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

Hello, and welcome. Before we begin, I must remind you that members of the media and the press are not authorized to participate in this event. If you are from the media or the press, please disconnect from the call now. The content presented on this conference call is proprietary to and are subject to the copyrights of Jefferies or third parties. You may not externally record transcribe publish or otherwise publicly disclose any portion of this call, including, but not limited to the name or other identifiers of the speakers unless Jefferies [indiscernible] in writing. Please note, this call is being recorded. By attending this event, you agree to all of these instructions. And I'll pass it off to John to get us started.

Thank you, Katie. Good morning, good afternoon, everyone. Very pleased to have David Harney here with us, who is the CEO of Great-West Lifeco. Great-West just reported their second quarter earnings yesterday and David very happy to have you here. Hopefully, we can have a very good discussion. I'm quite excited about this.

Yes. Thanks very much, John.

Before we begin, just administrative detail. Obviously, being Canadian, I'm going to hog the puck and ask a whole host of questions. But if there is anybody online that actually has something they would like topically like us to discuss. Please e-mail me at jaiken@jefferies.com, and we'll see if we can tag that in.

But -- so David, just to start off, you've now been CEO for the group for just over a year. I believe you were appointed shortly after last year's Investor Day. As you sit here today, are there any potential shifts or tweaks that you're viewing in terms of your long-term strategy?

No. Like long-term strategy remains the same. Just within my first year, like I had an incredible first year and I'll have a fantastic team around me. We integrated in the second half 2025, we've had great our first 6 months for this year, when we touched on some of the reasons for that success as we go to each of the segments. But I think if you stand back, like, certainly, one of the reasons for our success as an organization is just our, I think, long-term thinking, the consistency of our strategy. We like to build scale positions in mature markets. We love our 33 geographies, Canada, the U.S., the 3 businesses that we have in Europe. And then our global reinsurance business alongside that, like we're very committed to those areas have no desire really to be outside of that, very committed to the sort of product lines and markets within those geographies. They're fantastic tailwinds behind retirement insurance wealth. And I think when you look at our overall portfolio, there's sort of no, sort of, product line or areas that we're in that we don't want to be in. I think we add on sort of adjacencies or scale very well until we get the opportunity when we have a portfolio that's sort of beating our medium-term objectives. We're very confident on the outlook of that portfolio. And I think having that sort of firmness and steadiness of strategy and the portfolio that's in good shape. I think it just gives us a lot of focus as an organization. And the focus of me and the team is it's just delivering in each of those areas have been as good as we can be. So absolutely, no tweaks, no changes. Our strategy is working, and we remain firmly committed to that.

Fantastic. David, taking this on a different tack, if you go back and take a look at last year's Investor Day deck, is there anything that might have changed in terms of the presentation or the focus of the -- of what you spoke to on the Investor Day?

