Empower Annuity Insurance Company of America (PRU) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Conference Call. [Operator Instructions] I'd now like to turn the conference over to Mr. Paul Mahon, President and CEO. Please go ahead.

Thank you, Gillian, and good morning to everyone. Today, I'm pleased to announce that Great-West Lifeco's subsidiary, Empower Retirement, has entered into a definitive agreement to acquire the full-service retirement business of Prudential Financial. Joining me on the call to discuss this exciting news is Ed Murphy, President and CEO of Empower Retirement; and Garry MacNicholas, Executive Vice President and Chief Financial Officer of Great-West Lifeco. Please turn to Slide 2. Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures. These notes apply to today's discussion and presentation materials. Also, please note that all financial information throughout the presentation is in U.S. dollars unless otherwise indicated. We'll open the line to questions from analysts after our formal remarks. Please turn to Slide 3. Empower will acquire Prudential's full-service retirement business for a total transaction value of $3.55 billion. The value includes approximately $2.1 billion of capital to support the business. The total transaction value is $4.45 billion in Canadian dollar terms. Prudential has $314 billion of assets under administration, 4 million participants and 4,300 plans. The majority of the business is defined contribution with some defined benefit plans. The transaction will be financed from existing resources and a combination of hybrid instruments and additional debt. Garry will elaborate on the transaction financing later in the presentation. The acquisition is an excellent strategic fit for Empower and Great-West Lifeco. It reinforces Empower's leadership position in the U.S. retirement market, increasing its participant base to over 16 million and assets under administration to $1.4 trillion. It leverages Empower's strong track record of building scale through M&A and its proven integration expertise. Moreover, it fully aligns with Great-West Lifeco's value creation priorities of workplace extension and leveraging digital capabilities. For shareholders, we're acquiring a profitable business, which is expected to further diversify Lifeco's earnings profile by scaling in power and adding to Lifeco's already cash-generative earnings profile. We believe shareholders will recognize this as a highly accretive transaction, driven by large synergy opportunities and a focus on long-term value creation. The acquisition financials provide a compelling value proposition for Great-West Lifeco shareholders. In the near term, significant cost synergies are expected from migrating the Prudential business to the Empower platform. And over the medium to long term, growing revenue synergies are projected from extending our personal capital-enabled advice and financial wellness offering to Prudential participants. Prudential is expected to contribute $325 million of after-tax earnings to Empower on a fully synergized run rate basis by the end of 2023. This contribution, along with the benefits of our previous transactions, are expected to increase Empower's contribution to Lifeco earnings to 30% by the end of 2023. The transaction is expected to be immediately EPS accretive and deliver 8% to 9% accretion on a run rate basis by the end of 2023. Finally, using illustrative 70-30 equity debt financing, which is consistent with Lifeco's overall capital structure, the fully synergized P/E multiple is 8.1x. We view this as a very attractive valuation for a highly strategic acquisition with significant long-term growth potential. And the reality is, we will be using far more efficient financing without any equity, which means significantly greater value creation potential for shareholders. I will now turn the call over to Ed, who will tell you more about Prudential and what it will bring to Empower. Over to you, Ed.

