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 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.

Thank you, Therese. Good afternoon, everyone. I'm excited to share news today that Canada Life has reached an agreement to acquire Investment Planning Counsel, a leading independent wealth management firm from IGM Financial. Joining me on today's call are Garry MacNicholas, Executive Vice President and Chief Financial Officer; and Jeff Macoun, President and Chief Operating Officer, Canada. 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 presentation materials. Following our prepared remarks, we'll open the line for questions. Please turn to Slide 3. Canada Life will acquire the business of Investment Planning Counsel as a subsidiary of IGM Financial for a cash consideration of $575 million. This acquisition aligns with Great-West Lifeco's strategy of growing its wealth management businesses across the organization. Over the past few years, we've invested in extending our Irish Life Wealth Management platform and added personal capital in the U.S. as a foundational capability for Empower's personal wealth business. The transaction we're announcing today aligns with our strategy in Canada to be the leading platform for independent advisor, including best-in-class independent wealth management solutions. With $31 billion in assets under administration and 650 advisors, Investment Planning Counsel, known as IPC, propose Canada Life to be one of the largest independent wealth providers in Canada with over 4,000 advisor relationships and $85 billion in assets under administration. In addition to adding significant scale to our existing mutual fund and seg funds-focused wealth platforms, it offers an expanded range of competitive product solutions, including mutual funds, securities and discretionary portfolio management offerings. This broader set of wealth solutions will allow advisors to grow their practices and support the changing needs of their clients within the evolving regulatory environment We'll also enhance Canada Life's existing strengths in independent adviser practice management, planning and succession support. The transaction is highly strategic for Canada Life. The addition of its broader spectrum of wealth capabilities and strong talent will unlock significant value creation for Canada Life over time. The deal economics are attractive with the purchase price of $575 million, representing 13x pro forma 2023 EBITDA. Garry will review other financial details later in the presentation. I'll now turn it over to Jeff Macoun to describe how the acquisition strengthens Canada Life. Jeff?

