Great-West Lifeco's (GWLIF) CEO Paul Mahon on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Great-West Lifeco, (GWLIF)

Great-West Lifeco Inc (OTCPK:GWLIF) Q2 2013 Earnings Conference Call August 7, 2014 11:30 AM ET

Executives

Paul A. Mahon – President and Chief Executive Officer

J. Dave Johnston – President and Chief Operating Officer, Canada

Robert L. Reynolds – President and Chief Executive Officer, U.S.

S. Mark Corbett – Executive Vice-President and Chief Investment Officer

Clare Richer – Chief Financial Officer of Putnam Investments Corporation LLC

Arshil Jamal – President and Chief Operating Officer Europe

William W. Lovatt – Executive Vice-President and Chief Financial Officer

Garry MacNicholas – Executive Vice-President, Actuarial and Risk.

Analysts

Steve Daniel – Bank of America Merrill Lynch

Gabriel Dechaine – Canaccord Genuity

Tom MacKinnon – BMO Capital Markets

Peter Routledge – National Bank Financial

Mario Mendonca – TD Securities Inc.

Operator

Good morning, ladies and gentlemen. Welcome to the Great-West Lifeco Inc's Second Quarter 2014 Conference Call.

I would now like to turn the meeting over to Mr. Paul Mahon. Please go ahead, Mr. Mahon.

Paul A. Mahon

Thank you Rafael. Good morning and welcome to Great-West Lifeco’s second quarter 2014 conference call. Joining me today is Bill Lovatt, Executive Vice President and Chief Financial Officer for Lifeco; Garry MacNicholas, Executive Vice-President, Actuarial and Risk, Lifeco; Dave Johnston, President and Chief Operating Officer for Canada; Bob Reynolds, President and Chief Executive Officer Great-West Lifeco U.S.; Clare Richer, Chief Financial Officer of Putnam Investments; Arshil Jamal, President and Chief Operating Officer Europe; and Mark Corbett, Executive Vice-President and Chief Investment Officer for Lifeco.

Before we start, I'll draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to the discussion you will hear this morning, as well as to the presentation material that will be provided to you.

Late yesterday, Lifeco reported its second quarter earnings and also declared a quarterly dividend on its common shares unchanged at CAD0.3075 per share.

Now I will turn to the Slide 4. Lifeco second quarter net earnings climbed 18% from last year to CAD615 million or CAD0.62 per share. These high quality earnings were driven by strong and profitable top line growth at 23% increase in expected profit on in-force business and the ongoing contribution from experienced gains.

Irish Life had another very strong quarter contributing CAD57 million to Lifeco's earnings, and that’s up from CAD52 million in quarter one 2014. Assets under administration CAD805 billion at quarter end, up 35% from one year ago. The year-over-year increase was a combination of organic growth in both Canada and the U.S. and CAD118 billion contribution from Irish Life.

Now continuing on to Slide 5. Lifeco’s sales continued to grow year-over-year, up 30% or 22% on a constant currency basis, driven mainly by Canada, Europe, and Putnam. These sales results were accompanied by strong positive net cash flows. In Canada sales of individual insurance products increased by 19% and wealth management sales were up by 15%.

In Europe, Irish Life contributed CAD2.1 billion to sales. Putnam's total sales reached $7.4 billion U.S. up 16% from Q2, 2013 driven by a 43% increase in mutual fund sales. Positive net flows in the quarter reflect the benefit of continuing strong investment Premiums and deposits increased by 33% year-over-year driven by strong sales and by market-leading persistency rates, as well as a CAD2.4 billion contribution from Irish Life.

Turning to Slide 6. The Company's capital position remains very strong Our MCCSR ratio for the Great-West Life Assurance Company, the regulated was entity was 228% at June 30, not including approximately CAD700 million of cash at Lifeco. In addition our book value per share climbed to CAD16.04, up 19% year-over-year. I would now like to draw your attention to the following developments in the second quarter.

In May, the Canadian Actuarial Standards Board published their revised Standards of Practice. The changes to economic reinvestment assumption used in the valuation of investment contract liabilities are not expected to have a material impact on Lifeco’s net earnings or capital. Garry MacNicholas will provide some more details on this in his comments.

I would also note that we've appointed a new CFO at our Great-West Financial organization. Louis Mannello, Jr. will be joining us in Denver effective August 11 and will be reporting to Bob Reynolds and to Bill Lovatt. To summarize, our strong earnings momentum continued into the second quarter. We kept investing in future growth through the execution of our strategic initiatives our well-diversified distribution networks. I will now turn the call over to Bill Lovatt to speak to our financial results. Bill.

William W. Lovatt

Thanks Paul. On Slide 8, our second quarter operating earnings were CAD615 million or CAD61.6 a share. Excluding the after-tax impact of Irish Life related restructuring costs of CAD8 million, adjusted operating earnings were CAD623 million of CAD62.4 a share.

Turning to Slide 9, we present our adjusted operating earnings return on common equity for the trailing four quarter basis. Adjusted ROE was 15%; down 20 basis points from quarter one. Over the past 12-months operating earnings have included CAD96 million of Irish Life related restructuring and acquisition charges. Based upon these operating earnings the in-quarter return on equity was 14.3%.

