Great-West Lifeco Inc. (OTCPK:GWLIF) Q4 2022 Results Conference Call February 9, 2023 3:30 PM ET
Company Participants
Paul Mahon – President and CEO
Garry MacNicholas – EVP and Chief Financial Officer
Ed Murphy – President and Chief Executive Officer of Empower
Raman Srivastava – Executive Vice-President and Global Chief Investment Officer
David Harney – President and Chief Operating Officer, Europe
Arshil Jamal – President and Group Head, Strategy, Investments and Reinsurance
Jeffrey Macoun – President and Chief Operating Officer of Canada
Conference Call Participants
Meny Grauman – Scotiabank
Gabriel Dechaine – National Bank Financial
Doug Young – Desjardins Capital Markets
Tom McKinnon – BMO Capital
Paul Holden – CIBC
Mario Mendonca – TD Securities
Nigel D’Souza – Veritas Investment Research
Darko Mihelic – RBC Capital Market
Operator
Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Fourth Quarter 2022 Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Mr. Paul Mahon, President and CEO of Great-West Lifeco. Please go ahead sir.
Paul Mahon
Thank you, Carl. Good afternoon, and welcome to Great-West Lifeco’s fourth quarter 2022 conference call. Joining me on today’s call is Garry MacNicholas, Executive Vice President and Chief Financial Officer, and together we will deliver today’s formal presentation. Also, joining us on the call and available to answer your questions are David Harney, President and COO, Europe; Marshall Jamal, President and Group Head Strategy, Investment and Reinsurance; Jeff McCown, President and COO Canada; Ed Murphy, President and CEO of Empower; and Bob Reynolds, President and CEO Putnam Investments.
Before we start, I’ll draw your attention to our cautionary notes regarding forward-looking information and non-GAAP financial measures and ratios on Slide 2. These apply to today’s discussion and presentation materials.
Please turn to Slide 4. Great-West Lifeco delivered a solid performance in 2022 with full year base earnings of $3.2 billion and base EPS of $3.46 These steady results were achieved against a backdrop of economic and market uncertainty and driven by the strength and diversification of our businesses. We closed out the year with a strong fourth quarter with base EPS of $0.96, which Garry and I will cover in our comments.
The company’s fundamentals remain strong and we continue to reduce our post-acquisition leverage ratios and build up cash and capital. Yesterday we announced a 6% increase in the common share dividend. This announcement and our long track record of raising the dividend, highlight the strong capital generation of the Lifeco portfolio and our confidence in the future. The strength of the company’s market leading franchises provides stable growth in earnings and liquidity to support our investments in future growth.
In the last few years, we’ve deployed significant resources on three transformative acquisitions to accelerate growth at Empower. We’ve made strong progress in 2022, adding new capabilities and welcoming millions of new customers to the empower platform. We completed the Mass Mutual integration in December, achieving our cost synergy target of $160 million and exceeding our objective for client and asset and revenue retention.
We’re using the same disciplined approach with Prudential and we’ll start migrating its 4 million participants to the Empower Platform in March. The acquired Prudential business is performing in line with our expectations, run rate cost synergies of U.S. $43 million have been achieved to date and the business has contributed $171 million Canadian to the Lifeco base earnings since we closed the transaction in April.
Together, the Mass Mutual, Prudential and Personal Capital Acquisitions Position Empower with the tools, capabilities and customer relationships required to build a wealth management growth engine alongside its market leading defined contribution retirement business. To this end, we launched Empower Personal Wealth in January of this year integrating Empower’s IRA business and Personal Capital’s hybrid digital wealth business. We will begin reporting the DC business results and the personal wealth results businesses separately starting in Q1.
Given this change, we’re planning an investor education session to introduce this new reporting approach ahead of our Q1 results reporting. There’s a lot going on at Empower, so later in the presentation I’ll provide some color on 2023 growth that management is targeting for the Empower business and the key drivers behind this target.
This of course, is the last quarter, which will report under IFRS 4 before transitioning to IFRS 17 and IFRS 9 in Q1. We’re nearing the finish line of our preparations and are well positioned for the transition. We have provided a condensed opening balance sheet as of January 1st, 2022 in our disclosures today and updated the expected impacts we shared with the market in June, which remain largely in line with previous disclosures. In addition to moving forward with our business priorities and getting ready for IFRS 17, we’re also advancing our corporate purpose and social impact agenda.
Over the last 18 months, we’ve taken action in three areas of focus, introducing a commitment to net zero carbon, establishing enterprise diversity goals and deepening our commitment to reconciliation. We’ve aligned the organization and our Board around these three focus areas and look forward to sharing more on this with you at our annual meeting in May.
Please turn to Slide 5. This slide shows our medium-term financial objectives, 8% to 10% base EPS growth, a base ROE of 14% to 15%, and a target dividend payout ratio of 45% to 55% of base earnings. Notwithstanding the headwinds that held back 2022 performance, we’re tracking to our base EPS growth objective with five-year growth of just under 9%.
This reflects solid organic growth and strong contributions from acquisitions. It also reflects our operational discipline, including how we manage our investment portfolio, underwrite and price new business and manage expenses.
With these same ‘22 headwinds while they had a dampening impact on base ROE, we remain confident in meeting this objective over the medium term. With respect to our dividend payout ratio, this is a medium-term target and our goal is to work into this range over the next few years.
Please turn to Slide 6. Our fourth quarter saw strong overall results with base earnings of $892 million and base EPS of $0.96 cents up 8% year over year. Net earnings were over $1 billion or $1.10 per quarter, up 34% year over year. Garry will cover the financial drivers in more detail.
Please turn to Slide 7. Our Canadian business saw an improving trend in insurance and wealth sales to close out the year. While group insurance sales were lower year over year due to fewer large case sales persistency was strong and Canada Life led the market in sales in the fourth quarter.
Strong Individual Insurance sales results were driven by participating Life sales. Group Retirement sales had strong sequential growth, with gains in our core defined contribution and next step asset rollover businesses. On the individual well side, sales also improved sequentially and were in line with industry trends. These results are supported by Canada Life’s continuing improvement in technology enabled customer and advisor experience.
Please turn to Slide 8. In Europe, business performance was steady, as economic conditions improved and the political environment in the UK stabilized. Insurance sales were down from a year ago, while individual annuity sales increased sequentially. And while the UK bulk annuity market demand remains strong, we did not write any large cases, as we maintain strong pricing discipline.
We’ve resumed selling equity release mortgages in December and are seeing solid traction in an overall market that has somewhat lower new business activity, due to higher interest rates. While Europe sales were down from a year ago, Q4 sales were up sequentially with positive net cash flows in both individual and group. The stability in these European results reflects business models focused on financial necessities like pension savings, retirement income solutions and group protection.
Please turn to Slide 9. Putnam’s AUM was impacted by market declines and ended the quarter at $165 billion. Net outflows of $1.5 billion showed continued improvement compared to the last three quarters and were primarily in Putnam’s lower fee fixed income products.