Thank you, Paul, and good morning, everyone. Please turn to Slide 4. Here, I'm going to give you a brief overview of the business we are acquiring. Prudential is a full-service retirement solutions provider with capabilities across all plan types. It offers recordkeeping, proprietary and third-party investments, rollover, IRA rollover and financial wellness solutions. As Paul noted, it has $314 billion of assets under administration, 4 million participants and 4,300 plans. Prudential's portfolio is largely comprised of defined contribution plans which represent 87% of the assets under administration. Prudential has a strong position in the large and mega corporate plan market and strong relationships with government, health care, not-for-profit and Taft-Hartley customers. It also has state-of-the-art nonqualified deferred comp capabilities, which will become a new offering for Empower, allowing us to serve our customers more broadly. Please turn to Slide 5. This slide summarizes how the acquisition of Prudential reinforces Empower's leadership in the U.S. retirement market, strengthening our position as the clear #2 player and growing our participant base to over 16 million and assets to $1.4 trillion. Prudential enhances Empower's position with the large corporate, government and Taft-Hartley customers. It also adds new competencies, like defined benefit in the previously noted nonqualified deferred comp capabilities and increases wealth and investment management extension opportunities. Please turn to Slide 6. This slide is a snapshot of the top 10 players in the U.S. defined contribution market and is a great illustration of Empower's position as the clear #2. Moving to Slide 7. Here, we've presented Empower's target markets and how the acquisition of Prudential will accelerate our growth in those markets. The defined contribution, IRA and taxable markets we are pursuing are large and growing. Combined, these markets represent $47 trillion of U.S. household investable assets. As highlighted in the previous slide, Prudential increases our scale and position in the defined contribution market. Looking to the IRA and taxable spaces, we'll be able to leverage our differentiated value proposition in wealth and investment management, powered by Personal Capital, to support the retirement and financial wellness needs of Prudential's customers. This will increase IRA rollover potential across a larger participant base. And in the taxable space, it will broaden Empower's client base for our financial planning capabilities. Let's turn to Slide 8. This time line clearly illustrates how Empower has used M&A to broaden and strengthen its offering for the benefit of key stakeholders. Since its formation following the JPMorgan Retirement Plan Services acquisition in 2014, Empower has invested in platforms to broaden its capabilities and enhance value to customers. Personal Capital gave us a leading financial wellness and digital wealth offering and added retail solutions for existing planned participants. MassMutual added scale, particularly in the small and medium corporate segments and gave us an entry into the Taft-Hartley market. Prudential further increases our scale and enhances our position in large corporate, while also adding state-of-the-art nonqualified plan capabilities. Let's move to Slide 9. Both Empower and Prudential share a commitment to serving the financial needs of the retirement investor, their advisers and employers. This transaction will create an even stronger service organization in Empower that benefits all key stakeholders, while further solidifying our industry leadership position. Plan participants will benefit from a modern digital offering and enhanced participant experience. They will have access to powerful online tools combined with human advice and a holistic offering focused on retirement and financial wellness. Empower is positioned as a scale operator with the ability to deliver value to plan sponsors through platform investments and innovation. Plan sponsors will also enjoy an industry-leading client service experience, with coverage in all D.C. market sectors through a segmented model that aligns service with customer needs. And for shareholders, as Paul noted, we are acquiring a profitable business that's expected to be highly accretive to Lifeco earnings and a driver of long-term value creation. Let's turn to Slide 10. Like the Liberty Mutual transaction, this acquisition presents significant synergy opportunities. As you saw in the first quarter results, we are on track with realizing the synergies we set at the time of the MassMutual deal. We are equally confident in realizing the synergies for Prudential, highlighted here. Empower has made the right investments to create a highly efficient and scalable recordkeeping platform. Currently, we administered 12.6 million participants at a lower unit cost than Prudential, and there is ample capacity on the platform to add more. We expect to leverage our lower unit cost advantage by migrating the Prudential business to Empower's proprietary platform. The integration is expected to occur over 24 months following the close. And to result in a run rate pretax expense synergies of $180 million. We expect to incur onetime integration cost of $170 million and deal cost of $55 million. On the revenue side, Prudential's current business brings complementary capabilities like nonqualified plan services and administration into the fold. We're also excited by the potential to provide IRA rollover services and support by leveraging Empower's Personal Capital-enabled retail platform as well as advice-based services and discretionary money management to Prudential's 4 million participants. We expect these opportunities to result in $20 million of revenue synergies on a run rate basis by the end of '23, growing to $50 million by 2025. Please turn to Slide 11. Empower is a skilled and experienced integrator, and the integration of Prudential will follow a clear and proven strategy, ensuring minimal disruption for plan sponsors and participants. Since the JPMorgan conversion in 2015, we've maintained a dedicated mass conversion team to perform complex business integrations. With their best-in-class integration capabilities, our veteran team has developed a fully automated plan and data setup that will be used for the Prudential integration. Beyond the quality of our team and processes, we're confident in this integration for some key reasons. First, Prudential operates on a single OMNI platform today, and we have experience integrating OMNI platforms to the JPMorgan and MassMutual acquisitions. And second, the administration of Prudential's defined benefit business is currently outsourced to a third party, eliminating integration risk. Overall, we expect integration to be complete in 2023. With that, I'll turn it over to Garry to discuss the financial details. Garry?

Thank you, Ed. Please turn to Slide 12. In addition to being an excellent strategic fit, this transaction drives significant value creation for Great-West Lifeco. We are acquiring a high-quality book of business with significant expected expense synergies in the near term and revenue synergies that are expected to ramp up as the integration proceeds. In addition, there's the longer-term value creation opportunity in meeting the broader wealth management needs of millions of individual participants. The transaction is immediately accretive to EPS and expected to be 8% to 9% accretive on a fully synergized run rate basis by the end of 2023. The valuation is attractive, especially given the strategic alignment and long-term growth potential, representing a P/E multiple of 8.1x on an illustrative levered basis. The transaction has highly attractive financial returns with an IRR in excess of Lifeco's hurdle rate and the financial benefits are in addition to Lifeco's medium-term financial objectives that were outlined at our recent Investor Day. For example, this transaction is expected to add about 1% to Lifeco's ROE in the medium term. Turning to Slide 13. This slide shows the derivation of the 8% to 9% EPS accretion expected from the transaction, as called out earlier. Please note, all figures on this slide are in Canadian dollars, in line with how we report our EPS results. We start with the unlevered expected after-tax earnings of the Prudential business on a run rate basis at the end of 2023, fully synergized and allowing for an assumed amortization of intangibles. The CAD 406 million earnings shown on this page is the same as the USD 325 million earnings noted earlier, converted at $1.25. We subtract financing costs and foregone investment income and then divide by the Lifeco shares outstanding to get an expected accretion of $0.33 per share in 2023. This amounts to 9% accretion based on the 2023 consensus estimate of $3.76, and slightly lower 8% to 8.5% accretion, if based on our medium-term financial growth objectives of 8% to 10% EPS growth per year. Please turn to Slide 14. Here we lay out how we've calculated our illustrative fully synergized to P/E multiple for the transaction. Please note, we've returned to U.S. dollars on this slide. We have assumed 70% equity and 30% debt financing to be broadly consistent with Lifeco's overall capital structure. As Paul noted, the actual financing for the deal will utilize hybrid instruments additional debt and existing resources, which makes it even more financially attractive. We start with a total transaction value of $3.55 billion and deduct $160 million transaction tax benefit. We then take 70% of that to come up with the illustrative equity value of just under $2.4 billion. As described earlier, we start with the expected unlevered fully synergized run rate after-tax earnings of USD 325 million. We then deduct an assumed after-tax cost leverage on the 30% debt component to determine levered earnings of $294 million, which gives an 8.1x multiple on the assumed equity of $2.373 billion. Please turn to Slide 15, which outlines the financing plan. As noted, we intend to use a combination of existing capital, hybrid instruments and short-term debt to fund the transaction. For permanent capital raising, Lifeco plans to issue approximately CAD 1.4 billion to CAD 1.5 billion of limited recourse capital in the Canadian marketplace, which represents the $1.15 billion in U.S. funds. We have bridge financing in place and expect to refinance the bridge through the LRCN issuance in the near term, subject of course to market conditions. We have made arrangements to secure $1 billion of short-term debt. This portion of the financing facilitates our focused deleveraging plan with the objective of bringing leverage back within rating thresholds in a timely fashion. The deleveraging plan is supported by the cash-generative earnings nature of the business, including the highly visible expense synergies. Recall, we used a similar approach with the MassMutual transaction, which included USD 500 million of short-term debt. That debt has already been largely repaid and will be fully cleared before close. We will refinance -- sorry, we will finance the remaining $1.4 billion using existing capital resources. This includes excess capital in the existing Great-West U.S. entities, reinsurance reserve financing and the acquired capital of the business. That concludes my formal remarks. Back to you, Paul.

