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Edited Transcript of GWO.TO earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Great-West Lifeco Inc Earnings Call

WINNIPEG Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Great-West Lifeco Inc earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arshil Jamal

Great-West Lifeco Inc. - President & COO of Europe

* Garry MacNicholas

Great-West Lifeco Inc. - Executive VP & CFO

* Jeffrey F. Macoun

Great-West Lifeco Inc. - President & COO for Canada

* Paul Anthony Mahon

Great-West Lifeco Inc. - President, CEO & Director

* Raman Srivastava

Great-West Lifeco Inc. - Executive VP & Global CIO

* Robert Lloyd Reynolds

Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC

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Conference Call Participants

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* Doug Young

Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst

* Gabriel Dechaine

National Bank Financial, Inc., Research Division - Analyst

* Mario Mendonca

TD Securities Equity Research - MD & Research Analyst

* Paul David Holden

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

* Scott Chan

Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst

* Stephen Gordon Theriault

Eight Capital, Research Division - Principal & Head of Research

* Sumit Malhotra

Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services

* Tom MacKinnon

BMO Capital Markets Equity Research - MD & Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Great-West Lifeco's Third Quarter 2019 Results Conference Call.

I would now like to turn the call over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead, Mr. Mahon.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [2]

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Thank you, Laurie. Good morning, and welcome to Great-West Lifeco's Third Quarter 2019 Conference Call.

With me on this call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. Garry and I will deliver today's formal presentation. Also joining us on the call and available to answer questions are Arshil Jamal, President and Chief Operating Officer, Europe; Jeff Macoun, President and Chief Operating Officer, Canada; Ed Murphy, President and Chief Executive Officer at Empower Retirement; and Bob Reynolds, President and Chief Executive Officer of Putnam Investments.

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 today's discussion as well as to the presentation materials.

I will begin by -- with an overview of Lifeco's third quarter results and developments in the quarter, and Garry will take you through a more detailed financial review. And after our prepared remarks, we'll open the line for questions.

So please turn to Slide 4. The company reported earnings of $0.79 per share, up 4% year-over-year on an adjusted basis. We're pleased with these results, which reflect solid operating performance, the sale of the U.S. Individual markets business and our successful substantial issuer bid share buyback in the spring. The third quarter results also benefited from lower than typical tax rates. Net earnings were $730 million in the third quarter. The U.S. Individual markets business contributed $54 million to adjusted earnings in Q3 2018.

Excluding this, earnings were up 6% year-over-year, an excellent result given the headwinds from the actuarial standards change.

Turning to capital, the company reported a LICAT ratio of 139% compared to 136% last quarter. Lifeco cash was CAD 300 million at Q3 and does not include cash from the ceding commission of CAD 1.1 billion related to the sale of the U.S. Individual markets business.

I would now like to take a few minutes to highlight the progress we're making on priorities across our 3 regions.

Turning to Slide 5. In Canada, we continued on our journey to one brand and the amalgamation of our Canadian insurance companies. We achieved an important milestone on October 3 when policyholders of Canada Life, Great-West Life and London Life voted in favor of amalgamation. Subject to formal regulatory approvals, our Canadian insurance companies will combine into a single legal entity under the Canada Life name effective January 1, 2020. Our move to one brand and one company in Canada is producing benefits by simplifying our business, allowing us to focus more on product development and speed to market, things that really move the needle when it comes to customer and adviser engagement and satisfaction.

While expense growth has moderated in Canada, investments in technology and digital capabilities continue. We introduced enhancements to SimpleProtect in the third quarter, including the addition of critical illness applications as well as functionality that allows advisers and clients to connect remotely and complete the online application, making the process more convenient for both.

SimpleProtect is also delivering a better experience to customers and advisers with faster turnaround times. More than half of the policies are placed within 1 day using the digital application. This fundamentally changes the customer and adviser experience. In Group, we introduced the health connected portal, a new health and wellness platform that offers group plan members digital health advice and coaching. We also launched a new paperless claims experience, allowing group plan members to submit all claim types from their desktop or mobile phone.

On the distribution side, our subsidiary Financial Horizons Group continued to be a consolidator in the managing general agency space. It acquired TORCE Financial Group and VANCE Financial Group, extending our reach and enhancing our ability to serve a diverse customer base, including the Asian communities in Toronto and Vancouver.

Turning to Europe. Our U.K. transformation is on track, supporting our growth ambitions in the broader U.K. retirement income market. And in Germany, our future system strategy is well advanced. This migration to modern, scalable platforms in the U.K. and Germany will allow us to expand our product offerings, driving higher revenues and deliver cost savings over the next few years as we automate and retire legacy administrative systems.

On the distribution side, Irish Life announced the acquisition of Acumen & Trust by a majority-owned Invesco Limited, further extending our distribution reach in Ireland. Subsequent to quarter end, we completed our minority equity investment in JDC Group, strengthening our position in the German broker market.

In the U.S., Empower Retirement entered into a 21-year agreement for the naming rights to the Denver Bronco Stadium, which will now be known as Empower Field at Mile High. This agreement will give Empower significant national brand and media exposure in the U.S., showcasing the Empower name and value proposition to millions of current and potential customers. Empower continues to deliver solid sales growth in the third quarter, with several large plan sales and AUA reaching USD 652 billion. Organic growth remains strong, and Empower is on pace for a record sales year.

I would also note the continued improvement in Putnam's financial performance. Putnam's pretax operating margin increased to 9.5% in the quarter, driven by an ongoing cost reduction program and very strong fund performance.

As of September 30, 2019, approximately 90% and 86% of Putnam fund assets performed at levels above the Lipper median on a 3-year and 5-year basis, respectively.

Please turn to Slide 6. As Brexit headlines continue to dominate the British media, I'd like to provide an update on Brexit as it relates to our U.K. business. As a reminder, we do not distribute products into the EU from the U.K. Our U.K. business is domestic, and our primary business is group risk and retirement income will remain important to the U.K. population regardless of the Brexit outcome. Impacts to date have largely been limited to currency movement on our translated earnings.

Our U.K. investment portfolio remains well positioned, and we continue to monitor it closely. As in prior quarters, we've included additional color on our property-related exposures in the appendix to this presentation. We have already taken actions to prepare for and to minimize the impact of various Brexit scenarios. These actions pertain to our legal entity structure and governance approaches, recognizing the roles of both the U.K. and the EU regulators.

With that, please turn to Slide 7 for further discussion of third quarter results.