Notably, Putnam delivered positive equity flows in 2022 in a period when equity sales across the market declined by over 10% year-over-year. These flows are supported by Putnam’s excellence in investment performance for clients with 40 funds rated four or five stars by Morningstar, 96% of equity assets with four or five star Morningstar ratings and 83% of total assets with four or five star Morningstar ratings. These ratings reflect Putnam’s track record of strong performance over five and 10 years.
Please turn to Slide 10. Empower’s DC business continues to experience strong momentum with sales up 8% year-over-year and client retention at 97%. This is a testament to the excellence in service our Empower colleagues have continued to deliver to clients, despite the heavy integration activities over the past year.
As noted, the MassMutual integration is now complete. Targeted pretax cost synergies of $160 million were achieved and asset participant and revenue retention outperformed our original expectations.
The Prudential integration is on-track. $43 million of realized pretax cost synergies are unchanged from last quarter. As we noted with MassMutual, cost synergies are typically front and back end loaded. In Prudential’s case, we expect the remaining $137 million of annualized cost synergies to be realized, when client conversions are complete and redundant systems and services are decommissioned after Q1 2024.
We are excited about the prospects for continued growth in Empower Personal Wealth with our enhanced customer experience now available across the combined Empower and MassMutual participant base. We are seeing good early momentum with sales growth up 15% over Q3.
Please turn to Slide 11. Capital and Risk Solutions expected profit increased 7% year-over-year. Other margins and fees were up 20% with growth in structured and longevity reinsurance and improved pricing in the PNC business more than offsetting slightly lower actuarial PfAD releases.
The new business pipeline remains healthy in both structured and longevity reinsurance portfolios. We remain focused on our core businesses in the U.S. and Europe, and we continue to pursue expansion across — expansion opportunities in select new markets.
And with that, I’ll now turn the call over to Garry to review the financial results. Garry?
Garry MacNicholas
Thank you. Paul, Base EPS of $0.96 was up 8% from Q4 2021. Notwithstanding the lower market levels this quarter compared to Q4 last year. All four segments contributed to the strong performance, which also included the acquired Prudential retirement business that was not in last year’s results.
Net EPS of $0.10 is up 34% from last year, reflecting the higher base earnings as well as favorable excluded items which were primarily actuarial and tax related.
In Canada, base earnings of $295 million were down 7% from a strong Q4 last year, primarily due to market related fee, income pressure and lower yield enhancement contributions partially offset by strong group life and health insurance results.
In the U.S., Empower base earnings of $155 million included $47 million from the addition of Prudential retirement business. Excluding Prudential, the results are down 8% in U.S. dollar terms year-over-year due primarily to market impacts on fees and the anticipated integration shock loss in the mass mutual block, partly offset by strong organic growth in the business and improved spreads in the general account.
Recall, over 50% of net revenues at Empower are asset based, and so the impact of lower markets on asset-based fee revenues continues to be a headwind, especially against the market levels in Q4 2021. This comparative period markets issue is expected to continue into Q1 2023 based on market performance so far this quarter. That said, business fundamentals such as top line organic growth, customer retention, and retail expansion remains strong.
As noted on the last call, in Q4, we completed the final conversions for the MassMutual Business. Through the integration, we have met our expense synergy targets of $160 million on an annualized run rate basis, and we have exceeded the original customer revenue retention targets excellent achievements by the U.S. team.
A similar integration revenue loss pattern is expected on the Prudential business. While there has been very little revenue attrition to date, some is expected in 2023 as part of the integration process and that will begin to impact year-over-year comparisons as we progress through 2023.
We remain confident in hitting the customer and revenue retention targets we set out for this transaction. We also expect the benefit of full expense synergies $180 million annualized to emerge once the integration is complete early in 2024. While we have achieved run rate synergies of $43 million to date, we do not expect to see much additional synergy benefit to arise until 2024.
Turning to Putnam, earnings were down from Q4 last year, largely impacted by two factors. First, lower asset-based fees as expected given sharply lower average market levels for both equity and fixed income this year compared to last. Second, there was a negative swing of $33 million from one-time tax items, a negative $16 million this quarter opposite, a positive $17 million in Q4 2021.
The Europe segment posted a particularly strong quarter with solid business fundamentals and results of across Ireland, Germany, and the UK. In addition, there were elevated deal enhancement benefits in the UK and favorable tax impacts.
The capital and resolution segment, which is primarily the reinsurance business unit saw earnings continue to benefit from steady new business success. Also, U.S. life claims experience continues to improve from the elevated COVID related claims experienced at the height of the pandemic.
Turning to Slide 14, this table shows the reconciliation from base and net earnings. Net earnings were over a $1 billion this quarter. In addition to the strong base earnings across the segments, there are positive actuarial assumption changes, management actions, and market related impacts on liabilities.
The previously announced tax increase on Canadian financial institutions was substantially enacted this quarter. While the additional 1.5% tax will modestly impact future earnings, the revaluation of deferred tax attributes resulted in a one-time positive impact this quarter. The remaining items are predominantly acquisition and integration related costs.
Turning to Slides 15 and 16. These next two slides highlight the source of earnings first from base earnings perspective and then net earnings. I’ll focus my comments on Slide 15, the base earnings SOE with a reminder, the amounts above the line are pre-tax.
Expected profit was up 2% year-over-year the increase is primarily due to the additional Prudential, plus business growth in Capital Risk Solutions and improved margins in both Canada group customer and the Empower general account.
This was largely offset by lower expected fee income due to the sharp market downturns experienced during 2022 in each of the regions. Experience gains are the other notable item I’d call out, largely driven by yield enhancement in the UK mentioned earlier. The improvement from last quarter’s Experience loss needs to be viewed in the context of the $130 million impact of Hurricane Ian provisions taken in Q3.
Earnings on surplus of minus $24 million, improved $12 million from last year with the benefit of higher interest rates partly offset by the impact of additional financing costs related to the Prudential business acquisition.
The effective tax rate on base earnings this quarter was 11% reflecting the jurisdictional mix of earnings and certain non-taxable investment income. Skipping ahead to Slide 17, these tables expand on the Experience results as well as the mentioned actions basis and changes in assumptions to highlight various items in the quarter, most of which we’ve touched on already.
As shown in the chart on the left, yield enhancement continued to contribute positively, primarily in the UK this quarter. The elevated UK gains were in part due to having secured attractive assets earlier in the year that could either be used to support new business or enforce liabilities.
Given the absence of large bulk annuity deals recently, the assets were allocated to the enforce block, resulting in a yield enhancement pickup rather than new business gains that we’ve seen in the past. The net impact of mortality, longevity and morbidity was neutral this quarter with some pluses and minuses across a diversified book of insurance risks.
Credit was a small positive gain relative to expected credit loss impacts as our high-quality investment portfolio continues to perform well. The table on the right highlights modest basis change impacts this quarter plus the actuarial portion of the corporate tax rate change. There are only a few smaller year end assumption updates and refinements as the bulk of the actuarial reviews were completed in Q3.
Moving to Slide 18, this slide highlights operating expenses by segment. Expenses are up year over year, but that was to be expected given the increase in business and the addition of the Prudential business. Adjusting for Prudential and currency movements, expenses overall are up 3%, demonstrating strong expense discipline.