Turning to Slide 10, on the left-hand side of the page we show a strong 30% year-over-year growth in sales in Q2, 22% on a constant currency basis. The sales growth was driven by Canada and Putnam. In Europe, Irish Life contributed $2.1 billion in the quarter. Sales were down from both Q4 and Q1 mainly on seasonality and large case sales of Great-West Financial. On the right-hand side of the page, premiums and deposits were up 33%, 25% on a constant currency basis driven sales growth in industry leading persistency as well as CAD22.4 billion contribution from Irish Life.

On Slide 11, fee income was up 34% year-over-year and 26% on a constant currency basis, demonstrating strong growth in every region. Excluding a CAD153 million contribution from Irish Life, fee income was still up 15% year-over-year. Fee income grew by 28% at Putnam, by 21% at Great-West Financial, by 13% in Canada on a year-over-year basis.

On Slide 12, operating expenses were CAD904 million in the second quarter, up 26% from last year. Excluding CAD105 million of Irish Life expenses, operating expenses were up 12%. Operating expenses at Great-West Financial were up CAD27 million year-over-year. Ignoring the currency impact, about 40% of the increase is attributable to business growth. The remaining increase is driven by unusual expense items including in-quarter one-time expense items related to the JP Morgan acquisition and management transition expenses.

Higher year-over-year expenses at Putnam were due to an increase in compensation expenses due to sustained superior investment performance, higher sales, and assets-related expenses. Putnam's expenses were down 12% from Q1, 2014 driven by the reduction in fair value adjustments on share-based compensation that we discussed at some length in last quarters call.

On Slide 13, total assets under administration CAD805 billion at the end of the second quarter. This represents a 35% increase from the second quarter of 2013 driven by strong organic growth in Canada and the U.S. and a CAD118 billion contribution from Irish Life.

Slide 14, book value book value per share. As of June 30, Lifeco's book value per share reached CAD16.4 which was up 19% from a year ago. The year-over-year increase in book value reflects strong earnings growth, capital issuance in Q3 of last year, and the favorable impact of currency except in the recent. Specifically during the second quarter, currency had an unfavorable CAD0.31 on the book value per shares [indiscernible].

Paul A. Mahon

Thanks Bill. I'm now going to turn it over to Garry MacNicholas who will speak to capital and related matters. Garry.

Garry MacNicholas

Thank you Paul. Starting on Slide 16, at June 30, 2014 Great-West Life’s consolidated MCCSR is 228%, a two point decrease from March 31, 2014. Earning were strong and net of the normal growth in capital requirements, this is positive to the ratio. However, there are several headwinds this quarter. Interest rate declines led to an increase in fair value driven capital requirements impacting the ratio by two points.

The continuing IAS19 pension accounting transition combined with in-quarter currency movements and additional requirements on new business made up the remainder of the ratio headwind, offsetting the positive earnings contribution. And as a reminder, the MCCSR ratio shown here do not include holding company cash, which at June 30, would add approximately 12 points to this ratio.

Turning to the source of earnings display on Slide 17, note there was a 23% increase in expected profit this quarter over second quarter of 2013. about half of the growth, CAD57 million, is attributable to the addition Irish Life, the remaining CAD62 million representing a 12% increase over quarter two 2013 in primarily due to higher expected fee income based on underlying asset value increases as well as good business growth across the company.

The new business gain CAD6 million in Canada improved from strain of CAD6 million last year primarily as a result of universal life pricing increases. The result in Europe is primarily earnings strain from the non-deferred sales costs on wealth management business mostly at Irish Life, partially offset by the gain at issue on U.K. payout annuities. The 45% decline in U.K. payout annuity sales this quarter compared to Q1 resulted in CAD10 million lower gains being recorded, which is volume driven as the margins were maintained. Experience gains contributed CAD127 million, similar to CAD129 million reported in the same quarter last year and down CAD34 million from the strong gains reported last quarter.

The result was a gain driven primarily by investment yield enhancement results with CAD48 million in Canada and CAD40 million in Europe recorded this quarter. This is slightly higher than the average contribution over the past three years of close to CAD80 million per quarter, which has been fairly evenly split between Canada and Europe with a smaller amount in the U.S.

In addition to the investment gains, the Company saw strong gains in mortality and morbidity in the U.K. group business partially offset by policyholder behavior experience losses. During the quarter, there were modest assumption changes and management actions contributing CAD36 million mostly in Canada, compared to CAD22 million in the same last year.

Earnings on surplus of CAD32 million was CAD6 million higher than a year ago primarily due to Irish Life partially offset by lower realized gains on assets and surplus, also known as OCI gains. Consistent with prior treatment, the other line has been used for the CAD10 of restricting and other costs related to the Irish Life acquisition in quarter.

Turning to slide 18, the recently published revisions to Canadian Actuarial Standards of Practice in regard to economic reinvestment assumptions, are expected to have a small positive impact on net income and their implementation in the fourth quarter. As a result of the revisions we will be increasing the lower end of the range of interest rates tested as part of the actuarial evaluation which will reduce liabilities primarily in Canada.

The new constraints on recognition of non-fixed income investments are expected to increase liabilities, a gain primarily in Canada. The impact on business outside of Canada is small as the exposure to long-tail liabilities is more limited. We expect to make a number of other smaller changes, fine tune some of the assumptions used in these initial estimates, and consider if any, will make the scenarios tested in addition to those prescribed.

