Great-West Lifeco Inc. (OTCPK:GWLIF) Q2 2022 Results Conference Call August 4, 2022 2:30 PM ET
Company Participants
Paul Mahon – President and CEO
Garry MacNicholas – EVP and CFO
David Harney – President and COO, Europe
Arshil Jamal – President and Group Head, Strategy, Investment, Reinsurance and Corporate Development
Jeff Macoun – President and COO, Canada
Ed Murphy – President and CEO, Empower
Bob Reynolds – President and CEO, Putnam Investments
Conference Call Participants
Meny Grauman – Scotiabank
Tom MacKinnon – BMO Capital
Gabriel Dechaine – National Bank Financial
Doug Young – Desjardins Capital Markets
Mario Mendonca – TD Securities
Nigel D’Souza – Veritas Investment Research
Paul Holden – CIBC
Operator
Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Second Quarter 2022 Results Conference Call.
I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead.
Paul Mahon
Thank you, Ariel. Good afternoon, and welcome to Great-West Lifeco’s Second 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, Reinsurance and Corporate Development; Jeff Macoun, President and COO, Canada; Ed Murphy, President and CEO, Empower; and Bob Reynolds, President and CEO of 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 discussions and presentation materials.
Please turn to Slide 4. Despite the challenging macro backdrop, Great-West Lifeco delivered solid results with base earnings per share of $0.89. This was up slightly from the first quarter and in line with the prior year. This steady performance reflects the strength, resiliency and diversification of our business. This diversification helps us weather market cycles and this was evident in our second quarter results. Insurance results in Canada, Europe and CRS were strong with favorable mortality and morbidity experience and improved investment experience. This performance helped to offset weakness in fee income in our Wealth Management and Asset Management businesses, which were negatively impacted by the sharp decline in equity markets.
Empower’s results included a full quarter of the Prudential transaction, which closed on April 1. While the contribution from the Prudential was in line with our expectations and the integrations of MassMutual and Personal Capital are tracking to plan, and power results were impacted by lower fee income and expense items that Garry will cover in his remarks. Notwithstanding the challenges presented by equity markets this quarter, we remain confident in the outlook for Empower and its value creation potential through synergy capture, organic record-keeping growth and expansion of its retail business. Later in my remarks, I will provide more color on Empower’s performance and outlook.
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. While year-to-date base EPS growth is below our 8% to 10% objective, these are medium-term objectives, and our confidence in meeting them over the medium term has not changed.
Please turn to Slide 6. Our Canadian business demonstrated top line stability in the quarter with group and individual insurance sales in line with last year. In wealth, group sales increased year-over-year with strong growth in our next step asset rollover program. Similar to Empower, Canada Life has been investing in this offering, including a more digitally enabled retail customer experience for our participants when they’re leaving workplace retirement and savings plan. Similar to the industry, individual seg fund and mutual fund sales slowed, reflecting market uncertainty and volatility. This decline was partially offset by an increase in sales of guaranteed interest options and payout annuities.
In our group insurance business, we continue to make good progress with our ClaimSecure business plan. Since the close of the acquisition in Q3 last year, the integration is going well with quote activity building and plan retention strong. We closed our first significant joint sale between Canada Life and ClaimSecure in quarter and had several SecurePak sales. SecurePak is a new bundled offering we launched last quarter, combining Canada Life’s insurance benefits and ClaimSecure’s modern claims processing capabilities. Canada Life also announced a dividend scale interest rate increase in participating life insurance products in the quarter.
Please turn to Slide 7. In Europe, sales were strong with year-over-year increases in all insurance and annuity offerings, including a large bulk annuity transaction and good momentum in equity release mortgages. Individual wealth sales saw solid growth year-over-year, while group wealth was steady with the prior year but down sequentially due to a large corporate pension sale in Q1. Europe saw strong performance overall, including growth in base earnings, which Garry will cover shortly. This performance reflects the resiliency of our European businesses, which focus on financial necessities like pension savings, retirement income solutions and group protection where demand is less affected by the macro environment.
Please turn to Slide 8. Putnam’s AUM was impacted by the sharp market declines and ended the quarter at USD167 billion. Net outflows of $4.4 billion were primarily in Putnam’s lower fee fixed income products. Putnam’s investment performance remains strong, as demonstrated by 4 or 5-star Morningstar ratings on 23 funds and just under 80% of fund assets performing at levels above the Lipper median on a 5-year basis.
Please turn to Slide 9. At Empower, this quarter’s sales results did not include any mega plan wins and fewer large case wins than last quarter or last year. Volatility in large and mega sales is quite normal and the new business pipeline remains strong. Retail Wealth Management continued to see strong growth with Empower IRA sales up 37% and personal capital sales up 14% year-over-year. Empower’s overall assets were just under $1.3 trillion at the end of the quarter with $321 billion acquired from Prudential on April 1. I would note that the value of Prudential assets was $284 billion on June 30, reflecting equity market declines in the quarter. You’ll note we’ve added details on the invested assets we acquired through the transaction in the appendix of the deck. While the Prudential business came with a high-quality invested asset portfolio, it was a little less conservative than Lifeco’s with a higher percentage of BBB and below investment grade. We are comfortable with the overall asset mix, which is in line with our U.S. competitors.
Please turn to Slide 10. While Garry will cover Empower’s in-quarter financial results in his comments, I would like to provide some insight into how the business is performing, offset our value creation objectives especially in relation to the 3 acquisitions noted on this page. Starting with MassMutual, we’re very pleased with our progress against our 3 near-term objectives: client retention, client migrations and expense synergies. When we laid out the MassMutual integration plan, we set an ambitious goal of approximately 82% of client revenue retention, which would be industry-leading if achieved.
I’m pleased to share that we’re on track to exceed this goal with most terminations flowing through the last 3 quarters and a smaller percentage to come through the balance of this year. The strong performance was driven by retaining the right talent for MassMutual and building early relationships with clients. And notwithstanding our keen focus on integrations, Empower has organically grown participants by approximately 5% over the last 12 months, overcoming the impact of MassMutual plant attrition. This growth is more than twice the overall market growth and excludes the benefits of the over 4 million Prudential participants added at April 1 of this year.