Recognizing there will likely be some inflationary pressures in labor and other costs emerging in the future, this is an area we will monitor closely and we will look to achieve productivity gains in our operations and adjust pricing if appropriate.
The overall message here, consistent across the segments, as we continue to manage our expenses closely, balanced against the need to continue to invest for future growth.
Please turn to Slide 19. The Q4 book value per share of $26.60 was up 8% year-over-year. About three-quarters of that or 6% growth was driven by strong retained earnings over the past four quarters. In addition, currency translation was a positive this year, led by a stronger U.S. dollar. The LICAT ratio of Can Life remains strong, improving two points to 120%.
Earnings net of dividends and the continued smoothing in of the scenario switch benefit drove the increase. Lifeco cash, which is not included in the LICAT ratio, ended the quarter at $1 billion. The increase from last quarter primarily reflects the €500 million debt raise in Q4 in advance of a €500 million maturity in April.
OSP released its 2023 LICAT guideline in Q3, setting out the adjustments to accommodate the transition to IFRS 17. The first LICAT ratio under the new guideline will be reported as part of the Q1 2023 results, and we are currently estimating a positive impact of approximately 10 points on transition. Note the actual impact will be dependent on market conditions at the time, including the level of interest rates, given different sensitivities between IFRS 4 and IFRS 17.
Turning to Slide 20. This slide provides an updated view of the anticipated impacts as we move to IFRS 17 and is very much in line with the information we provided last June. Note two, in the year end consolidated financial statements contains summarized opening balance sheet information on the transition to IFRS 17 and IFRS 9.
As expected, there is a reduction to shareholders’ equity, which we had flagged in June as being in the 10% to 15% range. This is a result of a net reduction to retained earnings, driven primarily by the creation under IFRS 17 of a new deferred profit liability, the contractual service margin, which basically represents unearned expected future profits. The resulting reduction is 12% for shareholders’ equity and 14% for book value per share, in line with original estimates.
The contractual service margin is included in regulatory capital. And as noted earlier, we are expecting approximately 10 points improvement in the LICAT ratio on transition, based on current estimates and conditions. I should note, we have only recently begun to work on the IFRS 17 comparative Q4 results, as we wrapped up to IFRS 4 reporting this week.
Also, we are still analyzing the comparative results from previous quarters, particularly in relation to investment results given the large equity and interest rate movements during 2022. We will be looking to share information on comparative 2022 earnings under IFRS 17 and 9 at the Q1 call in May.
We continue to expect modest base earnings impact overall, although of course, that will vary by segment given the different business mixes, and we continue to target 8% to 10% base EPS growth over the medium-term.
Back to you, Paul.
Paul Mahon
Thanks, Garry. Please turn to Slide 21. As Garry outlined, we remain confident in delivering on Lifeco’s objective of 8% to 10% base EPS growth per annum over the medium-term. For 2023, we expect low single digit offset to this growth as a result of the transitioned IFRS 17.
As a reminder, this is an accounting change that impacts the timing of earnings, not the economics of the business. We will report our Q1 financial results in May under the new IFRS 17 and IFRS 9 standards, including results for the comparative quarters in 2022.
As part of our new reporting, we’ll be providing more insight into Empower financial results by splitting out Empower’s core DC business from Empower Personal Wealth previously referred to as retail. We’re planning an education session for analysts and investors in the spring where we will outline our new reporting for Empower. In advance of that, given the multiple Empower transactions over the last two years and with much of the Prudential integration still to come, we wanted to broad more detailed perspectives on the drivers of Empower performance as we move into 2023.
Management is targeting annual base earnings growth between 15% and 20% from 2022 to 2023 for Empower. This growth assumes long-term average equity market growth and stable interest rates throughout ’23. It includes pre-expense synergies of $43 million already captured, but does not include the remaining targeted synergies of $137 million with the majority of those coming in early 2024 when client conversions are complete and redundant systems and services are retired.
It also reflects expected pre-revenue losses associated with clients not retained. To date, we’ve retained approximately 94% of approved revenues and are targeting ultimate revenue retention in the low to mid 80% range. We expect to see most of these terminations in associated revenue losses late in the latter parts of ‘23 or early parts of ‘24.
Finally, it reflects the continuing growth of our Empowered Personal Wealth business, which is beginning to see solid traction following the integration of personal capital capabilities into the Empower participant and IRA rollover experience.
As I noted, we’re providing this additional information from Empower because of the multiple acquisitions impacting Empower’ financial results year-over-year. We do not plan provide this type of information for our other segments where we’ll be focusing on providing insights into the impacts of IGRS 17 for 2023.
And with that, I would like to turn the call back to the operator to open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question comes from Meny Grauman of Scotiabank. Please go ahead.
Meny Grauman
Hi. Good afternoon. I just wanted to follow-up. Paul, you were talking about retention rate assumptions for Prudential, if my notes are correct, mass mutual retention was over 85% when all was said and done. So, I want to make sure I have that right and then compare it to the guidance of low to mid 80%. And the question is just why do you think that the retention rate for Prudential will come in lower than for MassMutual? What’s driving that assumption?
Paul Mahon
I’ll start out, but I’m going to turn it over to Ed who can provide a bit more color. The reality is we had set a low to mid-eighties target for MassMutual and we have performed it. And if you actually look at precedent transactions in the market that was a kind of a market leading level of performance and the strong performances one we’re very proud of. But maybe Ed can provide a little bit more color on the target, the targets we’ve set for Prudential. Ed.
Ed Murphy
Sure. Thanks Paul. You’re correct, Manny. The performance on MassMutual was 85%, actually a little north of 85%. And, you know, there’s obviously a lot of moving parts with these transitions. Prudential has about 3000 clients. MassMutual had 26,000 clients. The level of complexity with the Prudential clients is far greater. That said, we feel very confident that we’ll come in, well, within that range that we shared with, on MassMutual, as Paul referenced, we had a target in the 82% to 83% range. And, we feel very confident we’ll hit that range, if not exceed it.
Meny Grauman
Thanks. And, and then just a question on the dividend, just wondering, we haven’t seen a dividend increase since mid ‘21. I’m wondering if you could just help us understand the expected cadence of dividend increases from here, and with the move that was announced today, is it a reflection of something in the outlook that’s changed, or is just a function of the payout ratio? So, I’m just curious about that.
Garry MacNicholas
So, Manny, taking it back to last year, we actually increased our dividend in Q4 last year. We kind of did a two-part increase. And the overall increase was actually 12% last year. That was after having stepped away from dividend increases for a year during, COVID. But if you actually look at the track record, we’ve kind of been focused on Q4 increases.
If you go back and look at it historically, generally it’s been in around the 6% range. And, this would be a continuation of that. And I would say it’s reflective of our view on, the strength of the business, our liquidity, and it’s about trajectory. Having said that, we’ve outlined that obviously there’ll be a bit of softening in our EPS growth because of the one-time impact of IFRS 17 transition, but we do view this dividend as indicative of our view as we think about, our medium-term growth and we’re, we like our prospects for medium term growth.
Meny Grauman
Thanks, Paul.