Thank you very much, Garry. Please turn to Slide 16. Before we move to the Q&A, I'd like to reemphasize the strong alignment of the transaction with Lifeco's strategic priorities and financial objectives. The acquisition of Prudential further strengthens Empower's position as a leading player in the U.S. retirement market with added capabilities and enhanced extension opportunities. The financial benefits of this acquisition are incremental to our medium-term based EPS growth objective of 8% to 10% and will also support our 14% to 15% base return on equity objective at Lifeco. It further diversifies our regional earnings mix and adds to an already strong cash-generative earnings profile. Please turn to Slide 17. In closing, I'd like to reiterate how pleased we are with the transaction and highlight how well-positioned the Empower team is to deliver for stakeholders. Ed and his team have a strong track record of successful M&A integrations and we're confident Prudential will be yet another successful addition to that list. We look forward to welcoming Prudential's 4 million participants to Empower's state-of-the-art platform and helping them realize their retirement and financial wellness goals. To conclude, we're excited about this important next step in strengthening Empower for the benefit of both Empower and Prudential customers while helping drive long-term value creation for Great-West Lifeco shareholders. And with that, operator, please go ahead and open the line to questions from analysts.

[Operator Instructions] Our first question is from Gabriel Dechaine with National Bank Financial.

I've got a couple of numbers questions and then a strategic one. First, in your accretion calcs, do you have anything earmarked for whatever earnings are associated with whatever business you're planning to reinsure to free up capital? It looks like there's a reinsurance transaction involved here that you have yet to do, I guess.

Thanks, Gabriel. I'll turn that one to Garry.

Sure. Gabriel, we're anticipating that, that reinsurance solution will be internal reinsurance between our U.S. entities and the Canadian European entities.

Okay. Then the other one is leverage ratios can be calculated in different ways. How do you -- where do you put your pro forma leverage ratio? Because I get to about 37% pro forma, if I'm just using Q1 numbers. And does that -- if that number is correct, does that put any additional pressure on you to delever? Because that was the message following MassMutual, and then here we are in less than a year later, you're adding on more debt.

Gabriel, we've actually worked with rating agencies, and I'll let Garry share insights into the conversations we've had.

Sure. Thanks, Paul. The -- so just in terms of the pro forma leverage, obviously, every rating agency has their own adjustment. But just the way we would look at leverage, we would see this pro forma just under 36% at the end of the year, assuming that's the point of close. Well, as [ May drifted ] to Q1. And I'd note relative to the Q1 actual, I made a comment in the speaking notes that we have -- since Q1, we have largely repaid the short-term USD 500 million facility that was part of the MassMutual transaction. So that's bringing the leverage down, which is probably why your estimate might be a touch high.

Right. But still you're back to where you were when you did the Mass Mutual deal. So we're...

Right. And certainly -- you're correct and we have had constructive discussions with the rating agencies and stepping through our deleveraging plan. And similar to MassMutual, we have included USD 1 billion of short-term debt and we would expect that to be paid within the -- from close, probably 18 to 24 months following close. So that really facilitates a prompt and timely deleveraging in line with expectations.

Could you see yourselves doing something extra to accelerate that process, like selling Putnam?

Gabriel, I'll take that. So we continue to be active in looking at our overall portfolio. We're looking for opportunities, frankly, right across the Lifeco Group to make sure that the portfolio is optimally positioned for growth. Clearly, if the right opportunities come along, we're going to be looking at actually, acquisitions and opportunities to finance them. We're going to be looking to position businesses in the best way they can for growth. Right now, we're staying on strategy with Putnam. And our strategy with Putnam is to continue to deliver high-quality performance for their customers, to maintain good discipline on cost and to look for a transaction that will unlock value over time, and that's our stay the course.

