Great-West Lifeco's (GWLIF) CEO Paul Mahon on Q4 2016 Results - Earnings Call Transcript

| About: Great-West Lifeco, (GWLIF)

Great-West Lifeco Inc. (OTCPK:GWLIF) Q4 2016 Earnings Conference Call February 9, 2017 3:30 PM ET

Executives

Paul Mahon – President and Chief Executive Officer

Garry MacNicholas – Executive Vice-President and Chief Financial Officer

Mark Corbett – Chief Investment Officer

Arshil Jamal – President and Chief Operating Officer for European and Reinsurance Operations

Bob Reynolds – President and Chief Executive Officer, Great-West Lifeco U.S

Analysts

Steve Theriault – Dundee Capital Partners

Doug Young – Desjardins Capital

Tom MacKinnon – BMO Capital Markets

Sumit Malhotra – Scotiabank

Mario Mendonca – TD Securities

Operator

Ladies and gentlemen, and welcome to the Great-West Lifeco Inc. Q4 2016 Earnings Call. I would now like to turn the conference over to Mr. Paul Mahon. Please go ahead sir.

Paul Mahon

Thank you Michael. Good afternoon and welcome to Great-West Lifeco's Fourth Quarter 2016 Conference Call. I'm joined today by Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, President and Chief Operating Officer for Canada; Bob Reynolds, President and Chief Executive Officer, Great-West Lifeco U.S.; Arshil Jamal, President and Chief Operating Officer for European and Reinsurance Operations; and Mark Corbett, Lifeco's Chief Investment Officer.

There is also a number of other senior officers available on the call to respond to specific questions as required. I will review the highlights of today's fourth quarter results including headlines from our Canadian U.S. and European business operations. And Garry MacNicholas will then provide a more detailed financial review. After our prepared remarks we’ll open the line for questions.

Before we start as usual, I will 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 discussions you'll hear today as well as the presentation material that we have provided to.

Turning to Slide 4, our fourth quarter earnings of $676 million, reflects solid results in Canada and Europe. Putnam’s restructuring charges impacted our Q4 earnings and a weaker pound Sterling remained a headwind. We maintained a strong capital position ending the year with an MCCSR of 240% and RBC ratio estimated at 455% as well as a 28% leverage ratio.

This gives us significant capital base to support future growth and investments in our businesses. We also announced a 6% increase in our common share dividend to $0.367 per share and this follows a 6% increase in dividends back in 2016. The fourth quarter saw Lifeco return to the capital markets, where we completed a successful EUR500 million 10-year euro bond issue. EUR200 million of the proceeds were downstreamed to finance the redemption of an outstanding note at Irish Life Assurance. The balance of proceed remains at Lifeco further enhancing our financial flexibility.

The intervention of Irish Life Health acquisitions remains on track to deliver EUR16 million of annual run rate synergies. Our Irish health companies were re-branded Irish Life Health and our new operation is a top three player in the health insurance market in Ireland.

Last week it was announced, that Irish Life was selling its investment in Allianz Ireland to a subsidiary of Allianz SE. The transaction is expected to close in Q1 2017 and is subject to court approvals.

Turning the Slide 5, earnings this quarter were $676 million or $0.686 per share. These headline figures are in line with last quarter but down year-over-year. On a constant currency basis Q4 2016 earnings were up 4% from last year's result and 7% excluding the restructuring charge.

In Canada, we saw a good earnings pick-up with group morbidity results rebounding as a result of management pricing actions. Canada’s earnings results included a strong contribution from investment gains. Results in Europe were solid, benefiting from improved experience gains, although the weaker pound sterling impacted reporting earnings in Canadian dollars by $30 million year-over-year.

U.S. segment earnings were down by $70 million compared to Q4 of 2015. Putnam’s earnings were down $45 million on lower revenues and management took action in response to these market pressures. In November Putnam announced a realignment of its business, which is expected to result in a $65 million annual U.S. dollar expense reduction. The associated restructuring charge reduced Lifeco’s Q4 2016 earnings by $20 million.

Garry will cover these earnings, these earnings items in more detail in his section. Lifeco maintained a strong capital position, with Great West Life’s MCCSR ratio up 13 points to 240%. Reinforcing the financial flexibility that I noted earlier, we have almost $1.1 billion of Lifeco cash at year-end, which is not included in the MCCSR ratio.

Moving the Slide 6. Our Canadian sales increased by 11% year-over-year with strength across all lines. Individual life sales were up more than 161% year-over-year. And this was driven by a surge in business as a result of the change in taxation rules on cash value life insurance. Our Canadian group business led the market in sales both in the quarter and for the full year 2016.

U.S. sales were down 42% driven primarily by the variability and large plan sales at Empower. In Q4 of 2015, which was last year, large plan sales represented over $9 billion of U.S. sales and these were not repeated in Q4 2016.

