addition to looking at other opportunities to protect and extend positions in our core business.

And with that, please turn to Slide 5 for a discussion of our first quarter results. Adjusted earnings this quarter were $619 million, which is flat year over year, but up 7% on a constant currency basis.

Q1 is typically a softer quarter for us with some seasonality combined with the fact that we do fewer actuarial reviews in the first quarter. This trend continued to play out in our Q1 results this year.

Currency also remained a headwind, mainly due to the decline in the British pound post the Brexit vote and impacted earnings by $44 million compared to Q1 2016. I would note that adjusted earnings exclude post tax restructuring charges of $28 million.

$17 million of these charges relate to our health and retail business in Ireland and the remaining $11 million to the completion of integration activities at Empower Retirement. Reported earnings this quarter were $591 million, up 2% year over year on a constant currency basis.

Canadian earnings were down from the prior year, but adjusted earnings showed good growth in both the U.S. and Europe, especially on a constant currency basis.

I would note that Canadian results were impacted by unfavorable policyholder behavior associated with the tax changes to participate in policies effective January 1, 2017. Garry will elaborate on that and cover earnings in more detail in his remarks.

Lifeco maintained its strong capital position with Great West Life's MCCSR ratio at 239% and a $1.1 billion of Lifeco cash at quarter end which is not included in the MCCSR ratio. During the quarter, our subsidiary, Irish Life insurance PLC, redeemed it's 5.25% €200 million denominated notes.

Moving to Slide 6, Canadian sales increased by 12% year over year with higher individual life insurance sales and solid individual wealth sales in both segregated funds and mutual funds. Group wealth sales also experienced healthy year over year growth.

U.S. sales were down 39%, primarily due to a mega fund sale of approximately $11 billion in the first quarter last year which did not repeat in Q1 2017.

As we've noted in the past, these sales can be lumpy. Empower continues to have a strong pipeline across all segments.

I would note in particular core sales, our most profitable segment, have shown good growth with core funded sales up 11% year over year. Putnam sales were higher year over year as well, driven by higher mutual fund and institutional sales of U.S.$10.6 billion, which contributed to positive net flows in the quarter.

In Europe, sales were up 6% year over year on a constant currency basis with strong U.K. annuity sales and higher wealth sales in both the U.K.

and Ireland. So all in all, we've seen good top line growth across our segments, providing strong momentum.

Turning to Slide 7, fee income increased 4% year-over-year against the positive backdrop of higher equity markets in Canada, the U.S. and Europe.

I would note that our fee income results in each business segment are impacted by their mix of assets, whether it's equity versus fixed income, retail versus institutional, but also based on the geographic distribution of their assets. As we look at the segment's results, Canada fee income increased 7% due to higher average assets under administration, driven by higher average equity market levels.

I would also note that Canada experienced positive net cash flows in both individual and group wealth businesses in the quarter. In the U.S., fees at Empower increased with growth in participants to 8.2 million and higher average equity market levels, while mutual fund performance fees and service fees at Putnam were lower.

Overall U.S. fee income was up 4% year-over-year and up 8% on a constant currency basis.

In Europe, fees and other income were up 1% year-over-year and up 10% on a constant currency basis, driven by higher asset management fees and higher other income. I'll now refer to Slide 8.

We've presented our expenses both including and excluding pretax restructuring charges. These charges were $37 million this quarter as described earlier and $33 million in Q4 2016 related to Putnam.

Excluding restructuring charges, our expenses this quarter were up 1% year-over-year and 5% on a constant currency basis. My comments that follow reflect expenses on an adjusted basis, excluding the restructuring charges.

In Canada, expenses increased 4% year-over-year, mainly due to planned strategic investment in the business. This does not include any savings impact from the recently announced transformation and workforce reduction.

In the U.S., overall expenses were down 4% year-over-year. At Putnam, expenses declined 9% year-over-year on the back of our cost savings initiatives last quarter, which resulted in lower compensation and benefits due to lower headcount.