We have an expert team that is seasoned and disciplined, and they’ve completed 6 of 8 waves of client migrations. We’re on track to complete the last 2 waves in Q4. Our ability to retain clients and move them to the Empower platform drives our expense synergy capture. We remain confident on meeting our USD160 million pretax objective by the end of 2022. The playbook for Prudential is similar to the one we use for MassMutual. Our early focus was on retaining prudential talent that strengthens our team and can play an important role in transitioning relationships to empower and client migration work. We’ve set similar client revenue retention goals for Prudential and remain confident in achieving our USD180 million pretax synergy goal with $25 million achieved to date.
The fourth goal in these acquisitions is to accelerate Empower’s retail wealth management strategy by embedding Personal Capital’s hybrid digital wealth management capabilities into the Empower environment. This includes creating a new digital experience for participants, while in plan and deploying Personal Capital’s tools and advice model to grow Empower’s retail wealth management business with a focus on rollover and roll-in of assets. A reminder that across the Empower platform, there’s approximately $80 billion of money in motion each year, representing a significant opportunity to serve participants retail wealth management needs.
To sum up, we remain confident in meeting our value creation objectives including strong client retention and achieving expense synergy targets. We’re actively driving forward our strategy to build a significant retail wealth management business, leveraging the capabilities of Personal Capital across Empower’s over 17 million plan participants.
Please turn to Slide 11. We’ve shown expected profit in Capital and Risk Solutions for several quarters now as a better measure of growth in volumes. We introduced this expanded view of PfaD releases and other margins and fees in Q1 to provide more color into the movement period to period. CRS expected profit was steady year-over-year and up 6% sequentially. Overall, business growth was strong with new longevity contracts in the U.K. structured transactions in the U.S. and another reinsurance transaction in Israel. The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We continue to focus on our core U.S. and European markets as we pursue expansion opportunities in new markets such as Japan and Israel.
And with that, I’ll now turn the call over to Garry to review the financial results. Garry?
Garry MacNicholas
Thank you, Paul. Please turn to Slide 13. Overall, as Paul noted, Lifeco produced solid financial results this quarter. The benefits of diversification really shown through, especially given the challenges of declining stock markets and elevated volatility. Base EPS of $0.89 was steady year-over-year, but there were several notable moving parts. Not surprisingly, equity market declined to a headwind, particularly in the U.S. segment, where a significant portion of the revenue is asset-based fees. In addition, currency impacted EPS by about 3% compared to last year, reflecting a stronger Canadian dollar against euro and sterling. However, these pressures were offset by very strong insurance risk results plus the addition of the acquired Prudential Retirement business. Overall, a very solid result in a difficult environment.
Looking at net earnings per share, it was $0.79, down 6% from Q2 2021, primarily due to transaction and restructuring costs related to the Prudential Retirement acquisition as well as the currency impact noted above. For segment results, starting with Canada, base earnings were $296 million, up 1% from Q2 last year. Insurance experience overall was a positive this quarter, particularly in group as long-term disability results showed a strong turnaround and health results continued positive. This was partly offset by unfavorable individual policyholder behavior experience. Canada also benefited from another solid contribution from yield enhancement activity supported by widening spreads and continuing volumes of equity release mortgages.
In the U.S., Empower base earnings of USD133 million included USD35 million from the addition of Prudential Retirement business. Excluding Prudential, Empower’s base earnings of USD98 million was down from USD147 million in Q2 last year. The decline can be attributed to 3 factors: the drop in U.S. equity markets, the impact of expected acquisition-related mass future client attrition and higher expenses. As a reminder, over 60% of the net revenues at Empower are asset based. These fees were negatively impacted by the decline in U.S. markets in the quarter, which led to $139 billion or 12.5% reduction in assets under administration, excluding Prudential. Relative to expectations coming into the quarter, Empower fees were down almost USD20 million pretax in Q2.
As Paul has said, we are on track to exceed our original 82% client revenue retention target on the MassMutual integration. However, when looking at period-to-period comparisons during integration, it is important to recognize that there is a lag between deal closure and client terminations given that it takes time for clients to go to market with RFPs. So most of the impact of the expected attrition would be felt in 2022 and very little had been experienced by Q2 last year. While there will be some further attrition in advance of final conversions, it is expected to be very modest, the large majority of the attrition is behind us.
Often, acquisition-related revenue attrition is offset by market growth in new cash flows, and this occurred during 2021. However, with the sharp market declines this year, the revenue attrition is more noticeable in year-over-year comparisons. Expenses were up year-over-year in line with the steady organic growth in DC plan participants, higher compensation expenses and also the impact of our recently announced industry regulatory change, which led to additional printing and mailing costs, which are noticeable with over 17 million plan participants. We are working to address the change and reduce those costs, but it will take a number of quarters.
Retail wealth costs are also up significantly year-over-year, reflecting the accelerated build-out of the retail wealth strategy. This includes the additional sales hires that we noted in Q1 2022, along with the necessary support staff, investments, which are expected to drive revenue growth in future quarters. On the integration front, the rollout of Personal Capital digital capabilities to the broader Empower client base continues at pace, with over 8.5 million plan participants now having access to the enhanced user experience.
MassMutual expense synergies are at $88 million on an annualized run rate basis and are on track to deliver the $160 million target once integration is completed later this year. It is worth calling out integrating savings tend to be more pronounced at the start and end of the program. Early savings come from eliminating duplicate overhead costs, while later savings arise as prior admin systems and service agreements are discontinued post conversion to the Empower platform. We expect to see the same pattern for Prudential with early savings noted this quarter and most cost synergies coming towards the end of integration.
Putnam earnings were down from Q2 last year, impacted by lower asset-based fees plus mark-to-market losses on seed capital this quarter compared to seed capital gains recorded in Q2 2021. The Europe segment had another very strong quarter in Q2 with base earnings up 13% year-over-year or 23% in constant currency, allowing for the significant appreciation of Canadian dollar, Euro and Sterling. U.K. base earnings were up 91% year-over-year, partly benefiting from strong yield enhancement gains, but also due to last year, including a significant onetime tax charge. Ireland-based earnings rose 9% over Q2 last year, notwithstanding currency impacts, largely driven by strong insurance experience gains and the addition of Ark Life, a closed block acquired late last year. Base earnings in Germany were down 44%, primarily due to last year, again, including a onetime positive tax matter at this time as well as the impact of currency.