Lifeco sales were up 22% year-over-year, mainly driven by strong large case sales in Canada and at Empower.

In Canada, sales were up 22%, supported by strong large case sales in both group Insurance and group wealth. This included higher investment only and bulk annuity sales, which can be lumpy. Individual customer sales were relatively flat compared to last year and with lower segregated fund sales, partly offset by higher mutual fund sales. In the U.S., Empower recorded sales of USD 13 billion. This continuing strong momentum reflected growth across all customer segments and included several large plan sales. At Putnam, higher institutional sales were balanced by lower mutual fund sales. As shown in the appendix, Putnam saw positive net flows into retail mutual funds and net outflows in institutional quantitative equity strategies, consistent with current industry trends.

In Europe, sales were comparable to last year with higher fund management sales in Ireland, offset by lower bulk annuity sales in the U.K.

Turning to Slide 8. Lifeco fees were up 1% year-over-year. In Canada, fee income was up 2%, with higher fees in group and fees remaining steady in individual. In the U.S., fees increased 5%, adjusting for the U.S. Individual markets business that was sold in June. Empower fees were up 8% in local currency, reflecting growth in participant and AUA. At Putnam, fees were down 3% in local currency due to asset mix and lower average AUM, partly offset by improved fund performance fees. In Europe, fee income was up 3% or 6% in constant currency, primarily due to higher management fees in Ireland and Germany.

Referring to Slide 9. Lifeco adjusted expenses continued to show a moderating trend, up 1% year-over-year, 2% in constant currency, with excellent cost control across segments.

In Canada, expenses were up 3%, in line with our expectations, but still supporting continued investment in digital capabilities to drive differentiation and growth.

Moving to the U.S., expenses were up 1% and flat in constant currency. Adjusting for the sale of the individual markets business, U.S. expenses were up 7%, reflecting higher expenses in Empower related to strong sales and participant growth. Expenses at Putnam were down 10% in local currency, reflecting cost reduction initiatives.

In Europe, expenses increased 1%, 5% in constant currency as we balance business growth and strategic investments with good expense discipline across operations.

I will now turn the call over to Garry MacNicholas.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [3]

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Thank you, Paul. Starting with Slide 11. Earnings in the quarter were $0.79 per share, an increase of 4% year-over-year. EPS growth reflected solid operating performance, the sale of the U.S. Individual markets business and the substantial issuer bid. Earnings in the quarter also reflected a lower than typical tax rate resulting from favorable developments in certain tax matters in Canada and the geography of basis changes this quarter.

In Canada, earnings declined 5%, mainly due to the impact of basis changes, including the actuarial standards change and policyholder behavior experience losses, partly offset by strong investment trading gains. In the U.S., earnings were up 31%, excluding the $54 million from the divested Individual markets business in Q3 2018. For Putnam and Empower, I will switch to U.S. dollars to describe their results. At Putnam, core net earnings improved to $9 million from a loss of $6 million in Q3 2018, reflecting lower operating expenses. Empowers U.S. dollar earnings were steady year-over-year, but up 14% when excluding the $6 million impact of the actuarial standards changes on that business.

Europe's adjusted earnings were up 12%, 17% in constant currency, reflecting higher basis changes and better investment experience in the U.K., partly offset by less favorable claims experience.

Please turn to Slide 12. This table shows segment and total Lifeco results from a source of earnings perspective. And as a reminder, the SOE categories above the line are showing pretax. Earnings this quarter showed healthy expected profit growth, improved new business results and a contribution from changes in assumptions. This was partially offset by the impact of the actual standard changes and lower than usual experienced gains and losses.

Excluding U.S. Individual markets business, expected profit was up 8% year-over-year, reflecting strong business growth, particularly in Europe and Reinsurance, improved Canada Group margins and improved performance at Putnam. New business strain was lower than both prior quarter and prior year, as gains were recognized on group or bulk annuity sales in Canada and the U.K. Experienced results overall this quarter were broadly neutral, which is lower than our historic run rate. Solid trading gains were offset by life, longevity, disability and policyholder behavior losses as well as expenses related to strategic investments. Management actions and changes in assumptions contributed $65 million this quarter. Included in that, the implementation of revised actuarial standards, reduced pretax earnings by $65 million, at the lower end of the range we indicated last quarter.

Other changes and assumptions, therefore, contributed $130 million. We've included more detail on both experienced results and changes in assumptions on the following slide, which I'll come to shortly.

Earnings on surplus of $20 million reflected gains on the sale of certain surplus assets, plus gains on seed capital in Canada and at Putnam. The effective tax rate on shareholder earnings grew 7%, reflecting the jurisdictional mix of income this quarter, in particular, with respect to basis changes, along with favorable developments on certain tax matters in Canada.

Turning to Slide 13. These tables expand on the experience results and management actions and change in assumptions to highlight various items in the quarter, again, on a pretax basis. Starting with experience results, yield enhancement was solid, supported by equity release mortgages originated through the Retirement Advantage operation we acquired in 2018. This operation has now been rebranded to Canada Life Home Finance.

You will note, however, mortality, morbidity and policyholder behavior results were all below expectations this quarter. While the higher than unusual -- higher than usual claims are generally considered in period volatility, we have seen policyholder behavior losses on some lines for a number of quarters. Policyholder behavior is influenced by a variety of factors, including interest rates, underwriting, price competition and technology advantages -- advances that we and others in the industry are monitoring.

This quarter, based on the trends we have been seeing in our experience, we reviewed and strengthened the assumptions for our Canadian Term insurance business. Other notable assumption changes this quarter were positive contributions from updates to assumptions regarding U.K. annuity and longevity, Canadian critical illness and credit-related assumptions partially offset by the impact of the actuarial standards change.

Turning to Slide 14. Our book value per share was $21.02, down 1% from last year, reflecting the impact of the substantial issuer bid, currency translation rate changes and the impact of lower interest rates. Our LICAT ratio was 139%, up from 136% last quarter. Positive in-quarter net earnings and the fair value impact of lower interest rates, increased total capital resources partially offset by higher capital requirements related to investment trading activity.

As a reminder, return on equity is based on a rolling 4 quarters and adjusted return on equity this quarter was 13.4%, and we continue to target a longer-term ROE of at least 15%. Reported ROE of 12.4% includes the $199 million loss recorded on the sale of the U.S. Life and annuity business in Q2 2019.