Recognizing there are still matters under review, the net earnings impact to the above changes is currently estimated to be CAD50 million post tax. Our testing today indicates little impact on our disclosures for net earnings, sensitivity to interest rate, or other market movements. And that concludes my remarks.

Paul A. Mahon

Thanks very much Garry. I will now call Mr. Corbett to speak to our invested assets update.

S. Mark Corbett

Thank you Paul. Turning to slide 20, the net impact from credit and rating activity were a positive CAD6 million in the quarter which continues to be within our expectations and is very favorable in the context of our nearly CAD150 billion invested asset portfolio.

Slide 21, highlights the diversification in our invested asset portfolio. Lifeco’s total invested assets were approximately CAD150 billion at June 30, 2014. Portfolio is heavily weighted towards fixed income with bonds comprising 71% and mortgage comprising further 14%. The quality of the bond portfolio remains very high with 82% rated A or higher and 98% rated investment grade. Bonds rated below investment grade represent only 1.1% of total invested assets and were pricing around CAD0.100 at the end of June.

The mortgage portfolio is predominantly conventional commercial mortgages which represents 10% of invested assets. The Canadian portfolio includes a component of insured single and multi family residential and conventional residential. Stocks and investment properties comprise 5% and 3% respectively of the consolidated invested asset portfolio. The stock portfolio is mostly Canadian publically traded stocks. The investment property portfolio is unlevered and focused on the Canadian and U.K. markets.

Slide 22, details our Lifeco bond holdings by sector and domicile of issuer. The portfolio is heavily weighted to the four main countries in which we conducted these operations and is otherwise well diversified by geography. Our exposure to peripheral Eurozone countries remain small that our broader Eurozone, Germany, France, and the Netherlands represent our largest holdings.

As I've reported previously, our portfolio of corporate bonds is well diversified across industrial classification no single industry class representing more than 6% of invested assets. I'll note as well that while our U.K. bank exposure represents 1.5% of invested assets, this includes certain global banks that have significant earnings diversification outside of the U.K. Paul?

Paul A. Mahon

Thanks, Mark. I'll now ask Dave Johnston to speak to our Canadian operating results.

J. Dave Johnston

Thank you, Paul. Looking first to the left-hand side of Slide 24, insurance sales were CAD231 million, up 3% from the second quarter of 2013. Individual insurance sales including living benefit sales were CAD125 million and 16% higher than a year ago reflecting strong participating life sales. On a year-to-date basis, individual insurance sales are up 15% driven again by strong part life sales as well as universal life sales which were up 27% and 14% respectively.

Group insurance sales of CAD106 million were down 9% compared to the second quarter of 2013 reflecting in part lower quote activity as well as lower average cap size sales and mid size market segment. This CAD106 million sales level was, however, quite strong in relative market terms.

Industry sales were down over 20% in the quarter, and we were able to lead the industry in sales in that quarter. The right-hand chart illustrates total insurance premiums and deposits of CAD3 billion, 4% higher than the second quarter of 2013, reflecting strong sales and good persistency on in-force business within both our individual and group business units. Within the group business, refund and administrative services only premiums were relatively flat compared to a 4% increase in premiums in our higher margin small and midsize market segments.

Turning now Slide 25, wealth management sales on the left-hand chart were CAD2.7 billion for the second quarter of 2014 up 15% over 2013. Individual wealth sales 14% compared to 2013 reflecting solid segregated and mutual fund sales which increased by 14% and 37% respectively compared to the second quarter of 2013. Second quarter sales of group retirement services products were very strong at CAD715 million, an increase of 17% compared to the second quarter of 2013 and this was primarily driven by strong single premium group annuity sales in quarter.

I would also note that our total wealth management investment funds experienced strong net cash flows of CAD290 million for the quarter. Premiums and deposits for wealth management grew 15% compared to the second quarter of 2013 reflecting again strong persistency and sales.

Fee income is noted on Slide 26 for the quarter was up 13%. The 14% growth in the segregated fund fees was driven by strong net cash flows and higher market levels. The 14% growth in other fee income reflects higher mutual fund fees and higher real estates asset management fees. And the ASO fee income is comparable to last year and is consistent with the flat growth in premium income previously noted.

On Slide 27, we highlight expenses in Canada of CAD318 million for the second quarter. Operating expenses increased by 2% reflecting continued strong expense management in each of our business units and continued reductions in our macro unit costs on a year-over-year basis.

Turning to the Slide 28, operating earnings in Canada for the second quarter of 2014 were CAD304 million, up 8% from 2013. The second quarter results were Canada reflects strong performance in our core business operations, primarily from higher investment gains, improved new business strain, and higher fee income partially offset by lower morbidity gain and higher effective tax rate.

Starting at the bottom of the graph, group insurance reported operating earnings of CAD92 million, a 22% decreased from the second quarter of 2013. This decrease is primarily due to lower long-term disability morbidity gains resulting from an increase in incidence claim rates which we believe is consistent with industry trends.Tax benefits were also lower in quarter.

Turning to Slide 25, wealth management sales on the left hand chart, individual insurance operating earnings increased 37% to CAD97 million reflecting improved new business strain and higher basis changes. The improved new business strain reflects the impact of price increases, improved universal life business mix, and higher yields projected on assets backing new business.

Wealth management operating earnings were up 26% primarily driven by higher fee income from investment funds and very modest expense growth. The increase in fees was due to growth in assets under management driven by market gains and positive net cash flows. Corporate operating earnings in the quarter were CAD2 million which is the same as in 2013. All in all a very solid quarter for the Canadian businesses, and these would conclude my comments for the Canada segment.