In Capital and Risk Solutions, the reinsurance business continues to perform well with base earnings up 16% year-over-year and growth in the structured portfolio driving increased expected profit. Experience gains were seen in both the longevity book and the mortality book, which is somewhat unusual. It was particularly encouraging to see the continued improvement in U.S. life reinsurance mortality claims experience and recording a mortality gain in this line for the first time since the pandemic began.
Turning to Slide 14. Here, we can see the impact of various excluded items, which are minus $95 million overall this quarter. These are predominantly acquisition-related, including transaction and restructuring costs for the Prudential Retirement business plus ongoing integration costs, including Personal Capital and MassMutual as well. There were also modest impacts from actuarial assumption updates and market-related impacts on liabilities in period.
Turning to Slides 15 and 16. These next 2 slides highlight the source of earnings, first from a base earnings perspective and then a net earnings view. I’ll focus comments on Slide 16, the net earnings source — SoE with a reminder, the amounts above the line are pretax. Expected profit was 8% up year-over-year. The increase includes the addition of Prudential, which accounted for about 6% with a similar impact in the quarter-over-quarter comparison. Currency was a positive in the U.S., but a headwind in Europe, as noted earlier.
Moving to new business impacts. The results were pretty steady year-over-year in Canada, Europe and Reinsurance. The U.S. strain is actually here nondeferrable upfront sales costs on investment contracts, which is higher than last year, largely due to the addition of Prudential along with continued organic business growth, higher — some higher expenses and some currency impacts. Experience gains contributed positively again this quarter, and I’ll cover these in more detail on the next slide.
Earnings on surplus of minus $39 million is similar to last quarter and down from a positive $21 million last year, primarily due to seed capital losses at Putnam and in Canada compared to gains recorded in the prior year, plus the impact of higher financing costs as a result of the Prudential business acquisition. The effective tax rate this quarter was 10% on base shareholder earnings and 7% on net earnings, primarily reflecting the jurisdictional mix of earnings. The effective tax rate on base earnings in Q2 2021 was 9%.
Turning to Slide 17. These tables expand on the experience results as well as management actions and changes assumptions to highlight various items in the quarter, some of which we’ve touched on already. As shown in the chart on the left, yield enhancement continued to contribute positively, primarily in Canada and the U.K. this quarter with wider spreads and the continuing steady volume of new equity release mortgages, which are originated in the U.K. but allocated to back liabilities in both the U.K. and Canada.
The net impact of mortality, longevity morbidity was strongly positive this period as we saw experienced gains across most insurance risk categories and most geographies. Group Insurance results in Canada and Ireland were particularly strong. We typically see more offsetting pluses and minuses given the diversification of process portfolio, but this was a particularly strong quarter. Credit-related impacts were also positive this quarter, driven by upgrades in the bond and mortgage portfolios as our high-quality investment portfolio continues to perform well.
The expense and fees variance is best looked at in 2 pieces. A little under half of the impact relates — reflects lower asset-based fee revenues than expected at the start of the quarter given the market declines experienced in Q2. And as noted earlier, most of this was felt in the U.S. The remainder of the variance is related to expenses not included in expected profits. This includes cost for IFRS 17, additional strategy spend in Europe and higher mailing costs and onetime expenses noted in the U.S. The table on the right highlights there were no material basis changes this quarter, and the acquisition-related transaction costs were related to Prudential transaction.
Moving to Slide 18. This slide highlights operating expenses by segment. Expenses are up year-over-year, as expected, given the increase in business, both organically and through M&A. Excluding Prudential, Lifeco expenses were up 4% year-over-year. As is the case with many businesses, we are experiencing some modest inflationary pressures in labor and other costs. This is an area we’ll monitor closely, increasing the focus on achieving productivity gains in our operations and adjusting pricing, if appropriate.
In Canada, expenses were relatively flat, up 1% year-over-year, including the acquisition of ClaimSecure, but also reflecting some onetime expenses in Q2 2021. In the U.S., expenses were up 39% year-over-year. Excluding Prudential, expenses were up 11% with a modest decline at Putnam and 13% growth at Empower, which primarily reflects, as noted earlier, the organic growth in DC plan participants and the recent investments in the retail strategy build-out, along with higher labor and those mailing costs mentioned.
In Europe, expenses were down, but as noted earlier, for earnings, currency movement had an impact with expenses actually up in constant currency. The increase is mainly due to acquisition-related costs in Ireland, including the Ark Life closed book and organic business growth across the segment. And in Capital and Risk Solutions, the expense growth is off a very small base and is line with growth in the business, including the continued expansion into newer markets.
Please turn to Slide 19. The Q2 book value per share of $25 was up 5% year-over-year, primarily driven by strong retained earnings given the solid results in each of the past 4 quarters, although currency translation in OCI has been a headwind this year with the weaker European currencies. The rise in interest rates lowered fair values on AFS securities. However, there’s a largely offsetting gain in pension OCI. As disclosed at our recent information session, we expect shareholder equity to be reduced in the range of 10% to 15%, upon transition to IFRS 17, primarily due to the creation of the contractual service margin liability.
The LICAT ratio on the right-hand side, the LICAT ratio for Canada Life remained strong at 117% within our target range of 110% to 120%. The ratio was down 2 points compared to last quarter driven by interest rate increases, partly offset by the continued smoothing in of the LICAT scenario switch benefit. As noted in Q1, we would describe the decline as more of a formulaic issue rather than an economic one. Since in general, our business benefits from higher interest rates. As a reminder, under LICAT, a portion of available capital is calculated at fair value, which declined again this quarter as interest rates rose further. However, the required capital is largely calculated at fixed rates as defined by OSFI and so did not move in the same manner.