As I’ve noted in past quarters, these sales can be quite lumpy at Empower. But Empower continues to have a very strong pipeline across all segments. Putnam sales were higher year-over-year driven by U.S. $4.6 billion of mutual fund sales. In Europe, sales were up 13% year-over-year with strong fund management sales in Ireland, a good retail pension season in both Ireland and Germany and higher UK payout annuity sales.

I'll now refer to Slide 7. I would note that expense numbers on this slide include a number of one-time and exceptional items. These include new business-related expenses from the elevated life insurance sales in Canada in Q4, the addition of the new health business in the European expenses, and that's in Ireland, the restructuring charge at Putnam and last year there was a one-time release in both the U.S. and Europe. When we exclude these items, overall the underlying operating expense growth at Lifeco was well managed and in-line with historic norms.

Turning to Slide 8, fee income was 1% higher year-over-year against a generally positive backdrop of higher equity markets in Canada, the U.S. and the UK, although the Euro stock's 50 index was lower. I would note that our fee income results in each business segment are impacted by their mix of assets.

Equity versus fixed income, retail versus institutional and also based on their geographic distribution of assets. As we look at the segment's results, Canada's fee income increased 5% due to an increase in asset volumes and higher equity market levels. Canada experienced positive net cash flows in both individual and group retirement services in the quarter. Participant levels pushed toward 8.1 million at Empower with associated fees increasing, offset by lower mutual fund AUM and performance fees at Putnam. This resulted in overall lower fee income in the U.S. segment.

Fees and other income were up 4% in the European segment, driven by growth in assets under management and growth in other income from the Irish Life Health business. I'll now turn the call over to Garry who can provide more insight into Lifeco's financial results. Garry?

Garry MacNicholas

Thank you, Paul. Starting with Slide 10, operating earnings in the fourth quarter were $676 million, or $0.686 per share. As Paul noted earnings this quarter include 20 million of Putnam restructuring charges. Excluding those charges, earnings were $696 million or $0.707 per share an increase of 3% year-over-year and close to 7% growth at constant currency.

Currency was a $33 million drag on earnings compared to Q4 2015, primarily due to Sterling. Canada's earnings increased on favorable mortality and improved group long-term disability experience, strong yield enhancement and higher fee income. This was somewhat offset by a lower contribution from basis change and losses on policyholder behavior experience.

In the U.S., earnings were down from the prior year quarter, primarily due to lower fee income in Putnam and the $20 million restructuring charge. Europe’s operating earnings of $307 million were strong, up 11% on a constant currency basis, reflecting higher contributions from new business gains, new sales and from yield enhancement. The negative impact from the decline in pound Sterling compared to Q4 last year was $30 million, as translation rates a year ago were $2.03 compared to $1.66 this quarter.

Turning to Slide 11, as a reminder, the source of earnings categories above the line are shown pre-tax. Lifeco's year-over-year expected profit decreased $27 million or 4% from the same quarter in 2015, mainly due to adverse currency movement and lower fee income at Putnam.

New business streams decreased to $43 million in Q4 2016, lower than prior periods, largely due to profitable annuity sales in Canada, the UK and the reinsurance division. Experience gains of $88 million, were higher this quarter than the prior quarter and prior-year quarter. Yield enhancement was strong across all segments, contributing $115 million. This was partially offset by minus $27 million of other experience items.

In the U.S. fee income was lower than expected and expenses were higher for both Empower and individual markets. In Canada, while mortality was strong and group long-term disability was more favorable than last year, policyholder behavior experienced in individual life was unfavorable this quarter. This was largely related to conversion activity into new policies in the run-up to the introduction of the new tax rules in January this year. Assumption updates and other management actions resulted in a release of $141 million this quarter compared to $223 million last quarter and $149 million this quarter last year.

The main contributors were updates to economic and annuitant mortality assumptions. $33 million included in other is the pretax amount of Putnam's restructuring costs with a smaller remainder, the Empower integration costs. The earnings on surplus of minus $12 million is $45 million lower than last year, reflecting lower net investment income and a number of one-off items in prior periods. All this comes together in the net income before tax line shown in the middle of the page. Year-over-year this is up 7% and a slight improvement in the quarter-over-quarter result, up $6 million or 1%.

I would also note here the effective tax rate on shareholder earnings is 15% this quarter, up from 7% rate last year, due to fewer one-time tax benefits. And it is unchanged from last quarter.

Turning to Slide 12, it is a – Slide 12 is full year view of the source of earnings which we include for Q4 reporting. So on a year-to-date basis Lifeco's expected profit of $2.642 billion in 2016 was 4% lower than 2015. The decrease year-over-year, similar to the quarter, is primarily a result of lower expected fee income at Putnam and currency impacts. The strain on new sales of $232 million in 2016 is slightly higher than 2015, primarily a result of a shift in sales mix in the U.S., driving an increase in non-deferrable acquisition expenses, partially offset by higher volumes of profitable UK annuity business.

