Great-West Lifeco Inc

Thank you very much, Paul. Good afternoon.

Welcome to Great-West Lifeco's third quarter of 2016 conference call. I'm joined today by Garry MacNicholas, Executive Vice President and Chief Financial Officer; Bob Reynolds, President and Chief Executive Officer, Great-West Lifeco U.S.; Arshil Jamal, President and Chief Operating Officer Europe; Mark Corbett, Lifeco's Chief Investment Officer; and Stefan Kristjanson, President and Chief Operating Officer Canada.

I'd like to actually welcome Stefan to his first analyst call as the leader of our Canadian operations. Stefan, who took over this role beginning in August, has a strong leadership track record, including our Canadian group operations' accountability and the very successful Irish Life integration.

Welcome, Stefan. There are also a number of other senior officers available on the call to respond to specific questions as required.

I will review the highlights of Lifeco's third quarter results, including headlines for our Canadian, U.S., and European business operations, and then Garry MacNicholas will provide a more detailed financial review. And after our prepared remarks, we’re going to open up the lines to questions.

Before we start, I'll 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 the discussion you'll hear today as well as to the presentation material that we've provided.

Turning to Slide 4, earlier today Lifeco reported its third quarter earnings and also declared a quarterly dividend on common shares of $0.346 per share. And that's unchanged from the prior quarter.

Earnings this quarter were $674 million, or $0.68 per share. These headline figures are in line with last quarter, but down year-over-year.

Q3 2016 earnings were negatively impacted by the movement of sterling in the past 12 months. The currency impact this quarter compared to the same quarter last year was CAD45 million.

On a constant currency basis, Q3 2016 earnings were level with last year's results. Garry will cover earnings in more detail in his section.

Capital strength and flexibility continues, with our MCCSR ratio at 227%. The decline in MCCSR ratio from last quarter reflects the deployment of capital for growth, including the acquisitions of Aviva Health and GloHealth in Ireland, which were internally funded.

In addition, we deployed $170 million of capital through share buybacks in the quarter. There remains 700 million of liquidity at the Lifeco holding company level that is not reflected in the MCCSR ratio I quoted.

We are well positioned, given this capital, to continue pursuing our strategic investments, both organically and through M&A activity. Moving on to Slide 5, our Canadian sales increased by 6% year-over-year, driven by very strong individual insurance and group wealth management sales.

This was partially offset by softer mutual fund and segregated fund sales, consistent with the market. U.S.

sales were down slightly year-over-year, but still robust. At Empower, the business mix was skewed to the more profitable smaller case sales, which were up 20% year-to-date.

Large and mega fund sales, which tend to be lumpy, were lighter in the period as compared to a year ago. I would note that Empower continues to have a very strong pipeline across all segments.

Putnam's retail mutual funds continue to be impacted by the general industry outflows for active equity managers. However, this was balanced by strong institutional sales and positive institutional net flows again this quarter.

Referring to Slide 6, overall expense growth continues to moderate, reflecting a balance of investment in our businesses and operational expense discipline. This quarter includes $21 million of expenses related to both operations and integration at our newly formed Irish Life Health business unit.

U.S. expense growth reflects the increase in participants at Empower from 7.5 million in Q3 2015 to over 8 million today, as well as continuing integration efforts and platform enhancements.

The integration continues to be on track to conclude by Q2 2017, with just $5 million to $10 million of spend on integration and enhancement of the platform remaining. The higher Empower expenses were partially offset by lower variable expenses at Putnam.

The increased expense levels from Q2 and year-over-year in Europe were primarily due to Irish Life Health, as noted earlier. Turning to Slide 7, fee income was 2% higher year-over-year against the generally positive backdrop of higher equity markets in Canada, the U.S., and the UK, but lower in Europe.

I would note that our fee income results in each business segment are impacted by their mix of assets, whether that's equity versus fixed income, retail versus institutional, and also based on the geographic distribution of their assets. As we look at the segment's results, Canada fee income increased 3%, due mostly to higher equity market levels.

Retail net flows continue to be positive in Canada, but overall flows were negative due to a withdrawal from a low margin group retirement plan. In the U.S., while average assets levels and associated fees increased at Empower, they were offset by lower mutual fund AUM and performance fees at Putnam, resulting in overall lower fee income in the U.S.

segment. Fee and other income is up significantly in the European segment, driven by growth in fee income on assets under management, growth in other income related to our Irish Life Health business, as well as fees on a legacy book block of business at Irish Life, where fees are linked to in-period changes in equity market levels.

