Great-West Lifeco Inc. (OTCPK:GWLIF) Q3 2022 Earnings Conference Call November 3, 2022 11:30 AM ET
Company Participants
Paul Mahon – President and CEO
Garry MacNicholas – Executive Vice President and Chief Financial Officer
David Harney – President and Chief Operating Officer, Europe
Jeffrey Macoun – President and Chief Operating Officer of Canada
Andra Bolotin – EVP and Chief Financial Officer, Great-West Lifeco U.S.
Edmund Murphy – President and Chief Executive Officer of Empower
Arshil Jamal – President and Group Head, Strategy, Investments and Reinsurance
Raman Srivastava – Executive Vice-President and Global Chief Investment Officer
Conference Call Participants
Tom MacKinnon – BMO Capital Markets
Meny Grauman – Scotiabank
Doug Young – Desjardins
Gabriel Dechaine – National Bank Financial
Paul Holden – CIBC Capital Markets
Nigel D’Souza – Veritas Investment Research
Operator
Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Third 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 morning, and welcome to Great-West Lifeco’s Third 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 Chief Operating Officer, Europe; Arshil Jamal, President and Group Head, Strategy, Investments and Reinsurance; Jeff Macoun, President and Chief Operating Officer of Canada; Ed Murphy, President and Chief Executive Officer of Empower; and Andra Bolotin, Executive Vice President and Chief Financial Officer, Great-West Lifeco U.S. Andra will be filling in for Bob Reynolds, who’s unable to be on today’s call.
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.
Please turn to Slide 4. Great-West Lifeco delivered a solid performance in the third quarter despite a still challenging and volatile macro environment. Like the second quarter, weakness in equity and fixed income markets negatively impacted asset levels and reduced fee income in our Wealth and Asset Management businesses. Currency movements, particularly the notable strengthening of the Canadian dollar against the sterling and euro, also had a negative impact on results.
Base earnings per share of $0.74 included a reinsurance claims provision of CAD 128 million or $0.14 per share related to Hurricane Ian, which we announced on October 19. Our thoughts remain with the families, businesses and communities impacted by the devastation caused by Ian. Through our partners, our Reinsurance business supports people at times like this in helping rebuild their lives.
Excluding the reinsurance provision, base EPS of $0.88 was comparable to last quarter and down 5% year-over-year, a solid quarter considering the headwinds of weaker markets and weaker European currencies. The quarter included a solid contribution from Prudential, a sequential improvement in Empower’s underlying earnings excluding Prudential, steady results in our life and health insurance businesses and excellent investment and credit performance. This resiliency in earnings reflects our strength and diversification across business types and geographies. Coupled with discipline and a conservative management philosophy, it supports the company’s steady performance in volatile times. We will highlight some examples of the benefits of diversification as we go through to today’s presentation.
We made strong progress against our strategic priorities in the quarter. I’m pleased to share that we completed the transition of MassMutual clients to the Empower platform just in the last few days. This final wave migrating over 900,000 participants from MassMutual is an important milestone for Empower. We’re set to meet our cost synergy targets by the end of the fourth quarter. And as we close out this MassMutual acquisition, I’m pleased to share that Empower has achieved participant retention of 92%, asset retention of 89% and revenue retention of 87%, well ahead of our original expectations.
We’re using this same disciplined approach with the Prudential integration. Planning is well underway. The teams are working closely with this important customer base, and client migrations are set to begin in the first quarter of 2023.
In addition to the strategic benefits of scale and synergies, these acquisitions have strengthened Empower’s value proposition for new clients. Momentum in the defined contribution business is strong with a request for proposal activity higher in the last year than in any previous year across all plan types.
Beyond Empower, we’re confident in the strength and resilience of our businesses and strategies in the current environment. While major economies grapple with the challenges of inflation, interest rates and the potential for recession, we will continue to operate with discipline. This includes discipline in managing our high-quality investment portfolio, underwriting and deploying capital on new business and managing expenses.
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 looking ahead, we’re confident in meeting them over the medium term.
Please turn to Slide 6. Our Canadian business saw stable insurance sales in the quarter with individual broadly in line with last year and group growing 15%, partly due to the addition of ClaimSecure. In wealth, group sales saw modest growth year-over-year and positive net cash flows with strong momentum in our next step asset rollover program. Individual wealth sales declined on lower segregated fund and mutual fund sales in line with industry results. The sales results in Canada this quarter highlight the benefits of our diversification with softer individual wealth sales, offset by stronger group insurance and group wealth sales.
Given the inflationary environment, Canada Life is positioning the business through strong expense discipline. We’re managing expenses through a sharp focus on priorities and productivity improvement, supported by the ongoing modernization of our technology platform.
Please turn to Slide 7. In Europe, business performance was steady with last year despite the economic headwinds and turmoil in U.K. financial markets towards the end of the quarter. Insurance and annuity sales were solid but lower compared to last year when the U.K. booked a $1.3 billion bulk annuity sale. Strong momentum continued in equity release mortgage sales until we temporarily suspended new originations in late September in response to heightened market volatility.
ERM is an important business for us as it adds breadth to our retirement income solutions for our clients and is an attractive asset backing long-term liabilities. We remain committed to the ERM market and expect to resume in originations as the U.K. interest rate environment stabilizes. Excluding currency impacts, Europe had a steady performance, including in wealth, where sales declined to a modest 3% year-over-year in constant currency. Base earnings were also resilient, which Garry will discuss shortly. This reflects the diversified nature of our European businesses, including a product set focused on financial necessities like pension savings, retirement income solutions and group protection.
Please turn to Slide 8. Putnam’s AUM was impacted by market declines and ended the quarter at USD 158 billion. Net outflows of $2 billion improved considerably from the prior quarter and were primarily in Putnam’s lower fee fixed income products. Flows in higher fee equity products were positive year-to-date.
Putnam’s investment performance remains strong as demonstrated by 4- or 5-star Morningstar ratings on 30 funds and just under 80% of fund assets performing at levels above the Lipper median on a 3-year basis. Additionally, 80% of assets across all asset classes and 96% of all assets in equity are in Morningstar 4- or 5-star rated funds.