Paul A. Mahon

Thanks, Dave. I'll now ask Bob Reynolds, President and Chief Executive Officer, Great-West Lifeco U.S. to speak to both the Great-West Financial and the Putnam results. Bob?

Robert L. Reynolds

Thank you, Paul. I will start with Great-West Financial. Slide 30, sales $2.2 billion, compared to $2.5 billion. I might add that all these in U.S. dollars. 401(k) sales were down slightly year-over-year at $1.3 billion. In the standard – market we had 533 plan sales compared to 621 a year ago. This decrease in the – sold was partially offset with a higher average plan size. Average plan sales size in Q2 2014 was $1.6 million versus $1.5 million in 2013.

Public non-profit sales were down $348 million compared to Q2 of 2013. This decrease was primarily due to three large plan sales in the prior year for (inaudible). Annuity sales (inaudible) partners are up almost $100 million compared to a year ago. And in – total sales were $400 million, up 68% in 2013 driven by strong cole-bole, retail bank, and IRA sales. Revenue premium in quarter was $1.5 billion, up from 6% from 2013 due to higher individual market sales. Individual market is up 70%, primarily due to the sales increase and cole-bole to institutions products.

Turning to Slide 31…

Paul A. Mahon

This is Paul. The phone – the line is breaking up a bit so maybe slow down a bit and we'll see if it will connect – stay connected better.

Robert L. Reynolds

Turning to Slide 31. Fee income in the quarter was $173 million, up 13% from 2013. variable fees in total the bottom two parts of the bar, were up $16 million or 18% due to higher equity market levels. The S&P average level was up 18% and higher asset levels from net cash flow from the last call month sales. Administrative fees were up $1 million year-over-year due to growth and participants and individual market fees were up $3 million or 15% due to strong cole-bole sales in growth IRA block of business.

Turning to Slide 32. Operating expenses in quarter were $131 million up $17 million or 15% in 2013, approximately $7 million of this increase is attributable to business growth. The average number of participants and retirement services was up 150,000 or about 3% an individual market sales were up significantly compared to prior year. The remaining increase is primarily driven by unusual expense items. Q2 of 2013 included $2 million of access liability releases, which reduced expenses in the prior year. In Q2 of 2014 includes one-time expense items related to the JP Morgan integration efforts and management transition expenses as Bill referred to earlier.

Turning to slide 33. Net income in quarter was $71 million, down $14 million from 2013's level of $85 million. Growth in the business is contributing to higher fee income offset with higher expenses as noted earlier. The decrease in net income is primarily due to one-time positive items included in Q2 of 2013. Prior year included higher surplus related gains yield enhancement, and basis changes that were not repeated in the current period. In retirement services earnings were $36 million, down $7 million or 16% in 2013.

Strong growth in the business is contributing to higher fee income offset by higher expenses. The decrease in income was primarily due to lower surplus income due to the one-time items. In individual markets, earnings of $36 million were down $7 million from last year’s level of $43, primarily due to lower surplus gains as well as an expense basis change in Q2 of 2013 not repeated in 2014. Partially offset was improved mortality experience. The corporate area has a loss of $1 million consistent with prior year.

I'm now going to switch over to Putnam. Turning to Slide 34, ending assets under management of $158.6 billion increased 19% from Q2 2013 and 3% from the first quarter of this year due to the impact of favorable market conditions, investment performance and positive net asset inflows. Average assets for the quarter were $154.5 billion an increase of 14% from the same period a year ago.

With respect to Putnam investment performance for the five years ended June 30, 2014 78% of Putnam’s fund assets are above the Lipper median compared to just 36% for the five years ended December 31, 2008. Mutual fund new sales in the quarter were $5.7 billion which is an improvement of 43% in the same period a year ago while net inflows $1.7 billion an improvement $1.6 billion from a year ago driven by results in our retail advisor sold channel which includes wire houses, regional broker dealers and registered investment process.

Putnam’s sustained performance and efforts in the advisor sold channel continue to drive strong sales and year-to-date June net flows of $4.1 billion or ahead of 2013 full year results. The institutional channels remain in net outflow $1.5 billion, which is increase of $1 billion from the year ago quarter did the timing of sales and continued client rebalancing after the strong markets and performance in 2013.

Turning to Slide 35. Putnam’s fee income in the quarter was $227 million and the improvement of 28% in the same period a year ago due to the impact of higher average assets under management and mix on Putnam’s investment management fees. Improved performance fees and increase service and sales based fees also drove growth in the period.

Turning to Slide 36. Putnam’s total revenue in quarter of $240 million includes $9 million of net investment income gains from liquidation of seed capital position from successfully launched products. The year-over-year increase in expenses was driven by an increase in compensation costs of $18 million due to sustain superior investment performance and higher sales on assets related expenses of $10 million. Putnam’s core earnings after tax were $4 million and $8 million increased from a year ago. Putnam’s operating margin for the quarter was 4.2%.

Turning to Slide 37, Putnam's contribution to Lifeco in quarter is a loss of $8 million for the quarter which was a $6 million improvement compared with the same period a year ago, and this is primarily due to improved core earnings. Thank you, Paul.