Turning to Slide 15. Assets under administration were $1.6 trillion, up $156 billion or 11% year-over-year, reflecting higher markets and business growth. This is up sharply from year-end, given the market recovery so far in 2019. That concludes my formal remarks. Back to you, Paul.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [4]

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Thank you, Garry. Laurie, we will now open the line for analyst questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Steve Theriault from Eight Capital.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [2]

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A couple of questions. First, maybe you talked a bit about experienced gains management actions and assumption changes in the quarter. When we look at the first 3 quarters of the year, it looks like it's running about half the level of the last 5 years. So we talk about this from time to time, and maybe we can revisit it. Is there anything you're seeing or whereof that suggests this contribution will be meaningfully lower over time? And maybe to help us understand a bit better, can you talk about the year-to-date drivers that have driven that in 2019 so far?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [3]

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Yes, Steve, I will turn that over to Garry. But I would note, if you look to this quarter, one of the things I would note is that we had a number of negative experience skins that are essentially just some claims issues that we're dealing with through increased pricing and processes and stuff. So I don't really view that as a systemic issue in any way, that was an interesting sort of quarterly phenomenon. But I'll let Garry speak to that a little bit more.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [4]

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Sure. Certainly, in the year-to-date, one of the things to remember, of course, is in Q2, we did have the U.K. retail property items that would have showed up as experienced losses. So that's fairly large relative to our typical variations. So I think that's probably dominating the year-to-date figure. Also, you may recall back in Q1, we had some issues in our Irish Life Health operation, and we've addressed those through repricing, and we're starting to see improvements in that. This quarter, some of it was just higher claims in LTV. A lot of these claims actually happened in Europe as it comes out. And usually, we get some pluses and minuses. And this time, we -- this quarter we happened to have mortality, longevity, mortality through the reinsurance, longevity through the U.K. and the reinsurance, the LTV and the Irish operation, all just -- slightly negative, but they all went in the same direction. So I don't see anything systemic there. A lot of our gains are driven by yield enhancement, which has remained steady throughout the period. So it's really some of these other factors this year that are -- have made the year-to-date lower and you're right to note that.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [5]

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And there's nothing seasonality wise for Q4, is there, on this front?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [6]

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Not particularly, no.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [7]

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Yes. Okay. And then on Putnam. You mentioned, I think, Garry, seed capital gains. I didn't see that in the (inaudible) size that for us? And maybe we could -- you could comment on your view on the sustainability of a pretax margin close to 10% for Putnam this quarter?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [8]

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Yes, I'll start off with thinking about sort of looking ahead at pretax margin. We're feeling good about where we've got to so far in terms of pretax margin, but we're continuing to look for opportunities for improved relative cost performance and opportunities for greater efficiencies at Putnam. So we're continuing to work. We don't view that as end of game, we'd like to see it to be stronger than that, and I know Bob and his team are working hard on that. But I think Garry can speak to sort of the -- more of the in-period seed capital.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [9]

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Yes, the seed capital impaired I probably didn't call it, it was very modest. I think it was $2 million. This is a very small presence in this quarter. So it's positive.

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Stephen Gordon Theriault, Eight Capital, Research Division - Principal & Head of Research [10]

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Okay. And last thing for me. We've seen a lot of written about -- there's been some issues with U.K. property in past quarters, and we've seen a lot of written over the last couple of months on WeWork and the possible fall out in U.K. property. Any exposure for you there thinking ahead?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [11]

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Yes. Thanks, Steve. We continue to -- as we've generally just said in our comments here, and we've said each quarter, we stay on top of our property. We like the solidity of the portfolio. And it's stable and strong. But we certainly, like everyone else, would have done a deep dive in understanding any exposure we have to WeWork. And I'll actually just turn that one over to Raman to make some brief comments on that.

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Raman Srivastava, Great-West Lifeco Inc. - Executive VP & Global CIO [12]

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Thanks a lot. So yes, into the direct question you had with relation to WeWork, we have obviously looked at this, and looked at this for a number of quarters, and we've had opportunity to participate in WeWork or other service office exposures -- both in Europe and the U.S. and in Canada, for that matter, we have very limited exposure directly to WeWork. And even in the space as a whole, we've really limited our exposure to this sector of the market, whether it be the direct property or mortgages or via bond. So we have very minimal exposure to not just WeWork with this space in general.

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Operator [13]

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The next question is from Gabriel Dechaine from National Bank Financial.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [14]

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I want to ask about Empower. And you mentioned the -- excluding a basis change, earnings were up 16%. I'm just wondering what kind of basis change would take place in that business that's more of -- like I wouldn't think there would be much because it's a record-keeping business?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [15]

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Yes. Thanks, Gabriel. I'll let Garry handle that one?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [16]

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Sure. There was a modest basis change. This -- Empower, as part of their offering, has a general portfolio fund. So you do have some general account exposure. And it's a source of our margins and profitability as well. And within that, the actuarial standards change did have a modest impact. So the overall -- we recalibrate, we use stochastic modeling. It's an actuarial technique for setting their reserves. And so part of the standards change was changing the calibration of those models. So when we put that in, the net impact of that update was $6 million. So you're right, it typically doesn't have a lot in the way of basis changes, but it can have some.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [17]

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So that -- it's an annuity product of some sort?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [18]

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It's really a fixed income solution that employers would provide for sort of stable, longer term returns as part of that overall Retirement solution portfolio. And it's a General Counsel offering and other companies might use stable value and solutions like that. But it features actually as a standard that a lot of insurance companies would provide as part of their 401(k) offerings in the U.S.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [19]

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Okay. And just the -- I mean, even with that, I assume that the Canadian dollar growth figure. Therefore, the U.S., the growth will be a bit lower. And that's a -- is it?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [20]

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Sorry, no, just to clarify that, it was $6 million U.S. was the impact. And the Empower earnings, I believe, were 44%. So that's how we get our 14% year-over-year increase.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [21]

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Okay. Moving on. Your new disclosure there on the actuarial or the management action items and the experience, that's new. It's helpful. And you did talk a bit about the lapse issue in that study. And just wondering, is there something more substantial about the Q3 review at Great-West. Because as I recall it, you kind of make these big adjustments or some adjustments and management actions every quarter. Is anything -- is this part of an ongoing process where Q3 is a bigger -- bigger item.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [22]

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I'll let Garry speak to that one.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [23]

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Sure. We do review our basis on an ongoing process through the year. But that said, a lot of the experience studies do get done in the second quarter, and then your results are ready and you're ready to finalize in the third quarter. So there typically has been, over the years, if you look back more activity in the third quarter than the other quarters. But we do keep an eye on our BCs throughout the year. But there is just the natural cycle of some of the studies and just the prioritizing actuarial work (inaudible).