Please turn to Slide 9. At Empower, sales increased 37% year-over-year with DC sales up 42%, driven by a large $5 billion government plan sales. As noted, the DC business is experiencing strong momentum. We’re also pleased with the momentum we’re seeing in retail, where IRA sales grew 10% year-over-year. Retail Wealth Management is a significant long-term opportunity for us as we work to serve the broader financial wellness needs of Empower’s DC plan participants. To this end, we’re leveraging Personal Capital’s hybrid digital advice capabilities in the Empower environment. And as of the end of the third quarter, the new experience was made available to 11 million of the Empower participants.
Turning to our integration programs. MassMutual is now complete with the final wave of the planned conversions happening earlier this week. It was our largest conversion with 900,000 participants migrating. I would like to thank the integration teams for their hard work and resilience throughout the MassMutual migration journey. We have achieved USD 101 million of pretax cost synergies and are on track to reach our $160 million target by year-end. As noted earlier, asset participant and revenue retention have outperformed our original expectations. The Prudential integration is on track with USD 43 million of the USD 180 million pretax cost synergy target realized, and client migration is set to begin in the first quarter of 2023.
Please turn to Slide 10. CRS expected profit was down 4% year-over-year. Strong overall growth mostly offset lower actuarial PfAD releases while other margins and fees were up 18%, reflecting growth in structured reinsurance and improved margins for the P&C business. The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on the core business in the U.S. and Europe as we continue to pursue expansion in new markets.
While the reinsurance claims provision in the quarter is included in experience gains and losses and thus, not referenced on the slide, I would like to touch on the benefits to Lifeco of participating in the P&C retrocession business. While we’re exposed to losses during major catastrophic events like Hurricane Ian, we like the diversification and the non-correlated risk exposure it provides with the strong returns it generates through the cycle. We’re a disciplined underwriter with annually renewable contracts, and the business is governed by strict exposure limits and return targets.
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 12. Base and net earnings per share are both $0.74 this quarter, which includes the previously announced hurricane provision representing $0.14 per share. Before this provision, base EPS of $0.88 were generally in line with Q2 and similarly delivered against a challenging economic and market backdrop. The results are 5% below last year, which primarily reflects lower asset-based fee revenues and European currency translation headwinds, partially offset by the addition of earnings from the acquired Prudential Retirement business. Overall, a solid result in a difficult environment.
In Canada, base earnings of $283 million were down 9% from last year due to market-related fee income pressure and lower yield enhancement contributions along with lower gains from mortality and disability this quarter. This was partially offset by a $20 million tax settlement gain.
In the U.S., Empower base earnings of USD 171 million included USD 47 million from the addition of the Prudential Retirement business, and that included a USD 6 million catch-up from the initial reporting for Pru last quarter. As a reminder, over 50% of net revenues at Empower are asset based. The impacts of lower markets on asset-based fee revenues continues to be a headwind, although business fundamentals such as top line sales, customer retention and retail expansion remained strong.
As noted earlier, we have recently completed the last wave of conversions for the MassMutual business, which is an important milestone and great accomplishment by the team. And through the integration, as Paul noted, we have exceeded the original customer revenue retention targets.
When looking at period-to-period comparisons during integration, there is a lag between deal closing and the impact of any client terminations given that it takes time for clients to go to market. So most of the impact of the expected attrition on MassMutual has actually been felt in 2022, very little was in the comparative quarters last year. Somewhat offsetting this, we are on track to meet our original run rate synergy target of $160 million by the end of Q4, and the benefits of those synergies will fully emerge in the Q1 2023 results.
A similar pattern is expected on the Prudential business. There has been very little attrition to date, which is good. However, some attrition is expected in 2023 as part of the acquisition process, and that will impact year-over-year comparisons in 2023. On the positive side, the benefit of full expense synergies will begin to emerge once the integration is complete early in 2024. Expense synergies tend to be more pronounced at the start and at the end of the program. Early savings come from eliminating duplicate overhead costs, while later savings arise when prior admin systems and service agreements are discontinued post conversion into Empower’s platform. We are seeing this play out on MassMutual with the final conversions completing earlier this week, and we expect to see a similar pattern for Prudential with early savings noted this quarter and most cost synergies coming towards the end of integration.
Turning to Putnam. Earnings were down from Q3 last year, largely impacted by lower asset-based fees as expected given the assets under administration decline, plus mark-to-market losses on seed capital as of September 30.
The Europe segment posted another very strong quarter in Q3. Currency was clearly a headwind with both euro and sterling down over 11% from last year. In constant currency, base earnings were down just 1% from Q3 2021, which, as a reminder, was an outsized result for Europe last year since it included a large pension settlement gain in Ireland. Strong yield enhancement results in the U.K. were a key contributor for this quarter.
The Capital and Risk Solutions segment, which is primarily the Reinsurance business unit, saw earnings significantly impacted by Hurricane Ian. While there have been some larger experience in new business gain items in recent quarters, both positive and negative, a trend of steady transaction success in reinsurance continues to underpin base earnings growth. Aside from the hurricane impact, life mortality results improved considerably from a very challenging Q3 2021. This was partly offset by a decline in longevity experience. Based on the results of the last 2 quarters though, mortality results and longevity appear to be normalizing following a 2-year period of pandemic-related impacts.
Turning to Slide 13. This table shows the impact of various items excluded from base earnings. There were a number of larger items this quarter, but in total, there was no overall impact. Base and net earnings were the same. Actuarial assumption updates were a net positive, and I’ll cover these on a later slide. Market-related impacts on liabilities were partly — were negative, and that’s partly due to hedge ineffectiveness given continued market volatility and partly a tempering of future growth expectations for U.K. real estate assets backing liabilities.
