Great-West Lifeco's (GWLIF) CEO Paul Mahon on Q4 2017 Results - Earnings Call Transcript

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About: Great-West Lifeco, Inc. (GWLIF)
by: SA Transcripts

Great-West Lifeco Inc. (OTCPK:GWLIF) Q4 2017 Earnings Conference Call February 8, 2018 3:30 AM ET

Executives

Paul Mahon - President and CEO

Garry MacNicholas - Executive Vice President and CFO

Stefan Kristjanson - President and COO, Canada

Bob Reynolds - President and CEO, Great-West Lifeco U.S.

Arshil Jamal - President and COO, Europe

Analysts

Steve Theriault - Eight Capital

Gabriel Dechaine - National Bank Financial

Mario Mendonca - TD Securities

Tom MacKinnon - BMO Capital

Doug Young - Desjardins Capital Markets

Sumit Malhotra - Scotia Capital

Operator

All participants, please standby. Your conference is about to begin. Good afternoon. And welcome to the Great-West Lifeco’s Fourth Quarter 2017 Results Conference Call.

I would now like to turn the call over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead, Mr. Mahon.

Paul Mahon

Thank you very much, Michael. Good afternoon. And welcome to Great-West Lifeco’s fourth quarter 2017 conference call. With me on the call today are, Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, President and COO of Canada; Bob Reynolds, President and CEO of Great-West Lifeco U.S.; and Arshil Jamal, President and COO, Europe. There are also a number of other senior officers available to respond to questions as required.

Before we start, I’ll draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on slide two. These cautionary notes will apply to today’s discussion, as well as to the presentation material that we have provided.

I’ll provide an overview of Lifeco’s fourth quarter results, including headlines from our Canadian, U.S. and European businesses, and Garry will then provide a more detailed financial review. After our prepared remarks, we’ll open up the line for questions.

The company saw solid operating performances in the fourth quarter with strong topline results and controlled expense growth driving a 5% increase in adjusted earnings year-over-year. Reported results in the quarter were impacted by two one-time items that we announced last week. One was a charge related to U.S. Tax Reform and the other was a net charge on the disposal of an equity investment.

The makeup of our fourth quarter results is similar to that of the past two quarters, strong underlying performances impacted by one-time items. Some of those items were outside our control like the impacts of U.S. Tax Reform, while others were the result of deliberate strategic actions taken by the company. While having a negative effect on reported results, these actions set the stage for stronger earnings growth in the future.

The Canadian segment had a great fourth quarter with healthy premium and deposit growth. Lower adjusted expenses and adjusted earnings growth of 10% year-over-year. The transformation we undertook earlier in 2017 is having a positive impact on our productivity and profitability as you’ve seen in our numbers. It’s also having a positive impact in other meaningful ways, like improving our interactions with customers and advisors, and enhancing our competitiveness.

In fact, I’d like to take this opportunity to acknowledge the great work of Stefan Kristjanson and the team across Canada, whose efforts led to Great-West Life being named Life and Health Insurer of The Year at the 2017 Insurance Business Awards in November.

Moving to the U.S., Empower Retirement is showing great momentum with growth in sales, assets and participants, and operating earnings that have more than doubled since the fourth quarter last year. The sales pipeline remains strong and we continue to evaluate acquisition opportunities in the DC record-keeping space.

Turning to Putnam, scale remains an issue and we continue to actively assess M&A opportunities to address this challenge. Putnam continues to sustain strong investment performance relative to its peers. As of December 31, 2017, 93% of Putnam’s fund assets performed at levels above the Lipper median on a one-year basis and 85% of Putnam’s fund assets performed at levels above the Lipper median on a five-year basis.

As announced last week, reported results in the U.S. were impacted by two charges. One reflected the reevaluation of deferred tax balances and insurance contract liabilities resulting from U.S. Tax Reform.

The other charge related to the disposal of an equity investment in Nissay Asset Management. At the same time, we acquired Nissay’s minority interest in PanAgora. PanAgora is a quantitative institutional asset manager, majority owned by Putnam. It is a fast growing entity and we are pleased to increase our stake to 100% of the voting shares.

In Europe, we saw a solid performance across regions and businesses in the fourth quarter, with double-digit earnings growth in Ireland and Germany. We completed the integration of Irish Life Health, which exceeded our annual pre-tax cost savings target and on January 2nd, we closed the acquisition of Retirement Advantage in the U.K. This acquisition reinforces our already strong position in U.K. payout annuities and has a great new retirement income solution, equity release mortgages to our product line up.