Yes. I think yes, Yes. [indiscernible] demand in things, I'd say if we went and did our Investor Day next week is to be practically the exact same deck. Now there might be 2 tweaks I made to it, and I touched on that. But it'll be basically the same thing again. And I think even as a team, as we go out and talk to investors, it's not at all, but at the same time, we've been surprised just as the longevity of it and actually how the basis and what we called out in that, I think, is just right. So I think there's a couple of very important things we did just at Investor Day last year, like one was just setting out our ambition, the earnings per share growth of 10%. The capital generation in excess of 80% of earnings the ROE ambition in excess of 19% and then the dividend range. And we've outperformed against those. We remain very committed to those. But I think beyond that, it was giving, I think, transparency on the capital generation and sort of going into detail on that and also transparency on what is going to deliver that growth and actually breaking that that growth ambition into the different segments. So double-digit growth in the U.S., mid-single-digit plus growth in Europe and reinsurance and then mid-single digits growth in Canada. And going into a reasonable amount of detail in each of the levers are as important in each of the markets to deliver that growth. So I think that transparency on our ambition, that transparency on the growth levers, that transparency on the capital generation, it's been very well received by the investment community adds to that focus I mentioned earlier, for us as an organization as well. So I think we were holding an Investor Day again today we'd be doing exactly the same. Now I think experience will always be a little bit different than your [indiscernible] growth ambitions. Obviously, we've had a fantastic run in the market. That means the U.S. significantly outperformed its year-on-year growth is 26% in the first half of this year. We're seeing an exceptional spike in demand for capital solution products within the reinsurance business. So its growth is 38% in the first half of this year. I think probably spike of demand for a period. So reinsurance will moderate, albeit off a higher base. Europe, we've done very well on capital optimization and capital optimization takes surplus capital out of the business that makes earnings targets harder. But even with that, Europe is hitting. And then what we've seen in Canada then is probably a little behind, but just the moderation in long-term visibility experience. And when you look behind that, then there's actually very strong performance there. So probably the only tweaks if we were setting our ambitions each of the segments, I think, could be the same. I'd probably be a little bit higher on Canada. So it's only that's the one that's behind moderation on the disability experience. But I think when you look behind Canada, we're investing a lot in [indiscernible]. We're investing back in group benefits. We're upping our ambition of the retirement side. So I'd say we're very close to, sort of, higher ambition in Canada. If we were having an Investor Day again, I think I'd have the same ambition for Canada that I would for Europe and Capital and Risk Solutions. And I think the other thing we would probably talk a little bit more about is it's just amazing -- Investor Day is only last year, we didn't talk about AI at Investor Day. And that's even just a sign of how far AI has come on in such a short period of time. So you would certainly have to be talking about that and just how that's going to assist your strategy as well. So I think the only 2 sort of changes are moderations.

Well, one of the things that I found absolutely fascinating with Great-West is your group ROE has been steadily improving over the past 6 years at basically 1 point a year. And what do you attribute the key drivers to this performance? And is there, at some point, a natural ceiling for your ROE? Or should we -- it's not obviously not going to go to 100%, but at what point does the improvement start to level off?

Yes. That has been a fantastic success story. There's a few different reasons for that. Like the primary reason is the sort of higher growth of the capital-light businesses. So that probably drives 80% of the improvement. And even at Investor Day last year, I think our ROE was 17.5%. We said we expected that to grow to over 19%. It's 19.3% now just at the end of Q2. Like I suppose if you go back, we made large investments, obviously, in the U.S. through the acquisition of the JPMorgan book going back then Prudential and MassMutual and also the adding of Personal Capital. Like they were big investments, but they paid off hugely. Like Ed and the team have done an incredible job in just integrating all of those businesses and building an at-scale platform that is very good at what it does. So -- and it's sort of that, that has driven the higher growth in the capital-light businesses. And then just the success of that investment is actually what's driving the ROE. So probably 80% of the ROE expansion is coming from the higher growth of the capital-light businesses, largely on the back of successful investments in the U.S., but also wealth businesses and retirement businesses performing well in Canada and Europe. There's been a little bit of add-on just through optimization, like we talk a lot about just the importance of managing your capital well and capital generation and optimization work. We even touched on that again in Q2 just on the success in Europe. Like as John explained on the call, like we're probably 2/3s of our way through the optimization program. So the boost we've got for that probably moderates a little bit. There's still a little bit more there. But there isn't a natural ceiling, like our capital-light businesses will continue to grow faster than our capital supported businesses. And if we continue to grow our overall earnings in line with our medium-term objectives and a higher portion of that growth is coming from our capital-light businesses, ROE will continue to grow. And really, what we focus on as an organization, there's lots of different targets there. But if we deliver on earnings growth and we deliver on capital generation target, everything else looks after itself.

Well, since it's largely structural, I guess the flip side to that is, do you see any headwinds to profitability, either in terms of macro or anything regulatory or structural that could be coming down the pipeline that we're not aware of?