The remaining items are predominantly acquisition related, including transaction and restructuring costs plus ongoing integration costs with respect to personal capital and the retirement businesses acquired from MassMutual and Prudential. Transaction costs were actually a net positive due to the release of the contingent consideration provision for personal capital, given the impact markets have had on the ability to achieve asset-based growth targets. Note, the release of the $54 million pretax is largely a nontaxable item, which added to some of the tax rate distortion this period.
Turning to Slides 14 and 15, sources of earnings displays. These next 2 slides highlight the source of earnings first from a base earnings perspective and then net earnings. And I’ll focus comments on Slide 15, the net earnings perspective, with a reminder that the amounts above the line are pretax. Expected profit was down 7% year-over-year. The increase is primarily — sorry, the decrease is primarily attributable to lower expected fee income given the decline in assets due to market downturns in each of the regions as well as currency headwinds, particularly impact to Europe. The decrease was partially offset by the addition of Prudential’s business and improved margins in Canada Group business and the Empower General Account business.
Moving to new business impacts. The results were more typical this quarter than Q3 2021, which had included a large gain on an asset-based reinsurance transaction. The majority of impact is the U.S. new business strain, which represents nondeferrable upfront sales costs on investment contracts. And it was higher than last year, largely due to the addition of Prudential along with continued strong organic business growth at Empower.
Experience gains contributed positively again this quarter, and I’ll cover these in more detail on the next slide. Earnings on surplus of minus $8 million improved $10 million from last year with the benefit of higher interest rates, partially offset by the impact of additional financing costs as a result of the Prudential acquisition.
The effective tax rate this quarter was 6.5% on base shareholder earnings. While the tax rate reflects the jurisdictional mix of earnings and certain nontaxable investment income, this quarter, there were also settlements of outstanding tax matters in Canada and the U.S. and a tax pickup on inflation-linked U.K. gilts, which combined lowered the tax rate by about 5%. The net earnings tax rate of minus 3% benefited from those same items but, in addition, was affected by the jurisdictional mix of basis change — actuarial basis changes as well as the nontaxable personal capital continued consideration release noted earlier.
Turning to Slide 16. These tables expand on the experience results as well as management actions and basis changes 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 the U.K. this quarter. The net impact of mortality, longevity and morbidity was a modest negative this period following the second time since the pandemic began, although perhaps this balances out against the strong experience gains we saw last quarter across most insurance risk categories and geographies. Life mortality and disability results in the U.K., and annuitant longevity results in reinsurance were the main contributors to the overall experience results this quarter.
Credit-related impacts were positive again this quarter, driven by upgrades in the bond and mortgage portfolios as our high-quality investment portfolio continues to perform well. The table on the right highlights through a number of larger basis changes this quarter. Policyholder behavior experience is influenced by a variety of factors, including interest rates, underwriting, product designs and the availability of competing products. Based on the trends we’ve been seeing in our block and the results of a wider industry experience study, we reviewed and strengthened the assumptions for our Canadian universal life business.
Other notable assumptions change this quarter was a positive contribution from updates to U.K. annuitant longevity assumptions based on the more recent pre-COVID trends. This is not picking up the distortions during the pandemic, and we will continue to monitor emerging experience and research regarding the potential longer-term impacts of COVID-19 on annuitant mortality. There were also smaller positive contributions from assumption updates we find this quarter.
Moving to Slide 17. 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 and the onetime Irish pension gain last year, Lifeco expenses were up 4% year-over-year. Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future, this is an area we’ll monitor closely, increasing our focus on achieving productivity gains in our operations and adjusting pricing, if appropriate.
Looking at the segments. In Canada, expenses were relatively flat, up 2% year-over-year, and that includes the acquisition of ClaimSecure. In the U.S., expenses were up 28% year-over-year on a constant currency basis. At Empower, excluding Prudential, expenses were up 3% in U.S. dollars with a similar increase at Putnam. Empower’s DC business was up just 1%, which primarily reflects the 5% organic growth in DC plan participants, largely offset by the synergies realized from the MassMutual integration. The overall 3% increase reflects recent investments in retail wealth strategy build-out.
In Europe, the headline expense growth is being heavily impacted by the Irish pension settlement gain last year, currency movements and the impact of the Ark Life acquisition. Within Europe, the local business units are striving for low single-digit expense growth outside of any unusual items given the pressure on revenues from lower markets.
In Capital Risk Solutions, the expense growth is off a very small base and is aligned with the growth in the business, including the continued expansion into newer markets.
Please turn to Slide 18. The Q3 book value per share of $25.61 was up 5% year-over-year, primarily driven by strong retained earnings given the solid results over the last 4 quarters. Currency translation in other comprehensive income was a positive this quarter as a stronger U.S. dollar more than offset the weaker European currencies. The rise in interest rates this year has lowered fair values on available-for-sale securities. However, there’s a partially offsetting gain in pension OCI.
As disclosed at our information session in June, 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 at Canada Life remained strong at 118%, at the upper end of our target range of 110% to 120%. The ratio was up 1 point compared to last quarter. Earnings net of dividends and the continued smoothing in of the scenario switch benefit were partially offset by the increase in interest rates, particularly U.K. gilt rates. As noted in prior quarters this year, we have described the negative impact on LICAT from higher interest rates, more as 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 the available capital is calculated at fair value, which declined again this quarter as interest rates rose further. The required capital, however, is largely calculated at fixed rates as defined by OSFI and so does not move in the same manner.
OSFI released its 2023 LICAT guideline in Q3, setting out the adjustments to accommodate the transition to IFRS 17. The first LICAT ratio under the new guideline were reported as part of the Q1 2023 results, and we expect a positive impact on transition. As an indication of the impact, we have estimated the pro forma LICAT for September 30 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 LICAT ratio, ended the quarter at $0.3 billion.
Back to you, Paul.
Paul Mahon
Thanks, Garry. Please turn to Slide 19. We’re pleased with Lifeco’s results in the third quarter, where the strength and diversification of our business underpinned a resilient performance. Looking ahead, we will continue to advance our business strategies with the same operational discipline that has served us well in the past in periods of economic volatility. This will include striking an appropriate balance between carefully managing our expenses and investing for growth, while maintaining a firm commitment to our conservative risk discipline and continuing to deliver for our clients in these uncertain times.