At Great-West Financial, expenses were up 1% year-over-year. And in Europe, expenses increased 6% as a result of ongoing cost of $13 million at Irish Life Health and a onetime pension curtailment gain of $13 million that reduced last year's expenses.

We continue to see moderation in our underlying expense growth resulting from our heightened focus on efficiency. I will now turn the call over to Garry MacNicholas to review Lifeco's financial results in more detail.

Garry?

Thank you, Paul. Starting with Slide 10, adjusted earnings in the first quarter were 619 million or $0.63 per share, flat year-over-year.

As Paul noted, adjusted earnings exclude restructuring charges of 28 million. Including those charges, earnings were 591 million or $0.60 per share.

This continues a historical pattern of softer Q1 results that we've seen in recent years with Q1 producing about 23.5% of the full year's results on average. On a year-over-year basis, adjusting for restructuring and currency, earnings grew by 7%, and that's without the benefit of a very low tax rate in Q1 2016.

Quarter-over-quarter, the decline in earnings was attributable to the impact of basis change and management actions which contributed almost 80 million more post-tax in Q4 than it did this quarter. As we look at the earnings by segment and note this is done on an adjusted basis, excluding those restructuring charges in the U.S.

and Europe highlighted earlier, we use the same format to adjust for the Canadian the restructuring charge in Q2. In Canada, earnings declined year-over-year with unfavorable policyholder behavior experience and lower basis changes, partly offset by an improved group visibility result and higher net fee income.

Note, the unfavorable policyholder behavior was related to the surge in life, individual life sales as a result of the tax changes effective January 1. This quarter represents the tail end of the impact of these changes as policies work their way through the issue process.

In the U.S, adjusted earnings were up 6% from the prior year. Higher adjusted earnings in the U.S.

were due to higher net fee income at Empower and higher net investment income at Putnam, along with the benefit of expense reductions following their restructuring in Q4 last year. Europe's adjusted earnings of 306 million were very strong, up 7% year-over-year and up 22% on a constant currency basis.

Strong underlying earnings growth in many areas of the business year-over-year was muted by the negative impact from the decline in foreign currencies of $42 million, most notably in pound sterling. The translation rates for Sterling a year ago were 1.96 compared to 1.64 this quarter, a decline of 16%.

Turning now to Slide 11. And as a reminder, the SoE categories above the line are shown in pretax.

Lifeco's year-over-year expected profit decreased 48 million or 7% from the same quarter in 2016 mainly due to adverse currency movement and higher expenses. We've realigned our approach to expected expenses coming into 2017, the effect of which would mean to move some of the experience losses we saw in 2016 up to reduce expected profit instead.

There's no net impact, just adjusting the geography. New business strain decreased to 24 million in Q1 2017, lower than prior periods, largely due to improved profitability on individual customer sales in Canada and higher bulk annuity sales in the U.K., which also contributed positively to the improvement.

Experience gains of 119 million were higher quarter-over-quarter and year-over-year. Positive trading gains across all segments contributed 90 million to earnings.

Other experience variances amounted to 29 million. In Canada, favorable annuity of mortality experience and expense gains in individual customer were muted by unfavorable policyholder experience referenced earlier.

In group customer, improved long-term disability experience in core midmarket business was offset by poor morbidity experience on two large accounts. In the U.S., there was positive variance in Q1 driven by higher fees and expense gains on Empower.

In Europe, results continue to benefit from favorable results in payout annuities. Assumption updates and other management actions resulted in a release of 44 million this quarter compared to 141 million last quarter and 54 million last year.

The main contributor was an update to U.K. annuity longevity assumptions.

There were a few other studies completed this quarter which is not unusual, particularly for the first quarter. The 40 million included in other consists primarily of restructuring costs of 17 million in Great-West Financial in the U.S.

and 20 million in Ireland split evenly between Irish Life Retail and Irish Life Health. And recall, these are pretax figures rather than the post-tax amounts quoted earlier for adjusted net earnings.

