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

Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Fourth Quarter 2022 Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead, sir.

Thank you, Karl. Good afternoon, and welcome to Great-West Lifeco's Fourth Quarter 2022 Conference Call. Joining me on today's call is Garry MacNicholas, Executive Vice President and Chief Financial Officer. And together, we will deliver today's formal presentation. Also joining us on the call and available to answer your questions are David Harney, President and COO, Europe; Arshil Jamal, President and Group Head, Strategy, Investment and Reinsurance; Jeff Macoun, President and COO, Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO, Putnam Investments. Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-GAAP financial measures and ratios on Slide 2. These apply to today's discussion and the presentation materials. Please turn to Slide 4. Great-West Lifeco delivered a solid performance in 2022 with full year base earnings of $3.2 billion and base EPS of $3.46. These steady results were achieved against the backdrop of economic and market uncertainty and driven by the strength and diversification of our businesses. We closed out the year with a strong fourth quarter with base EPS of $0.96, which Garry and I will cover in our comments. The company's fundamentals remain strong, and we continue to reduce our post-acquisition leverage ratios and build up cash and capital. Yesterday, we announced a 6% increase in the common share dividend. This announcement and our long track record of raising the dividend highlight the strong capital generation of the Lifeco portfolio and our confidence in the future. The strength of the company's market-leading franchises provide stable growth in earnings and liquidity to support our investments in future growth. In the last few years, we've deployed significant resources on 3 transformative acquisitions to accelerate growth at Empower. We've made strong progress in 2022, adding new capabilities and welcoming millions of new customers to the Empower platform. We completed the MassMutual integration in December, achieving our cost synergy target of USD 160 million and exceeding our objective for client and asset and revenue retention. We're using the same disciplined approach with Prudential and we'll start migrating its 4 million participants to the Empower platform in March. The acquired Prudential business is performing in line with our expectations. Run rate cost synergies of USD 43 million have been achieved to date and the business has contributed CAD 171 million to the Lifeco base earnings since we closed the transaction in April. Together, the MassMutual, Prudential and Personal Capital acquisitions position Empower with the tools, capabilities and customer relationships required to build a wealth management growth engine alongside its market-leading defined contribution retirement business. To this end, we launched Empower Personal Wealth in January of this year, integrating Empower's IRA business and Personal Capital's hybrid digital wealth business. We will begin reporting the DC business results and the Personal Wealth results businesses separately starting in Q1. Given this change, we're planning an investor education session to introduce this new reporting approach ahead of our Q1 results reporting. There is a lot going on at Empower. So later in the presentation, I'll provide some color on 2023 growth that management is targeting for the Empower business and the key drivers behind this target. This, of course, is the last quarter, which we'll report under IFRS 4 before transitioning to IFRS 17 and IFRS 9 in Q1. We're nearing the finish line of our preparations and are well positioned for the transition. We have provided a condensed opening balance sheet as of January 1, 2022, in our disclosures today and updated the expected impacts we shared with the market in June, which remained largely in line with previous disclosures. In addition to moving forward with our business priorities and getting ready for IFRS 17, we're also advancing our corporate purpose and social impact agenda. Over the last 18 months, we've taken action in 3 areas of focus: introducing a commitment to net zero carbon, establishing enterprise diversity goals and deepening our commitment to reconciliation. We've aligned the organization and our board around these 3 focus areas and look forward to sharing more on this with you at our annual meeting in May. Please turn to Slide 5. This slide shows our medium-term financial objectives, 8% to 10% base EPS growth, a base ROE of 14% to 15%, and a target dividend payout ratio of 45% to 55% of base earnings. Notwithstanding the headwinds that held back 2022 performance, we're tracking to our base EPS growth objective with 5-year growth of just under 9%. This reflects solid organic growth and strong contributions from acquisitions. It also reflects our operational discipline, including how we manage our investment portfolio, underwrite and price new business and manage expenses. With these same '22 headwinds, while they had a dampening impact on base ROE, we remain confident in meeting this objective over the medium term. With respect to our dividend payout ratio, this is a medium-term target, and our goal is to work into this range over the next few years. Please turn to Slide 6. Our fourth quarter saw strong overall results with base earnings of $892 million and base EPS of $0.96, up 8% year-over-year. Net earnings were over $1 billion or $1.10 per quarter, up 34% year-over-year. Garry will cover the financial drivers in more detail. Please turn to Slide 7. Our Canadian business saw an improving trend in insurance and wealth sales to close out the year. While group insurance sales were lower year-over-year due to fewer large case sales, persistency was strong and Canada Life led the market in sales in the fourth quarter. Strong individual insurance sales results were driven by participating life sales. Group Retirement sales had strong sequential growth with gains in our core defined contribution and next-step asset rollover businesses. On the individual wealth side, sales also improved sequentially and were in line with industry trends. These results are supported by Canada Life's continuing improvement in technology-enabled customer and advisor experience. Please turn to Slide 8. In Europe, business performance was steady as economic conditions improved and the political environment in the U.K. stabilized. Insurance sales were down from a year ago, while individual annuity sales increased sequentially. And while U.K. bulk annuity -- the U.K. bulk annuity market demand remains strong, we did not write any large cases as we maintain strong pricing discipline. We resumed selling equity release mortgages in December and are seeing solid traction in an overall market that has somewhat lower new business activity due to higher interest rates. While Europe wealth sales were down from a year ago, Q4 sales were up sequentially with positive net cash flows in both individual and group. The stability in these European results reflects business models focused on financial necessities like pension savings, retirement income solutions and group protection. Please turn to Slide 9. Putnam's AUM was impacted by market declines and ended the quarter at USD 165 billion. Net outflows of USD 1.5 billion showed continued improvement compared to the last 3 quarters and were primarily in Putnam's lower fee fixed income products. Notably, Putnam delivered positive equity flows in 2022 in a period when equity sales across the market declined by over 10% year-over-year. These flows are supported by Putnam's excellence in investment performance for clients with 40 funds rated 4 or 5 stars by Morningstar, 96% of equity assets with 4 or 5 star Morningstar ratings and 83% of total assets with 4 or 5-star Morningstar ratings. These ratings reflect Putnam's track record of strong performance over 5 and 10 years. Please turn to Slide 10. Empower's DC business continues to experience strong momentum with sales up 8% year-over-year and client retention at 97%. This is a testament to the excellence and service our empower colleagues have continued to deliver to clients, despite the heavy integration activities over the past year. As noted, the MassMutual integration is now complete. Targeted pretax cost synergies of USD 160 million were achieved an asset participant and revenue retention outperformed our original expectations. The Prudential integration is on track. USD 43 million of realized pretax cost synergies are unchanged from last quarter. As we noted with MassMutual, cost synergies are typically front and back-end loaded. In Prudential's case, we expect the remaining USD 137 million of annualized cost synergies to be realized when client conversions are complete and redundant systems and services are decommissioned after Q1 2024. We're excited about the prospects for continued growth in Empower Personal Wealth with our enhanced customer experience now available across the combined Empower and MassMutual participant base. We're seeing good early momentum with sales growth up 15% over Q3. Please turn to Slide 11. Capital and Risk Solutions expected profit increased 7% year-over-year. Other margins and fees were up 20%, with growth in structured and longevity reinsurance and improved pricing in the P&C business more than offsetting slightly lower actuarial PfAD releases. The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on our core businesses in the U.S. and Europe, and we continue to pursue expansion across -- expansion opportunities in select new markets. And with that, I'll now turn the call over to Garry to review the financial results. Garry?