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [24]

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The reality is, Gabriel, that a lot of activity is spent on planning and budgeting and forecasting for 1, 3 and 5-year plans in Q4. So it's that Q2, Q3 activity. And that's where -- why we tend to see more activity that sort of comes through in Q3.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [25]

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And that 200 and some-odd-million from policyholder behavior is it the lion's share of that? How much of that would be tied to the term -- Canadian term business?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [26]

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Yes, it is the lion's share. About 90% of that.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [27]

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Got you. And then last, a quickie here. Just to clarify, the experienced loss, the claims trends in Ireland, it wasn't related to the critical illness product because it's -- you mentioned long-term disability as the driver?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [28]

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Yes, I'm going to let Arshil speak to that one, Arshil?

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Arshil Jamal, Great-West Lifeco Inc. - President & COO of Europe [29]

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So there are 2 issues in the European mortality morbidity line. We've seen an elevated level of claims in the traditional U.S. reinsurance business that's coming through the mortality line. And then in Ireland, earlier in the year, we had weakness in Irish Life Health. So we're repricing there. We're not quite getting our target margins, and there was a slight experience loss. But in-period, there was a bigger experience loss related to long term disability. So we're seeing slightly higher incidence rates in Ireland. And then the fall in interest rates also means the present value of our claims costs have increased and we offer 2 year rate guarantees there, so it will take us a couple of years to recover on the pricing side for those interest rate falls, along with that modest increase in incidence rate. So that's really that -- sort of driving the European side of that mortality morbidity number.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [30]

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And Gabriel, we've talked about this in the context of our Canadian group play and health book. And it's -- you'd characterize it in the same way. It started to have some falling interest rates, where you see some changes in claims patterns and what you do is you start to put through pricing, and we're very active on that front.

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Gabriel Dechaine, National Bank Financial, Inc., Research Division - Analyst [31]

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You started in December, I believe?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [32]

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Yes, we did.

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Operator [33]

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The next question is from Doug Young from Desjardin Capital.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [34]

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Just on Slide 4, I guess, related to the capital. I'm just wondering if there was any fund moved out of the U.S. and up into the Canadian Opco. I mean, your LICAT was quite strong in the quarter. And I guess, within the same vein, there was, I think, $500 million freed up from the U.S. transaction, but I didn't see any mention of that. So I don't know if that was moved up or if that's -- if it's still $1.6 billion dollars that's sitting down in the U.S. company from that transaction?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [35]

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Garry?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [36]

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Sure. So a couple of questions there. First, there wasn't any money moving up from the U.S. into Lifeco or the (inaudible), the Canadian Opco. You're right, LICAT is a Canadian Opco measure. So cash moving to Lifeco from the U.S. wouldn't have mattered in any event. But there was none that moved up. And then on the second part, we've just -- we've called out the Ceding Commission. There is obviously -- some of the other is freed up capital just from our operations, lower requirements as we've divested the individual markets business. And so that's -- that money is still there, it's still in the operating company. Actually, both those amounts are at the moment. We flagged the ceding commission. And then there's further work just to finalize what our target RBC ratios to operate on the U.S. will be going forward, and that will determine the final amount that moves up from the -- that freed up capital.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [37]

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Okay. So no change. The URR, was there a positive impact on LICAT from the URR change? I think there would be, but I don't know if you -- if there was and you can quantify. Just because it looked like the interest rate risk and the denominator did come off a bit.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [38]

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No, there was no URR impact. The benefit of LICAT just from lower in-period rates is the fair value on the total capital resources goes up a bit, and it goes up more than the denominator of the calculation. And so you end up getting a small lift from lower rates, which ironically is the opposite of MCCSR, so.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [39]

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Yes, but there was -- so there was a small positive impact, but nothing material?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [40]

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Yes. But it wasn't from the UUR, it was just lower rates.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [41]

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Just from lower rates...

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [42]

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Just lower in-period rates.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [43]

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Okay. And then just Putnam, I know you talk about expense initiatives. Can you elaborate exactly what you're doing? Because I think there's some question about sustainability. But what exactly are you doing to reduce costs at Putnam right now?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [44]

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Yes, I'm going to actually refer that one on to Bob Reynolds. Bob, do you want to speak to that?

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Robert Lloyd Reynolds, Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC [45]

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Yes, I think it's been an ongoing process. We embarked over a year ago. But it's also a change in performance fees, and we were paying double rent for a period of time and then just expense management across the company. And there has been some headcount adjustment, but that hasn't been the biggest part of it.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [46]

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So performance fee, double rent, you mean, in terms of what you're paying out in compensation?

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Robert Lloyd Reynolds, Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC [47]

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No performance fees on the fund. Performance has gotten better, and that's been an improvement to the bottom line. On mutual funds, performance fees can be both positive and negative from a dollar amount to the bottom line. And then we moved headquarters. And during the period to build-out, we were paying rent in both places. So we knew that was coming, but certainly it helped.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [48]

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Yes. And Doug, I would say that a lot of this is a function of Putnam's strategy, too, in terms of the commercial offering into the marketplace. As Putnam has been looking to drive stronger performance and better outcome for customers. So they've been consolidating certain funds to drive out better long-term performance and value for clients and for their advisers, and that resulted in some of the headcount reductions. Also some initiatives that we've looked at on the IT and the automation side. So these are real savings, and it's a real concerted effort. And Bob is doing a great job leading the team here on this.

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Doug Young, Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst [49]

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Okay. And just maybe lastly, tax rate. I think it was mentioned, being low. In a normal quarter, and I know probably there's no such thing as a normal quarter. But in a normal quarter, or when you're doing your planning? Like what is the tax rate? What should the tax rate be?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [50]

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I'm going to let Garry answer the detail, but I will say, in a normal quarter, the reason you can't sort of contemplate a normal quarter is because we have different tax rates in each jurisdiction. So the geography of earnings positive, or even the geography of a basis strengthening, can have a real significant impact in terms of moving that tax rate around, but I'll let Garry speak to sort of giving some insight into the tax rates.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [51]

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Yes. Typically, given our recent periods, a mix of earnings you're probably something in the mid-teens. That's not a bad indication. It does move around. But I think, overall, you see something in the mid, maybe mid- to low teens.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [52]

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Yes. But, Garry, to the extent that we have a quarter where we have let's say, a strengthening in an area like Canada with a slightly higher tax rate. And then we have contributions in an area with lower tax rate, you'll get that tax rate movement. So that's why it's hard to describe what normal is, but probably better to say sort of what's the typical average as opposed to normal. So it will move around.