The earnings on surplus 16 million, 5 million higher than last year, reflecting primarily higher net investment income and seed capital offset by lower mark-to-market gains on real estate. All this comes together in net income before tax shown in the middle of the page.

Year-over-year, this is up 5%, notwithstanding the currency and restructuring headwinds. I'd also note that, here, that the effective tax rate on shareholder earnings is 14% this quarter, up from the 5% rate in Q1 last year, mainly due to a Q1 2016 once-off foreign tax credit in the U.S.

segment. Turning to Slide 12, Lifeco's uncommitted cash position remained strong at $1.1 billion.

Our book value per share was $19.99, up 4% year-over-year. Return on equity was 13.9% based on adjusted earnings, excluding the recent, the restructuring charges in recent quarters.

ROE continued to be strong in Canada and Europe at or above our long-term overall Lifeco targets. Management continues to be very focused on improving margins and ROE in the U.S.

segment and bringing Lifeco overall back towards its longer-term target. And finally, on Slide 13, assets under administration reached $1.3 trillion, up $109 billion or 9% year-over-year, driven by market performance and overall business growth.

That concludes my formal remarks.

Thanks, Garry. Operator, we'll now open the line for the analysts to bring their questions forward.

I was just a little surprised not to see a little bit better expense improvement on Putnam and was wondering if you might be able to elaborate what happened on a sequential basis. I know on a constant currency basis, it was down year-over-year.

But was, I was actually expecting a little bit less, particularly after the restructuring charge taken last quarter.

I'm going to pass that one on to Garry. Garry?

Yes. Sure, John, there's, we did actually see in our, what I'll call regular run rate expenses, we did see a $13 million, that's pretax, just pretax improvement, which is in line with about a $50 million on an annualized run rate basis.

Unfortunately, just as it fell between the sequential quarters, we had a couple of one-off benefits in Q4. Again, these are small numbers but they do make a difference of $6 million in Q4.

Just a pension curtailment, there's some pension benefits and a benefit true-up, it was a $6 million benefit. Whereas this quarter, we had $7 million of unusual, like, onetime expense item, some accelerated expenses and, expenses category that are onetime for $7 million.

So you get a $13 million swing on sequential quarters. But we do see the underlying $13 million of run rate expenses coming through clearly.

Yes, I would just note that the group is tracking that on a very disciplined basis, and we're quite confident that we're capturing those benefits that we'd outlined last quarter.

We're doing one question, maybe I'll do a 2-part question. So this quarter, we can see the Empower participant line starting to move nicely after some more benign momentum for most of last year.

So can you remind us, was there a big sale that came on during Q1? And what does the pipeline look like for the rest of the year?

And then sort of related with the integration now complete at Empower, how quickly do you think we'll start to notice some top line, some revenue or some sales benefits on the back of all the hard work you guys have been doing the last while on overhauling the systems there?

Yes. You know what, I'm going to let Garry start with that one and probably turn to Bob for a bit of color as well on sort of the market side of it.

Sure. Just on the participants, the large sort of one off large case is actually Q1 last year, we have a large state case come in.

There's been steady growth in the rest of the markets. There's nothing particularly unusual in the business, just good, steady growth this quarter at Empower.

In terms of the momentum we've -- you mentioned that. You're right, we've got the expiration behind us, so obviously, that's a major distraction out of the way.

[Indiscernible] controlling in the meantime. It's buried in the supplemental deck, but it is worthy of note, on the -- it's a good thing to look at the net income before taxes at Empower, and just draw your attention to that.

Q1 this quarter was $57 million, these are Canadian dollars. And in Q1 2016, it would have been $20 million.

In Q4, it was $34 million. So you are seeing a bit of momentum developing there on the back of higher assets and better fee income at Empower.

Yes, I would say that as opposed to some other businesses, when you make a sale, there is a period for the plan to be implemented. And we don't recognize the sale until the plan is implemented.

