Great-West Lifeco Inc. (GWO) Earnings Call Transcript & Summary

Good afternoon. Good afternoon, everyone. I'm Tom Mackinnon with BMO Capital. And this afternoon, we're happy to have Paul Mahon, who's the CEO of Great-West Lifeco for a virtual fireside chat. Good afternoon, Paul.

Good afternoon, Tom. Glad to be with you this afternoon.

Yes, great. So let's start with -- we're going to go through some questions. And so let's start with really the obvious topic of discussion, and that's what you've done lately, spending over $5 billion on Personal Capital, MassMutual's defined contribution recordkeeping business. Maybe just tell us what is the strategy behind this.

Happy to start there, Tom. And obviously, it's been a key part of our activities over the last 6 to 9 months. So I would say, from a strategic perspective, it's on strategy. We're very much focused on trying to establish leadership positions in the markets where we operate. And we're also always thinking about where is the expansion or extension potential of any transaction. So if I start with MassMutual, that deal on its own is very attractive. We're acquiring a 401(k) record-keeping business that's high margin, so small to medium plan size segments. High expense synergy potential, given the fact that we're migrating from 3 platforms to one. Part of the motivation there as well is we have a very strong Empower team. So we've got high confidence in their ability to execute. They've got a proven track record, doing consolidation and financially attractive. I mean, strong accretion if you look out to 2022, 2023, we see this representing a significant part of Lifeco's earnings, we're projecting it as 20% plus. But I think that is sort of core. So it's a good transaction. It's accretive. But it also represents a real expansion or extension potential for Empower as we grow out to 12 million participants. And that really leads into the Personal Capital transaction. If -- as we look at the Personal Capital transaction, there's really 2 complementary value creation opportunities. The first is we see the Personal Capital platform as a highly effective and growing standalone -- we call it a hybrid digital wealth platform. And it's actually on a solid path to standalone profitability. And we think it's differentiated. It's differentiated technology. But it's when you leverage this platform and this capability across the Empower platform where you really can see the upside and the growth potential for us. And this is the idea that -- Empower represents 12 million participants on a record-keeping platform. But for the most part, those are mass and mass affluent Americans, who are looking for advice and guidance and service. So we see this as a platform for a real extension into retail wealth management for those participants. So whether that's IRA rollover, roll in of other assets they have elsewhere or the sale of other products and services. So the 2 transactions together really strategically align. One is more sort of immediate term, take advantage of a consolidating market, and the other one really is setting us up for longer-term growth.

And some investors say spending over $5 billion in cash and debt and getting 5% accretion is not a great trade-off. Like what do you say to that?

Yes. We actually view it a bit differently. I would say that the 2 transactions represent time frame opportunity. So if I think about the MassMutual transaction, short- to medium-term, we're going to drive out $160 million in expense synergies. We look at it being 10% accretive on a fully synergized basis by 2022. And that's a real traditional consolidation synergy capture opportunity. The Personal Capital transaction is not immediately accretive, but we view this as acquiring a growth engine for the medium to long term. First of all, as I said, I think it has -- is on a track to standalone profitability. It's already profitable if you exclude new client acquisition costs. And we see a path to profitability there. But secondly, that investment is really going to accelerate and maximize long-term growth for Empower. As we transition Empower from kind of a record keeper with more traditional IRA rollover capture to the build-out of a retail wealth manager -- a digital retail wealth manager. So the view is sort of near term, maximize synergies, make the MassMutual transaction work, medium to longer term, really leverage the Personal Capital transaction to create value. So we're excited about it. We actually think it's -- they're both complementary and good trades for us.

Yes, that's great. I mean sometimes you hear people say defined contribution is, record keeping is just a processing business. And the only way to make any kind of reasonable margin on it is to have really significant size, like multiples of your size. Do you agree with that statement? Or what are you trying to accomplish with MassMutual and putting Personal Capital together into this? Do you need to have multiples of your size...