That concludes my formal remarks, Ariel. Please open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Tom MacKinnon of BMO Capital.
Tom MacKinnon
Just on the decision to stop writing equity release mortgages. I think you’re a major player in this marketplace with about a 12% market share. I’m wondering what you see as an impact in terms of your U.K. sales going forward as a result of this decision. And are there any other issues with respect to the value that you ascribed to those equity release mortgages on your balance sheet? The fact that you’re not writing businesses, that should — that new business, given the environment, does that suggest that you’re going to take a closer look at that asset on your balance sheet? And is there any danger of any potential write-down of that asset?
Paul Mahon
Great question, Tom. I’m going to — it’s Paul. I’m going to sort of — I’ll first make a comment that our decision to actually step away from that market was temporary in nature. It was given the very volatile interest rate environment. And as interest rate — the interest rate environment stabilizes, which we’re seeing in the U.K., our intention would be to be back in that market.
Having said that, there’s kind of two parts. One is the balance sheet impact. One is our perspective on that business in the U.K. market and what it means to us. Maybe what I’ll ask is Garry to comment on the balance sheet side. And then I’m going to turn it over to David maybe to talk about ERMs in the context of our perspectives on the U.K. environment, how it plays out for our business but also maybe a bit of broadening perspective on the U.K. environment and the opportunities there. So why don’t you start out, Garry?
Garry MacNicholas
Yes, sure. I think just quickly on the balance sheet side. The decision really was not about the in-force book. We feel it’s a high-quality portfolio of equity lease mortgages. This was entirely an ability to price effectively given the continual up and down movement of U.K. gilts in September. So really nothing to do. We think it’s got a high-quality portfolio and had nothing to do with the balance sheet.
Paul Mahon
Okay. And so maybe, David, you could talk about that product, what it means to our business there and your perspectives on sort of maybe more broadly on opportunities for growth in the U.K.
David Harney
Yes. So just to repeat, like the withdrawal from the market has to do with the interest rate volatility. So like borrowers of this product to have a lifetime fixed rate, and usually when you make the loan offer, they have a period of time to close. So for lenders, that’s — they’re just left with an exposure while people have that period, which is dangerous in a very volatile market. So interest rates have stabilized again now. So most people are coming back into the market, and we expect to be back in shortly as well.
Look, I think we still see strong demand for the product. I think it’s being tempered a little bit because it will be more expensive for people to borrow, and lenders will be careful then on loan-to-value ratios as well. So there will be a little bit lower going forward. But still, we see strong demand for the product. And again, just to emphasize on the balance sheet, we don’t really see issues there. The loan-to-value ratios are low. And historic borrowers that are on the balance sheet, like they’ve all borrowed at lower rates that are there at the moment, and those rates are fixed.
So I suppose other factors in the market and just related to the higher interest rates. Like I think it will dampen demand a little bit for equity release mortgages. But counter to that as well on the sales side, we do see higher demand for bulk annuities going forward because of the higher interest rates. So like overall, we’d be pretty optimistic how the sales outlook within the U.K.
Paul Mahon
Thanks, David.
Tom MacKinnon
What was — what percentage of your sales in 2021 were equity release mortgages? I mean these were origination, I assume, so they probably come in — I don’t know, were they like 15% or 20% of your sales in the U.K.?
David Harney
Let me check.
Paul Mahon
Tom, I think someone’s tracking that number down, but it would be in that lower 10% — I think that 10%-plus range. So from the standpoint of materiality, I mean, where we’ve got a pretty diversified business group is important to us at a good profit engine. We’ve got a leadership position. The annuity market, well, it’s lumpy relative to bulk annuities, and we pointed out that we had a large sale in Q3 last year, not this year. We think that will feature as — continue to feature as a good contributor. David, did you find that percentage for us?
David Harney
We split it out on Slide 7, so we show the equity release mortgage sales against the annuity sales. So for Q3 last year, there were — you can see $287 million equity lease mortgages out of that total of $2 billion. But we have the large bulk annuity sale there, Q3 2022 with more balance between equity release mortgages and annuity. So I probably — I do expect equity lease mortgage sales to be lower in 2023, but we probably expect annuity sales to be higher.
Paul Mahon
Yes. So that 10%, 15% is probably about right, Tom. But you’ve got to normalize for the volatility on bulk annuity sales, which will be more lumpy.
Tom MacKinnon
Okay. And if I get one last one in here, the $20 million tax settlement gain, was that in the base earnings? But the other $54 million that Garry alluded to, I don’t believe that, that was in base. That’s just in the reported earnings. Is that correct?
Paul Mahon
That’s correct, Tom.
Operator
Our next question comes from Meny Grauman of Scotiabank.
Meny Grauman
Just a few questions on expenses. One, I noticed there was a reference in the press release to some back-office operations that were moved to India and talking about efficiency benefits. So I’m just wondering how significant that was. And are there other sort of initiatives like this, Canada Life or across the enterprise? I’ll start there.
Paul Mahon
Thanks, Meny. It’s Paul. I will begin maybe at a high level and just remind listeners that we actually do have a pretty meaningful operation in India that has been built out originally in support of the Empower operations. And the core focus there, as a starting point, is to provide a broader around-the-clock service and around-the-clock ability to drive the operations. And there’s also, obviously, the benefits of efficiencies of being able to operate in different markets.
The key is technology. It’s being able to leverage that technology to make it happen. As we think about overall opportunities across the group, for sure, some opportunities will be the ability to leverage some capabilities like the India capability. The other part, though, is to make sure that we are focused on increasing automation. You’ll see that theme increasing right across the group. It’s a continued focus. And then the other one is to make sure that in periods like this, as we look at — certainly, as we look at some compression of fee income, that we’re making sure that we’re seeking out all the process improvements we can, productivity initiatives. And so I think you’ll see that as a theme and a discipline in our operations as we move forward. It’s always been a theme, but I would say it will be a bit of an elevated theme moving forward, and we’ll speak to it about in future quarters as we harvest opportunities.