Thank you, Paul. Base EPS of $0.96 was up 8% from Q4 2021, notwithstanding the lower market levels this quarter compared to Q4 last year. All 4 segments contributed to the strong performance, which also included the acquired Prudential retirement business that was not in last year's results. Net EPS of $1.10 is up 34% from last year, reflecting the higher base earnings as well as favorable excluded items, which were primarily actuarial and tax related. In Canada, base earnings of $295 million were down 7% from a strong Q4 last year, primarily due to market-related fee income pressure and lower yield enhancement contributions, partially offset by strong group life and health insurance results. In the U.S., Empower base earnings of USD 155 million included USD 47 million from the addition of Prudential retirement business. Excluding Prudential, the results are down 8% in U.S. dollar terms year-over-year due primarily to market impacts on fees and the anticipated integration shock loss in the MassMutual block, partly offset by strong organic growth in the business and improved spreads in the general account. Recall over 50% of net revenues at Empower are asset based. And so the impact of lower markets on asset-based fee revenues continues to be a headwind, especially against the market levels in Q4 2021. This comparative period markets issue is expected to continue into Q1 2023 based on market performance so far this quarter. That said, business fundamentals such as top line organic growth, customer retention and retail expansion remained strong. As noted on the last call, in Q4, we completed the final conversions for the MassMutual business. Through the integration, we have met our expense synergy targets of USD 160 million on an annualized run rate basis, and we have exceeded the original customer revenue retention targets, excellent achievements by the U.S. team. A similar integration revenue loss pattern is expected on the Prudential business. While there has been very little revenue attrition to date, some is expected in 2023 as part of the integration process, and that will begin to impact year-over-year comparisons as we progress through 2023. We remain confident in hitting the customer and revenue retention targets we set out for this transaction. We also expect the benefit of full expense synergies, USD 180 million annualized to emerge once the integration is complete early in 2024. While we have achieved run rate synergies of USD 43 million to date, we do not expect to see much additional synergy benefit to arise until 2024. Turning to Putnam. Earnings were down from Q4 last year, largely impacted by 2 factors: first, lower asset-based fees as expected given sharply lower average market levels for both equity and fixed income this year compared to last. Second, there was a negative swing of USD 33 million from onetime tax items, a negative $16 million this quarter opposite a positive $17 million in Q4 2021. The Europe segment posted a particularly strong quarter with solid business fundamentals and results across Ireland, Germany and the U.K. In addition, there were elevated yield enhancement benefits in the U.K. and favorable tax impacts. The Capital and Risk Solutions segment, which is primarily the Reinsurance business unit, saw our earnings continue to benefit from steady new business success. Also, U.S. life claims experience continues to improve from the elevated COVID-related claims experienced at the height of the pandemic. Turning to Slide 14. This table shows the reconciliation from base to net earnings. Net earnings were over $1 billion this quarter. In addition to the strong base earnings across the segments, there were positive actuarial assumption changes, management actions and market-related impacts on liabilities. The previously announced tax increase on Canadian financial institutions were substantially enacted this quarter. While the additional 1.5% tax will modestly impact future earnings, the revaluation of deferred tax attributes resulted in a onetime positive impact this quarter. The remaining items are predominantly acquisition and integration-related costs. Turning to Slides 15 and 16. These next 2 slides highlight the source of earnings, first from our base earnings perspective and then net earnings. I'll focus my comments on Slide 15, the base earnings SOE with a reminder, the amounts above the line are pretax. Expected profit was up 2% year-over-year. The increase is primarily due to the addition of Prudential, plus business growth in Capital and Risk Solutions and improved margins in both Canada Group customer and the Empower General Account. This was largely offset by lower expected fee income due to the sharp market downturns experienced during 2022 in each of the regions. Experience gains are the other notable item I'd call out, largely driven by yield enhancement in the U.K. mentioned earlier. The improvement from last quarter's experience loss needs to be viewed in the context of the $130 million impact of Hurricane Ian provisions taken in Q3. The earnings on surplus of minus $24 million improved $12 million