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Operator [53]

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Our next question is from Sumit Malhotra from Scotiabank.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [54]

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I wasn't going to go to Putnam. I just want to pick up on something you guys were saying there to Doug's question. I think it was about 3 years ago that the company took a restructuring charge for Putnam. And I think that was focused primarily around headcount. It seems like it's more recently that we've seen the level of expenses take more of a step down. So is it correct to say that it isn't necessarily any new type of restructuring charge that's been enacted as much as some of these noncomp expenses, like the real estate you referred to?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [55]

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I'll let Garry speak to the way we're approaching it.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [56]

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Yes. I think I'd also just draw back to this time 3 years ago. We did actually see improvements in the expenses in the order of $50 million, $55 million, if I recall, that we'd seen. We did see that improvement coming through. On the other hand, at the same time, we also had some fee pressure. So the net earnings didn't respond as much as we might have hoped from just the expense reductions. What we're seeing here is that the fees are staying a little more steady. So we're seeing the expense reductions really fall through to the bottom line more so than we had the first time around. So I think that's probably the larger change you're seeing.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [57]

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I was just going to say, I mean, the punchline that we get to here is, this business has moved back to the positive side of the ledger the last couple of quarters. And clearly, the expense savings have had a big part to play in that. Are you of the view, and I think this is where we were headed before, that the step down in costs that we've seen here are sufficient to keep you in positive territory for Putnam from an earnings perspective, even with some of the revenue or top line pressure you've described?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [58]

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Yes. Sumit, I'll speak to that. It's Paul. Yes, so obviously, there's lots of moving parts there. We saw a significant decline in equity markets in Q4 last year. So we can't predict what the world will look like relative to equity markets but if we assume just sort of the things that are controllable to us, which would be driving out really strong performance for customers. So having good disciplines around investment management and resulting in solid flows and good performance, we're on that. And we're -- right now, we're performing very well on that front. And secondarily, the controllable being expenses and efficiencies and where you're automated and where you're outsourced, all those things. We're very -- we're bullish on the disciplines that we have in place, and we actually do think there's some additional opportunities there. But again, it's the whole package, it's making sure that you maintain strong performance. You're keeping your very strong portfolio managers and teams in place to be able to drive that at the same time that you drive out efficiencies. And we think this is a -- where the model is at now, but we think there's additional opportunity looking ahead.

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Sumit Malhotra, Scotiabank Global Banking and Markets, Research Division - MD of Canadian Financial Services [59]

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And then secondly, is going to be on Canada. I think the bulk of the URR charge went through the Canadian business. So if I try to clean that up, it looks like earnings are up in the magnitude of 8% year-over-year, which is one of the better results you guys have had in some time. And same type of improvement was reflected in expected profit. Paul, I heard you say early on that the expense growth, some of the investment spend has started to taper off and expense growth in and around 3% is reasonable. There was also a comment on margins in the group business improving. Just maybe somewhat broader I was hoping you can give us an update on what the key factors are behind this improvement we see in Canada and whether the sustainability is something that you're of the view that can recur here?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [60]

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So I'll -- thanks, Sumit. I'll start off at sort of a high level to frame the way we think about it, whether it's Canada or any other of our businesses, but I'll let Jeff Macoun speak to sort of the details of where he sees building strength. So as a starting point, we did launch into some fairly significant investments in automation and building out a lot of our muscle around digital, and that did cost some money, and we did see those elevated expense levels. Then as you actually start to launch capabilities, whether it's launching this SimpleProtect, and we talked about it an awful lot, but the reality is, if you've got 50% of your apps that go through that going through in 1 day, and it's all automated, that means you do not have the same level of people engaged in the process, and that starts to have a cost impact. And I've talked in the past about it -- it's great to meet new stuff, but it's adoption that really matters. And when you get adoption, then you start to have a meaningful impact. So I think that's one part of it is the payoff, ultimately, that will continue to flow on as we digitize and I think the other one, that Jeff can speak to, would be automating claims. If we can now have every claim that someone can do on their smartphone or on their desktop, then that means that those are not pieces of paper that are coming in the mail and that we're processing and doing all that. So those are all just sort of a manifest in discipline. And then the other one just generally is really making sure that we've got good, solid discipline in all of our businesses saying, is this going to be productive expense. And making sure that we have that discipline. But I'll let Jeff speak to sort of his views on kind of where the strength is coming from in Canada.

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Jeffrey F. Macoun, Great-West Lifeco Inc. - President & COO for Canada [61]

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Thanks, Paul. Yes, we're really pleased with our progress. On the expense side, perhaps to add to Paul's comments, the actions of our work on automation are starting to pay off significantly. Our focus on digital, which we've talked about on these calls is taking place. And without -- within the business process improvement. So that's really helping us to moderate our expense. But I also would add on the revenue side, you're seeing a culmination of a number of product and service enhancements over the last number of quarters. So combine that together, and we're seeing a good overall result.

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Operator [62]

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The next question is from Mario Mendonca from TD Securities.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [63]

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Just a quick question. The -- and this is maybe similar to what Sumit was asking about a moment ago. It relates to the improvement in expected profit sequentially, it was 9% from one quarter to the next. Would you assign that largely to the group pensions business -- I'm sorry, group benefits business or expenses? Or maybe you could just help piece that together?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [64]

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Garry, why don't you provide a little color there?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [65]

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Yes. That was primarily in the group side of the business, and that's going to be a combination of higher assets in the group health side, and it's also going to be a combination of just stronger -- both sales by business growth in the group area and fully restoring our margins through the -- on the expected profits. So you're getting the group is firing on all cylinders. And that was the largest driver of the year-over-year change.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [66]

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Yes. I might add a little more color on that. But one of the areas where we've really been focused on in our, I'll call it, our workplace business is growth. We've talked a lot about the top line growth in Empower, and we talked about a lot of the top line growth in Canada in group. And that creates 2 points of strength. One is leverage on the cost side. And we continue to want to grow whether we grow that organically or through M&A. And then the other one is it expands the overall platform because each of those plan members or participants represents a -- kind of a mid-market customer who are seeking advice and support. And all of that comes through not only sales but also retention. So we're very, very focused on growing those businesses through strong sales and retention. And Jeff, you might comment a little bit on that in Canada?