Okay. And last one, what's the organic growth rate in this business? Like is it just every couple -- on the surface anyway, every couple of years, you're going to do a deal, you'll get a bunch of expense synergies. And it's also -- but it's also a highly competitive industry with a lot of fee pressures. Is there -- if you weren't to do any deals, what's the organic growth rate? Does it get close to 10% that you target at a consolidated level?

So Gabriel, I'll start off on that one. It's Paul, and then I'll turn it over to Ed. We've been actually growing the Empower business at a significantly faster rate than the competition, and that's driven by a very strong quality platform. But if you think about this business, we'll unlock value clearly in the first instance through transactions like this. But the long-term play for us, the medium- to long-term play for us is really the retail business where we see significant opportunity to grow the retail aspects of rollover, roll-in and helping Americans with their with their financial wellness. And we actually do see strong organic growth potential in this business. Ed, I'll let you speak to the rate of growth we've seen over the last number of years.

Yes. Yes, just to reinforce Paul's point, one of the key metrics that we look at, Gabriel, is the growth rate associated with net new participant growth. So that comes from existing companies that are adding employees, but also comes from our success in bringing on new clients. And we've consistently, the last several years, have grown at 2.5 to 3x the rate of the market as defined by net participant growth. And I would anticipate that to continue. At this stage, we have a pipeline that is largest in the history of the company. And so I feel very good about the organic growth efforts. And then just finally, I would say that increasingly, what sponsors and participants are looking for is more of a holistic experience. And so they're looking for Empower to help them in a way that transcends defined contribution. They have other goal areas, other objectives that they're looking to pursue. And we're just in a far better position to support asset consolidation efforts and support them in ways that extend beyond just defined contribution. That's the way I would think about it.

Yes. So Gabriel, to wrap that, if you consider those, what Ed has shared, we fundamentally do believe that this is a high-growth organic business beyond the benefits we'll get from these transactions that would exceed that 8% to 10% range.

The next question is from Tom MacKinnon with BMO Capital.

Just a couple of questions, maybe just with respect to the PRU business. Sometimes when we see acquisitions involving some large and mega corporate plans, there can be some lapses, like maybe some people want to not go -- not move forward with Empower or go with some other recordkeeper. I'm wondering if you factored any kind of shock lapse into your calculations. And if you could share that with us or thoughts on that. And then I have a follow-up.

Okay. Thanks, Tom. I'll let Ed handle that first question because it's something that we have a lot of experience with. If you consider the successful acquisition we did of the JPMorgan Retirement Plan Services business, the more recent work we're doing with MassMutual and prior transactions as well. But I'll turn it over to Ed, who can provide you with some context. Ed?

Sure. Thanks, Paul. Yes, Tom, we certainly do model that, some shock loss. What I would say is occasionally, you'll see M&A, you'll see consolidation and merger activity that oftentimes leads customers to consolidate. I think in terms of what our experience has been, we've got a pretty strong plan in terms of our outreach efforts. But more importantly, what I would say is we've got a very compelling value proposition as evidenced by the organic growth rates that we're experiencing. I think that's a strong statement about our value proposition. So we're very confident in our ability to retain the clients. One of the things I would note is that the average Prudential client has been with the organization for 17 years, which I think is a testament to Prudential into their service teams. We'll be making offers to essentially 95% of the workers. And so there's very little disruption to those clients. They're going to continue to have their service teams supporting them. And I'm quite confident with our capabilities and the enhanced value proposition that we can bring to clients that we will be very successful in hitting our targets. I will say, as it relates to MassMutual, while it's still early, we're running ahead of plan with respect to client commitments and client retention.

Okay. And in terms of the revenue split of the business that you're acquiring, how much of it is related to strictly fee income? And how much is related to, I think, what you call a general account margin revenue or spread income? And what do you see as being -- are there any risks associated with the spread income for the general account margin revenue associated with this business?

Thanks, Tom. I'm going to turn that one to Garry to start with. And then, Garry, you may want to pass that onto Ed.

Sure. I don't have the split in fee income and spread income right to hand, although the spread income is certainly an important part of this with the general account offering from the Prudential plans. Now in terms of the spread income, I will note that certainly, given the ALM strategies and the high-quality assets we're bringing over in addition to more modest minimum guarantee interest floors, we feel certainly confident and comfortable with the spread income that we forecast on the business. I just don't have the split right in front. But those are the key factors, the quality of the assets and then the -- and the ALM strategies, which would be very similar to the ALM strategies Empower has used, combined with modest guarantee floors.

Maybe is that split -- is the spread income higher at the PRU book than it is with current Empower or lower as in proportion?

I think in proportion, it would be higher in proportion, just given the weighting of the general account.

So there's a higher proportion of revenue from spread income with the book you're acquiring...

Definitely, at the PRU business. I don't remember it being dragged, but it is a higher proportion, if I recall correctly.

And is there any indication as to how their rollover activity has been trending versus what your rollover activity has been?

Tom, can you clarify what you mean by rollover activity?

I guess the IRA rollovers, could be Ed.

Tom, are you referring to IRA rollovers?