So there have been many large plan sales this year that will be implemented before the end of the year that we feel comfortable about, we feel very comfortable about because, obviously, it's committed. The pipeline is as strong as we've ever seen it.

And again, sales force, and you look at all segments of the market, are showing tremendous activity. And the pipeline is large.

Yes, Bob, it's also fair to say that with integration behind us, we would look at the right targeted acquisitions. But that's kind of the dynamic in the market, where you've got organizations like Empower that are really differentiated and you're starting to see customer movement because people are trying to go to the best of breed providers.

So we think there's good organic opportunity, plus the uplift in earnings. And we think there's -- for the right targeted acquisitions, we'd go there.

Yes. Anyone that goes to the market today in the U.S.

we will have Empower on the list since it's the second largest provider in the U.S. So we're in a great position and obviously need to execute off that.

Absolutely.

I have a quick numbers one. Just to recap what you were talking about on the call, that the policyholder experience in Canada.

And then something in the U.K. The numbers question is, the $58 million of pretax experience gains, you run off quite a few items and went into that.

Can you may be do that again? I didn't quite catch it all.

And then which ones went in what direction and by how much?

Okay. Garry, over to you on that.

Okay, yes. The -- so I was actually referring in the speaking notes to the experience gains that actually occurred at Lifeco overall rather than just specifically to Canada.

And so that was the $90 million of investment gains across the group. And then we had policyholder behavior, that was in Canada specific, and that was a drag of about $25 million pretax.

So that gives you some context of the Canadian. The bulk of the Canadian would've been made up by those trading gains in Canada.

So that would have been the bulk so that would have been the policyholder behavior, minus 25.

Yes, and just a reminder. The policyholder behavior was something that we saw underlying the results in Q4 as well.

A little bit elevated in Q1, but it was really -- that's where policyholders were taking advantage of the optionality in their contracts either to convert term to a participating policy, and that can have some impact with them. A lot of people got re-underwritten would have terminated an existing contract which would have had a negative earnings impact.

And then they would have been issued a new one under the old regime so they could max out on the older, more advantageous tax structure. We saw -- we just had a huge surge that continued on, which is the finalization of the underwriting in Q1.

But we kind of view that as behind us, very fortunately.

A question on Canada on the expected profit line. It was down 5% year-over-year.

I know the first quarter seems to have some seasonality to it, so I was wondering what -- why the expected profit will be down 5% year-over-year when you had pretty good asset growth year-over-year as well.

Garry?

Yes, you're right. There is a bit of seasonality in the businesses, [indiscernible] in the group side.

And some of the expenses are seasonality just in terms of the sales bonuses, things like that. So there is other some seasonality there.

I think we picked up a bit more of that expected profit this year than perhaps we had last year. As I mentioned earlier, we are -- we did see higher expected expenses go into that respective profit line which, of course, is a drag on it across through it.

So it was -- whereas in the past, I think this past seven quarters, we've seen some experience losses on expenses. What we actually saw this quarter was experience gains.

And that's because we've taken perhaps some more cautious approach on expenses into the expected profit line, primarily the U.S. but also a bit in the other jurisdiction.

Thus, it's mostly the higher expenses. And of course, that's one of the things we're really getting at through our restructuring that we announced last week, is that we recognize that the expense growth over the last two years in Canada accumulatively has been in the upper teens, and that has -- impeding our profit growth.

And so we're getting at that through the restructuring.

Let me just pick it up there, Garry, because I think you mentioned in your prepared remarks, and sorry if I missed some of it, that there was a net impact that you said took place between the expected profit and experience gains. Was that only in Canada?

Or is that on a total company level, because when I look at the numbers, it looks like expected profit was down in sequentially and year-over-year in each of your geographies. So I'm just hoping for a little bit of detail on what's driving this on a total company level.

Sure. The change in terms of the expenses, I'm not -- it's small, a smaller impact in Canada.