Paul A. Mahon

Thanks very much, Bob. I'll now ask Arshil Jamal to speak to our Europe and reinsurance results. Arshil?

Arshil Jamal

Thank you, Paul. Q2 sales in Europe were CAD2.8 billion, an increase of CAD1.9 billion from second quarter of 2013, reflecting the CAD2.1 billion sales contribution from Irish Life. UK sales dropped by 20% from a year-ago reflecting lower levels of payout annuity sales and lower levels of offshore investment bond sales. Compared to the first quarter, sales in Europe decreased by CAD700 million and again this reflects a 45% reduction in UK payout annuity sales and lower sales of some management products in Ireland compared to a very strong first quarter result in Ireland.

The reduction in UK payout annuity sales this quarter reflects the impact of the 2014 UK budget, which was tabled in March and which will take full effect beginning in April 2015. Our UK payout annuity sales result for this quarter and into July is consistent with expectations of a 50% to 75% reduction in the size of the overall market for individual payout annuities in the UK.

Q2 premiums and deposits of CAD4.9 billion or CAD2.9 billion higher than the second quarter of 2013, driven by the $2.4 billion contribution from Irish Life and by the CAD600 million increase in reinsurance premiums primarily due to a Dutch payout annuity treaty that we entered into during the quarter.

Turning to Page 40, Q2 fee income was CAD318 million, up CAD152 million from the CAD166 million level that we reported in the second quarter of 2013. In constant currency, fee income was up 69% from the second quarter of 2013. This increase was predominantly driven by the contribution from Irish Life along with higher fee income in the UK.

On page 41, Q2 operating expenses were CAD204 million, including CAD10 million of pre-tax restructuring expenses at Irish Life. Restructuring expenses at Irish Life were CAD5 million in the first quarter of this year and there were CAD7 million of pre-closed acquisition-related expenses reflected in the expense amounts for the second quarter of 2013. Excluding these items, underlying operating expenses were CAD194 million, up CAD84 million from the second quarter of 2013, again predominantly reflecting the inclusion of operating expenses from Irish Life as well as currency exchange rate movements. Compared to the first quarter of this year, underlying operating expenses increased by CAD8 million reflecting increased project-related expenses including Solvency II partially offset by the achievement of further expense synergies in Ireland.

The integration of Irish Life continues to progress very well. We have achieved 70% of our EUR40 million annualized expense synergy target through to the end of the second quarter and have spent 52% of our expected EUR60 million restructuring budget. Since close on July 19, 2013, and again through to the end of the second quarter, Irish Life has contributed CAD194 million to Lifeco's operating earnings.

And finally on Page 43, earnings for Europe and reinsurance were CAD246 million for the quarter. This includes CAD57 million of Irish Life operating earnings this quarter, up from CAD52 million that we included in the first quarter of 2014. The Europe corporate result reflects the CAD8 million of after-tax Irish Life restructuring costs which compares to CAD5 million of after-tax restructuring costs which compares to CAD5 million of after-tax restructuring costs in the first quarter of this year and CAD10 million of after-tax costs that we reported in the second quarter of last year.

Excluding these Irish Life impacts, operating earnings during the quarter were CAD197 million, up CAD9 million from the CAD188 million in the second quarter of 2013. Compared to the first quarter, operating earnings were up CAD9 million in the reinsurance segment, up CAD5 million at Irish Life, and down CAD23 million in the UK. Earnings in the reinsurance segment benefited from favorable claims experience on closed blocks of business and an increased contribution from new business that was partially offset by less favorably lapse in mortality experience compared to the first quarter.

Irish Life earnings benefited from favorable investment experience this quarter while the UK earnings decreased from the Q1 level due to a lower level of contribution from new payout annuity business and less favorable investment and mortality experience, although this was partially offset by very favorable UK morbidity experience which reflected a lower level of new long-term disability claims and a higher level of recoveries during the quarter. Those conclude my remarks, Paul.

Paul A. Mahon

Thanks very much, Arshil. I'm now going to turn the call back to our operator, Rafael, so we can get organized for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Steve Daniel from Bank of America Merrill Lynch. Please go ahead.

Steve Daniel – Bank of America Merrill Lynch

Thanks very much. Maybe just to start will Bill, just to make sure I understand the holding company cash correctly. So you raised CAD200 million of preferred and so that's taken the holding company cash up to CAD700 million. Is that the right figure I should have in my mind in terms of excess capital or is that CAD200 million maybe destined to be deployed into an operating company and it's there more temporarily and may be a timing issue?

William W. Lovatt

Your arithmetic is correct. We have just over CAD500 million in cash at the end of the first quarter at the holding company level. We issued the series S preferreds for about CAD200 million, so our Lifeco cash position is around CAD720 million at the end of June. When you look at the excess capital within the organization that cash forms part of it. But also as you look at the capital ratios within the various operating divisions that money is not included. So you'll see that we have a, for instance our MCCSR ratio is still quite robust and you could view it that it's above what our operating target is, so there's excess capital in the business unit as well as the liquidity reserve that we hold at Lifeco.

Steve Daniel – Bank of America Merrill Lynch

Would you be able to ballpark sort of an amalgamated view of what you think your excess cash is?

William W. Lovatt

No, I think that would come from a number of different places because we have, for instance, in the U.S. in Great-West Financial we have an RBC ratio, and we have above what we need to operate but we have where we are in competitive markets. So it would be a relatively subjective measure that you would look at, so we wouldn't report an aggregate excess cash number or excess capital number.