Turning to Slide 8, Brexit continues to be an area of global focus and uncertainty, as speculation over trade negotiations and potential outcomes continues. And as we previously indicated, our UK business is domestic in nature.

As such, the impact on our business has largely been constrained due to changes in exchange rates. In Q3, our UK businesses reported strong overall results, including the benefit of longevity basis changes.

As previously mentioned, the weaker sterling impacted Lifeco's earnings by approximately $45 million when compared to Q3 2015 exchange rates. In addition, with the UK property market having stabilized, we removed the 3.5% valuation adjustment that we had applied to our properties in the general fund.

We also reopened our unit-linked property funds to redemptions. So, to sum up, while there remains a lot of uncertainty regarding how Brexit will impact the UK, and in particular companies that have used the UK to passport into the EU, our businesses there are performing very well.

We remain confident in the strength of our UK balance sheet and our UK growth prospects. Referring to Slide 9, in Q3 we launched our Irish Life Health business combining the acquired operations of Aviva Health and GloHealth, creating the number three player in the Irish health insurance market with a 21% market share.

The integration is off to a very good start, with completion expected in 18 months. And of the expected EUR16 million of integration costs, EUR8 million have been expensed in Q3.

The integration is expected to generate EUR16 million of annual run rate synergies. In Q3, as part of the transaction, we booked a $24 million fair value adjustment to write-up the value of our existing interest in GloHealth.

I'm now going to turn the call over the Garry to review Lifeco's financial results in greater detail. Garry?

Thank you, Paul. Starting with Slide 11, operating earnings in the third quarter were $674 million, or 40.68 per share versus $0.72 a year ago.

Earnings this quarter were in line with the prior quarter, but down 6% year-over-year, largely impacted by currency and also a higher effective tax rate. Canada's earnings were down 11% from the third quarter of 2015, largely due to a number of factors, including higher strain on individual insurance sales, less favorable morbidity and policyholder behavior experience in individual insurance, higher operating expenses for wealth management business, and a tax benefit in the group division that did not recur this year.

In the U.S., earnings improved from Q2, but were down from the prior year quarter, largely due to lower investment gains and increased strategic expenses at Great West Financial. At Empower, both fee income and operating expenses increased year-over-year due to business growth, as the number of participants has grown 7%, from 7.5 million to over 8 million in the past year.

Putnam's fee income declined due to a reduction in retail mutual funds and unfavorable performance fees. This was offset by improved investment income on seed capital, a decline in variable expenses, and a one-time recovery of $8 million.

Europe's operating earnings of $313 million remained strong, up 20% on a constant currency basis, with a higher contribution from basis changes this quarter offsetting unfavorable mortality experience in the life reinsurance division. As noted earlier, there was a significant currency impact due to the decline in sterling compared to Q3 last year.

But also, when compared to Q2, there was a $19 million adverse currency impact since average currency translation rates last quarter were largely unaffected by Brexit, as it occurred right near the end of the quarter. Turning to Slide 12, and as a reminder, the source of earnings categories above the line are shown pre-tax.

Lifeco's year-over-year expected profit decreased $75 million from 2015. This was mainly driven by the U.S., largely a reduction in mutual funds' mix and unfavorable performance fees for Putnam, which was $42 million lower in expected profit from Q3 2015, although I would note the bottom line at Putnam was actually a modest improvement year-over-year.

In Europe, the decline primarily reflects the decline in sterling from Q3 last year. Expected profit increased $28 million, or 4% sequentially from Q2, mainly due to anticipated seasonality in Canadian and UK group businesses.

New business strain increased to $77 million, largely due to higher business volumes for reinsurance products with upfront strain, and similarly, for higher volumes in Canadian individual insurance new business. Experience gains of $11 million were lower this quarter than the prior quarter and prior year.

Investment activity was strong, contributing $75 million to earnings, but this was offset by $64 million of other experience loss. Life reinsurance results within the Europe segment were notably weaker this quarter, with a $26 million experience loss.