OSFI released its 2023 LICAT guideline post quarter end, 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 would expect a positive impact on transition. As an indication of the impact, we have estimated that pro forma LICAT ratio for June 30, which would be in the mid-120s. Note, the actual impact on transition will be dependent on market conditions at the time, including the level of interest rates, given the different sensitivities between IFRS 4 and IFRS 17. And lastly, Lifeco cash, which is not included in the LICAT ratio ended the quarter at $0.8 billion, a modest increase from last quarter, and this would convert to about 3 points on Canada Life’s LICAT ratio.
Back to you, Paul.
Paul Mahon
Thank you, Garry, and please turn to Slide 20. We’re pleased with Lifeco’s results in the second quarter, which demonstrated the benefits of diversification and the resilience of our business. While we recognize there is still much uncertainty in the macro environment, we are well positioned to withstand future headwinds and take advantage of opportunities given our disciplined approach to managing our diversified portfolio of businesses. As such, we remain focused on delivering on our medium-term financial objectives as we work to advance our business strategies, including successfully integrating acquired businesses.
That concludes my formal remarks. Ariel, please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Meny Grauman of Scotiabank.
Meny Grauman
First question on Empower, the expenses there. You highlighted the mailing costs due to regulatory change. I just wanted to clarify, is that a onetime mailing? Or this is something that’s ongoing?
Paul Mahon
Meny, it’s Paul. I’m going to actually pass that one over to Ed, who can describe what it is. It’s not onetime. It’s a new requirement — regulatory requirement, but it’s something that we can actually take management action on to address. So Ed, why don’t you take that question?
Ed Murphy
Yes, it’s not a one-timer, however, because of the regulatory requirement that took effect in January of this year, predicated on us informing customers of their statements, their financial statements being posted on the accounts. And so in order to do so, we have to capture e-mail investors for all of our — for all of our customers. So we have a very large percentage today, and we’re continuing to drive towards 100% of e-mail capture.
Meny Grauman
And how material is that expense? If you could quantify it?
Paul Mahon
I’ll let Garry. Garry?
Garry MacNicholas
Sure. Yes. I think the expense is in the USD6 million range — USD6 million to USD8 million range.
Meny Grauman
And then just as a follow-up, you mentioned there’s management actions you can take related to this. Are there any other cost-cutting measures that you’re considering at Empower, anything that you’d highlight that you’d be thinking about right now?
Paul Mahon
Yes. So Meny, I’ll start off at a high level there. And the one thing I noted in my opening comments there is that notwithstanding the fact that we’re deep into integrations right now, we’re actually growing at a high pace, Adam Power, both on the record-keeping side. So we referenced the fact growing, growing at 5%, kind of twice the market but also accelerating growth on the retail side. So if you take those 2 levels of expense, the growth and expense we’d have in terms of new clients coming on site and building the retail business, we view that as very productive expense. So we would not want to be pulling back on those. Having said that, I’ll let Ed speak to the way he thinks about managing expenses in Empower because there’s a great discipline in there. Ed?
Ed Murphy
Well, I’d say — yes, I’d say we look at it in 2 ways. The first is we’ve got active investments that we’re making in the platform to automate more of our transaction activity, and that will lower our cost per participant — fully loaded cost per participant. So there’s a number of things that we do short term. I think in the aggregate, we probably have one of the lowest unit cost in the business today. And then I’d say secondly, we are moving forward on a pretty aggressive transformation kind of this multiyear that I think could represent meaningful savings for us. So look, if the business is very much around the cost side of it, we have to focus on as a team, and we’re doing that. But at the same time, as Paul mentioned, we’re growing. We’re investing in distribution. We hired a number of salespeople in 2021. On the retail side, we’re ramping up in 2022 on the retail side. And you can see the dividend results [indiscernible] in terms of gross sales, any opportunity [indiscernible]
Meny Grauman
And then just on the LICAT ratio, you quantified the impact on transition. Just wondering if the LICAT target range changes under IFRS 17, I’m not sure if you mentioned that in June, but I just wanted to clarify that.
Paul Mahon
Yes. There’s no intention to change the LICAT target range. We remain that. And as Garry said, that’s the transition pro forma at June 30. The actual impact on transition will depend on the economics at the end of Q1.
Operator
Our next question comes from Tom MacKinnon of BMO Capital.
Tom MacKinnon
When you brought on the Pru acquisition as opposed to the MassMutual acquisition, can you talk a little bit about the differences in the makeup of the business? I think my understanding is that the Pru versus the MassMutual has a lower percentage of fee income and higher percentage of spread income than you’ve seen at MassMutual. How does that play out in a rising or a declining interest rate environment? Are there guarantees? And it also has a higher seg fund book of business? And how does that play out with respect to a volatile equity markets. If you could help us understand that, that would be great.
Paul Mahon
Yes. I’m going to turn that one to Ed to provide a bit of context around the profile of the business. And then maybe you can turn it back to Garry for any other nuances. Ed, over to you.
Ed Murphy
Yes. I think first, a couple of things, Tom. There’s a little over 3,000 clients in totality versus 26,000 with MassMutual and the composition of the plans are very different. The Prudential plans tend to be larger in terms of assets and participant count, they tend to bring a level of complexity to them relative to the MassMutual. But in terms of — if you look at the underlying assets that transferred over, I would say it’s a good mix of traditional 40 Act mutual fund product and general account products as well. So not too dissimilar from what we saw with MassMutual. There are floors just as it were with MassMutual, but I wouldn’t say the — it’s dramatically different.
Paul Mahon
Garry, you’d add to that?
Garry MacNicholas
Sorry, just — maybe I’ll just add a couple of points to that. Tom, you were asking on the general accounting. The general account was over $40 billion. So as a large general account as both the size of our existing combined Empower MassMutual general account. So it’s a good addition to the general account, as Ed was noting. And as you’ve correctly assumed, the general account offering is less sensitive to the market moves, it’s more sensitive to interest rates. And in fact, over time, one would expect as rates rise, there could be greater. Certainly, you’d be more clear of any interest rate floors. We’re particularly concerned given the asset mix that came approved on the interest rate for us. They were fairly modest. But obviously, the rising rates does give an opportunity to earn spread on that. So that, if anything, they would benefit a bit in this environment as we go forward and then — and less sensitive to equity market moves.