It'll be a bigger impact in the U.S., especially as the quarters go through -- we go through 2017, just our approach to that. If you look at the difference between the regions, in the U.S., part of the drag there and that was at Putnam, whereas we have a benefit from some expense changes, we also had lower expectations for performance in service fees than we had in Q1 last year, because we had a different track record for that period.

Obviously, we expect that to improve going forward based on recent improved Putnam performance. But in this quarter, we had low expectations for those performance fees.

In Europe, a lot of the downturn in Europe. I think they were down 24, of which 28 was currency.

So most of that is a little more than all of that is currency and then just a little bit on the expenses. But it's mostly currency.

I want to go back to the discussion you led on fee growth. So you provided some year-over-year comps and took a look at the various equity markets.

If you're going to do the same quarter-over-quarter, we see equity markets were up significantly, but there really wasn't any fee income growth sequentially. So just wondering what held back the growth on a sequential basis.

Well, I mean, I'll speak to the sort of the broad dynamics. One of the comments I make is the key driver of your fee income is going to be your mix of assets, how much of it is equity versus fixed income.

It's going to be dependent on whether it's institutional versus retail. And obviously, it's going to be a function of geography.

So if you take any of our businesses, whether it's the Canadian business that will have all of those factors, each of the businesses will have those factors. And I would say some dynamics that you would see going on, for example in Canada, would be pretty solid.

I think Canada would have tracked reasonably well. But at the same time, I think we've had stronger sense of our high net worth products in period.

We also had strong group retirement sales relative to retail seg funds. So that mix will be a dynamic where you can't really compare the market growth or the index growth and say, "Well, then I'm going to apply that against the Canadian book."

You got to look at those factors together. Anything else, Garry?

Yes, I'll just add and this was back on Slide 7, referencing. The currency also does play a factor when you're doing those year-over-year comparisons.

So you see, the U.S. was up in the constant currency, the U.S.

up is 8%, Europe is up 10%. And in the U.S., again, those performance fees, as I mentioned, at Putnam were stronger in Q1 of '16 and weaker in performance in service fees, weaker in Q1 '17.

So that will mute that growth. And yet we still end up on a gain.

We've had very strong inflows in the institutional. And while we've had improving, but not as strong flows on the mutual funds side, again, there's an impact on gross fee income.

After we've completed the answering the question, maybe you could allow the questioner just is to stay on just to firm up the answer, make sure they have it. I have a feeling that people are getting cut off right after our answer.

I just want to make sure that we've answered the question properly. I'm not sure where we got to the one question thing.

Anyway, that's okay. But just make sure that the individual has an opportunity just to acknowledge that we've answered them and they've understood where we come from.

Thank you.

I guess it's probably a question for Paul or for Garry. I guess I want to go maybe higher level up.

And If I take your earnings this quarter, the EPS, and I back out the impact from equity markets and credit, I back out the restructuring charge and then I back out the gain on the sale of your stake in Allianz RE, I get to around $0.59. Then I add back what I think is the currency impact, let's call it $0.04.

And so $0.62, $0.63. So it's flat year-over-year as far as I can tell.

And so what I'm just trying to get a sense, because I think currency has had obviously a big impact on a lot of things. What am I missing in terms of why it's flat?

And what can propel growth moving forward? I guess that's kind of the gist of my question.

Okay. Well, let me start out with this one.

So one of the challenges if we choose 3 factors, then those could take us north or south relative to up or down. You have to, actually, you have to understand all the moving parts.

So maybe what I'll do is I'll just touch on the key areas that we think are going to drive growth in the business and growth in earnings. Number one, group morbidity has been a drag over a number of core, couple of years now and a couple of quarters in Canada.

And we're seeing group LTV morbidity starting to move more and more favorably quarter-over-quarter as our new pricing comes in. So we like that trajectory.

We see that policyholder behavior drag of $25 million. And we saw that, and this is, they changed the tax act.

The last time they changed, it was 22 years ago. So I think we're sort of expecting this tax regime on insurance to be the last thing and we won't have that happening again.