Experience gains of $186 million in 2016 were $109 million lower than in 2015. The gains in 2016 primarily a result of yield enhancement in all segments and longevity results in Europe. The gains were partially offset by lower fees and higher expenses in the U.S. and poor group disability results earlier in this year and policyholder behavior experience in Canada, as noted earlier.

Management actions and changes in assumptions contributed $547 million to pretax earnings in 2016 compared to $464 million in 2015. The most material updates were to economic assumptions, expense assumptions, and annuitant longevity assumptions. Earnings on surplus of $58 million in 2016 were $21 million lower than 2015 primarily due to lower investment income and real estate mark-to-market. Other of minus $68 million is the restructuring cost noted earlier related to Putnam and the acquisitions of the Irish Health Company that we’ve re-branded to Irish Life Health.

Turning to Slide 13, Lifeco’s uncommitted cash position remained strong at over $1.1 billion. And this includes approximately $400 million of proceeds from the euro bond issue that were kept at the Lifeco level.

Our book value per share was $19.76, slightly higher than the prior quarter but lower than the prior year quarter reflecting exchange impacts seen during 2016. And the impact of share buy-backs. During 2016 we bought back and cancelled 8 million shares under our normal course issuer bid. Return on equity remains steady at 13.8%. The ROEs continue to be strong in Canada and Europe, at or above our long term overall Lifeco targets.

The lower return in the U.S. reflects a combination of the ongoing investments at Empower, as well as the pressure on margins from lower mutual fund assets and lack of scale at Putnam. Management is very focused on improving margins and ROE in the U.S. segment and bringing Lifeco back towards its longer-term targets.

Finally, turning to slide 14. We show assets under administration are at $1.2 trillion, up $35 billion or 7% on a constant currency basis driven by market performance and overall business growth.

Paul, that concludes my remarks.

Paul Mahon

Thanks very much Garry. Before we open up the line to questions, I'd like to discuss our outlook for 2017. On Slide 15 you'll note there's some notes there. Notwithstanding uncertainty in the geopolitical and economic environment, we are committed to driving forward with our strategy, which includes organic growth through investments in our businesses and executing targeted acquisitions.

In Canada, our investment in technology will deliver an improved experience for our customer. In the U.S., with integration almost complete, Empower will be of moving to a single system in driving cost reductions and efficiencies.

At Putnam, efforts continue to build a scalable, profitable asset management franchise. Putnam's announcement of $65 million in expense reductions back in November is evidence of our commitment to this goal. And in Europe we have some great opportunities. These include building out the Irish Health business and extending our position in the UK retail and bulk annuity markets.

Canada life products continue to fit very well into the post Solvency II German pension market and there are a number of interesting reinsurance opportunities under review at this time. At the same time, expense discipline will remain a Company-wide focus as we balance investing in our businesses with efficiency improvements.

Finally, our capital deployment priorities remain unchanged, organic growth complemented by targeted acquisitions. That concludes my formal comments so I'll turn the line over to the operator so we can get organized for questions.

Thank you.

Question-and-Answer Session

Operator

Certainly sir. [Operator Instructions] And the first question is from Steve Theriault at Dundee Capital Partners. Please go ahead, you line is now open.

Steve Theriault

Thanks very much, a couple of questions probably for Garry. So Garry, expected profit's been down year on year each of the last few quarters. So as we look to 2017 with – I think the pound Sterling's been a headwind there, Putnam's has been a headwind but now with the comps getting easier with Putnam restructuring under way with the higher rates we saw in Q4 and maybe you can comment on that as a driver, how confident are you into next year we'll start to see – get back to expected profit growth versus expected profit shrinkage over the majority of 2016.

Paul Mahon

I am going to give you that question, Garry.

Garry MacNicholas

Thank you. Steve, actually I think you have actually hit on most of the positive factors. The comparables will get easier as the currency's been relatively level starting in Q3 of 2016 as we go into 2017 currency all else being equal is staying at these levels will be less of a factor. We should see improved position at Putnam because of the lower expenses. At this point probably at $9 million to $10 million pretax in run rate synergies and we look for that to get up to $65 million through the later part of the year.

Those things will help profit. I couldn't guide to any particular number but those are all positive factors for us. And certainly the rise in markets, a gentle rise in interest rates, those will be helpful as well.

Steve Theriault

We don’t have to think of Great West as leverage to rates but would that be the higher Q4 rates, the rise we saw in rates the steeper yield curve will that – will that be high on the pecking order in terms of factors that will help next year or is it more the pound Sterling, the Putnam and some of the other things you’ve talked about?