Yes. Yes. I mean that's -- the longer-term plays. So as you mentioned, the roll-ins and rollovers. So...

Yes, for sure. Yes. I'll let Ed speak to that because, as you know, it's clearly a focus and it's a significant part of the long-term value we believe we can deliver but Ed can speak to how MassMutual has -- pardon me, how Prudential was handling that and what the transition will be. Ed?

Yes. Yes, Tom, they do have an IRA rollover capability. I would say ours is probably a bit more seasoned. And we've had roughly 95% of our planned sponsors of our nearly 70,000 plans have essentially signed off and consented to allow us to engage their participants and discuss termination services. So if there's a separation or if someone is looking to retire, we walk them through a very objective process where they can make a decision that's best for them. So from our standpoint, we definitely see that as an opportunity for sure. That's pretty large business for us today. It's about $20 billion in assets under management, and it's growing pretty aggressively year-over-year.

Next question is from Meny Grauman with Scotiabank.

Question about fee pressure and just -- it seems like there's more fee pressure in the large case markets. I'm wondering if that's the case in this Prudential business relative to MassMutual or the overall Empower business, if you can comment on that.

I'll start off at the top, Meny, and then I'm going to turn it over to Ed. But as we look at this business, one of the things we really like about this transaction and, frankly, the MassMutual one and the JPMorgan before that is that we've got a very diversified business, ranging from mega clients. And that would be more of a feature of the JPMorgan transaction, large market clients, and that's a bit more of the sweet spot for Mass. And then more of the midsized to small -- pardon me for PRU and then midsize to small with Mass. But the reality is, we operate this business to be profitable in all segments. And we recognize the different characteristics of the segments. And they -- every segment adds value to -- whether it adds value from the standpoint of profitability, but also it adds value from the standpoint of scale, reach with -- potential reach into the future with customers. So I'll let Ed speak to perspectives on fee compression and the way we're managing and, frankly, the fact that we do account for that when we look at these transactions and look at our growth objectives. Ed?

Yes. Thank you, Paul. We certainly have seen fee compression, and we build that into our models. What I would say is that one of the advantages we have is we run the business on a segmented basis. So we basically organize around the unique needs of our customers, and we have separate P&Ls for each business, which I think helps us to make sure we're matching services with customer needs. And I think the other thing I would add is the tremendous advantage we have from a scale perspective. The fact that today, we're 12.6 million participants on our platform really allows us to price very competitively in the marketplace.

And maybe as a follow-up, just if I look at your Slide #14, the illustrative P/E multiples, if I compare that to the MassMutual math, it looks like you're paying a lower multiple here for the Prudential business. If I contrast sort of those multiples, how do you think about the difference there? Is part of the difference related to that fee compression that we just discussed? Or what other factors are part of that differential as you think about it?

Meny, I'll start off with that one. I would view these -- the transactions actually quite comparable. They're both synergy-rich. We're -- in each instance, we're financing them with debt and available resources, in this case, in hybrid. And frankly, if you do compare them using that illustrative Lifeco capital structure, they're both -- one's 8.1, one's in the higher 8s. It's a bit of a nuance. As Garry outlined, this is a slightly more capital-intensive business than the MassMutual one. So that could account for a bit of the difference. The reality is as we add these businesses and scale for synergies, they're both adding significant value. So I view them as actually quite comparable. Ed, anything you'd add to that?

Yes. Not really. I might just add that the MassMutual business skewed to sort of the lower mid-plan marketplace, which tends to be a bit more profitable than the large corporate marketplace. But other than that, there's a lot of similarities.

Yes. The other similarity is the reality that with these acquisitions and as we think about our retail strategy, the Personal Capital-enabled retail strategy, the growth opportunities in some ways in the large end of the market can sometimes be a bit stronger with respect to that in terms of being able to work with sophisticated employers where you have opportunities to effectively reach the participants. So we would see strong wealth extension potential within this Prudential client base.

The next question is from Doug Young with Desjardins Capital Markets.

Maybe just a follow-up. Paul, you mentioned this or Prudential's retirement business is more capital-intensive than the MassMutual business. Can you elaborate on why that is?

Yes. So I'll just -- I'll speak to it at a high level, and then I'll have Garry provide a bit of color. It has a slightly larger skew to the general account business, which is the fixed income investment solution offered to participants. And as a result, some of those fixed income products have modest guarantee floors, and therefore, there's some capital related to that. So it's really just more a mix of business, a mix of the investments that the plans and participants have selected. Garry, anything else you'd add to that?

No. I think you've covered it, Paul. It is the general account we need. It's on our balance sheet. And so there are -- there's regulatory capital associated primarily with the assets, but also, as you say, with some of the product features, but it's primarily the asset credit rated regulatory capital requirements. And as a percentage, the Prudential business has larger general accounts than prior. So that's just what drives the higher regulatory capital.

And have you quantified what percentage of the Prudential Financial business is on balance sheet? It may be in the slides, I don't know, but if it is, you can point me to it.

Yes. We did call of the total transaction value, the amount that's regulatory capital. When Tom asked his question earlier, we didn't have a split of the revenue side of it between the 2 but both the PPA side and the general account side contribute to the overall profitability.

General accounts for about $35 billion.