But I will turn to Jeff, who can maybe speak to the benefits to Canada of this. And this is just a starting point for you, right, Jeff?
Jeffrey Macoun
Yes. Thanks, Paul. Meny, thanks for asking that. Maybe just to build on Paul’s comments, we’re seeing some real explosive growth particularly on the Group Life and Health side in Canada. So this is about a couple of things. One, enhancing our service 24/7, where this is a really good move for us. Second of all, to move to 24/7. It also gives us an opportunity on our cost structure, our unit cost to continue to look at reducing that. So we are up and running, and we will see those numbers increase in ’23 as we move along. But it’s really a couple of things: enhanced service; getting after unit costs; and to deal with our explosive growth that we’ve got in Canada, particularly on the Group Life and Health side.
Meny Grauman
Are there still benefits to this that are likely to flow through into sort of the run rate earnings picture in Canada? Like is that something we’re still going to see come into earnings over the next few quarters?
Paul Mahon
I’d say, over the next few quarters and years, though, really because you have to think about it from the standpoint of this is a first move. It’s looking at certain services that group has in Canada. We’re actually looking at this more broadly. And as I said, it’s a combination of things we can do for automation, process improvement just on the ground here in Canada and in our domestic markets but also leveraging some of this offshore capability.
And by the way, this is not an outsourced capability. This is something that we manage and that we’re leveraging and we’re seeing great benefits. So yes, you would begin to see some of these things flow through, but I think this is a multiyear opportunity for Canada and, frankly, for other businesses.
Meny Grauman
And that’s a good segue. I wanted to follow up just in terms of the U.S. asset management business. And Paul, you referenced some of the fee pressure. We can see that in that business. But when I look at the expenses, the operating expenses up year-over-year in the quarter and year-to-date. And so I’m wondering how much of an opportunity do you have there to change that picture and are there certain sort of expense initiatives in that business that you could highlight for us.
Paul Mahon
Yes. So I’ll start off with that one, Meny, and then I’m going to turn it over to Andra Bolotin. Putnam has actually had good expense discipline over the last number of years, and they’ve done that through a number of things, both just good discipline around headcount but also things like fund consolidations, which can really create a lot more efficiency in your systems. And when I say systems, I mean, the overall business system, whether it’s your back office, managing assets and the like. But I’ll let Andra speak to sort of actions taken to date and her perspectives on going forward. Andra?
Andra Bolotin
Thank you, Paul. So first, I would also remind folks that there was a reduction in distribution expenses that is not showing in that number. And I think there’s a footnote on the page that says it’s down $10 million year-over-year. But in addition, I think as you highlighted, we’ve done a lot with product consolidation and expense discipline. We’re going to continue to focus on that. And I would say that most of what we’re seeing is market driven, both on the P&L and on the net flows, and we would expect that to recover rapidly as market conditions improve. So this is something we just continue to focus on with expense discipline, and we’re — we look at this every day.
Operator
Our next question comes from Doug Young of Desjardins Capital.
Doug Young
Just starting with Empower, if we just do the simple math and we take out the contribution from Pru, earnings were down U.S. dollar basis about 14% year-over-year. Can you talk a little bit about how much of that related to the market decline year-over-year? Because, obviously, you say 50% of your revenue is market driven. How much of that related to the determinations that kind of are front-end loaded? And I’m just surprised that it wasn’t less given some of the expense synergies to come through. And so I’m just curious as to when you look forward because you’ve got the Pru deal coming through, like when should we see a pivot in this from an organic growth perspective?
Paul Mahon
Okay. So Doug, let me start off at the top. One of the things that we see and we — I think we highlighted in the quarter was relative expense growth relative to growth in our participant count in our revenues was well in line if you actually carve out the impact of Pru in quarter. So when I think about the in-quarter, I think there’s been good expense discipline in quarter, but there’s a lot of moving parts.
As you pointed out, you’ve got the tailwind of any client retention or client losses related to MassMutual. At the same time, we’re seeing actually very strong growth in pure organic terms. And I think as we pointed out before, when we have growth — organic growth, one of the things is we have the onboarding costs of those customers as we bring them on. We don’t defer all those costs. So you’re always going to have those multiple dynamics going on.
Maybe I’ll let Garry provide a little bit of context, and then you could turn it over to Ed to provide some context on his view on the forward-looking in terms of what the prospects are for Empower. Garry, do you want to go?
Garry MacNicholas
Yes. I think I’ll just comment a couple of things. When we talk about the lower equity markets, you also have to bear in mind that fixed income is also well down because of the rising rates. And so those two combined, the impact on asset-based fees was quite a good chunk of that decline year-over-year. And also, we haven’t spent a lot of time but the last year, we did comment in Q3 last year on very high surplus income gains at Empower, just a number of some of the alternative investments had good returns in Q3 last year.
We had good returns this year, but they were probably $10 million down from last year as well. So you’ve got the fee-based pressures in that. We’ve talked about the — last year had almost none of the MassMutual attrition in. This year, it had more. And on the other hand, we picked up those expense synergies from MassMutual. So there’s some offset there. But I think a lot of it is the market, and I’d just call it that, surplus income drag as another factor. But I think the business is really well positioned. Great expense control, maybe…
Paul Mahon
Yes. Yes. Ed, maybe you can speak about the expense control in the context of organic growth. It’s almost trying to strip out a bit of the Pru noise and the remaining MassMutual noise and provide some context around that, Ed?
Edmund Murphy
Sure. Sure. Thanks, Paul. Yes, I don’t have much to add with respect to the comments that Garry made and where the revenue pressure is coming from. I think that’s pretty obvious. But if you look at what’s happening, let’s just look at the defined contribution business for a moment. We had — if you adjust for MassMutual, we had 8% organic growth year-over-year, and our D.C. business had 1% expense growth. So we actually see pretty good operating leverage. We continue to invest a lot in distribution and growth, both on the defined contribution side and on the retail side of our business. So we’re adding people to support the opportunities that we have. And if you look at our pipeline right now, it’s $1.7 trillion on the defined contribution side. It’s the highest in our history. And we’re seeing really strong RFP growth and traction across the business.