Operator
The next question comes from Gabriel Dechaine of National Bank Financial. Please go ahead.
Gabriel Dechaine
Hey, good afternoon. The after-tax yield was about $135 million, which is good number, but quite a bit higher than the run rate, and I got the explanation on all that. I was wondering if you can tell me what that number would look like, if it happened in Q1 of next year under IRFS 17?
Paul Mahon
I will, Gabe, thanks for the question and I’m going to turn that one over to Garry. Garry?
Garry MacNicholas
Yeah, I think, we will be doing our Q4 comparative work, as I mentioned, we’ll, that’ll be coming up and we’ll be sharing the comparative quarters when we get to the Q1 reporting. So, we might have an opportunity to discuss what it looks like between the two different regimes then if we’re in at that level of detail. I’ll just make a couple of comments.
I think and we’ve noted in the past that, some of the yield enhancements will fade away under IFRS 17 and others will stay there different mechanism, but they’ll stay impacting our results in the base earnings. And I just wanted to point out that all of that has been factored into our, when we say, you know, a lower model, single digit impact, it’s all factored into that on a proforma basis. So, any one quarter, it’s a bit up and down. But, we just looked across the year and said what’s a typical year?
Gabriel Dechaine
That’s why, I figured you could at least provide a ballpark is that low single-digits earning impact would have factored that in, as you say. So, is there any way you can ballpark it? Annual, I’d say, you are running around $50 million to $100 million of yield enhancement gains under IFRS 4. What’s the comparative under ’17?
Garry MacNicholas
Yes. I think the things I’d point out is, when you look at this specific quarter, even just the impact on switching from one to the other will depend on the nature and the location, which portfolios the yield in enhancement and the nature of what drives the yield enhancement. In terms of a quarter like this, it’s probably more 50-50. But it really does vary quarter-to-quarter.
Paul Mahon
As Garry said, a rough estimate this quarter 50-50. But if the jurisdictional earnings were in another quarter, it could be a different way.
Gabriel Dechaine
Okay. That’s good enough. And just on UK, I guess, I was expect them to see some action on the real estate front there. We’re seeing other companies getting their appraisals and marking down their real estate holdings. And I know you have got a different portfolio than other companies, and went through an experience in the post Brexit period that maybe you adjust the portfolio a little bit. I’m wondering what you are out looking there for valuation on the broader real estate portfolio, the $7 billion and the third of that that’s in the UK?
Paul Mahon
Yes. Thanks Gabe. I’ll start off at the high level and then I will pass it to Raman Srivastava. The reality is, we have been staying totally on top of appraisals, the discipline we have always had. I will say that, if you think about the journey from financial crisis to now, we have been very, very disciplined in terms of managing our real estate portfolio, staying on top of it, staying on valuations, quality and a like.
So, we come into what you could say is some market dislocation with the strong portfolio. But I’ll let Ramon speak to what we saw in quarter and actually what flowed through the income statement in quarter. Raman?
Raman Srivastava
Yes. Thanks, Paul. And Gabe, you are right, there was a challenging quarter for real estate in the UK and other areas. I don’t think — we didn’t come to unscathed, if you would that the details that are embedded within the SOE on the market related impacts on Page 17. Embedded within that, there is roughly a pretax number of about minus $30 million associated with the impacts over quarter.
But what I’d say is, it comes to you on the property side, but ours is skewed more to industrial than it is to office or retail. So that’s one thing. And then we have talked in the past about the mortgage book and there is a lot of detail in the back as well, the analyst Slides on Page 38. And you would have seen some deterioration. So, like if you look at the DLTVs, for example, a year ago versus today, they are at 54% a year ago they were at 51%.
So there has been some deterioration in the credit quality. But I’d say, the starting point is still strong. We think if this weakness in the property sector continues. There may be some headwinds for us, but they are manageable, given our starting point and then diversified nature of the portfolio.
Gabriel Dechaine
Okay. And just, I mean, it’s been a while since you talked about UK property last time. In 2016, the portfolio just on $3 billion today, it’s a little over two. I guess, you have been shrinking it for the past several years. I didn’t notice. I apologize, but maybe you can walk us through that a little bit.
Raman Srivastava
Yeah, I mean, we’re continuing to reposition. I think we haven’t been adding a lot to the UK property over the past number of years. We’ve been judicially disposing of assets where it made sense, where the values made sense.
Our mortgage book, we had talked about before, some of the impact’s years ago, we’re in the pre-financial crisis mortgages. That’s dwindled down just a few hundred million now. So, it is quite a different composition now on that side than it was say, four or five years ago. So there has been some gradual, you wouldn’t have noticed any one quarter, but gradual transition.
Paul Mahon
Raman, I’d say — Gabe, I would say, and Raman probably doesn’t want to his horn, but the reality is seeing his team have worked really hard at managing down the risk. And if you thought of as we went into the financial crisis, what was the shape and nature of the invested asset portfolio in particular, if I was thinking about the UK versus where we’re at today, and it has a very, very different shape.
And as you recall, we got through that crisis period with relatively little damage. So, at this stage, we will — we, like everyone else will see some challenges along the way, but our starting point is strong.
Operator
The next question comes from Doug Young of Desjardins Capital Markets. Please go ahead.
Doug Young
Good afternoon. Just wanted to go back to power and what I guess my question is what is the ROE for this business? And where should the ROE be? And how quickly can you get there? And you’ve talked a bit about synergies and early termination pressures and market pressures, but bigger picture, just kind of taking a step back, like what is the ROE? Where should it be? How quickly can get there? Because I think of as businesses having low capital requirements, low margin, but high ROE especially for those that have scaled, I think you’ve got scale. So just try to understand that side of it.
Paul Mahon
Yeah, I guess I’ll start off at the high level, Doug, and turn it to Garry. But if you think in terms of the empowered business, we actually deployed capital to acquire that business. And obviously our model and our view was that these were accretive strong transactions with lots of expense and revenue synergy potential.
And ultimately, to be — and growth from once fully synergized would have a good solid ROE and then forward business would be very capital light or limited capital applied to it. So very high ROE growth beyond post-transaction, post getting this synergys in place.
So, Garry — that’s kind of the construct. Garry, maybe you can speak to where we’re at in that process.
Garry MacNicholas
Yeah, we do actually have the ROEs in the MD&A, and so you’ll see that the U.S. financial services, basically the empower business is in the low double digits right now. And again, that reflects making all the capital investments, all the e but without yet getting the R fully synergized. So, as the R picks up, and then the organic growth, as Paul mentioned, the organic growth is very capital light.
So, you should be seeing these ROEs — we would expect these ROEs to be going into the upper teams as the business, uh, develops in the coming years.
Doug Young
So, I thought that financial service would include Putnam. Is that incorrect?
Paul Mahon
No, we have the U.S. Financial Services, which is the Empower Business, and then we have the U.S. Asset Management, which is Putnam. We break out both in the ROEs.
Doug Young
Okay. So the idea is like 11, 10-11% getting to the upper teens. How long does that take? Is that a two-year journey, five-year journey? Just curious to?