About $35 billion. Great. And then on the USD 245 million of expected earnings and that's full synergy, almost 60% of that is coming from expense synergies and 7% from revenue synergies. So a lot of the economics is coming from what you can pull out of this business and so I'd like to get a little bit more detail of where the expense -- I think I get where the revenue synergies come from, but you can correct me if I'm wrong. I'm going to assume that's kind of picking up on the IRA and rollover and whatnot. But where -- can you detail a little bit more about where the expense synergies are going to come from?

Yes. I'll start off there and turn it to Ed. But as a starting point, we're looking at the -- bringing this business off of an existing platform that is higher cost to our more efficient platform, which is more automated, lower cost. And then secondarily, you've got the matter of overheads that you would have associated with the business that -- and ultimately, as we move businesses together, you don't need 2 systems. You don't need 2 sets of overheads that would be there. So it's typical of a synergy-rich transaction, it's the benefits of getting a larger book of business with sort of a single infrastructure behind it as opposed to the 2 infrastructures that represented it before. But I'll let Ed add a little bit more color on that, Ed?

Yes. I'd say the major areas are systems, the recordkeeping, marketing, management and overhead. I mean, those are sort of the most common areas where we would see expense synergies coming from.

Okay. And then maybe just for Ed, I mean, you just closed the MassMutual transaction. You're in the midst of integrating this. And then you're going to -- then you're layering on top another fairly sizable acquisition here. Can you talk about how you're going to manage these 2 integration processes at the same time? And how far are you along in the integration of the MassMutual? Maybe that will kind of answer a bit of the question as well.

Sure. I'll start with the second part of the question. On the MassMutual side, we'll start to commence the client migration efforts in the third quarter of this year, and that will run for about 12 months. So the planning phase and the build phase is nearing completion. So we're on schedule and feel very confident about where we are at this stage with the MassMutual effort. With respect to Prudential, we'll stand up the integration planning effort right away and that plan and build phase will take us to roughly the third quarter of 2022. And so then we'll then pursue the client migration wave schedule through the third quarter of 2023. So we don't anticipate any duplication or overlap with our efforts. So in the near-term for the Prudential clients, it's a stable, not a particularly disruptive time in the sense that they'll have their service teams continuing to work with them. So -- but let me go back to, I think, the real point of your question, which is there's a lot going on. Well, as we noted earlier, we've got a terrific team with deep domain expertise that we've assembled over the last 6 years, starting with the JPMorgan acquisition in 2015. So we've got the technical expertise. And keep in mind, this is the business that we're in. We're not in other businesses. So the folks that are on our team have been on this team for a long time, have tremendous expertise. And so we have a dedicated mass conversion team that will focus on this effort. And just as we have in the past, and we're confident we can execute.

And maybe just a quick follow-up. The $180 million of expense synergies, is that going to be more back-end weighted in the 24 months? Is that more of a 2023 event than a 2022 event?

Well, similarly to MassMutual, where we shared with you that we would realize $40 million in 2022 -- excuse me, in 2021, this, too, will be a phased approach. But -- so you'll see some benefits in 2022, for sure. But then yes, it will be more -- you'll see more of the synergies occurring in 2023.

Yes. Sorry. Doug, it's Garry. I just want to add -- you made an earlier comment about the $245 million and adjusting for the expense synergies. I think it is important to recall that if you go back up before the financing costs, it's up at $325 million. And then prior to that, that includes also the amortization of intangibles. So it's really hard to separate out the amortization tends, it was all the financing costs that are enabling us to drive those synergies. So starting with the $245 million in just deducting the expense synergies, I think, gets you to perhaps a slightly lower number than you might have otherwise thought included the entire earnings capacity of the business.

And why -- and maybe, Garry, can you quantify what the amortization of intangibles will be?

Yes. Just in the -- we did model some in this. We won't obviously know the final one until we've done the actual purchase accounting and allocate the goodwill and intangibles. But for this purpose, we did model, it'd be about -- in U.S. dollars, it was about $30 million after-tax annual allowance for amortization of intangibles. So that's built into those numbers. As we say, the $3.25 million that we quote was after that $30 million of amortization of intangibles. But again, to just emphasize, that's a modeled number. We'll obviously -- it's estimated based on what we know now, but we'll obviously true that up as we do the purchase accounting.

The next question is from Mario Mendonca with TD Securities.

Two quick number questions first. Life -- or Canada Life like that, I presume, would be unaffected by this. Is that fair?

Yes, that's correct, Mario.

And then cash as the whole company, would I be correct in saying that it's maybe in the nature of maybe 5, call it, like the minimum you need to run that business? Does that help -- the way to look at it?

Garry, I'll let you speak to the cash at the Holdco as we move through the transaction.

Sure. Yes. And I would not try to characterize this as the minimum we need. We typically do keep around $500 million at -- or higher of Lifeco cash. And that's really just a caution. We did increase our standby lines of credit last year. So we have plenty of other liquidity resources if really needed. And this transaction has -- is planned to have very limited impact on Lifeco cash. We'd still be targeting to be in around that $500 million range.