No. Look, obviously, as an organization, our earnings are linked to the performance of the markets, like particularly like obviously, our wealth and retirement businesses, a high portion of the revenue there is related to the market. So if there was a setback in markets, that would be a setback in our earnings the same way that the sort of run on the markets has meant we've outperformed those objectives. So that's just an obvious one. Other than that, I wouldn't see anything. The other thing that might pull back ROE, it's not so much headwind that might be there or an event like, say, the market is coming back is if we were to do an acquisition, like our return targets on acquisitions are lower than our ROE. So our minimum return target for an acquisition would be 15%. And that would be if we have practically 100% confidence on execution. It would need to be a little bit -- need to be north of 15% if you were less confident on execution. But even then our sort of toleration for not being confident in execution is very low. But if you had an acquisition where you were hitting 15%, 16%, 17% return, that would be a pullback on ROE for the period. So they're probably the only 2 things.

Fantastic. And then David, in your role as CEO, what is the Board looking at in terms of your own particular KPIs? And is that any different than what your predecessor faced?

No, it's the same, like the structure of sort of my compensation measurement, it's practically -- it's very similar to what Paul has. So we have a balanced scorecard approach. As I mentioned, like probably the 2 key metrics for investors are the earnings growth and the capital generation. If you do those well, everything else looks after itself. Now what you need behind those to do those well is obviously, expense efficiency is important. Delivering for your customers is hugely important, like you cannot have good positions in your markets and grow your earnings if you're not delivering for your customers, that's your ultimate job. And then there'll always be sorts of strategic areas that are important for growth. So it's a balanced scorecard over those areas.

And David, you brought up earlier AI and how it really has changed everything and wasn't really on the top of the list just over a year ago. How are you deploying it across the group? What changes are you seeing in terms of operations? And I guess, specifically, is this having any impact on the distribution channels?

Yes. It's amazing just how embedded AI has become in the organization. And obviously, just been sort of machine learning capability that would have been used more on the actuarial side for over a decade now. But I really mean just the generative AI capability and just how quickly that has entered into the organization. And I'd say we're probably at the start of a 5-year transformation that we're going to see in the business. But sort of where we're seeing it is like in many different areas, but just, I'd say, on the customer service side first, like very much in the call centers, either AI itself taking calls and dealing with calls or assisting agents in dealing with calls, either in preparation in monitoring calls and summarization or even AI itself now starting to take a number of those calls. And I think that's just going to continue to grow just as capabilities improve. The other area that's very linked to that then is like, obviously, when customers are bringing into call centers or contacting us, they're looking for something to be done. So there's sort of operations and processes that happen behind those requests, whether it's onboarding new customers or paying claims or changing member details or increasing contributions, moving funds. So again, Agentic AI is increasingly being used to automate those processes and improve the sort of speed and turnaround times at which we can implement those. And obviously, AI is incredible now when it comes to coding and programming. So our technology teams are using it just on software development. So that sort of life cycle is being transformed and the amount of throughput that we're getting there is growing and increasing all the time. The other area then like maybe your investor community wouldn't appreciate it, but anyone working in the industry would is like sort of insurance and banking were organizations that have existed for a long time. We all have legacy systems. We've all run sort of large-scale projects to modernize and upgrade our infrastructure. I think we all have painful war stories on modernization of legacy infrastructure that has happened. And AI is just incredible on that. And just the way that it can go in behind those legacy systems and understand how it interacts with all of the plumbing. So even behind the scenes, just what it can do and how it can help us modernize and streamline our systems is incredible as well. And I think that will turn into -- just the speed at which we operate as an organization is going to accelerate. Generally, in insurance, our SLAs, they're sort of longer than our customers would be used to dealing with in other industries. And I talked about just to our organization, we tend to operate in days. Other industries operate in minutes and seconds. And I think insurance and financial services will move to be a minutes and seconds type organization. I think that's going to have a phenomenal experience just on our interaction with our customers because our customers, they pick long-term financial services products. They're big decisions for them to make. They need a lot of confidence and trust in organizations that they're dealing with. And the sort of faster, more seamless we can be in our interaction with customers. It actually goes a long way to build customer trust and confidence. And I think for me, that's probably the most important thing. If we can execute well out of that customer service delivery, I think we're going to help grow the markets at an industry level. I think on the advice, it's interesting. Like there's a few things AI isn't going to change. So like I think the core need of our customers remains the same. Customers, I still think, like dealing with human organizations and need to trust the organizations that they're dealing with. So we're still going to be -- I always talk about that the business is a group of people providing the service for another group of people. That's sort of not going to change. But it is interesting, will AI start to play a bigger role in maybe advice and distribution. We're certainly seeing that customers are doing more research themselves before they come and talk to us. And that's actually a very positive thing for us because the more customers feel educated themselves and confident themselves, it's much easier for us to help them with the products that they have. So I still think at the end of the day, customers will want a very dominant human interaction with organizations, but AI will play a much bigger part of it.