Paul Mahon
You know, I would say getting ourselves into the mid-teens is going to be a function of booking the remaining synergies, client retention. And then you’re kind of into getting at where our targeted rates are right now and, you know, pre IRFS 17. And then after that it’s all about organic growth and its capital light organic growth. And that’s both, adding DC record keeping clients saying, just remind you that we’ve been growing at a good clip there at sort of twice or more than twice the market. And that’s relatively capital light growth.
And then the retail, or what we call the Empower personal wealth, that will be fundamentally capital light business that’s serving individuals who, IRA rollover individuals and the like. So, that will kind of build and it’ll build from year to year to year, as that becomes a larger part of the portfolio. But I can’t kind of say when we would hit, you know, 18 or 19 or any of those things, but that’s the vision and that’s the goal.
Doug Young
No, that makes a lot of sense. Just moving to the UK, it looks like you’ve exited the individual protection market in November. I’m just curious, why, how big was this business? Like, will there be any bumps as a result of that? And how quickly does that book roll off?
Paul Mahon
Yeah. Thanks, Doug. Good question. I will turn that one over to David Harney to provide context around the scale of that and whether it has really an operational impact into the, in the business, David?
David Harney
Yes. No, it’s a small business, so that’s a mark as we entered a few years ago just from a zero position, like our protection business in the UK is our group business, and we’re the leader there. So we had to go at adding on individual protection to that. We’ve, it’s a very competitive market and we’ve struggled the last number of years, so we’ve decided to tag it out of it. It won’t have any meaningful impact on the UK results going forward.
Doug Young
Okay. Fair enough. And then last quarter, I think you had $300 million of cash at the HoldCo this quarter you’ve got a billion dollars. I don’t think this was moved up from the Canadian or Canada Life sub. So maybe it came up from the U.S. sub, just curious, where that cash came from and how much cash would be left down in the U.S. sub. Because I don’t think we have the visibility, or if we do, you can point me to something to take a look at that.
Paul Mahon
Yes. Garry can speak to that. Garry?
Garry MacNicholas
Yes. It’s, actually fairly straightforward. It’s the real jump is the fact that we raised 500 million euros in Q4. So that’s, which we’ve got sitting at LifeCo and that’s in anticipation of a maturity that’s coming in April. So we de-risked the refinancing of that maturity back in, following the Q3 results presentation so an early sort of midway through Q4. So that’s what the cash is.
Doug Young
Awesome. Okay. Thank you very much.
Operator
The next question comes from Tom McKinnon of BMO Capital. Please go ahead.
Tom McKinnon
Yes, thanks very much. Good afternoon. The question’s really looking at the source of earnings on the base earnings. Experience, gains and losses in the U.S. of 82 million, just wondering what those are. I think the majority of the experience gains and losses that you had for the entire company were, on a base earnings basis.
were yield enhancements. What was this 82 in the U.S?
Paul Mahon
Garry, is that something we have got visibility into or is that something we don’t? Give us one minute here, Tom.
Garry MacNicholas
Yes. I think the one thing I know right off the top was the improvement interest rates would have been a pickup there. They would have also had relative to the expectations going into starting — start of the quarter on the fees. So we would have got a low starting point for market. So I think there was about a 20 million pickups on the market related side to be another. As I mentioned, the interest rates being up. I think 30 million pickups versus what we got going into the quarter, that would have come through on the spreads. And then they had — again expenses were positive relative to expectations in the quarter. I don’t remember the details why they were positive, so those three categories were really what was what was driving it.
Paul Mahon
And Tom, it kind of reflects our methodology that when we go into the quarter, we set the expectation market levels, interest rate levels, expense levels that are anticipated and to the extent that markets kind of outperform that goes into…
Garry MacNicholas
I think the expenses are probably tied to a budget. So as you go through it, there was a lag in updating that. So I think that’s — there was nothing, it wasn’t the yield enhancement. I think that’s really what you are getting. We didn’t have the yield enhancement there.
Tom McKinnon
Yes. I mean, the yield enhancements were 90% of the experienced gains and losses on a base rate, or more than 100%. I think of the 148, there is pretax 161 from yield enhancements for the entire company. So I don’t know how this — and there is no market impact — market related impact on liabilities associated with that because this is base earnings, not reported earnings.
So I’d be curious to see what this 82 here is, but you are suggesting none of it is related to yield enhancements. I guess, what I’m looking at, it was this largely an Empower? I think it was largely an Empower. So something happened in Empower that was better than you would thought that even drove the numbers to be still weaker than what I think the Street was looking for? So what was it that was happened in Empower that was better than you thought in the quarter that drove this 82 experience gain?
Garry MacNicholas
Yes. I think it was the three factors I mentioned earlier. But I’m happy to do a follow-up right after this, Tom. Just go through — maybe just go through that in a little more detail.
Paul Mahon
I think, Tom, just frankly, it’s three relatively more modest factors that I’d update you to if you think about it. Market levels improved a bit. So then we ended up with fee income slightly ahead of what we would have locked in as sort of the expectation. Interest rates moved a bit. So we would have seen maybe some widening margins. And then finally, Ed and his team actually did take some expense actions in quarter. And if you add those three things up, they add up to 82. But what I suggest is Garry could help you out offline on that one.
Tom McKinnon
Okay. Thanks so much then. That’ll be perfect. And there is absolutely nothing with respect to yield enhancements ever associated with this block. Is that what you are trying to suggest?
Garry MacNicholas
In terms of this quarter, there were no yield enhancement. I think in the past, we probably had some yield enhancements in the past in the U.S. block, but there aren’t any at the moment going through. And I don’t see this as one where we aren’t going to see yield enhancements in this block going forward either under IRFS17. So, I think, I’m sure there have been some in the past. I can remember some, but there aren’t — that was not the factor this quarter.
Tom McKinnon
Okay. Thanks.
Operator
The next question comes from Paul Holden of CIBC. Please go ahead.
Paul Holden
So first question is regarding the date on LICAT proforma, IFRS 17 obviously it gives you a lot more regulatory capital. I’m just wondering how you’re thinking about that A, in terms of how much of that is actually deployable capital, and then B, to the extent a portion of it is deployable capital, what are your capital deployment priorities?
Paul Mahon
So there’s a — that’s kind of a two-parter, Paul, so maybe I’ll let Garry walk you through where we’re seeing the strengthening of LICAT is as we contemplate transition. And then I can maybe take the second part as we think about deployable capital, what are the priorities? It’s over to you, Garry, for part one.
Garry MacNicholas
Yes, sure. I think, in terms of the 10 point — approximately 10-point rise that we’re expecting, that’s again, driven by the new Ascoril [ph] Plus, just the way IFRS 17 and IFRS 4 moved differently during 2022. So that made it a larger jump than we might have anticipated early in 2022.
I’d say over the longer term, I wouldn’t expect us to be holding more capital. It was typically run in the 120s or in the lower 120s. And that used to be the top end of our old range. So, I don’t see us holding more so in that sense. I think this the fact that it’s another 10 points over 130%, there’s going to be some more deployable capital there, but I think that’s the longer term. Yes, our sensitivities are reduced a bit, interest rate and sensitivity to reduce somewhat, a little more NFI sensitivity than IFRS 17, but we’re not seeing that, changing our targets.