Thank you, Paul, and good afternoon, everyone. Please turn to Slide 4. We viewed IPC as a highly attractive target for some time. IPC has meaningful scale in Canada's independent wealth management space with $31 billion in assets under administration and a network of more than 650 independent advisors. As you'll see on the right side of this slide, IPC has been growing steadily since 2018. Notwithstanding the decline in 2022, when wealth in asset under manager were impacted by volatile market conditions, it's had strong growth since the start of 2023. IPC also brings many complementary benefits to Canada Life's business with both an MFDA and an IIROC dealer, IPC is well positioned to meet a broad range of client needs. It also aligns with the new Canadian investment regulatory organization that will oversee both types of dealers. With the combined scale of IPC's dealers and our existing Quadrus dealer, we will be able to invest more efficiently in products and technologies, including a spectrum of personal wealth solutions that help advisors grow their business and serve their clients. IPC One is another key strength of this business and brings new capabilities to Canada Life. IPC One is a technology-enabled flat feed discretionary platform that allows advisors access to ETFs, pools, SMAs, mutual funds and alternative asset classes. Also of note is IPC Pinnacle, its corporate office team who offer practice management support to advisors throughout the business life cycle from the launch of their practices to business growth planning, to developing succession strategies that ensure continuity of advice and service to their clients. IPC will continue to operate as a separate platform in the medium term as the regulatory environment and technology solutions evolve. Over time, we expect to leverage all of these capabilities and create a single platform that supports mutual funds, securities and discretionary dealer offerings. This will better position independent Canada Life and IPC advisors to meet their clients' needs. Please turn to Slide 5. This slide shows our largest peers across the nonbank wealth management space. With IPC, we're building on our strong Canadian franchise with a growing personal wealth business. We've been a market leader in segregated fund assets and sales for some time. And as we accelerate our wealth strategy, IPC enables us to scale and extend our capabilities. The addition of IPC's assets of $31 billion to our segregated fund and mutual fund assets takes our market presence to $85 billion, making us one of the top nonbank wealth providers in Canada. And as we look to the future, we are very well positioned for strong organic growth and further investment in market consolidation. Please turn to Slide 6. With IPC, Canada Life is able to offer a broader range of solutions for advisors to support more complex affluent and high net worth client needs. By executing our strategy of being the leading destination for advisors, we can support even more Canadians with their diverse and changing needs. As previously noted, IPC's open architecture, MFDA and IIROC platforms as well as the unique discretionary platforms like IPC One, will be key enablers for advisor success in our evolving regulatory environment. Over time, as we make these new capabilities available to more advisors, we will be able to capture improved margins across our platform as advisors serve a broader range of more complex client needs. Please turn to Slide 7. We have a strong franchise in Canada, founded in many ways in our belief in the value of advice. This acquisition will make us even stronger and advisors even more central to our wealth strategy. IPC and Canada Life share a desire for long-term working relationships with advisors, and we both understand the support advisors needs through their business life cycle. IPC's platform complements Canada Life and elevates our advisor value proposition to another level. Leveraging our combined scale, we will be able to invest more efficiently in personal wealth solutions and technologies to attract new advisors and retain existing ones. As we continue to build our capabilities over time, we'll offer a broader range of competitive product solutions and advisors will benefit from our combined mutual fund, segregated fund, securities and discretionary dealer platforms, particularly as they adapt to Canada's evolving regulatory environment. And finally, by expanding our practice management and succession support, we can ensure advisors have both the choice and flexibility to create, run and retire from their business while feeling confident there will be a continuity of advice for their clients over time. We strive to be the leading destination for independent advisors and by acquiring IPC, we are proudly creating an infrastructure to serve advisors efficiently and effectively through their careers. Please turn to Slide 8. As we've been saying, acquiring IPC accelerates Canada Life's wealth strategy by extending our wealth management reach and capabilities, which in turn helps advisors better meet the needs of more Canadians. With this deal as one that benefits all of our key stakeholders, clients, advisors and our shareholders. Clients gain more access to advice for managing and protecting their wealth, a comprehensive set of solutions to meet their needs and digital tools to help them achieve their goals. For advisors, we've talked a lot about how they will benefit through access to increased support in a broader range of competitive product solutions. This will enable them to better engage in portfolio design and construction, the disciplined selection money managers, portfolio monitoring and ongoing oversight. And finally, when we successfully serve advisors and clients, our shareholders win. Through the addition of IPC's capabilities, we will be able to capture improved margins through an expanded range of structured products, managed solutions and unique platform offerings. In summary, the acquisition of IPC expands our reach and gives us the scale to improve margins, invest in additional capabilities and participate in further market consolidation. I will now turn the call over to Garry.

Thanks, Jeff. I'll spend a couple of minutes on the transaction financials. Canada Life will acquire IPC for a total cash consideration of $575 million, and this is expected to be fully funded from existing cash resources. The purchase price represents approximately 13x the pro forma 2023 EBITDA of $43 million, which includes immediate expected fixed cost savings. As noted, IPC will continue to operate independently in the medium term. Over time, we expect to evolve to a single platform, leveraging the advantages of greater scale for the benefit of clients and advisors. We have not factored in the potential costs and the benefits of that longer-term direction into this financial summary. The IPC business today is profitable, and the transaction is expected to be modestly accretive to Great-West Lifeco after 2 years, taking account of the foregone investment income on the cash used for funding and the estimated impact of the amortization of intangibles. Transaction and integration costs of $25 million pretax are expected over 12 to 18 months after the deal closes, primarily related to technology-related transition and retention. The impact on Canada Life's LICAT ratio is expected to be approximately 3 points. And lastly, the transaction is expected to close by the end of 2023, subject to customary regulatory approvals. And I'll hand it back to Paul now for closing thoughts.