So I would start, Tom, to say that it is a scale business. And it's a business where we've said that the market will consolidate because you need scale, you need to make significant technology investment. You can't be running a record-keeping business like this manually. It's got to be digital. So you've got to have the scale to actually spread out your cost. Now the reality is before this transaction, we were #2 in the U.S. record-keeping space. We're now a solid #2 and growing. Beyond that, we've made another acquisition since then that we announced the Fifth Third Bank acquisition, and we believe that, ultimately, we're at scale now, but we have opportunities through further consolidation to lower our cost position, to continue to differentiate service, and so I'd say we're in a strong position now with the potential to be even stronger as we continue to participate in consolidation. But as you pointed to, the key issue is not just the record-keeping aspect of it, where I would say today, we're near -- we may be the low-cost provider. There's not good metrics on that, but I believe that we are one of the lowest cost providers, and we have differentiated service. Use that as a starting point for a platform where you now apply tools and processes and capabilities to provide those participants with wealth management solutions over a lifetime, and I think that's really where the value creation is. So we think the scale we're at is solid today, and we think there's opportunities. We will be -- participate in further consolidation because we think it just drives out, frankly, a broader platform for the retail wealth management capture.

Yes. Help us understand how Putnam fits in with this. When you talk about rollover activity, do you need to have Putnam now more than ever? Or could you -- would you be able to survive with Personal Capital in MassMutual and not have Putnam? Or how does Putnam fit into this process going forward?

Yes. Good question. And I think that's one where there may be a perception that there's a dependency there, and there really isn't. Empower has positioned itself as an open-architecture retirement services platform. And by open architecture, I mean they really leave it to the client or the client's adviser or with some of our structured solutions, obviously, we leave it to the client to choose that solution as opposed to some of our competitors that would lack scale, would try and offset maybe losses they make on recordkeeping with proprietary product sell-through. What Empower has done is it's positioned itself as an open-architecture platform. And we think that is a better strategic positioning, given that it actually fits sort of the evolving fiduciary standards. And then what's required by asset managers is they actually have to earn their right to a position on the shelf. So it's either to a sleeve in a retirement solution or to a standalone solution as part of an overall portfolio of asset management that a record -- the sponsor would want. And so Putnam has actually done quite well with that. They've got very, very strong fixed income solutions as well as equity solutions, and they've actually been able to garner solid share on the shelf. But at the end of the day, the value that will come from that is ascribed to Putnam. Empower's strategy is to ensure that they are open architecture and well positioned for growth. And frankly, we don't believe that the long-term -- that relying on proprietary sell-through that some of our competitors do, we don't think that will be lasting, and we think that, in and of itself, will drive out further consolidation as that sort of falls out of vogue, given some of the fiduciary standards.

Yes. Good point. Hey, I want to shift gears a little bit to the Canadian business. When we look at that, we can say there's probably been a shift in culture and focus over the last 3 to 4 years with your Canadian business. If you look in terms of growth and value creation, you can typically say the Canadian segment was, say, prior to 2017 or '18 was, you'd made acquisitions. You'd harvested synergies, you'd expense cost containment. And I'm going way back to when that culture would have started, probably back with like acquisitions of London Life and Canada Life. And then if we look over the last 3 to 4 years, you've been probably investing more internally in terms of like customer retention and digital. So before you kind of bought or acquired growth and now you're investing for growth. Is -- so 2 questions here. Am I right in pointing out this general change in culture and focus in your Canadian operations? And can you give us...

You're bang on. As you pointed out, the acquisitions of London Life and Canada Life, were all about synergies and scale. And frankly, they're also about reach. The reality is it allowed us to expand both group from a scale perspective. But on the individual side, we ended up with more channels. We ended up more active in the managing general agency channel or more active in the national accounts channel. So we really like that. And for a period of time, we maintained separate brands because it actually played well to a multichannel strategy. You could avoid channel conflict. As the market evolved, we made a conscious decision to shift to organic growth, but to start to get even better leverage out of the scale we've got. And so what that drove to was a strategy to move to a single brand. And one of the drivers of that is, as the market becomes more digital and as customers and advisers turn to you for -- to connect digitally, trying to do it through multiple brands is challenging. We really wanted the benefits of a single brand, for people being aware of who we are. The other issue is simplification. We obviously consolidated our back office fully for group and went to a single brand for group. But on the individual side, we had not fully consolidated because we're trying to maintain these 3 separate brands. We now have opportunity for further simplification, and that will drive out further cost benefits. And then ultimately, as I said, I think the whole move to digital, the digital environment means that you've got to be more nimble. You've got to have speed to market. And if you think about our group business, as we think about digital applied there, it's very much like the way we view personal capitals, tools deployed against the Empower client base. We see the application of digital tools and advice to our group plan members, which amount to about 7 million plan members and their dependence in Canada, it's between 7 million and 8 million, significant opportunity for sell-through there. So it's really been a shift that's both reflective of market opportunity and also market conditions as digital takes off more.