So I think, we will — once we’ve gone through this — we’re being very measured right now in the near term just given the transition and the macro environment. But I think over time there’s more deployable, and maybe Paul can like to comment on that.
Paul Mahon
You stole my words, Garry, which would be in the near term, if you — and I would kind of characterize that as we think about the balance of ‘23, we probably not going to be looking to sort of unwind that through deployment in the short term because we will be in transition and we’ll all be learning and going forward.
Having said that, as Garry said, the new regime for us does actually reduce some of the sensitivity we would’ve otherwise had. So it’s not as though we have to set ourselves up with more strength to deal with volatility. We’re not too concerned about that. But having said that, it’s a risky environment. It’s an in — it’s a point of transition. So I think what we’ll do is we’ll maintain good discipline.
But having said that, the reality is we’re also not taking our eye off the ball in terms of opportunities to grow the organization and to put our capital to work. So, we’re always looking for opportunities in the market and we’ll be if the right opportunity came along, we would figure out ways to finance it. Having said that, again, Empower still has hard work ahead on the Prudential integration, and that will be a big focus for us in 2023. But we’ll continue to look across some markets for opportunities where we think we can strengthen the business. And as I said, with some caution though, given the kind of the risk on environment.
Paul Holden
Second question is related to Capital and Risk Solutions. I mean, there’s a number of like positive business drivers that you’ve articulated. Maybe it just be helpful for me to understand if you can, sort of to what extent each of those driver’s sort of matters for the business or, if I think about the increase in P&C retrocession rates as an example, how much does actually matter to future growth versus say the growing demand for pension risk transfer versus the improved mortality trends and life reinsurance.
I guess getting a better sense of or characterization of how much of each of those driver’s sort of matter to future growth might be helpful or would be helpful.
Paul Mahon
Yes. Great question, Paul. And you actually are sort of helping with the answer and appreciate it. because when you think about it, it’s a very diversified business that we’ve got and the only factor that we didn’t talk about there was structured solutions where they’re continue to be market participants who are looking for capital effective capital solutions in our structured solutions. So it really is about diversification where there’s opportunity in each of those categories and maybe Arshil can provide a little bit of color on that. Arshil?
Arshil Jamal
Yes, thank you for your question. So you’ve highlighted sort of the three or four areas that we are really focused on. So, over the last eight quarters or so, we’ve probably achieved something like 7% underlying expected profit growth. And that’s really the metric that we’re focusing on for our reinsurance business. And then we have opportunities in all of the business lines. But there’s slightly different pressures and slightly different outlooks.
So on the P&C catastrophe, which is where you started our focus there really is on risk reduction as opposed to driving up the margin. So, pricing in the marketplace has moved quite a bit and we’re not focused on increasing our margin, but we’re moving further away from the risk. So we’re trying to preserve the historic margin that we’ve made but get a little bit further away from the risk.
Whereas on the asset intensive side and on the longevity side, we see really strong market opportunities. We’re being very cautious in an elevated risk on environment, but we’re working closely with our investment colleagues and we did those large transactions in Japan when we could get very low cost to funds and put the money to work. And when we see opportunities like that, we really try to capitalize on those. So lots of opportunities on the asset intensive and longevity side. And we were talking a little bit about excess capital and using some of that to drive organic growth in CRS and some of our other business lines is also a place that we can deploy some capital.
And then finally we have our structured solutions business. And geographically that business really has sort of it as its core the U.S. marketplace and beyond the focus that we’ve had in the U.S. and continued growth that we’re seeing in the U.S. we’ve expanded that into a number of European markets and we have quite a good position there.
And now very cautiously we’re thinking about other geographies and whether we can take some of those structures that we have on capital relief for client companies and apply them in other regimes. And we’ve had some success doing that in places like Israel and Australia. And we’re thinking about some other markets so, you know, very measured, always a trade-off between margins and returns and risk, and good sort of measured growth or whatever. And the key metric for us is really that expected profit growth and we’ve been delivering sort of that 7% expected growth and in a slightly more stable environment that’s something that we target. And then in a riskier environment it might be a little bit less because we put a little bit more focus on risk reduction as opposed to margin growth. But that’s kind of the context across the three or four businesses there.
Paul Holden
Helpful. Thank you. Thank you for that. And I’m going to sneak in one more. Paul, appreciate your comments as you addressed. Slide five, which I think is an interesting one and just sort of as I was looking at slide five and saw that decline in base earnings this year and then the ROE. The market impacts are obvious. You highlighted it.
But can you help to think, are there any areas where maybe the company identified? Maybe could have done better in 2022? Is there room for action improvement? The Canada segment might be one area that comes to mind for me in terms of getting more sustainable earnings growth there. But Paul, interested to hear your thoughts, if there are any kind of areas you have identified where you think the company can do a little bit better?
Paul Mahon
Yes. It’s a good question and it’s absolutely a question that we talk amongst ourselves and talk with our Board about, because it’s not just about M&A and growing capital, it’s about growing your businesses organically and making sure you are making the right decisions from a capital deployment perspective. And I mean, organic capital deployment, as we invest in systems and capabilities to participate in markets where you really think you can get traction in growth.
Having said that, if you really look at the thing that was a drag in year is markets. When you think about the impact of markets, that’s sort of the most fundamental drag. But having said that, we are looking at businesses. So for example, I know Jeff and his team are actively working through opportunities to expand the group business in Canada with our Freedom channel. And I’ll let him speak to that. And when we look at the individual business, real discipline around pricing and making sure that, we have got the right products in the right markets and we are not getting opposed to ones that where we don’t feel like there is the right margins. And then we look to Wealth Management in Canada where we think we have got a big with our affiliated channel. So maybe a little bit of color.
So that Canada is one, and then all markets, Ireland where we have launched our a lot of digital capabilities in Ireland. We are extending through the Allied Irish Bank business that we have launched in partnership with AIB. So we are constantly thinking about how do you actually drive growth. And then backing all of those things is efficiency.
We do it. We are very, very minded to efficiency. So maybe just as a bit of color, I’ll let Jeff speak to where we are looking for growth and also the way he is thinking about efficiency. Jeff?
Jeffrey Macoun
Thank you, Paul. And you mentioned some of the fundamentals already. But I would just say that, we continue to believe that, the business fundamentals in Canada are very strong. If I pointed to some examples of that. If you look at ’22, we are very pleased with our top-line growth. As an example on the life and health side in the quarter, we were number one for sales, our retention of business, our persistency, our margins are very, very strong. We are delighted on our growth of our group wealth business.
As you recall, at this table, a couple of years ago, we talked about our investments in that area. So we see good growth in that top-line and also net growth and we see an opportunity to grow into other markets. Paul touched on the retail well side, I think there is an opportunity for us as we look to expand that area. And just on our membership that we have, the participants we have close to 4 million Canadians. We are expanding our Freedom experience, which we would call it. So those opportunities to work with Canadians, as their plan members, whether that be individual insurance, whether that be next steps, our retirement business, et cetera.