And then we see significant expense reductions that are going to be coming to Canada. So if I sort of thought of 3 drivers of strength in Canada, those are there.

We see the momentum. And that's, they're all on the come.

If I look to Europe, we've had strong payout annuity sales continuing. Those were good contributes for us in the quarter, and we're seeing strong margins.

We're taking action on some Irish Life expenses, and we've got an add-on business in Irish Life Health. And we've got good German momentum.

So overall, and we've seen quarter-over-quarter growth in our German business. And when I look to Putnam, as Garry outlined, there's puts and takes on the expense side, but we have harvested those expenses.

We've got strong performance that's ongoing in Putnam. We're seeing positive flows, actually.

And this is one of the first times in a while to see positive close, which is a real positive message. Empower, we've put the integration behind us now.

We've seen those sequential quarter-over-quarter earnings growth, and we see opportunities actually to get up greater efficiencies in Empower now that we can stop worrying about when they are bringing in the clients online. Now we can really get at the core business, trying to get greater efficiencies.

So I think about all those things. And I mean, I'm not going to look for the other 5 things that took it down or 4 that took it up.

We've got good core drivers of earnings that, I look at it, and I feel good confidence looking forward. Garry, I don't know if there's anything you would add.

No, I think you captured all the momentum quite well. Just want to add to bear in mind, so as you're trying to do your year-over-year, I know you adjusted for a number of things, but you want to make sure you pick up the tax line.

That was, I'll say, usually low in 2016. It's not really to do with this quarter so much as when you're trying to do a comparison and whether we've actually moved from last year Q1, that's a relative factor to keep in mind.

But other than that, I think there was momentum items you talked about, Paul, or....

Yes. And maybe just to add to the comment on the tax.

I mean, you don't take, it was, whatever it was, the tax, the shift, the swing in tax rates was 10% plus.

Yes, it went from 5% up to 14%.

Yes, so at 9%. So on the quarter, if you want to just do quarter-over-quarter, last Q1 versus this one, that was a significant driver.

But we're not viewing that as anything that we influence, it just it was really a driver of that growth rate that you're calculating there.

The real estate investment portfolio in the U.K. took -- was it last year, you took a bit of a charge against that?

I'm wondering what you're seeing now. Are you still confident in the valuation in that portfolio?

Are there some segments that are looking better or worse? Clearly a volatile political and economic area these days.

Yes, you know what, and I'll -- that gets a ton of attention at our U.K. board and at our -- actually, at our Lifeco board.

And Arshil can provide you with some insights into that. Arshil?

So we got the relevant details set out in the appendix to the analysts slides on Pages 27 and 28. So just to remind you that our commercial mortgage portfolio in the U.K.

is underweight Central London, underweight office, has very long underlying leases and very low LTV values. So despite the wobble in the market last year, in the market's values, our commercial mortgage portfolio continues to perform exceptionally well.

We did take a couple of impairments there that had a modest cost related to a retail provider's bankruptcy in the U.K., but other than that small hit that we took last year, the rest of the portfolio was holding up exceptionally well. And then similarly, on the property side, you can see that we have an outsized position there outside Central London in retail, but that's in the warehouse space.

And again, it's on long leases. And the warehouse side of the market in London has continued to show very strong appreciation in values even through all of the Brexit uncertainty.

So while there was some weakness and we had some adjustments in values related to the office portfolio in Central London in the middle of last year, that retail portfolio in the distribution centers had net gains last year both from a cash flow perspective and evaluation mark to market perspective. And so we continue to be very conservatively positioned.

It's an asset class that's given us very strong returns and it's a small part of the overall portfolio and an important part of the overall portfolio in the U.K.

Arshil, it's fair to say that we are actually quite bullish on retail distribution hubs. These are the future of retail.

As things move more and more to the Internet, these distribution centers, which are state of the art, are things that are Amazon and -- even if it's retail grocery distribution or -- so we like our position there.

Okay. So by retail, it's not storefront, it's the hub for an online merchant kind of thing, where the.