Steve Daniel – Bank of America Merrill Lynch

Okay. If I could ask just a follow-up to Dave Johnston. You mentioned price increase is helping individual insurance earnings this quarter. What was the timing of those increases and what products were targeted? And I guess any upcoming price increases coming down the pipe that you would envision anytime in the second half of this year?

J. Dave Johnston

So those price increases, the reference to that was our improved strain results. And those were primarily in our universal life. And they were put into place more so in the 12 to 24 month past period, so they're not recent price increases. We don't expect any upcoming price increases, if anything, in the first half of the year there's been very, very modest price decreases in some of our insurance lines.

But the improved strain was due to prior price increases, primarily on universal life. And we did have an improved business mix in our universal line with less level cost of insurance sales this quarter.

Steve Daniel – Bank of America Merrill Lynch

Okay. That makes more sense given it was one to two years ago. Thanks. And then before I let you go, and I apologize if I missed this, but did you quantify the yield enhancement impact for the quarter?

Garry MacNicholas

Yes, we did. It's CAD88 million, which is split CAD48 million in Canada and CAD40 million in Europe.

Steve Daniel – Bank of America Merrill Lynch

Great. Thanks so much.

Operator

Thank you. Our next question is from Gabriel Dechaine from Canaccord Genuity. Please go ahead.

Gabriel Dechaine – Canaccord Genuity

Good morning. Just wanted to ask you about the, firstly the group insurance and what you're seeing there. I just look at the claims ratio trend in the group business in Canada and it's been at an elevated level this year versus last year. Is that an area you're looking at re-pricing or is it just a claims fluctuation or how would you address that?

Garry MacNicholas

So in the group area we've seen I would say expected results for life claims loss ratios as well as our health and dental claims loss ratios. Where we've been short is on long-term disability, and that has been driven in our case by increases in incidence rates, we've done quite a bit of analysis on our in-force block of claim as the termination or recovery rates, and we've really seen no material change in that over the past year.

It's really been the incidence rates, and I would say that – yes, likely there will be some price strengthening occurring in our circumstance and we would expect within the industry because certainly the data that we have from an industry perspective suggests that the increase in incidence rate is not company specific. While it will vary, it seems to be more across the board. So I think that we will probably see some price strengthening over the balance of the year.

Gabriel Dechaine – Canaccord Genuity

Okay. Thanks for that. And Arshil, on the new business gains in Europe, excluding Irish Life it would've been I guess a CAD10 million new business gain. And if I understand you correctly you said if sales were at the level they were previously it would have been double that amount? Is that correct?

Arshil Jamal

That's probably correct. The reduction in payout annuity sales was a 45% reduction, so in Q2 we sold EUR150 million and Q1 we sold EUR270 million, and the margins were roughly comparable, and that reduction in sales led to a CAD10 million pre-tax reduction in the impact of new business in our SOE.

Gabriel Dechaine – Canaccord Genuity

So can I – is it a linear relationship to the sales level that you're kind of guiding us to?

Arshil Jamal

I think linear it's fine other than if their margins come under pressure, and so we haven't seen that yet so the reduced level that we're running into the second quarter, is that the similar level of margins. We have seen higher margins in the past, so if we do manage to achieve higher margins in the second half of the year that will sever to moderate some of the further volume declines that we might expect.

Gabriel Dechaine – Canaccord Genuity

Okay. All right. And did you – I believe you addressed this on last quarter's call, but would you expect the offset to be in the experience gain line from yield enhancement whereby the origination of assets you're able to put it more towards the in-force block and have some yield pickup there as opposed to new business, so you'll just see a shifting of lower new business gains and higher experience gains? Is that what we should expect to see?

Arshil Jamal

That is a modest possibility. I mean we've always had yield enhancement within our in-force block and we'd expect that to continue subject to our asset quality constraints and the level of guilt and liquidity we want to hold in our portfolios. So we still think we have some room to yield enhance. And after the availability is the constraint overall and our appetite for some of those. And we also have a quite active cross border program, so this last quarter we sourced the number of UK assets for our Canadian business for example that contributed to the Canadian yield enhancement result. So it's more complicated than that single line, but directionally absolutely some offset in increased yield enhancement and provided the active capability is still there and the origination still occurs.

Paul A. Mahon

I would add to what Arshil said. I think it's also important to note that we don't view the payout annuity business in isolation in relation to the UK retirement market. We're working strategically in terms of other responses, so there's opportunity for driving the business forward with new products and new offerings in the market, so there is a significant customer base there in the UK that need retirement products, and we're not going to continue to singly think about payout annuities.

Gabriel Dechaine – Canaccord Genuity

Well the new products, advice is going to be a bigger component for the retirees and will you have to make product potentially with lower margins to make them more attractive to retirees?

Paul A. Mahon

I would say it's early days right now, we're doing a detailed strategic review of that and looking at the options, but clearly we are very engaged in those products worldwide and we're going to make the best use of deploying capital that's freed up to grow our business in the UK.

Gabriel Dechaine – Canaccord Genuity

And just to go back on the yield enhancement, can you quantify I guess the amount of – or the allocation you would bring guilt down to or the amount of low yielding assets that you could rotate into higher yielding assets? Is there – is that a number you can put some quantification to?