Tom MacKinnon
And then just as a follow-up, I mean I jumped on the call late, but the base earnings in Empower, you may have addressed this were down 10% year-over-year, but you had a 14% increase in assets and a 38% increase in participants, albeit most of that increase happened on April 4. So I mean, what’s driving this drop? Is it just strictly higher OpEx? What other things would have been contributing to that? Because you started the quarter off with the higher assets to begin with.
Paul Mahon
I’m going to turn that one to Garry in a minute. But fundamentally, if you think about the shape of the business, about 60% of Empower’s earnings are market sensitive, and we saw a sharp decline in equity markets. So you actually have the fee income impact going on there. One of the things we shared in our speaking — in our formal speaking notes, was the fact that we had set a pretty aggressive goal in terms of client revenue retention for MassMutual in the low 80s. And we actually are at a point of where we believe we’ll outperform that in terms of revenue retention. But one of the dynamics of that is if you go back to Q1, Q2 last year, none of the clients that were ultimately going to leave Empower MassMutual funds that we’re going to leave Empower, in other words, the clients that we’re going to terminate, not many of them have terminated then versus over the last couple of quarters, we’ve seen clients who’ve gone out to RFP and they’re going to leave.
So we’ll retain the ones we retain, but we’ve seen that drop in revenue. And then Garry would have unpacked some additional expenses that have occurred, both driven by some unique issues in the business, but also the fact that we continue to grow organically. And I think one of the things I would have pointed out would be that we actually organically grew participants during this 1-year period. And actually, that organic growth outstripped the clients that have been lost through attrition in transition from MassMutual. And one of the realities is in a market like this, you will see your actual revenues dropping because of asset levels, but your participants aren’t dropping. And for the most part, your expenses are tied at a participant level. And frankly, then as markets come back, we will get the lift from assets, and we won’t see the same lift in expenses. So it’s the leverage of a business that has — that’s asset-sensitive.
I’ll let Garry add any other color.
Garry MacNicholas
Paul, I think you summed up well. I mean we’ve got the market impact is there. You’ve got the revenue attrition as expected from the mass future. We know it’s running ahead of target. It wasn’t there in the same period last year. And then we do have the expenses increasing for the reasons we outlined in the speaking notes in terms of the participant growth, the investments in retail and those mailing costs. So I think you’ve covered it well.
Paul Mahon
And I was just going to mention, Tom, there’s thunder enlightening in the background. We’re not in the bowling alley here. We have thunder in the background.
Operator
Our next question comes from Gabriel Dechaine of National Bank Financial.
Gabriel Dechaine
Any discussions you’ve had or insight you can provide on the capital — rating agencies and how they’re going to treat the CSM because if it doesn’t get treated those equity, I guess, I see your pro forma budget ratio pushing 40%, if I just take the midpoint of the book value impact.
Paul Mahon
I’ll turn that one over to Garry.
Garry MacNicholas
Sure. Yes, we — I mean, there’s been a number of conversations with rating agencies, both industry and just bilaterally. So first thing I’d note is that the rating agencies have not come out and actually formally said this is what we’re doing. However, a number of them have come out and stated their intention to incorporate the CSM into their metrics. So Fitch was probably the most clear of them who said that they were going to basically add it as after-tax CSM as an adjustment to equity. The others — and in the conversation set they would be looking to adjust the — for the CSM whether they have a — they calculated a raw ratio and then adjusted ratio, and they put them both in the chart. Certainly, in our conversations, they hadn’t decided how to do it, but they absolutely recognize the points I think A.M. Best already they have in their capital models, they have a treatment for this-type measures, and they would be looking to add both the CSM and the risk adjustment they were looking to take a town of. So I think the rating agencies are on top of this, making the appropriate adjustment. And they’ve all been very clear that they understand this is not changing the economics of the business or the financial strength of the company. This is an accounting regime change, so they’ll adjust accordingly.
Gabriel Dechaine
Yes, I saw the Fitch, I haven’t seen any of the others. So I was wondering which way the winds are blowing there, but it sounds like heading in the right direction. As far as the Empower business, I just want to go over a couple of numbers to make sure I got them and then the question the percentage of your AUA that’s sensitive to fee levels and hence, market movements is what again?
Paul Mahon
I’ll turn that one to Garry.
Garry MacNicholas
Yes. And just it wasn’t a percentage of AUA, it was the number I quoted, and I think it was in our original Empower Investor Day as well. It’d be around — it was in the neighborhood of 60% of revenues would be sensitive to the asset levels.
Gabriel Dechaine
And that’s inclusive of MassMutual, and that will go down under Prudential?
Garry MacNicholas
Yes.
Gabriel Dechaine
And then the other issue of, I guess, the timing, like there’s a lag, you expect the 20-odd percent of your customers to go away. But how long does it take for that process to take place because I’m trying to think about the — we might be facing the same situation with Prudential [8 months from now or 6 to 9] months from now? Maybe give a sense of timing there?
Paul Mahon
Yes. So you’re right, Gabe. So the reality is you closed the transaction. One of the things we work hard to do is retain the key people at both at MassMutual and Prudential and these are client relationship people. We work hard to get out there and market our value proposition. And if clients choose to actually — to terminate their plan, it takes time. They don’t leave in the first few months. So generally, it would be in the latter half of your — of the actual plan transition process. But I would go back to that when you look at these types of transactions historically, being able to achieve 80% plus client retention is very, very high — and that’s because clients generally will — they’ll be testing the market during that period. And what they’re doing is they’re testing the market and their — and the vast majority are choosing Empower. So we’ve got a very strong value proposition. We’re very confident in it, and we’re very confident in our ability to execute on the Pru transaction.
Ed, I don’t know if there’s any other color you’d provide on that?
Ed Murphy
No. No additional color.
Paul Mahon
Garry?
Gabriel Dechaine
I don’t dispute 80% as a good number. I’m just asking for kind of a time line so that I can adjust my model, and I can be a good analyst would in Prudential.