Garry MacNicholas

The general equity market levels will be more of a factor. Certainly as Paul just mentioned. The interest rates, where that most comes into play will be in our U.S. operations. It helps with the spread compression. And it also helps a little bit in Canada as well, where lower rates you do tend to find your spreads compressed. Having a little more breathing room there will help. It's not a huge factor for us.

Paul Mahon

The other factor, Steve, obviously is rising rates is going to help make products more competitive for customers. And that's going to build better values, whether it's in billed annuities or potentially pricing some of the insurance products. There's potential for lift there, but that's sort of a longer-term view.

Steve Theriault

Okay, thanks for that. The second thing was the impact from experience gained, management actions, assumptions changes. On the last couple of quarters, so both in Q3 and Q4, that's been elevated to approaching 30%. So for Paul or for Garry, after seeing a couple quarters like that, and the numbers have been trending up and maybe it's just some chunky yield enhancement at the back end of the year, but are we starting to see – you have that nice chart in the deck that shows, I think, a 21% contribution over the long term. That is still where you think the numbers will shake out over the medium term. Or just for whatever reason, maybe it's yield enhancement, maybe it's something else, is that structurally trending a little higher? Not in any particular quarter but thinking over the next up couple years.

Paul Mahon

We tend to view that over the long term as where it will be the natural flow-off of the business. While we may have seen in the last couple of quarters a bit of elevation there, if you actually look at it on a four-quarter rolling basis, there's not a noted change. Garry, anything you'd add?

Garry MacNicholas

I think, Steve, you referenced the right slides in the deck, there's 24. If you look at the last 2014, 24%, 2015, 23%, 2016, 22%, it is pretty steady on an annual basis. Those were all a little higher that the long-term average of 21%. Although during the crisis there were a couple yields lower years in there. Again, these things are notoriously difficult to predict in advance. Certainly we'll continue to be looking for yield enhancement opportunities to drive our experience gains on that side.

And yes, we have a strong track record but it's very difficult to predict forward.

Steve Theriault

Can you update us quickly on the size of the sovereign, the gilts or the U.S. Treasuries that you have that are, as we think, eligible for yield enhancement?

Paul Mahon

Mark might be able to comment on the relative size of the U.S. Treasuries. And Arshil, maybe you can speak a little to the size of the gilt. Mark, any insight on U.S. Treasuries? Or is that something we have to come back on?

Mark Corbett

If you turn to Slide 27, we provide the composition of our bond portfolio. There's a column there entitled government, government-related, gives you some sense for the scale of opportunities in the balance sheet. Still have lots of opportunity.

Steve Theriault

Okay. I'll take a look at that. Just one last thing. Probably, Paul, you mentioned that Allianz Ireland transaction. Will we see any gain next quarter on the back of that when it closes?

Paul Mahon

I am going to turn that one to Arshil.

Arshil Jamal

The purchase price is EUR145 million and that's a modest gain relative to our carrying value. But it will depend on the performance during the quarter because we expect the transaction to close at the end of the quarter. So if we get a good quarter, the underlying performance it will be a smaller gain. If we get less of a performance, then we'll get a bigger gain.

Steve Theriault

Sounds like quite small, though.

Paul Mahon

Yes.

Arshil Jamal

Yes, in handful of millions of euros, not 20 or 30.

Paul Mahon

The way we characterize that business, that was an investment we picked up as part of the Irish Life acquisition. It was not core business, it was investment. We're focusing on growth of things like Irish Life Health. So it was timely that the majority shareholder wanted to take that back and it was good timing for us too.

Steve Theriault

Thanks very much.

Operator

Thank you. Mr. Mahon, before we go to the next questioner, I'd just like to mention there are some sound issues coming over your phone line. Sounds as if someone is breathing to close to the microphone sir.

Paul Mahon

We’ll hold our breath. Thank you, operator.

Operator

Very good. The next question is from Doug Young at Desjardins Capital. Please go ahead. Your line is now open.

Doug Young

Hi, good afternoon. I promise not to breathe close to the mic here. Provisions for future credit losses, it looked, and correct me if I'm wrong, because I had a quick look through the MD&A, it looked like they were down $484 million in Q4. It's about a 14% decline. It doesn't look like a lot of that would have been FX-related if I have my numbers right. So just wondering if I can – do I have the numbers right? What would that be related to? Is that around, obviously that would go through the management action and assumption change line. And have you changed your views on credit loss? Is that why there would have been such a large decline? And I've got a few follow-ups.

large decline? And I’ve got a few follow-ups.

Paul Mahon

Okay. I’ll let Garry start on that. And Mark Corbett will add a little bit of color. Garry, you want to start on that?

Garry MacNicholas

Sure. First off, there was a currency impact. We do have a lot of long tailed business in [indiscernible] in our European operations. Most of that is in the UK. So there is a fair bit of remeasurement from the UK. The other – there was a taxes basis change in the period. The basis change was not that significant for that particular item. The majority of the basis change is actually in the participating accounts. So it wouldn’t flow through the shareholder earnings.