And we've seen some Canadian financials actually put targets out for the benefits that they're expecting to accrue from AI. For those of us on the outside, though, it's very difficult to ascertain the veracity of that. How do you and your management team think about the benefits or trying to quantify the benefits because I don't believe that Great-West actually has a target that you've got put it publicly.

No, no, we haven't put a target out, and it's something we've debated a lot. I think the benefits I've seen put out by other organizations, I think they're broadly right. Actually, I think even in time, like obviously everything depends on time. But I think in time, actually, those benefits will be outperformed and greatly outperformed. So I think the benefits that people have put out now are reasonable. And I think there's a similar quantum of benefit that I can certainly see within Great-West. I think the real question for me, though, and probably why we haven't put out a benefits target is it's probably the timeline of the benefits. There's also investment required for those benefits, and what's the scale of the investment. And then ultimately as well as you secure those benefits, and maybe on the back of investments that are required for the benefits, how much of this goes back at customers as well. So for me, the real question is it's easy to put out a benefits number, but the real question is, well, David, are you upping your medium-term objectives? Are you saying your earnings per share, which are already very confident are going to grow at 8% to 10% per annum over the medium term? Are you saying now that they're going to grow at a higher number than that? And I think my aspiration or sort of our belief as an organization is AI is going to transform our business over the next 5 years, I think, is the time frame. That is going to take investment within the business. I think we will repay that investment certainly within the 5-year period. And then really how successful we are sort of post that period and repayment of that investment is how good a job we do relative to our competitors. But I probably expect in time a lot of this benefit to go back to customers, and that's where it should go. The price points of all of our products will reduce as we generate these efficiencies. We operate in competitive markets. So these benefits should go back to customers. So what I see is certainly like increased confidence probably on hitting our medium-term objectives. I think they're still the right medium-term objectives for us, but we will actually probably hit those in a more transformative way and a greater improvement of customer experience than we might have imagined before. And I think that just positions us and probably the whole industry in a sort of stronger way in the subsequent periods.

David, we've seen some very strong growth in Capital and Risk Solutions over the last 12 months. And given that you had a leadership position there, do you think that your familiarity with this business makes the overall group a little more comfortable with the risk profile of the segment?