from last year, with the benefit of higher interest rates, partly offset by the impact of additional financing costs related to the Prudential business acquisition. The effective tax rate on base earnings this quarter was 11%, reflecting the jurisdictional mix of earnings and certain nontaxable investment income. Moving ahead to Slide 17. These tables expand on the experience results as well as the management actions and changes in assumptions to highlight various items in the quarter, most of which we've touched on already. As shown in the chart on left, the yield enhancement continued to contribute positively, primarily in the U.K. this quarter. The elevated U.K. gains were in part due to having secured attractive assets earlier in the year that could either be used to support new business or in-force liabilities. Given the absence of large bulk annuity deals recently, the assets were allocated to the in-force block resulting in a yield enhancement pickup rather than new business gains that we've seen in the past. The net impact of mortality, longevity and morbidity was neutral this quarter with some pluses and minuses across a diversified book of insurance risks. Credit was a small positive gain relative to expected credit loss impacts as our high-quality investment portfolio continues to perform well. The table on the right highlights modest basis change impacts this quarter plus the actuarial portion of the corporate tax rate change. There are only a few smaller year-end assumption updates and refinements as the bulk of the actuarial reviews were completed in Q3. Moving to Slide 18. This slide highlights operating expenses by segment. Expenses are up year-over-year, but that was to be expected given the increase in business and the addition of the Prudential business. Adjusting for Prudential and currency movements, expenses overall are up 3%, demonstrating strong expense discipline. Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future, this is an area we'll monitor closely, and we'll look to achieve productivity gains in our operations and adjust pricing, if appropriate. The overall message here, consistent across the segments is we continue to manage our expenses closely balanced against the need to continue to invest for future growth. Please turn to Slide 19. The Q4 book value per share of $26.60 was up 8% year-over-year. About 3/4 of that or 6% growth was driven by strong retained earnings over the past 4 quarters. In addition, currency translation was a positive this year, led by a stronger U.S. dollar. The LICAT ratio at CAD Life remains strong, improving 2 points to 120%. Earnings net of dividends and the continued smoothing in of the scenario switch benefit drove the increase. Lifeco cash, which is not included in the LICAT ratio ended the quarter at $1 billion. The increase from last quarter primarily reflects the EUR 500 million debt raise in Q4 in advance of a EUR 500 million maturity in April. OSFI released its 2023 LICAT guideline in Q3, setting out the adjustments to accommodate the transition to IFRS 17. The first LICAT ratio under the new guideline will be reported as part of the Q1 2023 results, and we are currently estimating a positive impact of approximately 10-points on transition. Note, the actual impact will be dependent on market conditions at the time, including the level of interest rates, given different sensitivities between IFRS 4 and IFRS 17. Turning to Slide 20. This slide provides an updated view of the anticipated impacts as we move to IFRS 17 and is very much in line with the information we provided last June. Note 2 in the year-end consolidated financial statements contain summarized opening balance sheet information on the transition to IFRS 17 and IFRS 9. As expected, there is a reduction to shareholders' equity, which we had flagged in June as being in the 10% to 15% range. This is a result of a net reduction to retained earnings, driven primarily by the creation under IFRS 17 of a new deferred profit liability, the contractual service margin, which basically represents unearned expected future profits. The resulting reduction is 12% for shareholders' equity and 14% for book value per share, in line with the original estimates. The contractual service margin is included in regulatory capital. And as noted earlier, we're expecting approximately 10 points improvement in the LICAT ratio on transition based on current estimates and conditions. I should note, we have only recently begun to work on the IFRS 17 comparative Q4 results as we wrapped up IFRS 4 reporting this week. Also, we are still analyzing the comparative results from previous quarters, particularly in relation to investment results, given the large equity and interest rate movements during 2022. We will be looking to share information on comparative 2022 earnings under IFRS 17 and 9 at the Q1 call in May. We continue to expect modest base earnings impact overall, although, of course, that will vary by segment, given the different business mixes. And we continue to target 8% to 10% base EPS growth over the medium term. So back to you, Paul.