Thanks very much, Garry. Please turn to Slide 10. I'd like to conclude by reiterating how pleased we are to be moving forward with this transaction. The acquisition of IPC accelerates Canada Life's strategy to establish a leading wealth management platform for independent advisors and their clients. It adds significant scale to Canada Life's existing platform, provides a range of new competitive product solutions and enhances practice management and succession support for advisors. Ultimately, these strengths will help advisors better serve their clients, setting them up for long-term growth and success in their business. So with that, I'll ask the operator to open the line for questions.

[Operator Instructions] The first question comes from Doug Young with Desjardins.

Got a few questions here. Just maybe bigger picture, Paul. I mean your debt-to-cap ratio is 35%, give or take. I thought lowering the debt to cap would be more of a priority for capital. And I know the cash flow coming in from the U.S. deals is earmarked for that as well. But I'm just wondering your thoughts in terms of measuring deployment of capital against that reduction versus a deal like this? And then can you remind us of your target that the cap ratio is and how long it might take to get there?

Thanks, Doug. I'll start off by just talking about priority. And when I think about priorities, for sure, we've been actively reducing our debt -- our leverage ratios. But when a strategic opportunity comes along, you have to really consider how you want to move on that in the speed in which we want to move on it. And we saw this as a highly strategic transaction for Canada Life. It's been actually an entity. We've had a keen interest in for quite a long time. The opportunity actually came to be now, and we decided that this was a priority. Having said that, we fundamentally are very focused on working down our leverage ratio, and I'll let Garry speak to that. Garry?

Yes, sure. A couple of things to note. First off, I think we've called this out at the Q4 call that we do expect with the transition to IFRS 17, but our LICAT ratio would be increasing by 10 points or so. So we certainly have the regulatory capital room for this. And in terms of -- given that room and the size of this transaction, we don't see this having any impact on our plans that we have in 2023 for deleveraging, and that's primarily the debt we're looking at there is the short-term debt related to the Prudential acquisition. So we don't see this impacting our ability to get at that debt and reduce the leverage ratio. And that's really the only debt repayment that was on the horizon in the near term. So I think we can do both the strategic and move on reducing our leverage ratio.

Okay. And then just maybe, Garry, few of the financials. You said the first 2 years -- is it dilutive in the first 2 years? And when you talk about dilution or accretion, is that before the intangible amortization? So I missed that.

Garry, you can take that.

Yes, yes, sure. So in the first couple of years, so I'll set aside the transaction cost, that's obviously going to be a bit of a drag. I mean the numbers are quite small regardless. So when I was talking to modestly accretive in 2 years, that includes the amortization of intangibles. So that's all in. And that's after the -- I just referred to that period because that's after the integration period. So there's no integration costs might be in the story. But the -- I mean the numbers are quite modest. They're in that sort of penny a share range. So they're not large. And I think the all-in -- if you put all the expenses in the first year, which be 2024, then it might be $0.01 or maybe [ $0.02 ] going the other way. But it will be, if I put all the integration costs, so it's quite modest there. But obviously, longer term, this has a lot of value to add.

Yes. And then tend to quantify, can you talk about the fixed cost saves? Have you quantified what that is?

Yes. The initial fixed costs that I put into that when we were talking about the pro forma 2023 EBITDA, that would be about $3 million upfront in terms of -- relative to the current run rate, we're expecting to be able to add.

Okay. And then lastly, just the -- these types of transactions, you're buying people, advisors, have you -- is there an earnout in this? Is there a retention benefit? Is that part of the acquisition price? Is that -- is there stuff on top of that? And can you quantify that?

Yes. So I'll take that one, Doug. It's Paul. As we looked at this transaction, the first thing we're doing is, we're actually keeping the IPC platform separate and distinct from our Canada Life platform. There's a lot going on in the industry now with the emergence of a single regulatory body overseeing both MFDA and IIROC dealers. And that has to play out. We're looking for technology solutions that could enable an end-to-end platform. So ultimately, the integration costs are really modest because we're really keeping these separate -- we're keeping these separate platforms. So the bottom line is, we don't see a lot of pressure there.