Robert L. Reynolds

I think if you look at our slides for the investment section of the deck, you can see there's a column on Slide 22 with our government holdings institutionally.

Gabriel Dechaine – Canaccord Genuity Group Inc.

Yes

Robert L. Reynolds

CAD43 billion 29% of our invested asset a large of component of that would be in federal governments. In Canada we have over CAD4.5 billion settlement, U.K. over CAD7 billion, so there's lots of runway for yield enhancement. As Arshil mentioned, the challenge is always finding attractive investments that meet our duration and rating requirements. So lots of room for additional yield enhancement. Not constrained in terms of our government holdings.

Gabriel Dechaine – Canaccord Genuity Group Inc.

So I mean like the 29%, what could that go down to?

Paul A. Mahon

It's far more complicated than that. It's a function of the quality of the assets. It's the asset liability matching, and that's not a number we would – I think it would be dangerous for us to guess at a number like that.

Gabriel Dechaine – Canaccord Genuity Group Inc.

Dangerous?

Paul A. Mahon

There's too many factors that come into play, so it's not a single number.

Gabriel Dechaine – Canaccord Genuity Group Inc.

No, I'm kidding. And my last one for Putnam. The performance fees in the revenue line was about $7 million I believe. And then can you – it looks like investment income was also elevated. It's not a huge number but around $11 million this quarter. You're usually in that $2 million range. What does that come from?

Robert L. Reynolds

The asset mix. So we had strong equity flows. And then the performance is more on the institutional side where we have many relationships with performance base.

Paul A. Mahon

Sorry, equity flow, how does that affect your investment gain line.

Clare Richer

On the investment income side, as Bob has noted, we had redeemed some seed capital that we had in successfully launched products. So that's really the increase quarter-over-quarter.

Gabriel Dechaine – Canaccord Genuity Group Inc.

Okay thanks a lot.

Operator

Thank you. The next question is from Tom MacKinnon from BMO Capital Markets. Please go ahead.

Tom MacKinnon – BMO Capital Markets

Yes. Thanks very much. Just turning to Slide 36 and 37 on Putnam. Bob, the seed capital gain after tax, was that a $5 million gain and that's included in the $4 million in core earnings shown for Putnam? Is that correct?

Robert L. Reynolds

That is correct.

Tom MacKinnon – BMO Capital Markets

And looking on Slide 37, what is the $5 million other associated with Putnam's contribution to Lifeco for Q2 2014?

Clare Richer

Included in that number would be some amortization of intangible assets about a $1 million trailing on the share based fair value adjustments. And then just some other miscellaneous items.

Tom MacKinnon – BMO Capital Markets

Okay.

Clare Richer

Great Lifeco overhead in French.

Tom MacKinnon – BMO Capital Markets

All right. And those are expected to be – miscellaneous items, are these expected to be – what do you think a run rate would be for these items in a quarter?

Clare Richer

For those categories, certainly that would remain relatively consistent. The other piece that will be included in there is the minority interest calculation. So we expect that would grow overtime.

Tom MacKinnon – BMO Capital Markets

Right. Okay. And then as a follow-up, with respect to the 401(k) and public non-profit business, sales are down considerably and were down over 10%, and I also noticed that the net cash flow continues to run negative here in 2014. Maybe, Bob, you can talk a little bit about what's happening in this marketplace and why we're getting a bit of bleeding in that cash flow because I haven't seen that for some time.

William W. Lovatt

Yes I think 401(k) market is just a general slowdown in the business right now. I think markets have been doing well and we haven't seen the number of searches that we have in years past. In he public non-profit we're seeing a lot of momentum there and we the – the pipeline is very, very strong and we do have some commitments going out. But I think it's just a timing issue right now.

Tom MacKinnon – BMO Capital Markets

Okay. Thank you.

Operator

Thank you. The next question is from Peter Routledge from National Bank. Please go ahead.

Peter Routledge – National Bank Financial

Thanks. Another question on Putnam. Just looking at your institutional on your mutual funds business, I wonder if you could tell us on a core earnings basis if both those businesses are sort of near breakeven as you appear to be in a core earnings basis overall or whether one might be doing a little bit better than another? Can you give us any color on that?

Robert L. Reynolds

We really don’t the different organization associated with those business - all about as you can image is fair amount of expensive that need to be allocated at across the various groups including the investment team in alike. So it become more difficult to say one versus the other.

Peter Routledge – National Bank Financial

I guess the reason why I ask is just looking at Page 34, it looks like your retail business is really doing quite well and your institutional business is lagging. So I guess you won't tell me if there's been a gap opened up in terms of profitability between those two contributors?

Robert L. Reynolds

No I think to emphasize there are certain expenses that clearly would each of the categories, and we certainly call some of those out as the sales-based expenses and the like. But other categories of expenses are really spread over the entire business and specifically in the investment side so that it become more difficult.

Peter Routledge – National Bank Financial

Okay. Maybe I'll try one other on it. On the retail side, I've noticed some of your individual funds are growing quite rapidly as well. Is there a level of AUM after – at the individual fund level after which you think okay, that fund has succeeded, it's sustainably profitable?

Robert L. Reynolds

We don’t look at it from a profitability standpoint. We look at it from the ability to generate superior performance and we work very closely with the managers and they ever think that size is a detriment to performance, we would close that fund. So it's just not – profitability has nothing to do with it. Our job is to perform to our clients.