And we continue to spend dollars wisely and invest on the technology side, in areas where we see big growth opportunities. So we are quite bullish on it. We have an aggressive plan and we think that there is great growth areas in all of our four key areas. So life, individual wealth, group wealth and the Life and Health side.
Paul Holden
Thanks, Paul. Thanks for your answers.
Operator
The next question comes from Mario Mendonca of TD Securities. Please go ahead.
Mario Mendonca
Good afternoon. Could we just go back to Capital and Risk Solutions and maybe Arshil might be best positioned to address this? A business like this, I often think of being helpful from a tax R perspective or regulatory R, and then also just there’s a good business case for it as well, which is risk reduction. When you think of your business in the context of that, like tax regulatory and risk reduction, do you see any vulnerabilities in the near future related to new business? Are there any sort of changes on the horizon that could impact demand for the products?
Paul Mahon
I think, Arshil is best positioned, but I think one of the — I’ll just say at a general level. We’ve got a very expert team that remains very connected with their clients globally. And Arshil talked about a solution that we tapped into in Japan and then more recently doing things in Israel. There are opportunities that exist really globally. We just need to make sure they’re disciplined in finding the right ones.
But I’ll let Arshil speak to that.
Arshil Jamal
So, I would start a little bit just by reframing a little bit to whatever. So, there isn’t really tax arbitrage or regulatory arbitrage. There is risk transfer and making sure that the risks ends up into the party that’s best able to absorb that risk. And a number of the things that we do in our reinsurance business are very diversifying from a life perspective, including the property catastrophe cat business. So there we’re exposed, we’re taking on risk, but we’re doing it in a way that doesn’t correlate with the rest of our balance sheet, doesn’t have equity market risk or credit risk. It’s more tied to natural perils. And so we’re well able to bear that volatility and that’s kind of our approach and mindset.
And then on the longevity and asset intensive side, that’s full risk transfer to us. We use our investment expertise, we use our actuarial pricing and underwriting expertise. We make a judgment and assessment and then we’re good long-term holders of that risk. But you are absolutely right to note in all of those businesses once we decide that we’re a good holder of it, we try to operate with — in a tax efficient way and in a capital efficient way fully respecting all of [indiscernible] LICAT rules.
So certainly, tax over time is a potential exposure for us to be managed. So I don’t think it would threaten the underlying business, but how we conduct it, our business and how we price our business potentially would be impacted by tax over time. And then finally, we have our structured financial solutions business where we’re typically taking on tail risk exposure for our clients and they’re entering into these arrangements to improve their capital position and effectively paying us a cost of capital.
And they’re very interestingly with higher interest rates some of the solutions that we have. And the cost becomes even more cost competitive relative to raising debt in other forms of capital in a higher interest rate environment. So, I think it’s a very balanced portfolio that we have with risk that we’re appropriately able to bear on our balance sheet. And I wouldn’t be describing it as sort of regulatory arbitrage or tax arbitrage, but we are absolutely tax and capital efficient in how we try to operate our reinsurance business as are every other reinsurer because that’s a key part of the success that reinsurers have relative to direct companies.
Mario Mendonca
Yes, I think I understand, and I appreciate the nuance and the distinction you’re making too. It doesn’t sound like there’s anything imminent on the tax or regulatory front that would impact how Great-West Lifeco deals with it or demand for the product. So, I appreciate that color.
One other quick one, the contract service margin, I’m coming to understand that there are some companies in 2023 where we’re going to pay a lot of attention to the evolution of the contract service margin. And then there are companies, and I put Great West Life in this camp, where there are plenty of businesses that drive long-term earnings growth without having a contract service margin attached to it.
So with that being said, I want to demonstrate that I understand that distinction. How do you think the contracts margin for this company evolves over a year? Would it be fair to say that every year it would grow by a certain percentage, or is it conceivable that it could shrink over time?
Paul Mahon
Garry, why don’t you take that one?
Garry MacNicholas
Sure. Yes. I think, you’re right. There are businesses where the contractual service margin will be an important part of the description and the value creation story for business. And we’ll have some of those. If I look at, say our, bulk annuity in the UK would be an example. The German business is another one that comes right to mind. But if I look at across Lifeco overall, I would not say that the contractual service margin and how it develops will be a big part of our narrative.
So I think for us, it’ll be a more focused on the businesses where it really helps understand the value creation in that business and the growth trajectory of it. And a lot of our businesses, Empower, a lot of the Canadian business, whether it’s the wealth side, the group businesses, you’re not going to have a CSM. So it’s — you’re just not going to see that, we’ve got some inforce, just based on mix of business. But where we’ve been growing and focusing and a lot of our businesses, you won’t see as much on the CSM, but there will certainly be pockets where we’ll be calling it out where it makes sense.
Mario Mendonca
No, that was precisely what I was getting at in my preamble, that I know that for Great West Life, the contract service margin doesn’t necessarily play a big role. That was the point I was making. But the contract service margin itself for this company, will it grow every year or do you think there are years when it could shrink, but I’m thinking of the total company contract service margin.
Paul Mahon
It’ll very much depend on the mix of business that we’re riding in that year. because that’s going to be a big driver. As I say, it’s, I mentioned the UK bulk annuity is a really good example, a bumper year of that’s going to change the growth trajectory. And a quiet year, it’ll go, it could be a lot flatter. So it really will depend on the mix of business.
Garry MacNicholas
I would say on a relative basis, our non-contractual service margin businesses, I would expect would be growing faster than those that are exposed to the CSM. So the CSM would feature, as less of a driver of growth and earnings as opposed to the other areas where we see growth.
Mario Mendonca
Yes, and I appreciate that that’s our responsibility as analysts and investors to find ways to compare companies even though they present in a pretty different way. So I appreciate your guidance in that respect.
Paul Mahon
Okay, thanks Mario.
Operator
The next question comes from Nigel D’Souza of Veritas Investment Research. Please go ahead.
Nigel D’Souza
Thanks for that. Thanks guys for taking my questions. Just a quick follow up. The first was just how you think about the dividend as a point of clarification. You mentioned the positive impact of LICAT on transition going to be healthy buffer to your internal target. So when you think about dividend increase in the future, what’s the catalyst between the payout ratio and the LICAT level, is the LICAT come into play, and you’re willing to pass on dividend increases and let base earnings catch up? Or is it purely a payout ratio that’s going to drive your decision making going forward?
Paul Mahon
I’ll let Garry to take that one.
Garry MacNicholas
Yes, sure. Just to clarify, the LICAT ratio is for Canada Life, that’s the insurance — the consolidated insurance operation Canada, Europe and most of the CRS business. So that’s what’s — there is a LICAT ratio. And so, the LICAT ratio has an impact on the dividend in Cat Life would send up to Lifeco. But the payout ratio, that’s measuring Lifeco’s common dividends relative to its earnings.
So, it’s not directly impacted by LICAT, other than that liquidity related comment. But given the cash generative nature of our businesses, the strong LICAT position, it’s not really a factor in our dividends or a payout ratio at this stage.