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Jeffrey F. Macoun, Great-West Lifeco Inc. - President & COO for Canada [67]

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Yes. We've -- in '18, we had a tremendous sales year, and that's continued on into '19. In almost every cell, we're exceeding targets. But better than that, we've seen our persistency rates really increase. And so it's nice to sell it, but it's better to keep the business. And we're really excited about that. And the third is we are placing the right level of renewals. So very important, and that's really a big part of the driver, both on the Life & Health, and I might add on the wealth business, where we're having a good go at new cash flow in the business.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [68]

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So clearly, you've had some success there. Would it be fair to say then that now that you've addressed some of the issues that the expected profit in those businesses, those group businesses, in particular, have reached a steady state and now it would be more volume related that would drive that growth?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [69]

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It's hard to forecast that. I mean, the reality is we're looking to grow the premium, which will help to grow the -- obviously, the expected profit. And then the other one would be, to the extent that we're moderating expenses through automation and lowering costs, then that can drive expected profit. So you want to be doing both all the time. What you'd like to do is improve the business model which is going to allow you to maintain or strengthen margins possibly. And then have that business model be sort of the best value proposition in the market so that you're growing. And that's really what our core strategy in these group businesses globally, including Empower.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [70]

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That's helpful. Quickly then, on the taxes. I have been trying to figure out, like disaggregate how much of that lower tax rate relates specifically to what we'd call sort of like tax resolutions that are a little less predictable and the extent to which it relates to just jurisdictional differences. So I've tried to size what I think is the gain in the quarter, perhaps related to resolutions in Canada. And I'm coming up with something in the neighborhood, $40 million to $45 million. Does that sound about right?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [71]

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I'll let Garry speak to that.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [72]

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No, actually, I would have said our effective tax rate being around 7%, I would say, 2% of the benefit was probably from the resolution of the tax match. So they weren't the largest contributor. There's more about the jurisdictional mix that drove the overall this quarter.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [73]

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Yes. So that occurred to me as well. So I went through the tax rates across the jurisdictions. And all of them are really low relative to history. So it's every jurisdiction. So if every jurisdiction really looks low relative to history, I struggle with how that really can be explained by mix of jurisdiction if everything is really low.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [74]

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Garry?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [75]

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Yes, sure. And again, if all the jurisdictions are lower than the overall average is going to be low. So I do think that actually works. But I mean we'd be happy to take this off-line just to help work through it for you because it is -- but it really is -- it was about 2 points from the tax matters that we resolved.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [76]

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But it's fair to say that jurisdictional benefits were more in Canada, where rates are a bit higher and some of the other -- and then basis change, the way you think about basis change in Canada, which was more -- it was a negative in Canada. So really, you've got benefits of tax benefits and lower relative earnings because of a basis change there in Canada. So that brings it down. And then you had some strength happening in other jurisdictions with lower tax rates. So what I think is if we go and take it as a one-off, we can sort of take you through the math.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [77]

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Yes, right. If you look in the supplemental information pack. If you look at the reinsurance, you'll see the tax there to gain. That's reflecting that reinsurance itself operates in several jurisdictions. And so where the basis changes happen to fall, the more negative one is the reinsurance or -- in the U.S., which has higher taxes than some of the positives in Europe, which are lower tax. So you will see it in the -- I'd say, we can take it offline and step you through it.

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [78]

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Sure. One final thing then on Page 13 -- I appreciate this disclosure. Very often, when I see these together, I start -- I ask myself, the extent to which management actions and changes in assumptions will have an effect on experience gains and losses in subsequent quarters. So when I see a pretty material strengthening here related to policyholder behavior, would it then -- could I then interpret that to mean that experience losses related to policyholder behavior could actually decline to 0 in the near term because you've strengthened the reserve so much?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [79]

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I'll let Garry speak to that.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [80]

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So first off, Mario, you are right that to the extent we do a basis change and then all else being equal, that we would see better experience going forward or worse experience depending on which way the basis change has gone. And so there is a connection there. Now that's why those all else be equal. So whether policyholder behavior goes to 0 or not -- I mean, the Canadian term was certainly a big part of that, but there's always some small amounts and always positives and negatives in there. So it's -- predicting any one of these like mortality and longevity -- we've had longevity changes quite a bit. It doesn't necessarily mean your gains are going to be positive or negative in the period, it just means they'll be different than they would have been had you not done the basis change.

So you're right to make the connection, but it's just no -- and all else being equal the policyholder behavior, for example, taking the $200 million now will improve future experience, but what that future experience level is, it's just hard to predict.

Does that help?

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Mario Mendonca, TD Securities Equity Research - MD & Research Analyst [81]

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Yes, no. There's no way you can draw a straight line from one to the other, but there's some connection there.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [82]

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There is a connection.

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Operator [83]

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The next question is from Tom MacKinnon from BMO Capital.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [84]

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Just a couple of modeling questions and then a follow-up. Just with respect to the big new business gains, bulk annuity kind of related in Canada. That $25 million has certainly been a lot higher than what we've seen in the past. So to what extent was it influenced by substantial sales of group wealth products? And what should we be thinking -- should we be looking at something going forward more in line with what it's been over the last several quarters as opposed to this quarter?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [85]

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Well, I'll start out by saying that when we look at things like bulk annuity, whether it's writing a single premium group annuity in Canada as it would be named or in the U.K. bulk annuity, the starting point for us is discipline.

We look at opportunities as they come to the market. If we have a good opportunity to achieve the returns that we want and if we're confident that we can source the assets to back those liabilities, then we'll be active. But I think as I said in my speaking notes, it's lumpy. We -- there may be another opportunity next quarter or the quarter after, but you don't know. You're always working on that. And -- but you're working on it with discipline. And I'll let Garry add a little bit more color in terms of the way we would look at it going forward.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [86]

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Sure. Tom, I think the $25 million, $22 million into real camps so I look at the year-over-year change and it's about 2/3 on the group customer side. A lot of that was a large single premium group annuity, but it's just higher margins in general. So that was a good result. The other 1/3 was actually in the individual customer business. And that's really just lower acquisition expenses. We mentioned expense control. So the lower acquisition costs year-over-year, it drove a higher new business result there. So both, 2/3 for group, 1/3 for individual.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [87]

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Okay, that's helpful. In the U.S., you've done this sale of the indemnity reinsurance in terms of the U.S. Individual life and or life insurance and annuity business. But now you're still picking up $5 million in earnings on this stuff and you say you've retained a portion of this. Can you elaborate what's going on in terms of what you've retained and how we should -- I mean they're small, but are you expecting like another $20 million each year from this stuff going forward?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [88]

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Yes, Garry, do you want to speak to that?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [89]

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Yes, sure. We did retain -- there's a couple of small blocks that didn't go as part of the transition. One was a -- primarily a car insurance block and has some associated nonparticipating riders with it, but it's primarily a car insurance block. And the other was assumed -- this is life retrocession business that (inaudible) been in. Again, it's a small line. As far as that, it was a good result this quarter, but not something that will bobble around. I would expect, being modest, we'd hope for it to be positive, but it's not going to be a sizable material amount period to period.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [90]

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So what you got in this quarter, we'll just assume to throw that out for each quarter for the next several quarters? Or is that the way we should be thinking about that little line?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [91]

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Yes. I don't recall anything unusual in this line, we might have had some favorable mortality for a -- but it's quite small. So yes.