Group Canadian disability results, while improving steadily from Q4, Q1, and Q2 as a result of pricing actions undertaken, were still below expectations for this quarter and also lower than Q3 last year, which happened to be a very strong quarter. Assumption updates and other management actions resulted in the release of $223 million this quarter, compared to $129 million last quarter and $127 million last year.

Over $200 million was related to updated annuitant longevity assumptions in all segments, but with the lion's share of those arising in sterling on the large UK payout annuity book, which of course increased the currency impact that we've seen. The earnings on surplus of $34 million were $44 million higher than last year.

Following the transaction to assume control of GloHealth during the quarter, the company reported a fair value gain which increased net earnings by $24 million. There were also gains on seed capital portfolios in Canada and at Putnam compared to losses in the prior year period.

All this comes together in net income before tax shown in the middle of the page. Year-over-year this is down 2%, but an improvement quarter-over-quarter results are up $41 million or 5%.

I'd also note here the effective tax rate on shareholder earnings is 15%, up from the 11% rate last year and last quarter due to fewer one-time tax benefits this quarter. Turning to Slide 13, Lifeco's uncommitted cash position remained strong at just over $700 million, although declining during the quarter as a result of accelerated share buybacks in the period.

Our book value per share was $19.18, comparable to both the prior quarter and prior year quarter, reflecting a reversal of the portion of U.S. dollar exchange rate impact seen late in 2015 and pension re-measurements at lower interest rates and, of course, the impact of the share buybacks.

Return on equity fell 13.8%, reflecting the impact of currency on earnings in this quarter compared to Q3 2015. The impact of FX this quarter, or more specifically the 8% drop in pound sterling, reduced our ROE below 14%.

ROEs continue to be strong in Canada and Europe, above our long term targets. The lower return in the U.S.

is the combination of ongoing investments in Empower and integration of growth platforms, as well as pressure on margins from lower mutual fund assets and the lack of scale at Putnam. Management is very focused on improving margins and ROE in the U.S.

segment, and bringing Lifeco back towards its longer term targets. And finally, on Slide 14, we show assets under administration are at $1.2 trillion, up 9% on a constant currency basis, driven largely by market performance and fair value gains as well as overall business growth.

Paul, that concludes my remarks.

Thanks, Garry. Before we open up the lines to questions, I want to take a few moments to sum up the quarter.

Notwithstanding continuing challenging economic conditions, there continues to be a strong focus on driving forward with our strategy, including investing in the businesses and executing targeted acquisitions. Overall, our diversification of businesses continues to serve us well.

Across our operations, we are focused on expense efficiencies, balanced with investment in automation and differentiation to ensure we remain competitive. For Putnam, we remain focused on reaching profitability through cost management and driving growth to reach scale in a challenging environment.

And importantly, we remain committed and confident in our strategic direction and growth prospects, supported by our capital strength and flexibility. That concludes my formal comments, so I'm now going to turn the line back over to the operator so we can get set up for questions.

Thanks.

Thanks very much. Good afternoon, everyone.

So, just first, I don't know if it was Paul or Garry, in your prepared remarks you mentioned 24 million of adjustment on the write-up of GloHealth. Is that pre-tax or after-tax, and where can I see that in the source of earnings?

This is Paul here. I'll refer that over to Garry.

Garry?

And then just turning to expected profit, down for a couple of consecutive quarters now. You've given some explanation.

Putnam's been a driver. It looks like about half of the 10% decline this quarter, but a couple of questions.

With AUM up quarter-on-quarter and year-on-year at Putnam, shouldn't we be seeing some improvement in the expected profit from Putnam? I thought that was the case, given prior comments?

And secondly, Q4 looks like a pretty difficult comparative quarter. Would you expect we should see expected profit down again in Q4 or are there some positive catalysts you could point us to for next quarter, or is the currency delta too overwhelming?

Okay. And then last, if I could, for Arshil, can you refresh us on your outlook for reinsurance?

Last quarter you sounded pretty positive, but year-to-date your earnings are down, Q3 was the lowest we've seen in a little while. Maybe that's currency.

We're just seeing it in Canadian dollars. But a bit of a refresh there would be helpful.

Thanks.

But, Arshil, you may want to add something to that.

Thanks very much.

Thanks, Steve.

Good afternoon. So, where do I start here?

The experience gains line, that's an issue that's hitting your Europe segment quite a bit. And the focus has been on the FX impact weighing on profits there.