Ed Murphy
But we’re going to start transitioning the clients in early ’23. And I think that’s where you’ll start to see some of the attrition. I mean we’re at 98% now, but that will come down over time just as we’ve seen with MassMutual. So it will be a similar cycle, I think.
Gabriel Dechaine
Maybe this time around, this quarter next year, right?
Paul Mahon
It might start to see some there. Garry, anything you’d add?
Garry MacNicholas
Yes. Just a couple of things to add, and I heard a number of 20%. I’m certainly hoping that similar to MassMutual we can get something in the 15% range, which would be excellent. But that subset and his team. I would note a couple of things to just put on to us as we go through, so we get the end — towards the end of the integration, that’s also — you’ll start to be seeing the run rate synergies come through. So you do tend to have that offsetting factor. And the other thing I’d just remind is that this planned attrition is built into all the numbers that we announced when we announced the transaction. So we factored the attrition at that — at our target into those announcements.
Operator
Our next question comes from Doug Young of Desjardins Capital Markets.
Doug Desjardins
Sorry, another just quick question on Empower. Garry, in your comments, you talked that there are 3 factors that caused the base earnings to go down, excluding Prudential. Can you quantify how much of the year-over-year decline was a result of drop in equity markets of attrition of higher expense like can you break it down into those 3 buckets, just to frame this?
Garry MacNicholas
Yes. At a high level, and it is a high level because there’s always — it depends on the order, you do the markets versus the attrition. But if you take a high level, and I’ll call it, say, $40 million. I think it’s a little bit more than that in the upper 40s. But about half of that would be due to the markets in the attrition side, and you’ve probably got another similar amount on the expenses. So they’re fairly well balanced. But I’d put a little more on to the markets than the attrition and then a smaller portion on to the expenses. I don’t have the exact breakdown of the number right in front of me, again it depends on the order you do the attrition versus the markets.
Doug Desjardins
And you’re saying the $40 million, that’s the year-over-year decline, excluding Prudential and then half of that —
Paul Mahon
Yes, that was.
Doug Desjardins
Okay. I can go away and do some math on that. And then second, just on Canada, there was mention individual customer or individual customer base earnings were down like 41%. You talked about policyholder behavior being negative in the quarter. Can you kind of flesh out what that related to?
Paul Mahon
Yes. So it was more than just a policyholder behavior. There are some tax issues there as well. So there’s some components there. Garry, do you want to take that?
Garry MacNicholas
Sure. Yes. Just — and I think your question is on the policyholder behavior a little more in there. You’ve got a combination of things. About 1/3 of it is just related to the pace at which people are funding, depositing into their plans into the premiums that come in. And that does tend to fluctuate quarter-to-quarter. It could be up 1 quarter and down another quarter. It was a negative this quarter. And then the other factors are related to surrenders. And again, some of that could be on Universal Life people either keeping their policies or not keeping their policies depending on which time frame it is.
Term insurance again replacement activity there is a little higher. I think we had some really competitive terms. We had some high replacement activity there. So that would have impacted the results a bit. But term is one that, again, it ebbs and flows. We had gains in that area in Q3 and Q4. We’ve had some negatives in Q1 and Q2. So I think overall, it was in the $20 million range. But it’s — and it’s a number of those pieces, each of them fairly small.
Doug Desjardins
So lapse was part of this, but it seems like lapse work, there was like both people keeping policies and people lapsing them there wasn’t any particular direction. Is that —
Paul Mahon
Yes, and it’s — you’re right.
Doug Desjardins
And then the third pace, like the third is the pace of funding by. I assume that’s the UL policies? Is that as well?
Paul Mahon
Yes. The UL policies and what investment options they go into and so on. Doug, I was just going to say the other reality on Canada individuals, that also includes our seg fund mutual fund business, where as you know, markets were down. So we’ve got — we’ve talked about fee income being down in relation to Empower. The same thing happening in our wealth management businesses in Canada and Europe. And that’s actually a meaningful number. So these are — — in my mind, Canada performed quite well in some pretty — in a pretty tough environment. It’s pretty resilient and diversified book.
Doug Desjardins
And then just lastly, in Canada, I just want to make sure that I understand group long-term disability experience, which has been under pressure across the industry. I don’t — I think you’ve actually had some pretty good experience in the last year or so. I just want to confirm that, that is still positive this quarter, not maybe there, but better than last year. Just trying to get a sense of how that is unfolding and what you’re seeing in that book?
Paul Mahon
Sure. I’m going to turn that one over to Jeff Macoun. Jeff?
Jeff Macoun
Yes. Thanks for that comment on LCD. So I think we’ve mentioned a few times that prior to last quarter, I believe it was 5 or 6 quarters in a row. We had very favorable disability experience. And that’s really a combination, we believe, of industry-leading renewals of our plans, selection of our plans, management of our plans. In the last quarter, we had 1 month in the first quarter that we saw less than expected, but that came back very, very strong in the second quarter at levels that are more in line with our expectations overall.
Doug Desjardins
So it was favorable essentially.
Paul Mahon
Yes, it was favorable. Like Doug, even in Q1, we did — it was not a negative. It was just less favorable than we would have expected. And I think Jeff has been modest. We’ve got a very strong disability operation with strong disability management services with discipline around pricing, discipline around underwriting, it’s a business that we’ll see volatility because you’re not in control of what’s going on in the outside environment. But Jeff and his team do a great job with that business. And we — you might argue that we do have differential performance there.
Operator
Our next question comes from Mario Mendonca of TD Securities.
Mario Mendonca
Perhaps for Garry, it’s somewhat more difficult to gauge the level of Great-West Life’s earnings that relate to equity markets than it is for some of your peers because of the way earnings are segmented, to give us a hand here, would you — what would you refer us to? Would you just refer us to the slides in your presentation on fee income and use that to help gauge the importance of equity market performance to your base earnings?
Paul Mahon
Garry, over to you.