Yes, that's a good point. I mean I was always taken aback by the fact that life insurers have such a broad reach in terms of all their group-defined contribution, certificate to holders as well as all their group plan members. And yet they didn't really establish their brand or their company, what everything that these companies can give to them by way of that. They really just seemed only market directly to the -- like the plan sponsor or the employer. And I think there's a great opportunity for them to reach right through to the employee and build out all their wealth and savings and insurance type needs as well. So would you agree with that, that, that's...

I would -- interestingly, I think there's lots of experiments over multiple decades of what we would have called worksite marketing. But what we didn't have was the benefit of the technology we have today. So it would have been employee meetings and signing up for additional voluntary products. And the actual take up rate, the penetration rate very low. And if you fast forward to today, and you look at, for example, during this COVID environment, what we've seen is investments in things like our SimpleProtect life insurance offering, which is kind of a straight-through processing where, frankly, we can get policies issued in as little as 30 minutes, including payment and coverage in place. When you get capabilities like that in place, adoption rates drive up significantly. The payback on your investment starts to come back -- come at a far higher rate than we would have expected. And I think technology allows us to look at the group plan member or participant, as we call it in the U.S., as a very different relationship than it would have been, say, 10 years ago before the advent of these technologies.

Yes. I want to go back and talk about sort of this investing for growth idea now that you sort of are doing more in Canada. If we look back from 2016 through 2019, I kind of looked at your operating expenses in Canada were growing about 5%, but the expected profit was growing at a 2% to 3% clip. That's changed a little bit in 2020. The expenses are, just as a function of COVID, are really up only 1% year-to-date and expected profits up 2%. So is there improving -- what was leading to -- were there additional expense spends before? And is that started to subside? And what can you talk about in terms of sort of turning the corner for organic growth here in Canada and improving operational leverage?

Good question. And I think your numbers are broadly right on. And so what we've seen during the period that you referred to, '16 through '19, was investment in kind of 3 categories. One would have been trying to shift ourselves from what I would say would be dependencies on the worksite or dependencies on more traditional infrastructure and technology such that, for example, your call centers would have been bound by a particular office or building. Fast forward to today during COVID, we were able to take our cloud-based call centers and move all of those call center staff and leadership remote to working from their homes without a hitch and maintain service. And that was one example of investments we were making to make us more nimble. And part of the investment, interestingly, was because we saw a workforce that had a greater desire for flexible work arrangements. Little did we know we would need the ultimate level of flexibility as of last March, obviously, when COVID set in. So that was one area of investment. Second area of investment, which I think all organizations are focused on would be security, things like cybersecurity, all of your IT security. And I think there's elevated spend probably across all of financial services. And frankly, that is in part because you've potentially got more risk out there. But in part because you're exposing more of the overall organization to digital processes. The third one, and it's the one that I think really goes to what is going to drive our ability to really drive expected profit. And that would be investments in both simplification of our back offices, so the things that we're doing as we migrate to a single brand. So as you can imagine, prior to announcing the single brand, we were already on a path to saying, okay, let's not think about trying to upgrade 3 separate systems, maybe for the Canada Life, London Life, Great-West brands, let's migrate to a single. So we had plans underway for that. And I'm talking more on the retail side. And then on the digital side, it's digitizing a lot of the processes that we have either to drive out efficiencies. So that's good, but also to drive client capture. So you've seen investments in all those areas. I'd say a lot of the infrastructure spend is in place, the infrastructure spend. I think ongoing investing in security and cyber will be an ongoing thing that we're all going to do. And I think the digital spend and the spend around back office simplification, that's where you're going to start to see the benefits coming through in our expected profit growth. So that's one means of expected profit growth because we'll get -- we'll call it, efficiencies or you might argue that we'll get -- if we have a better mouse trap, we can capture greater market share in traditional channels. Then the other area where we think there's significant opportunity for expected profit growth would be this extension and expansion of the group platform from being, as you said, just sort of a traditional, we're selling a group retirement plan or we're selling group benefits to how do we transition that to being a client relationship platform where you can sell through other products and services. And we have -- what we're trying to do is leverage intellectual properties and sort of the type of thinking that Personal Capital has done and apply that across the broader group. So we see upside there as well, Tom.