But if I look at the last two years of experience gains in Europe, between 2012, 2014, you had $200 million plus of experience gains a year. That dropped to $50 million in 2015, and that's negative now for the full year, including this quarter, in 2016.

Can you explain to me what's behind that trend? Because it's a big headwind for your profits outside of just the FX issue.

Arshil, I'll let you just sort of provide a little bit of a backdrop on that. Clearly, we just talked about the in-period issue of reinsurance mortality, but, Arshil, you can provide a little bit more color.

Yes. The European businesses are quite diverse, so there's different factors impacting at different times.

So, this quarter in particular we've noted the mortality underperformance in our reinsurance segment, and that's coming through experience gains and losses. We had quite a strong investment quarter this time around, with material trading gains that would have contributed favorably.

But last quarter we had that impairment on a group of mortgages to a UK retailer that was depressing our investment experience. If you go back three or four years ago coming out of the financial crisis, spreads were very, very wide and we were getting very attractive yield enhancement gains.

So, if there's any longer term trend to draw, it's probably that, while we're still getting quite a good contribution from investment experience now, the contribution two or three years ago was very elevated. And then beyond that, there's just been fluctuation across the various lines of business, depending on what the driver is that particular quarter.

So, I wouldn’t draw more than that broad inference in any one quarter's performance.

Yes, I think we'd just point you to some of the disclosure we have about the long term performance on the experience gain and management action line combined. So, I'd encourage you to look at those two lines together and not worry as much about the geographic breakdown.

So, I think if you look on a long term basis, about 20% to 25% of the overall company's earnings have come from those two items. It's performed in line with that for the nine months of this year.

We will see some noise from one segment to the other or whatever. But, yes, they're diversified businesses and the underlying performance continues to be very strong.

And I go back to where does that come from. Well, when we do acquisitions, we do it on a conservative approach.

When we write new business, we write it with good discipline in our pricing and our underwriting. And over the long term, we believe that this provides for a sort of stability of our outcomes.

And so, obviously there's going to be volatility in-period. It'll be different from quarter-to-quarter.

But over the long term, that conservatism makes for a strong and stable balance sheet. I don't know if there's anything you'd want to add, Garry.

And I go back to where does that come from. Well, when we do acquisitions, we do it on a conservative approach.

When we write new business, we write it with good discipline in our pricing and our underwriting. And over the long term, we believe that this provides for a sort of stability of our outcomes.

And so, obviously there's going to be volatility in-period. It'll be different from quarter-to-quarter.

But over the long term, that conservatism makes for a strong and stable balance sheet. I don't know if there's anything you'd want to add, Garry.

And I go back to where does that come from. Well, when we do acquisitions, we do it on a conservative approach.

When we write new business, we write it with good discipline in our pricing and our underwriting. And over the long term, we believe that this provides for a sort of stability of our outcomes.

And so, obviously there's going to be volatility in-period. It'll be different from quarter-to-quarter.

But over the long term, that conservatism makes for a strong and stable balance sheet. I don't know if there's anything you'd want to add, Garry.

And I go back to where does that come from. Well, when we do acquisitions, we do it on a conservative approach.

When we write new business, we write it with good discipline in our pricing and our underwriting. And over the long term, we believe that this provides for a sort of stability of our outcomes.

And so, obviously there's going to be volatility in-period. It'll be different from quarter-to-quarter.

But over the long term, that conservatism makes for a strong and stable balance sheet. I don't know if there's anything you'd want to add, Garry.

And I go back to where does that come from. Well, when we do acquisitions, we do it on a conservative approach.

When we write new business, we write it with good discipline in our pricing and our underwriting. And over the long term, we believe that this provides for a sort of stability of our outcomes.

And so, obviously there's going to be volatility in-period. It'll be different from quarter-to-quarter.

But over the long term, that conservatism makes for a strong and stable balance sheet. I don't know if there's anything you'd want to add, Garry.

No, I think Arshil covered it well earlier, that relative to, say, the averages three years ago, the spreads were wider. There was more investment gain activity.

By looking historically, we could do a few averages for all kinds of disclosures. But those investment gains were, in Europe, a bit higher two or three years ago than they have been today, although still making good contributions.

But other parts of the business have picked up, Irish Life and all its contributions has really added. So, you're getting a different mix, and Europe continues to grow.

Yes.

There's anything else.

Okay. Thanks.