Garry MacNicholas
Yes. I think certainly that’s fee income. And I think we do break out the admin services only fee income, which is obviously — that’s in the group world, that’s just transaction-based and then the — and that’s primarily in Canada. But the rest of the fee income is really driven by markets. And I think overall, I don’t have it and it does vary by segment, but it’s probably in the 60%, 70%, maybe 2/3 of that would be equity sensitive, maybe 60% equity sensitive. Now you’ve got some fixed income sensitivities there. So obviously, with rising rates and lower equity market, rising rates are lower fair values and equity markets, you had both aspects of fee income being hit by the environment in the last 6 months. But it’s a — as if you look at the fees and then think of the mix of underlying assets, that’d be one spot. And then we do try and describe these market-related impacts at the upfront section of our MD&A as well. It’s not the good spot to look.
Mario Mendonca
Do you know if there’s any disclosure either in the quarterlies or the annual where you aggregate all your wealth management businesses, including the retirement services business and give us a look at sort of a segmented look at wealth management, where you bring all your wealth management together. Is there anything like that? I don’t believe I’ve seen it.
Paul Mahon
Yes. Mario, we don’t — we actually don’t have that in terms of our disclosures. Certainly, we look at our business in a lot of different ways as we think about it strategically as we think about the resiliency of the portfolio, the diversification. But that’s not the way we manage the business. We manage the business in country with strong — driving our strong leadership positions, and that’s the way we look at it.
Mario Mendonca
Let me just ask one other quick follow-up. The Empower fee income, when that declines because of the market effects that we’re talking about, does that get reflected in the expected profit of that U.S. segment or somewhere else like experience gains and losses.
Paul Mahon
Garry?
Garry MacNicholas
Sure. So when we’re setting the expected profit going into a quarter, then we’ll look at the market levels and sort of run rate of fee income, the market levels that drive that at the start of the quarter. So when I referred earlier to the Empower fee income being off $20 million from what we expected, that was what we expected at the start of April 1, at the start of Q2, we had a certain expectation for fee income. Markets fell quite sharply all through Q2. And so that would have obviously reduced it. So you will see, I mean, just mathematically, we’ll see a lower expected profit on fee income as we start Q3. So that does get updated each quarter. And it’s at Empower and all of our other fee-based businesses in the various countries.
Mario Mendonca
Sure. But that would also mean then the difference between what you expected at the beginning of the quarter and what actually transpired would then go through experience. Is that right?
Garry MacNicholas
Yes. That difference that $20 million or so, as we are entering a part, I think it’s more like $50 million or $60 million overall is — it goes through the experience gain loss in the period and then we reset the expected profit for the next quarter.
Mario Mendonca
That makes a lot of sense. If I could, just one other thing on personal capital. It’s a compelling argument or thesis you have that Personal Capital can be brought to where it is improve the wallet at Mass and Pru, but is there any evidence so far? And perhaps it’s too early to ask this question. Was there any evidence so far that Personal Capital is making progress in that respect?
Paul Mahon
Yes, I’m going to turn that one over to Ed. Ed, you can provide some color on the progress there and sort of the timing of where we’re at. Ed?
Ed Murphy
Yes, Paul. So Personal Capital has capabilities that serve the mass affluent and higher net worth customers. So they have some capabilities that prior to the acquisition weren’t resident within Empower. Obviously, we’ve talked to you about what we’re doing from an integration standpoint and embedding those capabilities into Empower. And so that will essentially be completed in September of this year. And there are — as we’re in kind of this interim phase, there are — there have been meaningful and substantive referral and sort of cross-sell synergies where we’ve been able to introduce the capabilities of personal capital to some of our defined contribution participants who’ve expressed interest in a more holistic approach.
And I think to your question, I would say it’s early days. If you note Garry’s comment about where we are on incorporating all of those capabilities into the defined contribution experience, we’re in the process of rolling that out to the 8.5 million customers or to our 17 million customers, and we’ve now rolled it out to 8.5 million. So that’s going to continue. And as we move into 2023, you’ll see a more integrated direct-to-consumer wealth management business, bringing the best of Empower’s current capabilities from an IRA rollover perspective along with all the Personal Capital’s wealth management capabilities.
Mario Mendonca
And Garry, just one very quick thing. I think I’ve got my notes wrong on this. Did you say that Pru contributed $362 billion of AUA to the organization this quarter?
Garry MacNicholas
I think it was $321 was the amount that’s noted. It’s on the side. I think it’s $321 billion.
Paul Mahon
Yes. I would note that $321 billion at the date of close.
Garry MacNicholas
Yes. April 1, yes.
Paul Mahon
At April 1.
Garry MacNicholas
It would have fallen during the quarter to [$284 billion or $285 billion].
Paul Mahon
Yes. And as of June 30, the value of those — that AUA was [$284 billion].
Operator
Our next question comes from Nigel D’Souza of Veritas Investment Research.
Nigel D’Souza
I wanted to touch on was then, if I could. And when I look at your disclosure on the core margin, but then they slipped to negative this quarter. Just trying to get a sense of — in order that I go back to positive, is that more dependent on AUM appreciating and moving higher in subsequent quarter orders? Or are there costs that you could take out of Putnam that could move that margin to deposit territory if AUM remains relatively stable.
Paul Mahon
I’ll start off at a high level there, Nigel, and then I’ll ask Bob Reynolds to comment. So Putnam has maintained really good expense discipline. We’ve talked about some of the expense initiatives they’ve had over the last number of years. What you’re really seeing there is a sharp decline in markets, which caused a sharp decline in AUM and so a sharp decline in fee income. So as markets come back, we would expect to see a recovery in that ratio. The other fact is related to seed capital, where the relative seed capital performance a year ago was a positive contributor as opposed to there being a negative in quarter.
So overall, if we took off seed capital, I think it would have been sort of more of a flat — the impact of the seed capital would have been more of a flat, we would have been more flat in terms of margins. But overall, we want to focus on performance being the #1 issue, delivering for the clients. We’ll continue to look for efficiencies. But at the end of the day, it has to be about performance and delivering for clients. Bob, anything else you’d add?
Bob Reynolds
The only thing I would add to that, Paul, I think performance obviously is the name of the game and 80% of our assets are now in 4- and 5-star funds as rated by Morningstar. So the performance has been very, very good across all asset categories. That really helps us as we compete for new business. For instance, year-to-date, we’re in positive flows in equities, which is very beneficial in this type of market. But we are dependent upon markets and markets, S&P is down 20% at the end of June, Barclays was down 10%. So that really hurts. But having positive flows, especially in the equity sector really helps the firm. And we’ve also been able to do a lot in stable value, which is a big selling product in the 401(k) space.