Thanks, Garry. Please turn to Slide 21. As Garry outlined, we remain confident in delivering on Lifeco's objective of 8% to 10% base EPS growth per annum over the medium term. For 2023, we expect low single-digit offset to this growth as a result of the transitioned IFRS 17. As a reminder, this is an accounting change that impacts the timing of earnings, not the economics of the business. We will report our Q1 financial results in May under the new IFRS 17 and IFRS 9 standards, including results for the comparative quarters in 2022. As part of our new reporting, we will be providing more insight into Empower financial results by splitting out Empower's core DC business from Empower Personal Wealth previously referred to as retail. We're planning an education session for analysts and investors in the spring, where we will outline our new reporting for Empower. In advance of that, given the multiple Empower transactions over the last 2 years and with much of the Prudential integration still to come, we wanted to provide more detailed perspectives on the drivers of Empower performance as we move into 2023. Management is targeting annual base earnings growth between 15% and 20% from 2022 to 2023 for Empower. This growth assumes long-term average equity market growth and stable interest rates throughout '23. It includes Pru expense synergies of USD 43 million already captured, but does not include the remaining targeted synergies of USD 137 million, with the majority of those coming in early 2024 when client conversions are complete and redundant systems and services are retired. It also reflects expected Pru revenue losses associated with clients not retained. To date, we've retained approximately 94% of proved revenues and are targeting ultimate revenue retention in the low to mid-80% range. We expect to see most of these terminations and associated revenue losses in the latter parts of '23 or early parts of '24. Finally, it reflects the continuing growth of our Empower Personal Wealth business, which is beginning to see solid traction following the integration of personal capital capabilities into the Empower participant and IRA rollover experience. As I noted, we're providing this additional information for Empower because of the multiple acquisitions impacting Empower's financial results year-over-year. We do not plan to provide this type of information for our other segments where we'll be focusing on providing insights into the impacts of IFRS 17 for 2023. And with that, I would like to turn the call back to the operator to open the line for questions.