Paul Mahon
Yes. And Nigel, I would say, broadly, as we think about dividends, we will use our payout ratio range as a guide, as we think about considering what we do in a given quarter. But the other major consideration is our perspective on forward growth. And we would use those as the key drivers. As Garry said, we have highly cash generative businesses. So, liquidity wouldn’t tend to be a constraint. It would be a function of, as I said in my previous comments, we are looking to manage down within that range of 45% to 55%. We are a bit over it now and where our intention is to manage down over the next number of business cycles. And with that in mind, we will be thinking about forward growth as we think about growth in dividends.
Nigel D’Souza
Okay, that’s helpful. And the quick last question is again on the old enhancement follow-up. Just trying to get a sense of, if you could expand on the drive side, you have got healthy yield enhancement gains this year and pretty healthy yield enhancement gains in 2021 as well.
So, is that driven by certain set of market conditions that are more correlated to it or is it just either a pickup in yields and spreads? And how do you think about the run rate going forward, irrespective of the transition?
Paul Mahon
Garry, do you want to speak to — there is two part of there.
Garry MacNicholas
On the first part, what drives the yield enhancement pickup is effectively the additional spread that we are able to take by trading assets. So, we come out of lower yielding assets, say government bonds as easy example, into spread assets and we would capitalize that spread.
So, 2022, we would have had good success. We had quite a good pipeline of ERMs that were attractive spreads and in general in the market. I’m looking at Raman and seeing nothing. The spreads were corporate spreads were in general wider in 2022. So that combination gives us good opportunities for yield enhancement.
But it is just capitalizing the spreads net of appropriate credit risk charges, asset default charges. So that’s really what drives it, that’s the first part.
Paul Mahon
And I think your second part was what’s the outlook on the investment side.
I think that’s really, I mean, obviously, your credit spreads have narrowed somewhat in the back end of the year. But that has ebbs and flows overtime. So, I think we will remain active. We have got a very good investment job and we will remain active in that. And as I said earlier, under IFRS 17, depending on the portfolios and the nature of the underlying investments, you might get a slightly different presentation of it.
But the underlying value created by trading into attractive assets on a diversified and a high-quality portfolio basis, that will still remain regardless of the accounting regime.
Nigel D’Souza
Okay. That’s it for me. Thank you.
Operator
The next question comes from Darko Mihelic from RBC Capital Market. Please go ahead.
Darko Mihelic
Thank you, very much for taking my question. I know it’s a little bit late, so I really appreciate you taking the time. I just have two questions. The first is I wanted to just follow up, Paul, on what you said earlier with respect to Empower and when I look at the $710 million of base earnings in 2022 and suggesting that that will grow by, or you’re targeting 15 to 20 in 2023, and that’s all well and good. I think I have that conceptually in place in my mind, but at the same time in the US, we saw the corporate go from a loss in 2021 to earning money in 2022.
Are there any other puts and takes that we should be thinking about in 2023 with the rest of the U.S. business in terms of earnings power? And also, maybe if you can just throw in the answer to that, I noticed that you did a large reinsurance, or if you did a reinsurance and revenue reinsurance at the end of the year, does that factor into earnings power anyway, or shape or form in 2023? And that’s my first question.
Paul Mahon
That’s a full question. Garry, do you want us start out there?
Garry MacNicholas
Yeah, sure. I think, the first part of it was just the corporate segment in the U.S. and that often picks up miscellaneous things could be plus or minuses. They’re generally not that large and they do move around. They are not directly tied to the underlying businesses.
So, we wouldn’t be anticipating that necessarily. But obviously, things can arise positive or negative in a year, but that’s — so that’s not really a factor in our — we were correctly surmised that we were talking about empower and as say the corporate can just move around a bit, but it tends to be just one-offs.
And then the second part, and I had a great answer. The second part, I’m just trying to remember what the question was on the second part.
Darko Mihelic
The reinsurance.
Garry MacNicholas
The reinsurance, yes. I knew it was another, it was another unusual question. That’s good. No, the reinsurance — So in terms of, this is primarily for us, it’s primarily focused on capital relief. It was part of our planning and financing of the Prudential acquisition that we would potentially utilize external reinsurance as a part of the support for the RBC relief.
So, there is a fee we pay, but it’s modest in the overall picture of this. We would expect under normal business conditions to keep the economics of the business. So, it really is just a capital relief in some ways similar to the business that we actually provide for others in through our CRS business unit. But this is one that we’ve done with an external party to help support the RBC ratios in the U.S.
Darko Mihelic
Okay. Great understood. So, my second question is similar to Mario’s question with respect to IFRS 17 and the contractual service margin. I’m going to ask it a little differently though. When I look at the presentation of the balance sheet under IFRS, the opening presentation, I see that you’ve established a $6.8 billion contractual service margin. What surprised me was all of the puts and takes in terms of reclassifying some insurance contract liabilities to investment contract liabilities some pretty big movements there.
But at the end of the day, net-net your insurance contract liabilities are actually down about $10.8 billion, and that’s about 5%. So conceptually, I think of that as your long tail insurance businesses actually being a little, having a little bit less earnings power under IFRS 17 because before your PfAD apparently look larger than your contractual service margin of your risk adjustment. So can you correct my thinking on that or am I missing something pretty critical in that thought process?
Paul Mahon
Over to Garry.
Garry MacNicholas
Yes, so I think the, probably the one piece that wouldn’t necessarily leap off the page is one of the big contract classification changes with some of our U.S. businesses that were within Empower while there would’ve been insurance contracts under IFRS 4 are actually IFRS 9 contracts in the new regime rather than IRFS 17. So that’s what’s driving a lot of that shift. Now, that’s the big one that would come to mind.
And if you have pegged it right, that our, the risk adjustments under IRFS 17 are lower than the actuarial provisions for adverse deviation, the PfADs that you’d have today. And that’s cause the risk adjustment does factor in diversification, whereas the actuarial PfADs tend to be standalone margins on each assumption. So there is a natural reduction there as you move from the PfADs to the risk adjustment.
So I think those are the two biggest ones you called out. But again, we’d be happy to follow up afterwards if there’s, a chance to step through it more. But those are the two things I’d note right off the top, but we can certainly have a follow up call.
Darko Mihelic
Yes, I’d love to follow-up on the IFRS 9 reclassification of Empower because I didn’t think it impacted Empower’s earnings capability. Therefore, I’m still stuck on the thought process that overall the embedded earnings power on your insurance contract liabilities is lower under IFRS 17. But yes, absolutely. Let’s do a follow up call. That’s great.
Garry MacNicholas
Yes, it doesn’t — you are correct that it doesn’t impact Empower’s earnings power that shift. So that’s one where the shift between the two didn’t affect the earnings power. So let’s have a follow up call. That’d be super.
Darko Mihelic
Okay. Thank you very much. Appreciate 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 very much. As we close the call, I’d like to thank all of you for attending and I’ll also thank the analysts for their questions. As noted, we’re planning an education session on Empower’s new reporting and we’ll communicate the date when we’ve locked it down. And in the meantime, we wish you a good start to the year and look forward to reconnecting on our next call. Take care.
Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
Be the first to comment