So again, even if you adjust for the MassMutual purchase and the deconversions that ran through the business, you’re still looking at net participant growth in the DC side of 5.5%, which is roughly 2x to 2.5x the rate of the industry average. So we’re basically growing — we’re taking share away from the competition, and we’re growing faster than the market — 2x the market on the defined contribution side. And I think the market will continue to consolidate. I think the growth opportunities for Empower, both on the DC side and the retail side, are immense. So it’s important that we continue to maintain discipline on the expense side while investing for growth.
Paul Mahon
Thanks, Ed.
Doug Young
Just a follow-up. I guess I understand the participant growth and organic side. I was just looking at how it trickles down to the bottom line. And it sounds like this quarter, market was the biggest driver of the year-over-year decline, but we could face some further pressures over the next few quarters. I know as the pre-business terminations flow through and the lag effect from the expense synergies, obviously, depending on what market conditions do. But is that the right way to think about it?
Paul Mahon
Doug, do you think that’s the right way to think about it? And obviously, we, therefore, have to be cognizant of that and manage against market conditions. And it’s finding that right balance between expense discipline, but making sure that we don’t take our eyes off the long-term — medium- to long-term price when — for example, on the retail side.
So we do not want to — as we’ve now deployed, for example, the new personal capital-enabled participant experience, including for managed accounts and IRA rollover, we want to make sure that we are taking advantage of that capture opportunity, and that takes trained and licensed people able to support clients, and we’re seeing growth there. So we’re going to actually manage that balance, but we have to make sure that we’re cognizant of the market environment. And we are very much that way, and we will be disciplined.
Doug Young
And it takes me to my second question, Paul, just on Personal Capital. Like it sounds like things are going well, but you wrote off contingent consideration USD 41 million, which tells me it’s not — it hasn’t tracked in line with your expectations but worse than expected. And I guess that could be market driven. I’m just hoping you can maybe, in light of this discussion, talk a bit about what drove that.
Paul Mahon
Yes. So you captured it, Doug, and I’m going to turn it over to Ed to provide a little more context, but it’s market driven. The actual business has done very well from the standpoint of executing, serving clients, continuing to actually retain clients, client conversions going reasonably well. But the big challenge is really the significant fall in equity markets, and the reality is that contingent consideration was a function of asset-based consideration.
So I’ll turn it over to Ed. Provide a little bit more color if there’s anything I’ve missed, Ed.
Edmund Murphy
Yes. I would say, again, if you look year-to-date, gross sales are up 10%. Revenue is up 14%. Where we’ve seen real momentum is on the client retention side. We’re seeing a lot of adds to existing accounts. The challenge has been at the top of the funnel. So sales have been challenged a little bit.
So we continue to invest in growth, but that’s also leading to higher customer acquisition costs. So you’re seeing that play out through the P&L. But definitely, fees have been impacted, as Paul said, by lower markets and lower asset levels.
We’ve started to temper some of the acquisition spending. We started doing that 2 quarters ago in light of the challenging markets. But obviously, you’ve got to maintain a sustained presence when you’re out there in the marketplace. But this is also not a time where you’re seeing individual retail customers move relationships. When you experience this level of market volatility and the downturn, we’re seeing slower sales conversions at the top of the funnel.
Paul Mahon
Ed, I think that’s a good call out. And Doug, I would say that’s sort of a consistent theme we see across retail wealth management. You’re just not seeing money in motion in the same way. There’s a lot of people that are sitting and not moving. And you see that play out, for instance, in our retail second — mutual fund sales here in Canada. So it’s a dynamic of — that’s a little bit more market driven than I’d say — than are business model driven.
Edmund Murphy
I’ll just go ahead on the retail side. I was just going to — on our retail IRA rollover business, I just wanted to comment there that we’ve seen similar challenges. But if you look at sales, sales are up 32% year-to-date. Revenue is up 78%. So this is a lot of opportunity here. But with the market conditions the way they are, the top of the funnel, the conversion around new accounts has slowed a bit.
Doug Young
Okay. Just quick on, Garry, cash at the holdco, $300 million. It was $800 million last quarter. I think, historically, you’ve said you wanted to keep $500 million to $700 million. Did you move cash down to the Canada Life Opco? And if so, how much?
Garry MacNicholas
Yes. So we did not actually move the cash down. It’s more that we didn’t dividend as much cash up as we might normally do. And again, that’s just being mindful of the LICAT ratio and any potential volatility in the U.K. because it has that anomaly in LICAT where there was higher U.K. gilt rates because there are backing some of our actual margins account for capital. So it’s just being a little cautious on that front with the LICAT ratio. So we kept a little more money at Canada Life and didn’t dividend up. So we did not put any down, we just didn’t send it up.
Paul Mahon
Yes. And I would say, Doug, we’ve got lots of financial flexibility in the system. We’re not concerned about that. That was, frankly, as we transition through these last 2 quarters on our journey to IFRS 17, we’re managing the non-economic aspects of LICAT during that period. And we will have that behind us and frankly, when we — a quarter from now when we do parallel reporting of both IFRS 17 and IFRS 4.
Operator
Our next question comes from Gabriel Dechaine of National Bank Financial.
Gabriel Dechaine
I’ve got a few numbers questions. Hopefully, you can answer them. One, what is the size of the equity release mortgage portfolio on your balance sheet and the LTVs associated with that exposure? And then as far as the catastrophic reinsurance business goes, what’s the normalized annual earnings contribution from that business?