[Operator Instructions] The first question comes from Meny Grauman of Scotiabank.

I just wanted to follow up, Paul, you were talking about retention rate assumptions for Prudential. If my notes are correct, MassMutual retention was over 85% when all was said and done. So I want to make sure I have that right. And then compare it to the guidance of low to mid 80%. And the question is just why do you think that the retention rate for Prudential will come in lower than for MassMutual? What's driving that assumption?

Meny, I'll start out, but I'm going to turn it over to Ed, who can provide a bit more color. The reality is we had set a low mid-80s target for MassMutual and [ we outperformed it ]. And if you actually look at precedent transactions in the market, that was a kind of a market-leading level of performance and the strong performance is one we're very proud of. But maybe Ed can provide a little bit more color on the targets we've set for Prudential. Ed?

Sure. You're correct, Meny. The performance on MassMutual was 85%, actually a little north of 85%. And there's obviously a lot of moving parts with these transitions. Prudential has about 3,000 clients, MassMutual had 26,000 clients. The level of complexity with the Prudential clients is far greater. That said, we feel very confident that will come in well within that range that we shared with -- on MassMutual. As Paul referenced, we had a target in the 82% to 83% range and we feel very confident we'll hit that range, if not exceeded.

And then just a question on the dividend. Just wondering, we haven't seen a dividend increase since mid '21. I'm wondering if you could just help us understand the expected cadence of dividend increases from here and with the move that was announced today, is it a reflection of something in the outlook that's changed? Or is it just a function of the payout ratio. So I'm just curious about that.

So Meny, taking it back to last year, we actually increased our dividend in Q4 last year. And we kind of did a 2-part increase. And the overall increase was actually 12% last year. That was after having stepped away from dividend pieces for a year during COVID. But if you actually look at the track record, we've kind of been focused on Q4 increases. If you go back and look at it historically, generally, it's been in around the 6% range. And this would be a continuation of that. And I would say it's reflective of our view on the strength of the business, our liquidity and it's about trajectory. Having said that, we've outlined that, obviously, there'll be a bit of softening in our EPS growth because of the onetime impact of IFRS 17 transition, but we do view this dividend as indicative of our view as we think about our medium-term growth, and we like our prospects for medium-term growth.