Paul Mahon

So broadly, Garry, you’re saying the majority of this was currency-impact related.

Garry MacNicholas

It’s currency impact and participating. I’m not signalling an overall change in our views on credit. It’s more – it was an update to our models, particular in Canada and in the U.S. We had an update to our Basel II, more closely reflects our regional experience in those rather than just using the generic global model. We are more specifically recognizing the favorable credit experience we’ve had in both Canada and the U.S., so a bit of that benefit went through. I think it was in the order of $30 million or $40 million of basis change amount. I have the number here, I’ll pick it up in a bit, but it was in that sort of order.

Doug Young

Okay, so it wasn’t the full number. And then of that change, I figured maybe a big chunks was from par, but of that $484 million, do I just take the $30 million to $40 million, minus the $484 million and the difference is really related to par? Is that the way to think of it?

Garry MacNicholas

What we may do is we’ll he get the information for you, in a follow-up, on the split between the currency. I did confirm that the basis change that went through the source of earnings on a pretax basis was actually $39 million. So $40 million, I was ball-parking there.

Doug Young

Okay.

Garry MacNicholas

The majority of the rest is actually par and currency, but I don’t have the split of those two elements.

Doug Young

Okay, we can follow up on that. The second question is – if I read your slide number 10 correctly, it shows that there was $40 million of the $65 million cost saves in Putnam actually came through in Q4. That’s an annualized number so I assume it’s $10 million. Is that right? The full $10 million came through in the quarter? Or was it by the end of the quarter that was the run rate that you were seeing?

Garry MacNicholas

No, that would have come through in the quarter. It was $9 million to $10 million pretax.

Doug Young

The incremental that left really to come through per quarter pretax, on a U.S. dollar basis would be another, what, $6 million? So a good chunk of the savings has already been realized? Is that the way to think of it?

Garry MacNicholas

That’s right. You’re correct. A reasonable portion has been realized and that’s because the staff are no longer at the organization. There was an immediate reduction there. There are some vendor negotiations underway to drive out some of the remaining benefits.

Doug Young

Okay, so the numbers I had are correct?

Paul Mahon

Your illustration is close.

Doug Young

Okay, yes. Perfect. And then just lastly, maybe Paul, buy-backs is mentioned in slide 15. I always think of Great-West and the relationship with power and I don’t obviously think of you being overly aggressive on buy-backs. Has that changed? Or is this at the margins? Trying to get a sense of how your view is on buy-backs.

Paul Mahon

I’d start off, as we think about our capital deployment priorities, we’re investing in our businesses, whether it’s post acquisition, trying to drive out higher value. We’re looking for targeted acquisitions, as noted on the page. I would say buy-backs are always in the frame. If we’re going through the period, the cycle, and we’re not finding those alternative ways to deploy capital, giving back capital, whether it’s in the form of dividends, as we did this quarter, or in terms of buy-backs, we’ll consider that. I wouldn’t say it’s a sea change or a change in philosophy. I would just say we do have a strong capital position now and it’s something that’s in the consideration set.

Doug Young

Okay, fair enough. All right, thank you.

Paul Mahon

Thanks.

Operator

Thank you. The next question is from Tom MacKinnon at BMO Capital Markets. Please go ahead. Your line is now open.

Tom MacKinnon

Yes. Question with respect to Putnam and then a follow-up. The first is why have you waited so long in terms of taking this restructuring charge at Putnam in terms of trying to right-size the business? Give us some of the thought process behind that and why this wasn’t done years ago. And I have follow-ups.

Paul Mahon

Okay, thanks, Tom. I’ll take that. It’s Paul. I may turn over to Bob. I’ll give you a little bit of the background. When we acquired Putnam back in 2007, we recognized that there was a need for a fundamental restructuring there, which included some significant cost take-out that came in the couple of years following. But also rebuilding the investment management shop and in particular the performance. And one of the challenges there, I think at the time Putnam was number 62 out of 63 families. That wasn’t on the high end of the 62, it was near the bottom in terms of performance. And the market expects, wants and needs to see long-term performance as measured by 3, 5, 10-year performance.

So as we got into restructuring that business through 2009, 2010, 2011, 2012, we were building out the shelf with the expectation of growing, growing the business. It was growth play, not a synergy play by any stretch. So started to grow the shelf, obviously enhanced the capabilities on the investment management side, and by 2014 we were starting to see pretty strong flows coming in. At that point in time we, like most active managers in the states, started to experience the impact of the dramatic shift to passive investments. We’ve seen that sustain itself since the latter part of 2014 through 2015 and 2016. We’re actually seeing a bit of a turn now. One of the questions at that point in time is, do you move off of your strategy of focusing on growth and trying to get at synergies? Or do you stay the course through a cycle?