But in terms of retention of advisors, is there any programs you put in place to keep people in place? Or...

No, we actually -- what we see is, we're actually going to be strengthening the value proposition for advisors. So I mean, the reality is we're always managing advisory relationships. It's part of the blocking and tackling every day in the business. But we don't see this as an environment we're going to do that. We're actually going to be adding value to advisors on the platforms. And we're not going to be asking advisors to actually shift platforms. There's no change for advisors. They'll be able to carry on with their businesses, but we'll be there with capital to enable them. Jeff, do you want to add something?

Yes. Just, Doug, to add to that, I think Paul put it well. The leadership of IPC will stay intact, which is critically important and very much to their success thus far. We'll continue it as an independent body. It's business as usual, and we'll begin to add to the practice management and the value propositions and collectively working together on building the value prop longer term.

And one thing to add...

Garry, do you want to add something?

I just wanted to add that we weren't -- were not anticipated because I think this might have been where you're going. But we're not anticipating substantial additional costs other than what I called out earlier in terms of the integration costs. So we're not anticipating additional costs over that. That was an all-in when I was referencing to that integration cost.

The next question comes from Tom MacKinnon with BMO Capital Markets.

Yes. I mean, 2 questions here. The first one is the EBITDA for IPC for 2022 is $33 million. So just wondering how you get $43 million next year. I got $3 million of that $10 million difference as a result of these immediate cost saves. And then a follow-on really just with respect to the strategy and how it kind of fits in with the whole power organization here. So can you answer the first one, that would be great, and then we can move on to the second.

I'll turn the first question to Garry.

Sure. I think a large part of what's happened in 2022, like the -- we would estimate the current is about a run rate of about $40 million, and that's going to reflect 2 things moving over and above 2022. One is just the markets have improved, obviously, since some of the earlier turmoil within 2022. So that's been a pickup. And plus there were further -- IPC had made further capital deployment in 2022 in terms of investing in their business. And so the benefit of that is arising in the EBITDA in 2023. So you're seeing the benefit of both a little higher markets on some capital deployment by IPC last year.

Okay. And then presumably, you get leverage from IGM with respect to the IG Consultant distribution network. So why couldn't you do essentially the same without owning it with respect to IPC? What's the additional value here in terms of owning it? And then how do you justify the shareholders that even on an EBITDA basis, this IRR is about 7% to 8% at most. Like how do you -- what's your answer to those kind of 2 questions that I proposed.

Tom, I'll come back -- we'll come back to the IRR because I think we view the IRR as a lot stronger than that for sure. So I think this goes back to the fundamental strategy that Canada Life operates with an independent advisor channel with over $50 billion in assets under administration -- broadly, though, focused on segregated funds and mutual funds. As we look to the IPC platform, we see a platform that has a more diverse product offering that includes mutual funds, IIROC capabilities and also discretionary managed accounts. And that diversification of products being added along with the scale of $31 billion of incremental assets and 650 advisors is now positioning us with one of the largest independent wealth managers in Canada. It will give us the scale to invest. We see opportunities to advance those products across the broader range of advisors. So this is strategic. It's quite -- and I would also note that IPC actually operates separately from the IG Consulting or the IG Wealth Management channel. These are very separate businesses. It's operated as an independent entity under Investors Group. And I would say Canada Life is the best home for this entity from the standpoint that we'll be able to benefit from IPC, keeping them as a strong independent channel, along with the independent channels that we operate. From the standpoint of IRR, maybe I could have Garry speak to that.

Yes. Todd, I'm not quite sure how you've got the 7%. That sounds like...

Probably 43 divided by 575...

Yes. That would just be -- I was -- I would think of that certainly as a current run rate. That really doesn't pick up the growth. And we see this as a real growth prospect here. So I think that's the answer to your question. It starts out where it does it -- as you said, 43 over 575. But we certainly see the transaction as contributing to our 16% to 17% ROE target over time. So I think the difference is just in the growth.

And when you did that IRR calculations, did you do it excluding amortization of intangibles or with it?