Paul Mahon
Okay. So there’s two questions there. And so, Gabriel, I’ll remind you that as we’re thinking about the impact of interest rates on the in-force liability of the equity release mortgages, that’s not really an area of concern or focus for us. The reality is those were — mortgages were written at low rates, and it’s not a number that we sort of are worried about. But maybe Garry can comment on that, and then I’m going to ask Arshil to speak to perspectives on the P&C cat business, the size of that business, its profit contribution.
Garry MacNicholas
Yes. Just for reference, Gabriel, we do show the equity release mortgages. I think they’re in the slides back on Page 34, and there are also — they’ll be in the MD&A as well. They’re $2.6 billion.
Paul Mahon
Yes. So it’s a relatively small portfolio in the big scheme of things. Early days for us with that business, but very well managed. Low LTV. We actually — we like that asset on the books right now back on liabilities. It continues to be — it will be a positive contributor, continue to be so. Arshil, maybe you can speak to the P&C cat business and the attractiveness from a diversification.
Gabriel Dechaine
The LTVs, they were below 50% on that type of…
Paul Mahon
They seem to be more below 30%, Gabriel?
Gabriel Dechaine
Yes, yes. Okay.
Paul Mahon
Okay. Do you want to speak to the — how P&C cat fits into the — to both our profit profile and our diversification profile, Arshil?
Arshil Jamal
So just to remind you, the P&C cap portfolio reprices every year, and the market conditions do change based on the experience. So we don’t generally break out what the annual profit contribution is, but what I would say is, over the last 5 years and over the last 10 years, despite the losses, including the loss that we just reported, that portfolio has contributed to the return and meet its return expectation targets, contributes really well from a diversification perspective, and is the smallest of our business lines within the Reinsurance business unit.
So I think that’s sort of a historic theme setting. And as we look forward into this renewal season, we’re expecting significant increases in margin, and we’re going to see very little of that flow through to our bottom line in margins because we’re going to prioritize risk reduction and maintaining our underwriting discipline. So we’re going to write the same limits going forward, but we’re going to reduce the risk in that portfolio so that we avoid secondary payrolls and continue to provide very valuable coverage to our clients in the face of very, very large events, including events like Hurricane Ian. But again, over a 5 and over a 10-year period, these do — this business line contributes very strongly to our overall profitability. It’s a diversified risk, and we expect stronger margins going into this renewal season compared to the previous years.
Paul Mahon
Yes. So Gabe, I would just add that this is something that is always front and center around this time of year as we have discussions with our reinsurance committee, the Board — and at the Board. And we’re kind of all over looking at the profitability over time. And the reality is we’ve got a very expert team that is well on top of this.
And the key for us is to think about — the way we think about this is that we have this size level where our exposure is capped. It’s annually renewable. So we’ve got the decision we can make each and every year. And we focus on making sure that we’re playing a way further out on the risk spectrum relative to when you see things going on in the market that we really only want to be there for clients on the major catastrophic events like Ian.
And that’s what’s happened. And actually, we’re there for that. The reality is there’s customers that now customers of P&C insurers that now have to rebuild their lives, and we’re a part of that system, helping them rebuild. But at the end of the day, it’s a good diversifier from a risk perspective, but it’s also a good profit contributor, and we’re very comfortable with the business.
Gabriel Dechaine
All right. Yes, so gave the numbers there. It doesn’t — not one of those the other bad year wipes out 10 years across. That’s pretty much what I was after.
Operator
Our next question comes from Paul Holden of CIBC.
Paul Holden
All right. Two questions. So first one was relating to earnings on surplus. And maybe you can give us a sense of how quickly you can turn over that portfolio to capture the benefit of higher yields.
Paul Mahon
Okay. Maybe I’ll start off with Raman, who can provide a bit of perspective on our surplus and the opportunities that exist within it. And the key is you’ve got to be confident in those steps in an environment with lots of volatility. So Raman, why don’t you sort of take it up, maybe start off at a level at overall our perspectives on the portfolio and the surplus opportunity?
Raman Srivastava
Yes, sure. So I think — well, maybe just starting at the high level. Our starting point on the surplus and on the assets in general is one of high quality. So I think in terms of the ability to rotate as markets both in rates and in spreads, we will have, I think, over the coming quarters, a lot of opportunity to rotate into higher — not just higher rate but also higher spread product without sacrificing credit quality. So that’s the first point.
I think we’re starting from a place that allows us to move. Our surplus portfolio tends to be shorter. So there’s a natural maturity and roll-off that occurs with the governments, whether it’s U.K. gilts or other governments that we have. So there’s not a lot of trading per se. There’s natural maturities, and there’ll be a natural ability for us to reinvest those maturities into higher spread asset. So it tends to be a shorter portfolio. And I’d say the market environment should be friendly for us to reinvest both in fixed income and some of the non-fixed income parts of the market.
Paul Mahon
Garry, did you want to add something to that?
Garry MacNicholas
Just quickly to note that in the earnings on surplus, you also see the debt cost. Now the good news there is a lot of our debt is actually long term. And so it doesn’t roll over as much. There would be some maturities, but a lot of it is very long term. But the debt costs are the other side of that.
Paul Holden
So just want to clarify one part of the answer, just to make sure I understand. So it sounds like as the portfolio naturally rolls over, you’ll be able to take advantage of that, but you won’t actively sell existing fixed income holdings in order to capture higher yield. Is that correct?
Paul Mahon
Raman?
Raman Srivastava
I mean we could do both, but I’d say there’s just a natural ability for us to do it without having to sell fixed income. So we had an opportunity to do both, but there’s a lot that rolls over just naturally given that’s inside of 5 years on average.
Paul Mahon
Yes. So I think what Raman is getting at, Paul, is that we’re limited in part by market capacity and market opportunities. So he said the first — our first opportunity for deployment will be the natural rollover. If there’s more opportunities than what that takes, then we’ll certainly be looking at the balance of the portfolio.
Paul Holden
That’s helpful. Okay. And then second question is with respect to the pension risk transfer market. Obviously, what transpired in the U.K. LDI market in Q3 was well covered by the media. And I’m just wondering if there’s any kind of implications for Great-West in that market sort of more on a, I want to call it, structural type basis. Like does this change the way you think about structuring your pension risk transfer business? Does it change the way your clients think about engaging in that market? Does it open up more opportunities for you? Does it close down some opportunities for you? Just trying to wrap my head around all of that.