Or the hub for someone who's moving their business in the direction of some less storefront and some online. Because you're seeing that going on [Indiscernible]

And the $90 million of investment gains, that's the yield enhancement stuff that you were talking about earlier. What would that comprised of?

You said that it was mainly Canada. Can you give me a breakdown of where most of it came from?

Yes, I'll let Garry start there.

Sure. That was -- it was the yield enhancements and it was about -- just maybe -- just over $70 million for Canada.

And then I think it was fairly even split between the other 2. But the bulk was Canada, the $70 million.

And then not so much geography because you mentioned that earlier, the pipe -- or the moving out of Canadian bonds into corporate bonds? Or was it real estate gains?

Or was it.

It was a broad mix. We [Indiscernible] private debt deals that we really like.

We also had some -- we were able to trade out of lower yielding assets into higher yielding assets. But I would say the best word for that would have been diversified.

The markets have been pretty active, and we've participated quite nicely.

Unless I'm mistaken, that's been a pretty low number up until this quarter. Is that correct?

I don't know. It's always a good -- it's always a solid contributor for us.

But like in any -- if we write a significant, let's say, energy generation deal on the debt side, that won't happen every quarter. You might do them every once in a while.

So the reality is it's -- it will have some volatility, but generally, it's sort of a consistent contributor year-over-year.

That's this quarter would be a fairly typical number. I mean, it's often in the 80 to 90.

It does move around quite a bit, again, by geography. But longer-term average has been in that sort of 80 to 90 range.

So not unusual.

A question with respect to the synergies, 34 million that you are talking about with Empower. I know some of the stuff is probably not falling to the bottom line as a result of some additional spend, but when do we think this will potentially fall to the bottom line?

Garry, do you want to start that?

Sure. Yes, you're right, Tom, the 34 million, I mean, some of that came from just decommissioning of old systems and the service contracts from the original provider.

In terms of -- we haven't seen -- most of those costs, we've actually found -- we've been reinvesting back into the business. But also just some of the complexity of handling some of those customized mega plans that came over with the integration.

So we've got a process in place now where we're really looking to streamline. And recall, we had targeted extracting 40 million to 50 million in savings in the two or three years following the integration.

And so while we've harvested some of them, we recognize that not a lot of it's fallen to the bottom line. So we are looking over the next two to three years to drive out that about, say, 40 million to 50 million range over that period.

So we're still keen do that and have that fall to the bottom line.

I'm going to let Bob speak to the fact that when you think about it, we've done a fantastic job on retaining these clients. We've now got the clients under our wings, there's margin to be made on that.

Now we've got an opportunity with that to really move to higher levels of automation in that business. And you're scale makes that a big payback opportunity.

So Bob, maybe you want to speak to the intent there.

Yes. I would say the intensity over the last 18 months to bring over close to 2 million participants over in the RPS business has taken a lot of time and energy in the organization.

It was completed in February, and so now the intention is making the organization as efficient as possible. And Paul's right, you have 8.5 million participants on your system now, so every dollar you spend on enhancements, it's allotted over 8.5 million.

So as we continue to grow and continue to make these investment's, it will definitely drop to the bottom line.

And if I could just squeeze a quick one in here. The gain on the sale of Allianz, is that in -- where does that fit into the source of earnings?

Is that a management action? Is that an experience gain?

What is that?

Garry?

Yes, it's in surplus income in Europe.

Okay, great. And that -- what was that pretax?

Around $20 million?

It was CAD20 million post tax, and the Irish tax rate is 12.5%. I'm getting reminded that pretax and post tax was the same.

There was no tax on that gain to us because it was a capital gains holding. So pretax 21 million and post-tax 21 million, all in surplus income.

I just wanted a little clarification, first off, with respect to the higher expected expenses that is affecting expected profit. Why would that be if you're taking on all these restructuring initiatives?

I would've thought that if you're restructuring to lower costs, you would not alter the actuarial inputs to have higher expected costs going through expected profit. So just a clarification on that.