Have a good afternoon.

Thank you.

In simple terms, that's probably a good way to describe it, but I'll let Garry provide a little bit more color.

Yes.

And so, they do move around quite a bit.

Yes. And for context, right now we're dealing in a UK environment post Brexit where you look at the real narrowing of yields.

And those, in time, are going to widen again, and we'll see stronger contributions.

Hopefully not too abruptly, yes.

Yes.

All right, thank you.

Thanks.

That is absolutely correct.

I'm going to let Arshil speak to that, because that was the material increase in expense, but Arshil?

Yes. So, adjusted for the acquisitions, both the legal and general company a year ago, as well as the Irish Life Health company in this period and adjusting for currency, expenses would have been absolutely flat year-over-year in Europe.

Yes, I'll let Garry speak to that. Garry?

Okay, perfect. That's all for me.

Thank you very much.

Thank you.

Thanks. Good afternoon.

This is probably for Garry to start, just going back to the management actions for a moment. It's a pretty regular line item for the company to see something come through in Europe or Canada, not as common for the U.S.

And the $50 million in management action gains this quarter did seem to be a big part of the increase in U.S. profits.

Just hoping you can give me some color as to what was the specific change that you made in that business.

Sumit, I agree. That is a good question for Garry.

Garry?

Okay. There is a couple of things.

First off, and it is in the supplemental deck, that account recovery that we noted, the $8 million after-tax, translates to $19 million pre-tax.

Sorry, Garry. That's the Putnam piece?

I beg your pardon?

That was the Putnam piece that you were talking about?

That was the Putnam piece.

Okay.

So, that was $19 million. What you're left with then in the U.S.

segment is $34 million, which interestingly was about the same level last year. That $34 million was fairly evenly split between a mortality basis change, just updating our mortality rates in the life book of business, and annuitant longevity, which we updated.

So, it was the other gain forecasting a slower rate of improvement at certain ages in the U.S., a much smaller book in the U.S., so that contributed. So, they're about half each of the remaining $34 million.

No, just to note that these two were both just the result of regular in-year experience studies. And they typically do come up in Q3, sometimes Q4, occasionally other quarters if something in particular has come up.

But Q3 is, like you said, like many companies, is a larger time for those changes.

Well, certainly if we were actively engaged, we wouldn't tell –

Sure.

We wouldn't telegraph that.

And sorry, I didn't really say that very well. I mean, you have indicated that capital is strong and you want to get bigger in certain businesses.

And it does seem like, with earnings down on a year-over-year basis and what you've described as a tougher macro environment, it seems like there's areas of the business that have a definitive need. Is that too strong of a way to put it?

Thanks for your time.

Thanks.

Good afternoon. I sort of want to follow up on the assumption change in the UK.

The 200 million you referred to, I think you said predominantly longevity assumptions. To build some confidence in these, sort of going to Peter's point about the quality, could you talk about what really drove it.

And I think, Garry, you referred to industry improvement in longevity I guess maybe going the other way. But you said there was some industry information that you got, and also you own experience studies.

What would be helpful to understand is did this all just play out in the quarter, or is this information that you would have been building up over time but this just happened to be the quarter it was booked in?

Well, I'm going to start, before Garry gets into the gory details as much as he chooses to, is that we're constantly monitoring the progression of mortality and morbidity, but in particular annuitant mortality, the improvement. There's tables that contemplate rates of improvement over time.

You'll see a softening of that or a shift in that, but you don't react to that immediately. You're constantly looking at it and monitoring it.

So, we approach all these things with a degree of conservatism. We don't sort of build things up and wait for a moment.

We're constantly looking ahead and making sure that we're approaching this in a very conservative manner, all these things within the range of accepted actuarial standards. But Garry, I'll let you –

You might even say we try to –

The news of the day.

We try and go partway to trends and always use a lot caution is the way we would do it.

Okay. So, perhaps just a related question, again on this annuitant mortality, or longevity, rather.

Had you seen a number of quarters of experience gains associated with longevity prior to making this change? And if so, over what time period had you seen the experience gains that drove this, drove the release?

A lot of this change, though, was driven by our view on the rate of mortality improvement, which is as much driven by population trends as our own experience gains. So, yes, some elements will track our own experience gains, but a lot of this is general population trends in the UK.