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Tom MacKinnon, BMO Capital Markets Equity Research - MD & Analyst [92]

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And with respect to the commentary around all the growth and expected profit quarter-over-quarter. And it seems to be primarily related to group insurance business, group wealth and then group life and health insurance. And I think you had talked about margin restoration. I assume that's the way you look at this business in terms of group Life & Health, in particular, on a margin basis. So my comment here is why not disclose that margin so we can see how that growth in expected profit would be because an SOE for group life and health businesses and as useful, as I would say, as a margin would be in that. So that's just a comment.

And then -- so a comment and maybe a hint as well because we've seen a margin disclosure for group life and health insurance from another guy that we cover. And then I guess it wouldn't be a Great-West Lifeco call without asking about what's going on in your hunt for a U.S. asset manager or U.S. record keeper. Is that still on the front burner? Can you give us any color there?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [93]

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Yes. Thanks, Tom. So as it relates to group margins, we'll take that under advisement. But as it relates to M&A, for sure, front burner. So we're talking a lot today about strength of the core business and the things we're working on, whether it's automation, but suffice it to say that management is still very active on a number of different M&A files. For sure, in the record-keeping space in the U.S. active on that and not just active and not just what I'd say is reactive to banking opportunities brought forward to us. But proactive in terms of trying to connect with decision-makers and look for opportunities because we do believe that market will consolidate and maybe not as quick as we'd hoped, but we think that opportunities are there, and we're active. On the asset management side, we remain active. But again, you'll see that we kind of have a two-pronged approach at Putnam. One is to drive out efficiencies to continue to drive our strong performance so that we can improve the margins we've got organically, but we still believe that an acquisition to provide some step rate scale will really unlock more value. So we're still active on that. We've got a team active and engaged on it. So yes, it's still front burner. And -- but what we're not doing is waiting around for acquisition in any of our jurisdictions. What we're doing is trying to strengthen the businesses with the tools we've got while we look for acquisitions.

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Operator [94]

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Our next question is from Paul Holden from CIBC.

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [95]

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Two questions for you, and they're both on the same theme, and that's the important one of driving future earnings growth. And Paul, you've highlighted 2 areas of sustained growth going forward, Canada and Empower. What -- I want to ask about is what you're doing in Germany. Specifically, you've made a number of investments there, and you talked about changing or updating the technology platform there. So maybe a better sense of growth potential in Germany would be helpful.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [96]

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Yes, I'll start off at a high level, I'll frame Germany in the context of the way we look at it relative to our other businesses. Thematically, if you look at areas where we have a strong focus and deep capabilities is really helping people with retirement savings and retirement income. And we're trying to really strengthen that and look at the full life cycle of a customer's need to save for retirement and then help them optimize through retirement. Our German business is really a place where it's about retirement savings. We've got a strong retirement savings platform, good reach into the market there. And what we viewed was that we wanted to actually play a bigger role in Germany, not just in the retail savings space, but also in the group savings space, which is kind of burgeoning in Germany. So as a result, we made a decision to invest meaningfully in systems to allow us to be better at what we did today and to extend the business. And it sort of fits into that theme of -- if you think about where the western world is going with boomers and where the wealth is transferring and the like, you want to be playing in this space. It is the place to be -- space to be playing at. And I'm going to let Arshil speak to sort of our views on past growth and growth going forward in Germany.

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Arshil Jamal, Great-West Lifeco Inc. - President & COO of Europe [97]

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So as Paul mentioned, our real focus in Germany at present is in the broker distributed unit-linked pension space where we are quite competitive in providing retirement solutions to individuals who procure their individual pension contract through an independent broker.

And then our technology investments really there are to modernize that platform. So we're almost done moving all of our new business activities onto that new platform. It is installed, it's up and running. We're slowly ramping up issuance of new business onto that new platform.

So going into next year, most of our new business will be issued off of that new platform, and then we'll be focusing on migrating our historic business onto that new platform so we can turn that off and then further plot out some expense benefits in our unit costs. And then more importantly, once we have that new platform, in addition to sort of individuals working with brokers, we really want to turn our attention to the broader retirement landscape there. And we think there's a tremendous opportunity in the small case pensions arena. So we do administer it today, a number of very small, 5% or 10% occupational pension cases in our German business, but I think once we're on a modern platform that is scalable. We can really focus on that segment of the business. And over time, I think that will be as big as our individual retirement business. And we've also broadened the product portfolio there. So historically, we would have focused on some niche protection products. To supplement the retirement offering that we had. But then we've really broadened that, and we have a very modern, compelling term insurance offering a modern compelling disability offering, along with innovative critical illness and other products that we would have offered in the past to make our reputation in that market. And so that business is growing very, very strongly and notwithstanding the falls in interest rates and some of the weakness in the overall growth in the economy. We are taking share from others in that marketplace. And I am very optimistic, not quarter-by-quarter, but I'm very optimistic that over a 3- or 5-year period that we will see a material incremental contribution from our German business.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [98]

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Yes. And I would just add to that, Arshil, that if you think about a post Solvency II environment, the product areas that we are playing in, this unit-linked retirement savings, is kind of the future of the German retirement savings regime as people move away from high guarantee products that you can't sustain through -- in the Solvency II environment. So we happen to be playing in the market that is growing, and we happen to be taking share in the market that's growing. So you kind of get the double lift. And that's why we're actually pretty bullish on Germany.

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Paul David Holden, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research [99]

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Great. Thanks for that thorough answer. And then going back to Canada, one of the products, I think about a lot in a fallen rate environment is participating life, which obviously is an important product for you and the sales have been strong, but what I worry about is if we're stuck in this lower for longer, for another 5, 10 years, what happens to that participating product? Do you anticipate demand would fall off? Or just generally, how do you think about that risk and potentially mitigating that risk?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [100]

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That's a good question. I think as a starting point, people use that product, obviously, for the protection benefits, but also for estate planning benefit. So obviously, the underlying returns associated with it can be quite relevant.