Peter Routledge – National Bank Financial

But if a fund sort of stays at a permanently low level, you wouldn't cancel it? You'd just – say a fund performs well but doesn't gather assets, you'd keep at it?

Robert L. Reynolds

Yes, we constantly evaluate our fund line-up and we believe they all have a role. And I think you can't take a short-term look at this. You have to look over a market cycle. Funds go in favor outer favor and the funds we have in our line-up we think long-term will be popular with investors and funds we want to be in, but it's something we constantly look at.

Peter Routledge – National Bank Financial

And maybe one more question, just for Garry. The rise in MCCSR at GWL, kind of fairly pronounced now. Why are you holding so much capital at the OpCo? Is there – I mean what are the reasons for that? You haven't done that up until about 2013 it looks like. What's the change that necessitated that?

Garry MacNicholas

On terms of the MCCSR ratio at Great-West Life, you mentioned it's risen. It's risen most notably the last couple of quarters parted with bring on average life which is well funded and also as rates rose that alleviated some of the pressure on capital requirements. That's a large -- and the currency gain has moved in our favor over that time. And I think I'll flick it then over to Bill for the comment on that?

Robert L. Reynolds

I'll just remind you, Peter, too that if you look at it, it's rising now because it wasn't rising before. And when we converted to IFRS, we had the phase-in of the adjustments and so let of kept this fairly flat at around the 200 level for a long period of time. And once those have phased out we're now seeing the growth in the surplus that you'd normally expect the ratio to be lining with.

Peter Routledge – National Bank Financial

And then why not dividend up to the OpCo? I mean if it's surplus?

Robert L. Reynolds

Yes, that's absolutely a possibility and it goes back to the earlier question about how would you measure your excess capital. And just quite turnover the liquidity that's available at Lifeco would be available liquidity because we might to keep some liquidity up at Lifeco, not all of the MCCSR available capital that resides in the entity would necessarily required you know relative to our MCCSR -- our target, the maximum is 2015, we would have an ability to dividend some of it up to Lifeco. Absolutely.

Peter Routledge – National Bank Financial

Okay. Thanks very much.

Operator

Thank you. (Operator Instructions) The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca – TD Securities Inc.

Good afternoon. Garry, I know you've described the yield enhancement gained across the two geographies, but I missed it. Sorry. If you wouldn't mind repeating it? It was CAD48 million in Canada and…?

Robert L. Reynolds

And CAD40 million in Europe, and those are, just as a reminder, pre-tax numbers. CAD40 million in Canada and CAD40 million in Europe.

Mario Mendonca – TD Securities Inc.

Thank you. A more detailed question now. I understand that -- and this was the quarter when the Company did the real detailed review of assumptions related to the Irish Life acquisition, and I thought one of the key areas was lapsations. So it would be helpful to understand first of all, do I have that right, and how did that detailed review go and was there any material change to reserves or goodwill associated with Irish Life?

Robert L. Reynolds

So we closed up the purchase equation this quarter and there weren't any incremental adjustments made this quarter. I think we flagged in previous calls that the level -- the excess level of lapse that was experienced in Ireland by Irish Life and other player through the financial crisis that we had taken a view of that when we set up our opening reserves and the most recent study show that the lapse experience is inside those original assumptions. So going forward we're quite comfortable with the assumptions we set up in the opening balance sheet and we think it was a prudent to opening balance sheet.

Mario Mendonca – TD Securities

Okay. So Arshil, then could I -- we could conclude from that comment then that there could be some – there would be presumably some experience gains coming out of Ireland associated with lapsation if the experience studies are coming inside of your original reserve assumptions?

Arshil Jamal

That is a distinct possibility as we get 3 to 5 years worth of lapse experience and we review our assumptions on a longer term basis. But certainly we're not going to immediately move to change those assumptions. Typically our studies are of 3 or 5 year experience and in those 3 or 5 year period you have free to elevate at last.

Mario Mendonca – TD Securities Inc.

So nothing was released this quarter. This is something we just look at for the future then?

Arshil Jamal

We would absolutely flag reserve releases in the normal course when they do happen, and there was nothing as related to that in the quarter. The Europe number was just some modest one and two start we now 10s

Mario Mendonca – TD Securities Inc.

Okay. And then just one final question, also for you, Arshil. You referred to the Dutch reinsurance agreement and how it was relevant to strain this quarter. Could you tell us what earnings contribution on an after-tax basis that reinsurance agreement made this quarter?

Arshil Jamal

That's a 15 year arrangement covering a portfolio of temporary annuities and I think in this quarter we highlighted the contribution to premium income, because that was a one-time item, and we also identified qualitatively that that led to an increase in new business contribution in reinsurance. But it wasn't just that, we would also have some favorable developments in new business on our traditional reinsurance business, traditional mortality reinsurance business in the U.S., and we would not slow in quarter deal-by-deal profitability. But that deal exceeded our all the rate of return and we will be contributing possibility over 15 years.

Mario Mendonca – TD Securities Inc.

Thank you.

Operator

Thank you this is the end of the question-and-answer session I would now like to turn the meeting over to Mr. Paul Mahon

Paul A. Mahon

Thank you operator. I want to thank all participants for joining us today we look forward to reconnection with you in a quarter's time to speak to our third quarter earnings and enjoy the summer thanks.

Operator

Thank you. The conference has now ended please disconnect at this time and we thank you for your participation.

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