The next question comes from Gabriel Dechaine of National Bank Financial.

The after-tax yield in [ credit market ] was about $135 million, which is a good number, but credit higher than the run rate, and I got the explanation and all that. I was wondering if you can tell me what that number would look like if it happened in Q1 of next year under IFRS 17?

And I'm going to turn that one over to Garry. Garry?

Yes. I think we will be doing our Q4 comparative work. As I mentioned, that will be coming up, and we'll be sharing the comparative quarters when we get to the Q1 reporting. So we might have an opportunity to discuss what it looks like between the 2 different regimes then, if we're at that level of detail. I just make a couple of comments. I think -- and we've noted in the past that some of the yield enhancements will fade away under IFRS 17 and others will stay the different mechanism, but they'll stay impacting our results in the base earnings. And I just wanted to point out that all of that has been factored into our -- when we say a lower moderate single-digit impact. It's all factored into that on a pro forma basis. So any one quarter, it's a bit up and down, but we just looked across the year and said, what's a typical year?

Well, that's one. I figure you could please provide a ballpark as that low single digits earnings impact would have factored that in, as you say. So is there any way you can ballpark it? [Technical Difficulty] Annually, let's say you're running at around [indiscernible] of yield enhancement gains under IFRS 4, what's the comparative under 17?

Yes. I think the things I'd point out is when you look into the specific quarter, even just the year happened, the impact on switching from one to the other will depend on the nature and the location, which portfolio is the yield enhancement and the nature of what drives the yield enhancement. In terms of a quarter like this, it's probably more 50-50, but it really does vary quarter-to-quarter.

Yes. Gabe, as Garry said, rough estimate this quarter, 50-50, but if the [ jurisdiction of earnings were in ] another quarter, it could be a different weighting.

Okay. That's good enough. And just on U.K., I guess, I was expecting to see some action on the real estate front there. We're seeing other companies getting their appraisals and marking down the real estate holdings. And I know you've got a different portfolio than other companies and went through an experience in the post-Brexit period that maybe made you adjust the portfolio a little bit. I'm wondering what your outlook is there for evaluation on the all broader real estate portfolio, the $7 billion and the 1/3 of that that's in the U.K.

Yes. I'll start off with the high level, and then I will pass it to Raman Srivastava. The reality is we've been staying totally on top of appraisals. The discipline we've always had I will say that if you think about the journey from financial crisis to now, we've been very, very disciplined in terms of managing our real estate portfolio staying on top of it, staying on valuations, quality and the like. So we come into what you could say is some market dislocation with a strong portfolio, but I'll let Raman speak to what we saw in the quarter and actually what flowed through the income statement in the quarter. Raman?

Yes. Gabe, you're right, there was a challenging quarter for sure, for real estate in the U.K. and other areas. I don't think -- we didn't come through unscathed. If you looked at the details that are embedded within the SOE on the market-related impacts on Page 17, embedded within that, there's roughly a pretax number of about minus [ $30 million ] associated with the -- over quarter. But what I'd say is it comes through on the property side, but ours is skewed more to industrial than it is to office or retail. So that's one thing. And then we've talked in the past about the mortgage book, and there's a lot of detail in the back as well of the analyst slides on Page 38. And you would have seen some deterioration. So like if you look at the LTVs, for example, a year ago versus today, today, they're at 54% a year ago, they were at 51%. So there has been some deterioration in the credit quality. But I'd say the starting point is still strong. We think if this weakness in the property sector continues, there may be some headwinds for us, but they're manageable given our starting point and diversified nature of the portfolio.