Our capital strength allows us to pursue organic and inorganic growth opportunities. In addition to investments across our operating companies to drive organic growth, we continue to pursue M&A opportunities in the U.S. asset management and DC record-keeping spaces, as noted earlier. Also of interest are acquisitions that add a capacity or extend our position in a chosen market like the recent Retirement Advantage and Financial Horizons acquisitions.

Finally, we are pleased to announce that the Board has approved a 6% increase in our quarterly common dividend to $0.389 per share. This represents our fourth consecutive year of dividend increases.

And now, please turn to slide five. Adjusted earnings this quarter were $734 million, up 5% year- over-year. As noted, adjusted earnings excluded charge for U.S. Tax Reform of $216 million and a net charge on the disposal of an equity investments in Nissay of $122 million.

Lifeco maintained its strong capital position with Great-West Life’s MCCSR ratio at 241%, compared with 233% last quarter. Please note that the MCCSR ratio includes a positive 6-point impact of capital activity in advance of the closing of the Retirement Advantage acquisition. Lifeco cash was approximately $500 million at quarter end and is not included in our MCCSR ratio calculation.

Moving to slide six, Canadian sales decreased by 3% year-over-year, with higher individual and group wealth sales and a return to normalized individual insurance sales as compared to Q4 2016. The decline in individual insurance sales year-over-year reflects the new business surge we experienced in the back half of 2016 and Q1 2017, due to changes in life insurance policy taxation.

U.S. sales were up 4% and 9% on a constant currency year-over-year basis. Empower Retirement sales increased 20% in local currency, while Putnam saw higher mutual fund sales, partially offset by lower institutional sales.

In Europe, sales increased 66% or 60% on a constant currency basis, with higher fund management and pension sales, and a large bulk annuity sale in Ireland, and higher wealth sales in the U.K.

Turning to slide seven, fee income for Lifeco increased 4% year-over-year. Looking at the segment results, Canada’s fee income was up 9% due to higher average assets under administration driven by higher average equity markets and positive net cash flows.

In U.S. fee income was flat year-over-year and up 4% on a constant currency basis due to asset growth at Putnam and Empower. In U.S. dollar terms, Empower’s fee growth of 3% was impacted by a reclassification adjustment in last year’s fourth quarter. Excluding that adjustment, which had no bottomline impact, Empower fees were up 13%, while equity markets experienced strong growth year-over-year, particularly in the U.S. Fee income at Putnam was impacted by a decrease in performance fees and asset mix.

In Europe, higher asset management fees in Ireland and Germany, and higher other income in Ireland drove an 8% increase in fee income, 4% on constant currency year-over-year.

And now referring to slide eight, adjusted expenses for Lifeco were up 1% year-over-year. As a reminder, we define adjusted as excluding restructuring charges. In Canada, adjusted expenses declined 3% year-over-year, reflecting savings related to our business transformation initiatives. We have achieved $123 million of pre-tax annualized expense reductions as of year-end and remain on track to achieve $200 million of annualized reductions by the end of Q1, 2019.

In the U.S. expenses were flat year-over-year and up 5% on a constant currency basis. Expenses at Putnam increased 4% in U.S. dollar terms, driven by performance incentive compensation related to our strong fund performance.

In Europe, adjusted expenses increased 10% and 7% in constant currency, mainly due to business growth and expenses related to charges -- changes to defined benefit plans.

I am now going to turn the call over to Gary. Gary?

Garry MacNicholas

Thank you, Paul. Starting with slide 10, adjusted net earnings in the fourth quarter were $734 million, up 5% year-over-year, equating to $0.74 per share. As noted, reported results included $0.22 per share charge for U.S. Tax Reform and the $0.12 per share net charge on the disposal of the equity investment in Nissay Asset Management.

In Canada, earnings increased 10% year-over-year, primarily due to higher fee income, strong group health and disability results, the favorable impact of re-pricing activity in individual insurance and lower expenses from transformations.

In the U.S., adjusted earnings declined 3% year-over-year and were up 2% in constant currency. As Paul noted, Empower results were strong with earnings of US$30 million, compared to US$12 million last year. Putnam’s results were impacted by higher expenses and less favorable tax related items, but benefited from the write-up of an intangible of US$10 million.

Europe’s adjusted earnings were flat year-over-year and down 1% in constant currency, with higher earnings in Ireland and Germany offset by lower U.K. and reinsurance earnings.