And then as well, just with the $1 billion sub-debt redemption for June, is that all at the Lifeco level? I mean, you have 1.1 billion of cash there.

Is that really level of cash that, you mean, ex that, you'd be left with just $100 million at the holdco level? Is that really where you want to run?

Or are you actually looking to perhaps reissue?

So I'll answer the second one, which is, that's part of our overall capital planning. At this stage, when we made a decision in terms of what we want to do from a capital perspective, we'll obviously communicate that with our investors and provide them with insight on that.

But right now we're still working through that. And obviously, we've got significant cash, but we also want have cash available for opportunities.

So right now, we're working through that, and we'll land in the right place relative to how much cash we want to have versus other financing. Garry, do you want to get to the expense issue in terms of.

Yes, the expenses is a good question. Most of the restructurings, you should expect to see those as we actually realize the savings.

So we say, "Okay, now we're at this new lower rate." That's when we put it into expected profit.

So in this, for example, the past quarter, we wouldn't necessarily have lower expected profit in the Irish businesses or in the Empower businesses. But going into next quarter, to the extent we see lower expenses, we would see that coming into the quarters.

So as we take on the restructuring charge, it's only as those run rate synergies come through that they go through expected profit. But you are correct, that's where they would show up.

They will show up in the expected profit as an improvement to expected profit over the next couple of years. And the Canadian one will be the most of it, well, given the size.

Garry, I think that's where I was going when we were discussing the back and forth between expected profit and experience gains. Is that as the cost savings related to last week's announcement started to play out, it's really the expected profit in Canada that will gradually show the benefit.

I think that's what you just told us in that last answer.

Correct.

And this one is really more for Paul. It's one you've talked about in the past maybe more so than some of your peers when discussing acquisitions.

Is thinking through integration and systems, especially as a lot of what you're doing changes to the technology front. So with last week's announcement and just the restructuring in general, and you're talking just about changing or transforming the way you do business.

Is there any shift in how you thought about the acquisition process as well? Meaning, does this restructuring or transformation that you're undertaking delay any kind of acquisition activity until you're comfortable from a systems perspective that you could take on new transactions?

Or has that already been accounted for by GWO?

I'd say absolutely not. I would say that we have appetite for acquisition.

I mean, in the context of Canada, we're at pretty strong scale in Canada. So acquisitions in Canada, obviously there's some extension opportunities.

So our management team in Canada could be a bit stretched as we're, in the next 6 to 9 months. But realistically, as we're thinking about growing in the U.S.

through acquisition or if we were to look at something in Europe or in some other geography, we do not view the transformation activities as a limitation. In fact, sometimes acquisitions can be a real source of systems opportunity.

When we acquired Irish Life, there was some great opportunities for us to leverage all of their systems. As a matter of fact, that system suite became the target suite for us when we did that.

We saw actually some of that when we acquired London Life in terms of some of our systems and capabilities. So from our perspective, we view acquisitions as something that needs to carry on.

We need to think of that is a focused activity alongside transformation activities.

And if I'm not mistaken, I think it was specifically in talking through Empower and U.S. Retirement Services in one that you wanted to make sure that you were ready to, to use the old saying, 1 plus 1 equals more than 2 when you went through the acquisition process.

Yes, and there's no doubt about that. The one nice thing about where we're at now is there's lots of opportunity, there's lots of additional automation opportunity in Empower, and Bob referenced that.

But at the same time, we now have a pretty diversified book. We've got mega clients and we have capabilities we have to add on to that.

We're pretty deep on our core market capabilities. So from my perspective, again, it's the right targeted acquisition, though.

you want one that's going to be a good fit, that you can really make, have strong certainty over successful integration and get on with it. So we're targeted.

Bob? We, if the right target comes along, we'll be there, right?

Yes, s absolutely. There has to be consolidation in the retirement market in the U.S.

There's too many providers, and it is a game of scale, as I've mentioned before. So I think we're in a great spot to be an acquirer in this market.