Paul Mahon
Yes. Good question, Paul. And it certainly achieved a lot of angst in the media and obviously a lot of attention. I’m going to let David Harney start on that one because we don’t use some of the LDI strategies that have been highlighted. That doesn’t feature in the way we manage this. So we’ll start off with providing some context around that and whether we think it’s going to reshape the market in any way. So why don’t you start on that, David?
David Harney
Yes. So just on LDI, like we have a very small portion. So we do run some out of Ireland, but it’s quite a low leverage product. So most of our product into this market into the pension risk transfer is the bulk annuities. And I think what’s happened the last few weeks, the impact of that, I think, will — it doesn’t change our view of the market and what we supply in, but I think it will change the mindset of clients, like obviously the 2 options that have for managing these liabilities are LDI or if you transfer the risk to an insurance company through bulk annuities. So like I think the outcome of all of this is going to be pension schemes will lean more than to bulk annuities rather than LDI solutions. And most people are expecting strong growth in the bulk annuity market next year as a result of it.
Paul Mahon
Yes. Maybe you can speak to your perspectives on the growth that could emerge into the bulk annuity market. Why would it happen now?
David Harney
Like one the issues in the U.K. is companies that have defined benefit liabilities that have to start to hold that as a liability on their company balance sheet. And that’s a big motivation then for pension schemes to derisk and transfer these liabilities to insurance companies, and that’s not the same in other economies. So the long-term strategy of most companies is to exit these liabilities at some point. And we see very sort of strong demand for bulk annuities has resulted out over the next 10 years at least.
Paul Mahon
Thanks. Any other questions on that?
Paul Holden
No, that was it. That’s all for me.
Operator
Our next question comes from Nigel D’Souza of Veritas Investment Research.
Nigel D’Souza
I wanted to follow up on the Europe segment and on risk-based product premiums in the U.K. When I look at that year-over-year, quarter-over-quarter, it’s down, but there’s a bit of noise there. You have the bulk annuity sale last year. You had that currency headwinds this year. Just trying to get a sense of how do you expect or your expectations for risk-based product premiums in the U.K. going forward? How should we expect that to trend?
Paul Mahon
Yes. So Nigel, I’ll go back to sort of — from a strategic perspective, we’re positioned in product sets in Europe that are very much financial necessity. So we’re in pension savings. We’re in retirement income. We’re in group risk. And obviously, we think about bulk annuities as an opportunity. We view those product sets in a rising rate environment with some of the other risks that emerge as products that will remain resilient or maybe pushing to opportunistic.
So if you think about the bulk annuity space, David made reference to the equity release mortgages where we may see a bit of softening in demand there just because of higher rates. But we do think that the market itself, that our product set fits well in that market and that the return characteristics are attractive. But David, I’ll let you add to that.
David Harney
Yes. Go to Slide 7, it just shows that the display of insurance-related sales like, obviously, we don’t publish targets or anything like that. But I’d say in Q3, just the level of annuity sales that’s there, like us — that’s a little below what we’d expect in a quarter. So you might — like probably a more reasonable number to expect there is $500 million or $600 million. But it obviously just depends on the timing of winning those cases.
The equity release mortgage sales, then we do expect to moderate next year because borrowing costs will be higher for people, and we’ll be lending lower loan-to-value ratios. The insurance sales there in that segment are like they are low relative to the other sales. So that’s just bulk annuities, the large single premium sales, the ERMs are loans. So I’d say the sales number there for insurance and group risk probably, it underrepresents the importance of the product. Like it’s a much stronger contributor profit-wise. So the key profit contributors within the U.K. are the annuities and the group risk.
The group risk book, we expect to perform well. Like even though there are recessionary pressures in the economies, the premiums there are related to employment and salaries, and we’re seeing strong salary growth. And employment levels are very high in the U.K., so our group risk book is performing pretty well at the moment.
Paul Mahon
Thanks, David.
Nigel D’Souza
Okay. Great. So it sounds like you talked about the move higher on group and annuities on a constant currency basis. The last part I had was on this dividend payout ratio that you’ve outlined, 45% to 55%. You’re currently sitting closer to 50%. Do you want to see that payout ratio fall to the midpoint of 50% before you reconsider an increase? Just trying to get a sense of the timing of future dividend increases going forward.
Paul Mahon
Yes. No. So what I would say, Nigel, is we made a decision to move forward on a dividend increase in Q3 last year because of, at the time last year, it lifted the restrictions and we’ve been held off from that for a while. Our explicit decision this quarter was to actually go back to our normal cycle of Q4 when we do our reporting in early February, and that’s when we’ll take up that discussion with the Board.
But I would say that our view on dividends is not a function of what’s happened in a particular quarter. It’s really our medium-term outlook. And we remain confident in our medium-term outlook of 8% to 10% growth in earnings. Obviously, we’re going to see some volatility in periods like this. But we remain confident in our overall business, and we will use that confidence to guide our decision-making — our dividend decision-making next quarter. It will be our outlook for longer-term growth not any particular quarter.
We use that range of 45% to 55% as a bit of a guide around sort of where we would view it over the long term if you were to measure it on an average over a longer-term period. It’s not a guardrail. It’s not something where we’re trying to get back to the midpoint 50%. Getting to 60% doesn’t fuss me in any way. It’s more a function of what is our long-term outlook and our confidence in that.
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, Ariel. Well, listen, I’d like to thank all participants today for joining us. I’d like to thank the analysts for their questions. It’s always a good exchange. And actually, we look forward to getting back together with you in the New Year as we report our Q4 results. I think it will be early February or maybe a little bit later. Is it early February, Garry? Early February. So we’ll be back with you then. And in the meantime, I hope everybody has a safe fourth quarter holiday season, and look forward to talking in the New Year. Take care.
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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