It's what led us to be very cautious. The trend was going the other way in the middle to late 2000s.

So, I'd say 2005 to 2009 period, 2010 period, the trend was going the other way. And again, we reserved for that trend as we brought on large annuity books of business.

And now we're seeing the population trend go the other way. So, it's less about our in-period experience gains and more about general trends.

A lot of this change, though, was driven by our view on the rate of mortality improvement, which is as much driven by population trends as our own experience gains. So, yes, some elements will track our own experience gains, but a lot of this is general population trends in the UK.

It's what led us to be very cautious. The trend was going the other way in the middle to late 2000s.

So, I'd say 2005 to 2009 period, 2010 period, the trend was going the other way. And again, we reserved for that trend as we brought on large annuity books of business.

And now we're seeing the population trend go the other way. So, it's less about our in-period experience gains and more about general trends.

And the nature of these questions is just to help build up my confidence level in the assumptions. So, when you do see the experience taper off in a particular quarter then I don't get too fussed by it.

That's the nature of these questions.

No, I totally appreciate that.

Thank you for going through that.

Thank you.

Hi there. I have a number of questions, a couple of them just numbers.

I wonder if I can just clarify a few things. Did I hear in part of the remarks that there was a 42 million difference in performance fees at Putnam?

I believe in Garry's remarks he would have referenced 42 million as the combination of a number of different factors. But Garry, I'll let you clarify that.

Yes, that was a comment on the source of earnings display at Putnam. The year-over-year change in the expected profit line for Putnam was 42 million.

And again, that's pre-tax in Canadian. Some of that would have been performance fees, but the lion's share of that was lower retail AUM, notwithstanding it's a higher institutional AUM.

So, it's just the mix of fees.

Yes. Thank you, Paul.

Short term performance over the last 12 months has been average. And I think the three year number in total, all products, above median is 44%.

So, that reflects a performance shortfall in recent periods. But again, I think it's for a short period of time.

And the five year number remains at 68% above median.

So, let me speak to this, the dynamic of the business, and I'll let Stefan add a little bit more color. There's no doubt elevated strain right now because there's elevated sales, which is one factor.

The second factor is the declining interest rates. And we tend to be very active on replacing as interest rates fall.

But because of this exempt test work that we had to do, which, frankly, was investing in brand new redesigned products right across the piece, and it's something the industry had to do, we had to defer a price increase that we would have done sooner; we would have done probably late Q3 or even mid Q3 in favor of making sure that we had those products in place. So, our expectation as we go into the beginning of the New Year is we will go through a repricing on related products where we're seeing that strain, and we'll get things back on track.

Stefan, anything else you'd add?

No, I think you've captured it well, Paul. And now that the tax exempt work is behind us, that actuarial team is turning their attention to that.

So, we will be actively working on that repricing in the first quarter of 2017.

I'll let Garry speak to that one.

And interestingly, it's kind of the same dynamic, Darko, that I just referred to, which is we are in the process of redesigning products, including those prior products in relation to this exempt test. So, some of that strain that we're experiencing will not be present as we go into the new year with the redesigned products.

Okay, that's as I suspected. Okay, thanks very much.

Appreciate that.

Thank you.

Yes, thanks very much. Good afternoon, just a couple questions with respect to Empower.

The participants continue to generally be flat, the number of participants. And I think you had suggested that over the medium term we'd be getting up to in the area of 10 million participants, but we've been sort of stuck at 8 here for a while.

What's causing that and what do you see as trying to grow those participants and then just a couple follow ups.

Yes. I would say we finished ’15 at 7.5 million, and 12-31-16 we're going to be at 8.1 million.

So, that is significant growth on the platform. And the pipeline remains very, very strong.

And we just have not had what we call a mega client close this year, but we have committed sales in 2017 of $4.4 billion, which is around 400,000 participants.

And that's in the pipeline. Is that what you're saying?

That's already been committed.

Okay. So, how should I look at the fact that the revenues are actually down 3% quarter-over-quarter in U.S.

dollars and that earnings before tax are down 15% quarter-over-quarter in Empower on a U.S. dollar basis?

What's happening here?

No, it's more in the integration itself, preparing to bring these new clients onto the platform.

Okay. So, these aren't expenses associated with this 150 million enhancement spend then.

These are just other expenses associated with bringing these new clients onboard. Is that correct?

That is correct.