Okay. Something a little more strategic then. Looking at this business segment, this sector over the last many years, there's that JPMorgan deal back in 2014. And then, frankly, I don't remember hearing much about this in terms of consolidation for some time. And then over the last 2 years, there have been a number of deals, 2 of which [indiscernible] it was participated in. Is there anything you can help me understand like why has the M&A environment in this sector changed in the last couple of years? Is there something from a regulatory perspective, fee compression, costs, has something changed that's made this sector start to consolidate?

Mario, I'll start off on that, and I know Ed will want to add lots of color here. But the reality is when you think about the service expectations of participants, and we're talking about Mass, Mass participants here, they have fundamentally changed and as well as plan sponsors from the standpoint of automation technology, ease of access, quality of service. And the reality is to effectively deliver high-quality record-keeping services and the ability for people to reach their best retirement, you have to have a deep investment in technology, and you have to have deep expertise to deliver that. And the reality is when you think about some of the businesses historically that would have participated in some of the companies, they might have viewed that the primary way they were going to make money was on the margins they would have had on proprietary product. And then the recordkeeping was sort of a necessary service they needed to provide. Now what's happening is there's a fundamental need to be able to deliver that high quality, digital and automated service to clients. And you need that scale to be able to make those investments. And I think that's what you're seeing. You're seeing organizations looking at that. I think another feature would be that it's tougher to be driving high proprietary penetration when you consider fiduciary standards and the like in the market from the standpoint of saying that the best solution is a single-branded investment solution. And one of the features of Empower is an open architecture platform, including some of our own high-quality products, including general account solutions, but it's open architecture where we're allowing the plan sponsor and adviser to set the course in terms of what the investment solutions should be for the participants. So it's -- there's a number of things in place. Some of it would be that regulatory fiduciary pressure, but a lot of it, I think, is technology and the expectations of the sponsor and the participant. Ed, I'll let you add some color as you see it a lot closer in the market.

Frankly, I don't have anything to add, Paul. I think you addressed it.

Follow-up on this one question. Great-West Life has -- Empower rather, has made significant investments in this business over the last many years, that's how I remember it. Aren't any other major investments that need to be made from Great-West Life or Empower's perspective, beyond just the integration expenses? Are there any significant investments made to live up to the expectations of these sponsors and advisers for automation? For Great-West Life, have you made that investment, and that's what's enabled you to be a consolidator in this?

Well, I would echo and say we have made those investments. You may recall back when we talked about the JPMorgan acquisition, a lot of the investment at the time was not the cost of acquiring the business, it was the investment in the platform. And a lot of it wasn't necessarily even the integration cost, it was actually investment in the platform. So I think we've worked really hard. And I'll let Ed speak to this to get, in a lot of ways, ahead of the game from the standpoint of automation and digital capabilities. But like anything else, we'll need to keep investing in it, but I don't view it as investing relative to a gap. It should be investing relative to creating greater opportunity for driving growth. But I'll let Ed speak to that. Ed?

Well, we've certainly invested in the platforms. If you go back to 2014, '15, when we did the JPMorgan acquisition, we made a $150 million investment in underlying infrastructure and technology. I would say that we've been executing on a multiyear transformation effort. And we've been able to take a lot of those savings and reinvest in the platform, reinvest in technology, reinvest in straight-through processing and automation. And that continues. That's part of our BAU strategy and part of the investments that we're making every year that are essentially funded through the earnings of the business, and that will continue. I always say to the team, at our core, we're a tech and data company. And so that's where we are making material investments in the business, and I'm confident we can continue to do that going forward.

And then my final sort of related question to this. When I look at the players in this sector, in this business line, I'm starting to wonder why there's like -- what is the bogey? What level -- what number of participants do you need to have to be a long-term viable player in this business? Is it something like 10 million up and up? Is it maybe 5 million up? What's your gut feeling on what's the minimum participant level you need to be legitimate in this business?

I think 5 years ago, it was -- I think 5 years ago, it was 2 million. I think now the bar has been raised, and I think it's 6 million, 6 million participants on the platform. And that's why I think you're seeing not only exits, but you're seeing companies that have made decisions to outsource the back office. And this is, I think, to the point that you noted, this is a phenomenon that's accelerated in the last 24 months.

We have a follow-up question from Gabriel Dechaine with National Bank Financial.

Yes. Just a follow-up on one of my earlier questions, the reinsurance transaction. Can you just tell me what that entails? Like it's a pretty big number, and through the strike of a pen, you can free up some capital. Like what business is going where?

Okay. I'll let Garry speak to that one, Gabriel.

That -- the type of transaction that we utilize and we have some of this in place with the existing Empower business is reinsuring some of the general account business within this block from the RBC factors over into the LICAT factors where given the current LICAT scenario we're on, it doesn't have as much of an impact on LICAT. And of course, obviously, the LICAT capital is a much higher number so they -- it hardly moves the LICAT ratio at all. It's a de minimis move in the LICAT ratio and yet, it frees up the RBC room because, again, we run RBC at 400%. So being able to reduce the regulatory capital as a multiplying benefit. So it will be just -- it's the general account business we're moving across.

From the U.S. to Canada or to your reinsurance...

Yes. From the U.S. to one of our reinsurance entities that will roll up in the Canada Life LICAT ratio.

Got it. And is there any tax benefit to that as well?