And just -- I mean, it's been a while since you talked about U.K. property last time, yes, in 2016, the portfolio was just under $3 billion, today, it's a little over $2 billion. I guess you have been shrinking it for the past several years. I didn't notice. I apologize, but maybe you can walk us through that a little bit?

Yes. I mean we're continuing to reposition. I think we've been -- we haven't been adding a lot to the U.K. property over the past number of years. We've been judicially disposing our assets where it made sense for the values made sense. Our mortgage book, we had talked about before some of the impacts years ago we're in the pre-financial crisis mortgages. That's windle down just a few hundred million now. So it is quite a different composition now on that side than it was say, 4 or 5 years ago. So there has been some gradually. You wouldn't have noticed any one quarter, but gradual [ petition ].

Raman, I'd -- Gabe, I would say, and Raman probably doesn't want [ to, to his horn ], but the reality is the industry have worked really hard at managing down the risk. And if you thought of as we went into the financial crisis, what was the shape and nature of the invested asset portfolio, in particular, the first thing about the U.K. versus where we're at today, and it has a very, very different shape. And as you'll recall, we got through that crisis period with relatively little damage. So at this stage, we will -- we, like everyone else, will see some challenges along the way, but our starting point is strong.

The next question comes from Doug Young of Desjardins Capital Markets.

Just wanted to go back to Empower. And I guess my question is, what is the ROE for this business? And where should the ROE be? And how quickly can you get there? And you've talked a bit about synergies and early termination pressures and market pressures. But bigger picture, just kind of taking a step back, like what is the ROE? Where should it be? How could quickly get there? Because I think of these businesses having low capital requirements, low margin but high ROE, especially for those that have scale, I think you've got scale. So just trying to understand that side of it.

Yes, I'll start off at the high level, Doug, and turn it to Garry. But if you think in terms of the Empower business, we actually deployed capital to acquire that business. And obviously, our model and our view was that these were accretive, strong transactions with lots of expense and revenue synergy potential and ultimately, to be. And growth from once fully synergized would have a good solid ROE and then forward business would be very capital-light or limited capital applied to it. So very high ROE growth beyond post-transaction, post getting the synergies in place. So Garry, that's kind of the construct. Garry, maybe you can speak to where we're at in that process.

Yes. I -- we do actually have the ROEs in the MD&A. And so you'll see that the U.S. financial services is basically the Empower business is in the low double digits right now. And again, that reflects making all the capital investments, all the E, but without yet getting the -- are fully synergized. So as the R picks up and then the organic growth, as Paul mentioned, the organic growth is very capital light. So you should be seeing these ROEs -- we would expect these ROEs to be going into the upper teens as the business develops in the coming years.

So I thought that financial service would include Putnam. Is that incorrect?

No. We have the U.S. Financial Services, which is the Empower business, and then we have the U.S. Asset Management, which is Putnam. We break them both in the ROEs.

Okay. So the idea is like 11% -- 10%, 11%, getting to the upper teens. How long does that take? Is that a 2-year journey, 5-year journey? Just curious to...

Yes. I would say getting ourselves into the mid-teens is going to be a function of booking the remaining synergies, client retention and then you're kind of into getting at where our targeted rates are right now in pre-IFRS 17. And then after that, it's all about organic growth and it's capital-light organic growth, and that's both adding DC record keeping clients. And I'll just remind you that we've been growing at a good clip there at sort of twice or more than twice the market, and that's relatively capital-light growth. And then the retail or what we call the Empower personal wealth, that will be fundamentally capital-light business that's serving individuals who IRA rollover individuals and the like. So that will kind of build and it will build from year to year to year as that becomes a larger part of the portfolio. But I can't kind of say when we would hit '18 or '19 or any of those things, but that's the vision and that's the goal.

No, that makes a lot of sense. Just moving to the U.K., it looks like you've exited the individual protection market in November. I'm just curious why -- how big was this business? Like will there be any bumps as a result of that? And how quickly does that book roll off?

Yes. Good question. I will turn that one over to David Harney to provide context around the scale of that and whether it has really an operational impact in the business. David?