Okay.

Okay. And then the tax rate on Empower it looks like is less than 10% just in this quarter.

I know that this is small, but should we really think of the tax rate on Empower to be more in the 35% range?

Garry?

Or why isn't this number up at all? Why is it down?

I'm just trying to cull from the start of your question, Tom, if you'd adjusted in there for currency, which was quite a [multiple speakers].

I'm in Canada only though. I'm only looking at Canada.

I didn't hear the very start of the question. That's what I was asking.

It's a Canada only question.

There were two elements to that. One is we were expecting a combination of higher expenses and tighter margins in the wealth business.

So, expected profit year-over-year was down, I want to say about 10 million, 9 million to 10 million in the wealth business. And then we had adjusted our expectations somewhat for the group morbidity.

And just the time taking to get the pricing action in, although it wasn't as strong a factor in this quarter, but we had adjusted that in the prior one.

Okay, that's helpful.

Great, thanks.

Thank you. Good afternoon.

I have a couple follow up questions on Empower. The first is with respect to some of the large client mandates you won with sales two, three, four quarters ago.

Wondering if you can provide a status on the on-boarding of those clients, i.e., are we starting to see that flow through to revenue in Q3 and is there more of that to come in future quarters?

Okay. That first question, I'll turn that one to Bob and potentially Andrew in support of Bob.

Yes. When you onboard a client, you go through an implementation integration that lasts anywhere from six to 12 months.

And during that time, there is no revenue. So, once a client goes live, the revenue stream starts.

And the clients that I talked about in implementation that have already been sold for 2017, those are costs items now, not revenue. So, there's always a lag from when you sell a client and when it goes live and when the revenue stream starts.

Absolutely, absolutely and the point I was making, that they usually have a six to 12 month implementation. And once they're done, that's when the revenue stream starts.

Correct. So, the message I'm hearing is that revenue didn't go live for the most part in Q3.

So, it's still something to hit the P&L going forward.

That is correct.

Okay, good. And then next question regarding Empower is I think I would expect, and I believe you communicated this as well as your investor day, that there might be more consolidation taking place, particularly with the DOL fiduciary rules.

So, wondering if you're seeing any more indications of increased transaction activity or transaction interest, and if you would be willing to execute on such before you complete your system integration with the JP Morgan business.

Yes, we –

Yes, Bob, you take it.

Yes. I'm sorry, Paul.

No, you go.

We are seeing a pickup in activity, not a large pick up but there are more opportunities out there. I would say as far as our appetite right now, we would be interested in a somewhat smaller acquisition, one that deals with smaller clients that don't have the customization that large clients do.

So, we would not be focused on the large client market until after we get this integration finished, which should be done in February 2017.

And Bob, it would be fair to say that as kind of the DOL rule becomes a little bit clearer, because there's still lots of lack of clarity there, I think the market will sort of take that in. And you might expect to see a bit of an accelerated pace in terms of consolidation, because we do believe the market will consolidate for sure.

Yes. I think what's going to drive the market consolidation is just the whole scale issue, right?

I think the fiduciary rule does touch record keepers some, but this consolidation is going to be totally driven on the need for scale.

Got it. Okay, thank you.

That's helpful. Next question is, if we could try to get into the expense growth a little bit more on the wealth management side.

Wondering if that's coming more on the group business versus individual or if it's coming on both, and kind of what the nature of that expense growth is.

Yes. And I think we outlined that at investor day, that part of this is to think about not so much the clients of today but, as we look at segmentation, how are we going to reach and serve clients, ranging all the way from direct digital to kind of on the channel to the fully advised where we tend to be fairly focused.

So, there's investment there, and that's where it would be.

Okay. Okay.

And then excess capital and the ability to put that excess capital to work was a big message from your investor day. With the initial details out around LICAT, wondering if that message changes at all.

Not looking for number, but maybe any kind of color you can provide on any potential pressure points from LICAT or a change of view on the excess capital story.

I'll let Garry speak to that one for sure.

Yes.

Good. Okay.

That's all that –

Okay. Okay.

That's all the questions I had. Thank you.

Well, thank you very much.

Good. So, I would like to thank everyone who participated today, and thank you for your questions.

We look forward to reconnecting with you. I guess it'll be early February when we report on our Q4 results.

And between now and then, I hope everybody has a good holiday season. Take care.