We have been working in this lower interest rate environment for a long period of time. And when you look at our assets backing those part liabilities, we've been managing through a declining low interest rate environment with kind of a laddered investment strategy. So we've actually kind of managed through that. One of the things we see is that at some point you do end up with sort of a stable rate -- relative rate of return with the mix of fixed income, equity, real estate and the like. And part of it is just good transparency with clients understanding that -- where the value is at. But it's also a relative value thing. Clients will be looking at that. They might be looking at, let's say, universal life contracts that is reliant on fixed income as well, to a large extent, for a lot of products.

And so on a relative basis, it's still viewed as an attractive proposition. Garry, anything else you'd add on that?

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [101]

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No, I think you've really covered it well.

That's -- it's relative to what's out there for people looking to have protected wealth and estate planning solutions. I think participating insurance will continue to be an important product.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [102]

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Anything you'd add to that, Jeff.

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Jeffrey F. Macoun, Great-West Lifeco Inc. - President & COO for Canada [103]

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I would just add, Paul and Garry, that we continue to be very bullish on it. Advisers that we work with look to our organization for this offering. It's a wonderful and very effective estate planning tool that advises use primarily in the business owner market. And we continue to see good opportunities for us.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [104]

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Yes. And the one comment I'd make, Paul, is that, obviously, given the fact that we're talking about an insurance contract and estate planning, there's the inherent tax advantage in using that as a vehicle as opposed to some vehicle that's either a nonregistered just investment vehicle.

So that will sustain and we've gone through the tax regime changes a couple of years ago. So those benefits continue. And obviously, we just have to manage through the investment cycles environment like we would with any of our products. But it's a good question.

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Operator [105]

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(Operator Instructions). The next question is from Scott Chan from Canaccord Genuity.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [106]

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Maybe just tying Paul's question about earnings growth and looking at your NCIB, which has been inactive, year-to-date. Your peers are a lot more aggressive. What triggers or what would have to happen for you to be more active over the coming year on that front?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [107]

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I will let Garry speak to the NCIB.

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Garry MacNicholas, Great-West Lifeco Inc. - Executive VP & CFO [108]

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I think I'd first point out that we were inactive this year. We did actually do a substantial issuer bid. So we did a fair bit of share buyback activity this year. So that's one of the reasons for the inactivity. And I'd say we view the NCIB as just one of our options for managing capital. As Paul indicated earlier, we are looking to deploy capital in the organization to fuel growth but we recognize that at some point if the ratios get a little high and we don't have solutions, then one of the tools to help manage overall returns to shareholders is the buyback approach. So we have -- there's no fundamental change to that. But in terms of whether it's our own views or even just views we hear from investors that it's awhile that one recognize it's an important capital management tool. Typically, investors look for you to deploy capital productively, either organically or through M&A first, to fuel growth and then -- and have it supplemented by buybacks.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [109]

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Got it. And just a few questions on Putnam. Bob, you talked about the lower expenses. You talked about performance fee or a change in the performance fee structure. Can you kind of comment on that and how that reduces expenses. I just can't really tie that together?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [110]

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Yes. Maybe I'll just -- I'll jump in and then I'll let Bob speak to performance fees. Bob was talking -- I think Bob was talking more broadly about the relative overall earnings performance at Putnam, which is a combination of some of the expense disciplines we've had, but also some shift in performance fees, less of a drag or a positive contributor. So I think it was -- he was talking about the combination of those 2 things contributing to the margin and that the margin wasn't just about expenses. It was also about the outcome of our really good disciplined and strong investment management. But Bob, maybe you want to speak to performance fees?

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Robert Lloyd Reynolds, Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC [111]

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Yes. In the U.S., in the mutual fund side, they have to be fulcrum fees, meaning they can go up as much as they go down, and it's over a 3-year time period, and it's the average assets over those 3 years. And I know this is somewhat complex, but performance of fees, obviously, if assets are growing and you're performing well, will be a positive to the bottom line. If performance is not up to par and assets are going down, they can be a negative number. And over time, as our performances improve, they become a contributor. And going forward, we think they will add more.

We have performance fees on some of our funds, not all of them, but as I said, they can definitely improve.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [112]

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And just lastly... Okay.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [113]

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Go ahead, Scott.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [114]

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Yes. Just lastly, just on the institutional side of Putnam. I think, Paul, you called out quant equity as kind of -- I think the gross redemptions were pretty large in the quarter. I realize it's lumpy. Was there any other kind of asset classes that you kind of see that as -- that was kind of contributing to that Q3 gross number?

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [115]

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No. I mean, yes -- over to you, Bob.

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Robert Lloyd Reynolds, Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC [116]

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Yes. I would say on the institutional side, we have very positive flows in fixed income, very positive flows in multi asset. Equity side, especially on the quant, and this has happened across the industry, one had 10 very good years, which we definitely participated in, in the last couple of years have not gone as well, and they've -- we've suffered redemption as has the industry. I would say our redemptions have been a lot less than our competitors, but we're still feeling the effect of it.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [117]

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But it really is centered there, Scott.

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Scott Chan, Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst [118]

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Okay. How large is your quant strategies relative to your overall assets on that platform? Is it still large?

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Robert Lloyd Reynolds, Great-West Lifeco Inc. - President & CEO of Putnam Investments LLC and Chair of Great West Lifeco U.S. LLC [119]

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It's approximately $40 billion. And I would say a portion of it is quant equity and a portion of it's multi-asset on the quant side. And with multi-asset, it has positive flows and the quant equity is in redemption. But there's $40 billion in total.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [120]

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But overall, Scott, this is -- we're talking about a cycle here like we would in any of our -- if you look at an overall portfolio and diversification is key and our overall quant strategy is diversified. This just happens to be one part of it.

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Operator [121]

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This is the end of the question-and-answer session. I would now like to turn the meeting over to Mr. Paul Mahon.

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Paul Anthony Mahon, Great-West Lifeco Inc. - President, CEO & Director [122]

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Thank you very much. With that, I would like to thank you all for joining us for the call today. As always, please contact Investor Relations if you have any follow-up questions, and we do look forward to speaking to you again next quarter, and hope you have a great day, and I guess it's happy Halloween. Take care. Thank you.

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Operator [123]

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The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.