Yes. No, it's a small business. So that's a market we entered a few years ago just from a 0 position. Like our protection business in the U.K. is our group risk business, and we're the leader there. So we had to go at adding on individual protection to that. It's a very competitive market and we struggle the last number of years. So we've decided to take that out of it. It won't have any meaningful impact on the U.K. results going forward.

Okay. Fair enough. And then last quarter, I think you had $300 million of cash at the holdco. This quarter, you've got $1 billion. I don't think this has moved up from the Canadian or Canada Life sub. So maybe it came up from the U.S. Just curious where that cash came from and how much cash would be left down in the U.S.? Because I don't think we have the visibility, or if we do, you can point me to something to take a look at that.

Yes. Garry can speak to that. Doug?

Yes. It's actually fairly straightforward. The real jump is the fact that we raised EUR 500 million in Q4. So that's -- which we've got sitting at Lifeco, and that's in anticipation of a maturity that's coming in April. So we derisked the refinancing of that maturity back in following the Q3 results presentation in early -- sort of midway through Q4. So that's what the cash is.

The next question comes from Tom MacKinnon of BMO Capital.

The question is really looking at the source of earnings on the base earnings, experience gains and losses in the U.S. of $82 million. Just wondering what those are? I think the majority of the experience gains and losses that you had for the entire company were on base earnings basis were yield enhancements. What was this $82 million in the U.S.?

Garry, is that something we've got visibility into? Or is that something you want -- give us 1 minute here, Tom.

Yes, I think the one thing I know right off the top was the improvement in interest rates would have been a pickup there. They would have also had relative to the expectations going in the start of the quarter on the fees. So you would have got a low starting point for market. So I think there was about a $20 million pickup on the market-related side to be another, as I mentioned, the interest rates being up, I think, as the $30 million pickup versus what we thought going into the quarter, that would come through on the spreads. And then they had -- again, expenses were positive relative to expectations in the quarter. I don't remember the details of why they were positive. But so those 3 categories were really what was driving in.

Yes. And Garry, Tom, it kind of reflects our methodology that when we go into the quarter, we set the expectation market levels, interest rate levels, expense levels that are anticipated and to the extent that markets kind of outperform, that goes into.

I think the expenses are probably tied to a budget. So as you go through it, there was a lag in updating that. So I think that's -- there was nothing -- it wasn't a yield enhancement. I think that's really what you're getting. We didn't have the yield enhancement there.

Yes. I mean the yield handlers are 90% of the experience gains and losses on a base earning or more than 100%. I think of the [ $148 million, there's pretax $161 million ] from yield enhancements for the entire company. So I don't know how this -- and there's no market impact -- market-related impact on liabilities associated with that, because this is on -- this is base earnings, not reported earnings. So I'd be curious to see what this $82 million here is, but you're suggesting none of it is related to yield enhancements. I guess what I'm looking at, if -- was this largely in Empower. I think it was largely in Empower. So something happened in Empower that was better than you would have thought that even drove the numbers to be still weaker than what I think [ the Street ] was looking for. So what was -- that was happened in Empower that was better than you thought in the quarter that drove this $82 million experience gain?

Yes. I think it was the 3 factors I mentioned earlier, but you're happy to do a follow-up right after this, Tom, just go through -- and let me just go through that in a little more detail, but it's just a thing...

Tom, I just -- frankly, it's 3 relatively more modest factors that I'd update you to, if you think about it, market levels improved a bit. So then we ended up with fee income slightly ahead of what we would have locked in as sort of the expectation. Interest rates moved a bit. So we would have seen maybe some widening margins. And then finally, Ed and his team actually did take some expense actions in quarter. And if you add those 3 things up, they add up [ $382 million ]. But what I suggest is Garry, could help you out offline on that one.

Okay. That'd be perfect. And there is absolutely nothing with respect to yield enhancements ever associated with this block. Is that what you're trying to suggest?