And we made a decision to stay the course through a cycle. But at the same time we also reflected on this. It was really under Bob Reynolds’ leadership, who said we’ve got to tighten things down here. We’ve got to get out some of the costs. But the cost takeout has not removed our view from wanting this to be a growth engine as part of our broader asset management capabilities globally. So we took costs out but we took costs out on a basis that we were not going to damage the investment management, asset management capability and damage the opportunity for growth.

So I think if markets had not turned to passive back in 2014, we might not have taken this decision. But we did take the decision because I think the impact of passive for a couple of years has been tough. And Bob came forward with a recommendation to do that and the Board supported it. Bob, anything you’d add to that?

Bob Reynolds

NO. I wouldn’t add much to it. I think initially we cut 30% of headcount from 2008 over the next couple of years. We thought we were set up to do very, very well in the type of market we were in. And as you touched upon, we did do that. And I think it is just – especially the last couple years, the move to passive has accelerated. Historically this has been a cyclical phenomenon where passive does well, then active does well. So we went into 2016 with the idea that this is about ready to turn. And if you remember the first quarter, the market was down 10% in the first month and then was up 11%, 12% the rest of the quarter. So we were up 1% for the quarter but that volatility again pushed people out of active. And that’s when we said we need to do something about our cost structure because run rate’s your enemy and we made the changes. And just so happens the market ended up the year up 9%. But from that point in February, the market’s up – by the market I mean the S&P 500’s up 22%.

So I think we’re starting to see a rally. The index has fallen since June 30 until now is in the 30th percentile. In other words, 70% of active managers are outperforming it. It’s a short-term trend but we like the trend line at this point.

Tom MacKinnon

And maybe just a follow-up. Just with respect to Putnam, I noticed it didn’t like there was any financing charges taken in the quarter. Or if you can elaborate on that, what is generally the run rate in terms of financing charges?

Paul Mahon

Tom, I’m not – Garry, maybe you can answer that one.

Garry MacNicholas

Yes, we would have had the regular financing charges, would have gone through in the quarter. I think they’re in the back of the statements, financial statements. They may have been masked somewhat by a – there was a tax benefit in the quarter that may have offset some of that. Maybe that’s what you’re seeing, it’s the net of the two.

Tom MacKinnon

Okay. So what was that...

Garry MacNicholas

We can certainly do a follow-up with you.

Tom MacKinnon

What was that tax benefit? Was that in Putnam?

Garry MacNicholas

That was rising in Putnam and I believe it was $11 million in the quarter, $11 million.

Tom MacKinnon

Okay. And was there any fair value adjustments at Putnam as well? Or were they pretty immaterial?

Garry MacNicholas

Trying to – sorry, Tom, do you mean on the investments on the seed capital?

Tom MacKinnon

Yes.

Garry MacNicholas

The mark-to-market on the seed capital? Yes, I think it was less than $1 million of a loss, it was immaterial. Yes.

Tom MacKinnon

Okay, yes. Or just fair value adjustments related to stock-based comp at Putnam.

Garry MacNicholas

We don’t handle the comp that way. That was the old method.

Tom MacKinnon

Okay. And then the last one is with respect to Empower. So earnings are down quarter-over-quarter again. The participants are flat quarter-over-quarter. Earnings are down quarter-over-quarter despite the fact that the investment spend is significant, is a lot less this quarter than it was last quarter, it was about half the level. So maybe you can just help us understand when are we going to see the earnings at Empower start to turn?

Garry MacNicholas

I’ll start with just a couple of ones here. First, certainly this quarter, and I think we may see some of this in Q1, in terms of – there is a real final push at Empower, in getting through the integration work and getting off the old JPMorgan systems that we expect to do during the second quarter. So we are making that final push on the integration. I know there’s – there was a fair – there was a bump-up in expenses on the experience gains and losses, that there was higher expenses. So that was certainly one of the factors compared to the prior.

Also, on the expense side, in Q1 2015 there was a one-time expense gain, or a provision gain, and this was related to the original JPMorgan transaction where there was a settling up based on the number of participants moving over. So that was a benefit in 2015 that didn’t recur. I think that was in the $15 million range. [indiscernible]. Yes, there’s a fair bit of expense pressure at the moment, but we are certainly looking to see the benefits of these expenses coming into 2017 and for a couple years beyond.