Well, certainly, my familiarity with the business does make me very sort of comfortable with CRS and the sort of risk position of the business and its share of our portfolio. But I wouldn't characterize that as a change in any way, like that's exactly how Dr. Paul felt about the business before me and it's in line with how the overall group and the Board feels about the business as well. So really, the success that you're seeing in CRS now, I'd characterize as continuity rather than any change in view. Like we have an incredible team there running that business that has just fantastic tenure, like Jeff has been there for practically all of his career. All of his team around them have been there for a very long time. So it's a very stable team. Sort of all of the gating underwriting, review processes that are there in the business are exactly as was there before. We obviously have an executive review committee. Obviously, myself and John are [indiscernible] of you on to that committee, replacing Paul and Gary that were there beforehand. But that broader team is exactly as it was before. The Board then that reviews transactions as well. We have a reinsurance committee of the Board. That's the same committee that's been there for a long time. And even Gary I think was the [indiscernible] Group CFO, has sort of joined on that review committee as well. So -- and then the sort of other amazing thing is like obviously, we've seen a huge sort of spike in demand for capital solution businesses. But the biggest spike in demand we've seen are for products that we've been actually selling for over a decade and some of them actually for 2 decades. So these are not sort of new products that we brought to the market or an increase in sort of appetite that wasn't there before. Like the core demand is for products that we're very familiar with, and we've been offering to the market for a long period of time. And really, there's a number of reasons why we're just seeing that increase in demand for the product. Some of it is driven by regulatory changes. That would be more the case in Europe and Asia. And some of it is driven then just by growth in the underlying insurance markets, and that's particularly the case in the U.S., and say that the health insurance industry in the U.S. has seen huge growth over the last number of years, and that drives capital demand. And then I'd say the other factor that's just driving demand in the reinsurance segment, it's interesting on Investor Day when we went out as an insurance company and we talked about the importance of capital efficiency and set capital generation targets. That sort of maturity and understanding of the importance of capital efficiency and the understanding that's probably -- that's the most equivalent thing insurance companies have to stock within their business. So like I think all sectors of the insurance industry now are much more focused on capital efficiency. And when it comes to sort of supplying or raising capital. Obviously, you can do it by equity, you can do it by debt, you can do it through reinsurance. But reinsurance is one of the most efficient ways for companies to raise capital and just more and more companies are seeing that. But we've probably seen, I'd say, just a spike probably back on growth in underlying insurance within the U.S. like we expect that to moderate. And so I went -- I said earlier, if we had an Investor Day tomorrow, we probably set the same targets for each of the segments. So Jeff is operating off a higher base. I don't expect Jeff to sort of grow that at 38% every 6 months, that would be just unrealistic. But we do see continued demand that will moderate. But I expect for reinsurance now, we're growing off a higher base.

Yes. I find this very interesting, David, because I was pressing Jeff on the call yesterday about the growth outlook and everything else like that. And I know that you view the businesses as a portfolio, the diversification is a huge benefit. But is there any level of contribution that CRS could have that you start actually pulling back on their growth or the capital allocation? Or are you just allowing this to naturally run its course in terms of where demand goes? And if it continues to grow by leaps and bounds, almost so be it?

Yes. We do like the diversification it brings within the portfolio and having that diversified portfolio and I think the right share within the different segments is important. I think it's important for us that more of our growth comes from capital light, and that's our expectation. And even with the sort of spectacular growth Jeff has seen the -- like that hasn't sort of displayed that growth, like our capital-light earnings in '26 will be similar to '25, but the path going forward is higher on the capital-light earnings. And maybe if you look at our expectation, I think reinsurance earnings were 19% maybe of earnings in 2025. Like obviously, reinsurance has grown a lot in the first half of this year, but we've had spectacular growth in the U.S. as well, which is our biggest segment. So even with the growth we're seeing in CRS this year, like earnings would probably be maybe 21% of total earnings. Obviously, it depends on how all of the segments do in the second half. But my best guess would be in or around 21% of earnings for the full year. So and then I expect CRS to moderate. So that's in a range that we're very, very comfortable with.

And then, David, you mentioned U.S. also showing very good growth, definitely much more capital-light than CRS. I think you're targeting around 55% of earnings by 2029, if I'm correct. If we're going to look, call it, 10 years out, what proportion of earnings do you see coming from the U.S. segment? And then I guess my follow-on question is that is there any natural cap that you would put on this segment, even though it is one of your stronger growers, one of your capital-light businesses, if it managed to be 80% of the business, is that something that's bridged too far?