We wouldn't -- it wouldn't be driven by tax. There may be some modest tax benefit coming into, but it's not driven by -- motivated by the tax side. It's really the capital [ relief ].

I'm just -- this is maybe a dumb question. I'm just wondering why you don't do this in normal course. If you can just shift the business around and free up -- is it $1 billion or most of that $1.4 million? It seems like why wouldn't you have done that already? It's kind of -- it's a convenient source of financing, I just don't know why today.

Yes. Sure. Certainly, I mean, there are practical limits on the amount of this. And obviously, we have very disciplined transfer of pricing approach to make sure it works for both the U.S. entities in the transaction as well as the Canada Life Reinsurance subsidiaries. And we do actually use this as part of our Empower funding. So it is part of that. And obviously, there's we have to ensure the regulators are all comfortable with the amount of reinsurance, the local boards are comfortable amount of reinsurance. So it is a technical use, but like everything, it's part of a diversified approach and a balanced approach, but we do see a roll forward here.

And is there more of that?

[indiscernible] with LICAT and RBC.

Could you do more of that if ever another deal comes across your path?

It's something we would look at with any potential transaction as we keep a distance.

And we have a follow-up question from Tom Mackinnon with BMO Capital.

Maybe a question for Garry. In terms of GWLA, where does it take your RBC? What's the current RBC? And then what do you see the RBC at -- post this transaction for GWLA?

Sure. The RBC -- driver of what it is, obviously, it was quite high at year-end, even following the MassMutual. I believe it's up in the upper 400s now. We would typically look to target. Now we have been bringing it down as we've been repaying the MassMutual -- the short-term debt. We are looking to target a ratio of 400%. And typically, when we run the business, business as usual, we target 400 to 425 as an RBC ratio. So here with our financing plan, we peg this to have GWLA at a 400% RBC ratio at close. And then obviously, early focus will be on -- with the earnings that will rise in GWLA, will be on -- dividending up to delever the plan and just keep it 400. And then over time, it would grow beyond the 400. But yes, we're not putting undue pressure on the GWLA RBC ratio with this.

So there's no -- it's not funded from any capital from the Holdco. It's not funded -- I mean the internal capital that you're funding it with, where is that coming from? It's not coming from GWLA, it's not coming from the HoldCo. It's not coming from the CLA LICAT, then where is that coming from?

Yes. Sure. Sorry. When I said the current RBC ratio of GWLA, would be well in the upper 400. So I -- maybe I wasn't clear on that. So there is certainly a contribution of capital from the existing excess capital at GWLA, bringing it down to 400. And then the capital of the acquired entity, which included the capital notes that are transferring across. There's additional IMR, it's investment maintenance -- interest maintenance reserve, there's generated accounts for regulatory capital, additional admitted goodwill, accounts to regulatory capital. So there's a number of sources like that as we add the transaction on a U.S. regulatory basis.

And then just finally, on that -- on the reinsurance transaction, as you shift money across to other subsidiaries, I think you said it will eventually roll back up into CLA. Is that correct? Like so -- does that -- and then how does that fit in with the comment that, and that's having no impact on your CLA LICAT ratio? Like doesn't Canada Life Reinsurance move up into CLA?

Yes. No. That's what I was noting to give or so. As we do, we reinsure it out of the U.S. subsidiaries into a Canada Life Reinsurance, that is -- subsidiaries that are a part of the Canada Life consolidated LICAT ratio. So it moves from an RBC regime to a LICAT regime. Just given the current LICAT scenario we're on, this type of business adds very little to the LICAT ratio. As Paul said, none. I think it will be maybe it's 0.1 or 0.2. It's just not a material number. It does add a very a modest amount. But it adds very little, given the current LICAT scenario that we're in. Because this business is generally exposed a little bit to rising rates with the potential for book value surrender so that gets in the LICAT formula, whereas a lot of our Canadian business is more exposed to declining rates. So it diversifies nicely in LICAT, which is why there's very little LICAT impact compared to the RBC savings.

Okay. And I think Ed gave the proportion of the assets that are in general account. What about proportion that would be in proprietary accounts versus nonproprietary?

So the total -- sorry?

You go ahead.

Yes. So I think the way we would think about it, Tom, is the proprietary AUM would be roughly 1/3, about $100 billion. And that would be broken down between the general account, separate accounts, stable value wraps, et cetera. And about -- yes, and you could see there's about 53% of the $314 billion is in third-party mutual funds.

And is there any risks associated with bringing assets over that are proprietary? How do -- do they just transfer all of those assets over? Is that the way that part would work?

Yes. They come over with the clients as the clients transition. So basically, the plans as they move, generally speaking, the investment lineups and the underlying plans remain constant.

This concludes the question-and-answer session. I'd like to turn the conference back over to Paul Mahon for any closing remarks.

Thank you very much. I would like to thank all of the analysts, investors and participants today who joined the call. As you can tell, we're very excited about Empower's growth prospects given today's announcement and our proceeding actions and the fundamental value creation that we believe we'll be able to achieve at Great-West Lifeco. So with that, we're going to close the meeting, and I would like to encourage analysts, investors who have any follow-up questions to please reach out to our IR team, and we're happy to engage. Thanks very much, and we look forward to connecting with you again at the Q2 conference call. Take care.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.