Paul Mahon

Tom, I would comment on – as I think about this transaction, maybe comparing it to maybe some of our Canadian group life and health transactions where we kind of shuttered the business, stopped selling, we’re not trying to enhance the business in any way. You’re taking – whether it was taking the loan and life business and putting it on the Great-West system and focusing singularly on transition synergies. In this transaction we were very much focused on fighting it out in the market to keep all these clients. It was all about building the base, getting it to the 8.1 million, the client retention. And through this whole period we’ve been maintaining two back-office systems, the JPMorgan one and paying for that and the Empower system which is the original Great-West life system, augmenting that system to support the Empower client base and also dealing with multiple front ends until you’ve got all the customers off that. We will have this behind us as we get through the end of this quarter. And we’ve got the benefits of now being able to get at synergies, get at automation. I would say for context, Empower sales, 2014, $15 billion; $43 billion in 2015; $39 billion in 2016. So we did not shutter this business like we might have in past transactions. We’ve been trying to grow this base and now it’s all about synergies and automation. It has always been our view, we always talked about synergies coming after the transaction. So that’s where we’re at.

Tom MacKinnon

Okay. Thanks for the color.

Operator

Thank you. [Operator Instructions] And the next question is from Sumit Malhotra at Scotiabank Capital. Please go ahead. Your line is now open.

Sumit Malhotra

Thanks, good afternoon. First question is around capital. And obviously your MCCSR ratio is very strong, I think it’s at the highest levels in the group to end 2016. When I look at the denominator, the required capital, it’s actually been flat year-over-year. I think you have to go back some ways to see that occurring. You say somewhere in one of your slides that there’s fair value decreases. Is this strictly some of the foreign exchange movements that we’ve had related to European business? Or is there something that the Company is doing to manage – or business shifts that are requiring a lower level of capital?

Paul Mahon

I’m going to turn that one to Garry. He may have Dervla Tomlin, our Chief Actuary, also weigh in. Garry?

Garry MacNicholas

I think there’s a couple of factors that have been helping keep the requirements down. First of all, I mentioned a large block of non-participating long-tail business in the UK, and so currency is certainly a factor, bringing the requirements down. Doesn’t have as much of an impact as the overall ratio, available and required to move, but certainly it has been bringing the requirements down. And also in the fourth quarter, towards the back end as we saw a rise in rates, that rise in interest rates probably was worth 5 points to the ratio. These are done at – you do fair value at the end of the period. So it’s the rates right at the end of the quarter would have led to that. You’ve got both the currency, the pound falling and rising rates in Q4 helped keep that flat.

Sumit Malhotra

So the rising rates reduce the capital required.

Garry MacNicholas

That’s right. A lot of the capital is driven off factors times either the assets or the liabilities. And as the rates rise, because we’re on a fair value system, both the asset values and the liability values fall. So the factors are multiplied by smaller numbers and the requirements go down.

Sumit Malhotra

And for the macro stuff I think I’m fine with. There’s nothing really from a business mix perspective that you’ve done, because as I said I think it’s unchanged on a year-over-year basis. There’s nothing from a business mix perspective that’s really reduced the capital required in the overall business. Is that fair or is there something at work there as well?

Paul Mahon

Sumit, there’s no material change in the business mix. Obviously the mix is always shifting but no material change would have had that impact. Garry, there’s was a bit of a lift though due to the excess capital related to Irish Life.

Garry MacNicholas

Yes, I should point that out that we paid an Irish LIfe note yesterday, actually, that’s EUR200 million. That was part of the euro bond refinancing was used for that, the euro bond issue we did. That was worth about 4 points. We had already down-streamed the money into the European operations prior to year end so it gave us a bit of an artificial extra 4 points at the end of the year. So you should adjust for that.

Garry MacNicholas

Still very strong, yes.

Sumit Malhotra

Still very strong. That leads me to my second question. We’ve talked a lot in the last – going back to your Investor Day now about potential acquisition appetite. And you just spend some time, Paul, walking us through some of the moves you’re making to reduce the cost base at Putnam. When I think about that business, though, you’ve got a slide in here that you showed us on a constant-currency basis revenue was down 18% year-over-year. You talked about the challenges that all asset managers are facing in the U.S. in the shift towards passive.

Is active asset management still a business that Great-West life wants to get materially bigger in? I think we all understand the economies of scale that would come from an acquisition and layering on further AUM to that business. But is it something that helps you short-term but you’re just left with a bigger business that’s facing the same structural problems? Where does asset management in the U.S. rank in your pecking order?

Paul Mahon

I would say where we continue to be positively disposed to asset management in the U.S. and frankly globally. We would view the move to passive – to put it into context, closer to 90% rather than 80% of assets are managed actively globally. So the shift to passive has been obviously an issue. Some of it’s systemic but some of it also cyclical. If you consider where we’re at right now with only 30 – the index is only outperforming – there’s 70% of active managers outperforming the index. We could find ourselves into a cycle like that and at the end of the day there’s been a lot of conditions that have had investors on the sidelines. I think the conditions are such that investors could well get actively back in the game on active and you’ll hear lots of industry commentators saying the same.