Nigel D’Souza
If I could just finish quickly on your LICAT ratio and interest rate sensitivity. When I look at the impact this quarter based on disclosure last quarter, a 50 basis point parallel shift would negatively impact LICAT by 3 percentage points. Rates moved up more than that, but the impact, even including the interest rates moving scenario was only 2 percentage points. So I might have missed it, but was there another component that benefited LICAT this quarter that you mentioned earlier?
Paul Mahon
Yes. I’ll let Garry to cover that. Garry?
Garry MacNicholas
Yes. So just a couple of points to note. One is we did — I think I called out in speaker notes. We did have that one point smoothing into the scenario switch, so that always — and that’s not in the sensitivities because it’s a different matter altogether. So that 1 point certainly helped. But I’d say the real driver is that we had very strong earnings in the Canada, Europe and reinsurance of the CRS segments. And those are all the Canada Life — the consolidated Canada Life. Those operations are all in the consolidated Canada Life. So that the strong performance in those less obviously, dividends [up Lifeco]. That really contributed to the LICAT ratio as well. And obviously, we had some weakness in the U.S., but the U.S. operation by alone, which is not formed part of LICAT. So is the strong earnings in the Canada Life side of the house, we’re positive there as well.
Nigel D’Souza
Okay. When I look at your LICAT sensitivity disclosure this quarter, it’s once again 3 percentage points unfavorable impact or 50 basis point parallel shift. So it’s the same as last quarter. Now my understanding would be that as interest rates move up, notionally, the sensitivity to LICAT would decrease. Am I thinking about that correctly? How does your interest rate sensitivity evolved as the overall rate environment moves higher?
Garry MacNicholas
Yes, it doesn’t change a lot at these rates or at least in these narrow bands. There might be some rounding to ratio. Maybe it was a 3.2% is now at 2.8%, but it still looks like 3%. So there is — you are right that as rates rise, is just with complexities is a little bit of a shift there. But that’s not a large factor at these points and not certainly when you’re rounding to the nearest point.
Operator
Our next question comes from Paul Holden of CIBC.
Paul Holden
Just stick to a couple of questions for interest of time. So first one, clearly, everyone’s struggling a bit with forecasting Empower earnings. Wondering when we get to switch to IFRS 17, and you have to move to a true fee-based approach, i.e., away from the assurance approach for modeling Empower earnings. Will that improve the stability at all? Does anything really change?
Paul Mahon
Yes. It’s Paul. I don’t think you’re going to see a fundamental change in the stability. IFRS disclosures will highlight fee-based business a bit more than they do under IFRS 4, so there might be slightly different visibility there. But if you think about the underlying business, we’ve got a core business representatives today of Empower along with the MassMutual business that’s being integrated.
We’ve got the underlying fee income, which will rise with markets rise. As Ed said, we’re working on expense initiatives, which could broaden margins there. We’ve got the benefits of a rising interest rate environment, which can have some benefits in some of the guaranteed products. We’ve got the balance of the MassMutual synergies to come, and that will be in the latter stages of this year as we’re finishing integration. And then we’ve got the benefits of Prudential, which will be — we’ve talked about $180 million of pretax synergies, which would be incremental to the sort of the core business that we’ve got now.
And then beyond that, we’ve got a retail business where as Ed pointed out, we’re just in the early stages of launching these capabilities into that. But I think you will see us providing more insight into sort of the retail strategy and retail growth as we get into 2023 and beyond. So forecasting at this moment in time with lots of volatility in 2 transactions going on. I know it’s complicated. But our fundamental view is that this is a growth play, both on the 401(k) side driven by our strong organic growth and our synergies. And it’s a growth play on the retail side, taking advantage of 17 million clients, many of which are seeking more insight and support on their wealth management needs and leveraging Personal Capital’s capabilities to do that. So we view it as a growth play, and I think we’ll be able to evidence that in the quarters to come.
Paul Holden
And maybe just to help bring that message home. I believe you set a target for Empower in terms of earning mix reaching 30% once all synergies were realized. I’m assuming that’s still the target?
Paul Mahon
Yes. I would say that’s still the target in the same way we’ve got a medium-term growth objective of 8% to 10%. We’ve got that target. Now that target was at a point where equity markets were a bit higher, I mean, there could be some slight — if equity markets never rose again, there might be a slight softening of that. But our expectation is the world will continue to drive forward markets will recover. So we’re not changing our view on that target. We’re not changing our view on our medium-term objectives.
Paul Holden
And last question for me is with respect to CRS, saw a nice uptick in that other margin and fee line, both Q-over-Q and year-over-year. I want to make sure there was nothing sort of onetime in nature there that those are more reoccurring margins and fees.
Paul Mahon
I’ll turn that one over to Arshil Jamal. Arshil?
Arshil Jamal
You’re absolutely right. There’s nothing onetime in those numbers that reflects the growing nature of our structured portfolio where we earn fee margins for taking out of the money exposures, and it also reflects the improvement on the P&C catastrophe side, where we’ve seen a significant improvement in market margins, some of which is reflected in that line and some of which is positioning within our own portfolio where we’re moving further away from the risk or whatever. So we’re taking some opportunity on the strength of that market or whatever to derisk that portfolio a little bit. But absolutely, there’s nothing there that’s onetime in the period or whatever, and it’s a very favorable trend for us.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Mahon for any closing remarks.
Paul Mahon
Thank you very much, Ariel. I would like to thank all of you who listened in on today’s call and thank the analysts for their questions and participation. Please refer to our IR team with any follow-up inquiries. As you can tell, despite the macro environment, we remain bullish on our business and remain laser-focused on strategy execution. We look forward to reconnecting with you in early November for our Q3 call. And in the meantime, I hope you’re all able to enjoy some summer weather, maybe not the thunderstorms of today and some time with family and friends in the months ahead. Thanks again.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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