Yes, when we look at the overall finances -- yes, when we look at the overall financials, what the returns we're expecting us, we would look at the bottom line earnings for sure.

Jeff Macoun, you can add.

I was just going to add, Tom, and perhaps back to the top, it's -- we really believe -- I mean, we operate in this independent space and we believe that accelerates our vision of the place for independent advisors and their clients. And so we believe this is a significant growth play for us in Canada to attract advisors in the independent space. We're starting with about $85 billion, making us one of the largest nonbank wealth providers. The other thing, which we haven't talked a fair bit about is, we already have a significant footprint on the Canada Life side with Quadrus. And we believe that there's a growth engine there, which allows us to demonstrate our commitment to the wealth business. It allows us to give greater access to that group through an IIROC platform, immediate new expertise in this space as well and provide significant scale. So we believe there's a number of growth opportunities within the franchise.

[Operator Instructions] The next question comes from Paul Holden with CIBC.

You've made a number of references to the evolving regulatory environment, which assuming refers to the blending of IIROC and MFDA. And just ready, just wondering how ready is IPC today, I guess, most importantly from a systems perspective? How much investment is still required? And do you anticipate making some of that investment after the transaction closes end of 2023? Or will it be substantially complete beforehand?

So thanks. Good question, Paul. As we outlined in our comments, we're going to keep for the next -- for the foreseeable future, we will be keeping the IPC and our existing Quadrus platform separate as strong independent dealers. And ultimately, we do look to try to migrate to a common set of technologies. But the reality is today, there is not a common platform out there that effectively serves both MFDA and IIROC advisors. And so ultimately, yes, we will be looking to invest over time in providing that level of tools. Ultimately, we're looking to serve advisors that they could operate with clients who might migrate and graduate from MFDA-style unitized solutions to IIROC solutions and to other solutions that might be more complex. And ultimately, I think that will be the target operating model that we're working towards and investing in. Those investments though will come following in 2023. And those will all be a function of having a strong business case where there's value creation behind it.

Understand. And that kind of leads to my second question because there's also a number of references to scale. I just want to make sure I understand the significance of scale in this business. And I think it's getting to what we're just talking about, which is the required sort of technology, operational investments for this business and just having a bigger platform helps you absorb that from a margin perspective. Is that correct? Or are there additional benefits to scale in this advisory business?

Yes. I think the primary would be the fact that you have got a broader base of revenues on which you can spread costs out for sure. And the reality is, scale also represents brand and significance in the marketplace where there's trust from the standpoint of advisory channels. You're going to be a stickier platform if people believe that you're fundamentally committed to the business and investing it. Jeff, anything else you'd add?

I would just add to Paul's comment, I think it allows us to have a broader set of solutions that individually we don't have today, and there's an opportunity for that. It also allows us to have an enhanced support by bringing the 2 together and longer term with a best-in-class experience for both the advisors and clients. So by bringing the groups together, we just -- there's greater leverage for us to do more things in the marketplace.

Understood. And then I just want to add a follow-on to one of the points you brought up, which is offering a broader set of solutions. My impression is larger scale gives you the capacity to develop a broader set of solutions in-house versus third party? Am I reading into that correctly?

That is absolute -- you've read into it exactly right. When you look at sort of wealth solutions and the evolution of wealth solutions, increasingly, it's in-house managed account solutions, and we look at that opportunity to provide those if we've got that breadth of scale and capability. And what we're acquiring in IPC is not only scale, we are acquiring capability. We're acquiring capabilities that were not resonant in our current wealth business. So we're really not only growing the wealth business in terms of its scale, we're actually growing it in terms of our capabilities and our capacity to build those in-house solutions.

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

Thank you very much, Therese. Listen, I want to thank everyone who joined us this afternoon on fairly late notice. We appreciate you taking time. And we really also appreciate your questions and your interest. And if there are any follow-up questions, we encourage you to reach out to our Investor Relations team. Thank you very much.

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