Yes, that's good. I mean, if you had to look, you've got the U.S. with Empower and Personal Capital, you've got U.S. with Putnam, you've got Europe and you've got 2 parts of Europe, and then you have Canada. And if you wanted to -- if you wanted to say what of these would be your strategically, probably the best growth profiles, what would represent the best in terms of value creation for Great-West of those various segments? Or is it one of a -- this just diversifies the company, and this helps us -- just a little bit more color on where you think you -- what's your best prospects for growth out of the segments that you're in?

Yes. So for sure. Underlying our strategy would always be the construct diversification. We like geographic diversification. We like diversification across various types of businesses, whether it's more capital, heavy capital, light. We really like branded customer businesses where you get organic growth driven off of them. But on the other hand, we do quite well in some of our institutional businesses like our Capital and Risk Solutions. But if I was to go to where we see both current growth and prospects for strong growth, for sure, we would look to Empower. We believe that market will continue to consolidate, and we will be a participant in that. We're well positioned for it. We've got an appetite for that. Then the extension play for Empower from the standpoint of retail client capture is a significant opportunity for us. And we actually believe this whole acquisition of Personal Capital plays to where that market is going, to the mass market, the mass affluent market, where these hybrid digital tools are going to be critically important to being able to reach and sustain positions in that market. So I would see Empower as a strong growth engine. If I thought about the Canadian platform, if you view it as sort of a traditional market and you'd say the overall Canadian market is highly consolidated. And for the most part, it's going to be, call it, mid-single-digit growth, we think the extension opportunities in the group client space in terms of retail capture, where I would argue that the mass market Canadian or mass affluent Canadian is not as well served as they could be. We see opportunity there. But that's on the base of a very large business there. So you wouldn't see the same upside. If I get more focused on some of our other businesses, I look to Germany. Germany is a market where we are very well positioned with products that really work in a Solvency II environment with a growing brand and also a leading independent broker offering there. And we've just introduced a brand-new platform for that, and that's essentially -- it's a retail pension savings business, but our new platform allows us to reach into the group pension savings environment. So I would say Germany will continue to feature and feature more strongly as a growth engine for us. And then I guess the other business that we have seen strong growth in, and I believe we will continue to see strong growth is in our Capital and Risk Solutions and in part, it's because we bring to that market through our reinsurance solutions for clients, and that's obviously traditional reinsurance. It's structured capital -- structured capital solutions as well as P&C. It's diversified, but we really play from a position of really strong expertise, really strong reputation and strong diversification. And what we've seen during both the transition to Solvency II or even the -- through the COVID era, as companies have been challenged with managing what we'd refer to as redundant capital or excess capital charges, we've been able to provide them with solutions. So if I think about it, those businesses all represent growth opportunities. The last one I'll touch on is Putnam. And if you think about Putnam, we've been delivering strong performance for clients, and that's core. If you don't do that, you're lost. And we've had very, very strong performance over the last couple of years, frankly, over the last 5 years and even 10 years. We've been driving down costs, but at the end of the day, to unlock value at Putnam, we really need to think about a transaction. So while it wouldn't be an organic growth play, there is an opportunity to unlock shareholder value and to sort of create value through transaction with Putnam. So we've got the organic engines in Empower. We've got an organic engine from the standpoint of the German operation. We've got extension plays in Canada. And obviously, I mean, I could go to U.K. and Ireland. I'm not going to go through the whole thing. But then Putnam would really be about unlocking value through a transaction.