We think it’s an important part of an overall solution, whether it’s a retirement plan solution, whether it’s accumulating for a family’s accumulation plans. There’s no doubt that if you think about the products, the industry is shifting away from plain vanilla equity and fixed income. And we see moving into alternatives, moving into alternatives, moving into more specialized products, but that’s been a big move in what Putnam’s doing, sort of non-core products. Bob, you might add a little more color on that. But we remain committed and interested in asset management being an important part of all of our businesses because it’s part of the margin and part of the opportunity to grow your business. Bob, anything you’d add?

Bob Reynolds

I would add just that we believe that there is cyclicality to the active versus passive and we’ve been in a period where passive has been tough to beat. As I mentioned before, we’re starting to come out of it. But the real shift has been to look to investment strategies that are non-correlated to benchmarks. And this is an area that Putnam has had great product development in. In fact, over the last several years we probably rolled out 25 new products that dealt with what I would call alternatives. And we feel there’s a real marketplace for those. And along with the fact that active management will come back. It’s a cyclical thing and we’re big believers in it.

Sumit Malhotra

Thanks for your time, guys.

Paul Mahon

Thank you.

Operator

Thank you. Your next question is from Mario Mendonca at TD Securities. Please go ahead. Your line is now open.

Mario Mendonca

Good afternoon. I want to touch on the leverage ratio. It’s a bit higher than I’ve seen it in some time. I think you have to go back to Q1 2015. What I’m interested in is whether the intention is to have that leverage ratio sort of drift back lower this year. I understand there is the – I think there’s a euro bond deal. Or actually, no I’m sorry, there’s the HoldCo maturity, the $1 billion HoldCo maturity in June. What are your intentions there? Have you essentially pre-funded that or is that something you’d let roll off?

Paul Mahon

I’d start out by saying that we’ve got good capital flexibility now for whatever the priorities are. As we think about that maturity, I’m going to let Garry speak to that. We’ve got a disciplined way as the way we think about those. Garry, why don’t you share your thoughts.

Garry MacNicholas

Certainly we’re not in any position at all to comment on plans regarding that maturity. We look at each one of those things on a case-by-case basis. We saw an opportunity when we were looking at the euro bond market. We’d done a non-deal road show the prior year. We saw rates really quite attractive in Europe, so being able to raise EUR500 million at a 1.75% coupon, given that we are looking to expand. That did bump up our leverage ratio. And of course we would be – we haven’t factored in the fact we just paid off the EUR200 million yesterday. So you’re seeing the year-end picture, where the full EUR500 million is factoring in.

I think where we go with leverage ratio will depend on the acquisition opportunities. We’ve said in the past that we would be open to raising that leverage ratio the right opportunities came along. We’ve done it in the past and we would consider that. So it gives us some acquisition fire power. But it’s right in our target type of range and it will move around as it does over the next few years. We still feel we have capacity for acquisitions, that’s really how we view that.

Mario Mendonca

All right. Slightly a different type of question. Strain’s been a little harder to get a handle on over the last little while. It’s been a bit more volatile. I understand what your explanation was, the higher annuity sales in the quarter helped drive the strain lower but are margins annuity sales. Anything you can offer on strain going forward?

Garry MacNicholas

Well, our business mix is, again, we don’t have a forecast of it that we’d share, but our business mix is – we’re looking to do the same types of things we’ve done this past quarter which is write profitable annuity business in Canada, in UK, in reinsurance, in Ireland for that matter. We like that type of business and we’ve been quite good at it. The U.S. business, again, there are – as that mix has shifted to some businesses where we can’t defer the full extent of the acquisition costs, it is straining. But again, to the extent that business is profitable, which we believe it is, then that strain comes back in better income down the road. No fundamental change other than we’re looking to grow our businesses.

Paul Mahon

I’d say grow our businesses, but also I think our pricing discipline’s important. As we went through the falling interest environment in last year, we would have seen more strain on our universal life sales in Canada. And obviously the rise in rates is helpful but we’re also looking to repricing universal life as well as our living benefits products. Those were put on the back burner as we were dealing with the tax exempt changes and redesign our products. Pricing discipline is always going to be important relative to strain and we’ll maintain that discipline.

Mario Mendonca

And just for perfect clarity, when you say that you’re contemplating price changes, it’s to the upside. Is that right?

Paul Mahon

That would be – yes, that would be just making sure we’ve got our pricing in line with the interest environment. So yes, you would expect an upside.

Mario Mendonca

Okay. Thank you.

Operator

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

Paul Mahon

Thanks very much, Michael. I want to thank everyone for participating and particularly the analysts for your thoughtful questions. We look forward to connecting with you again at the end of Q1 and have a great Thursday. Take care.

Operator

Thank you. Ladies and gentlemen, your conference is now ended. All callers are asked to hang up their lines at this time and thank you for joining today’s call.

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