Turning to slide 11, note that here we are showing the source of earnings on an adjusted basis, which excludes the impact of U.S. Tax Reform, the net charge on the sale of the equity investment in Nissay and restructuring costs. These items are shown after-tax at the bottom of the display.

We have included the source of earnings on reported earnings in the supplemental package breaking out those impacts by line and category, so that you could see the pre-tax view as well. And as a reminder, the source of earnings category is above the line are shown pre-tax.

Lifeco’s year-over-year expected profit increased $9 million for 2016, mainly due to underlying business growth across the segments. You may recall that in Q1 last year, we spoke about a realignment in our approach to expected profit for 2017. In effect, in 2016, the expected profit was too high and the experience gains were too low.

That change explains the more muted increase you see in expected profit this quarter, compared to Q4 last year. Note, expected profit increased $22 million from the prior quarter due to the underlying business growth and currency gain.

New business strain of $18 million in Q4 2017 improved by $25 million compared to the prior year, largely due to re-pricing actions in Canada. Strain was broadly in line compared to the prior quarter, notwithstanding that Q3 included the benefit of two large longevity swaps in reinsurance.

Experienced gains of $83 million in Q4, reflected investment gains of $81 million, with other experience variances essentially net each other out. Favorable group health and disability experience in Canada and Ireland, and favorable fee income and expenses in Canada was largely offset by negative disability experienced in U.K., policyholder behavior experienced in Canada and higher expenses in Europe, largely related to the pension plan changes noted earlier.

Assumption update and other management actions resulted in a release of $125 million this quarter. The implementation of new actuarial standards resulted in a release of $105 million for mortality improvement assumptions, reflecting our diversified portfolio and a charge of $38 million for reduced ultimate reinvestment rate assumptions, as noted in earlier quarters.

Positive updates to economic assumptions and group disability assumptions in Canada and Europe were partially offset by strengthening of last assumptions primarily in reinsurance. Other of $20 million includes the write-off of the intangible assets in the U.S.

Earnings on surplus of $1 million were $13 million higher than last year. This is primarily due to higher gains on seed capital in Canada and Putnam, and higher OCI gains. All this comes together in the adjusted net income before tax shown in the middle of the page, which is up 5% year-over-year.

Turning to slide 12 and this shows the source of earnings for the full year in 2017, as it’s the end of the year. Again, this view is showing adjusted net earnings, which excludes the impact of U.S. Tax Reform, the net charge on the sale at Nissay and restructuring costs. These items are again shown after-tax at the bottom of the display.

Lifeco’s expected profit of $2.7 billion in 2017 was $30 million higher than in 2016. The increase is a primary result of good underlying business growth, partially offset by currency movement and that realignment of experience gains as discussed earlier. Strain of $150 million in 2017 was lower than 2016 as a result of re-pricing actions in Canada and gains on large annuity sales and longevity swaps in New York segment.

Experience gains of $341 million in 2017 were $155 million higher than 2016. The gains in 2017 were primarily result of investment experience, including field enhancements in all the segments with the other gains and losses largely offsetting.

Management actions and changes in the substance contributed $359 million to pre-tax earnings in 2017, compared to $547 million in 2016, and earnings and surplus of minus 4 this year was $62 million lower than 2016 primarily due to lower OCI gains and the gain on the sale of investment in 2016.

Turning to slide 13, Lifeco’s uncommitted cash position remained strong at $0.5 billion. Our cash position is lower than the prior quarters, as we downstream funds to the U.K. prior to year-end for the closing of the Retirement Advantage transaction in early January. Our book value per share was up 2% year-over-year at $20.11.

Adjusted return on equity was 13.4% or 14.3% excluding the catastrophe reinsurance loss in the third quarter. Reported ROE was 10.9%, reflecting restructuring charges, last quarter’s reinsurance losses, as well as the charge for U.S. Tax Reform and the disposal of the Nissay investment in the current quarter.

Turning to slide 14, assets under administration were $1.3 trillion, up $102 billion or 8% year-over-year, driven by market performance and overall business growth.

That concludes my formal remarks. Back to you, Paul.

Paul Mahon

Thanks, Garry. I’ll refer you to slide 15 now. And before we take questions, I just would like to say that we are quite pleased with the momentum we are seeing in our businesses and confident that the strategic actions taken throughout the year are setting the stage for stronger earnings growth of at Lifeco.

Our transformation initiatives in Canada are driving organic growth. Acquisitions like Retirement Advantage expanded our portfolio and brought new capabilities, and Financial Horizons, which extended our distribution reach further into the independent MGA space, bring important new growth levers.

Investments in innovation and technology will continue. Our investment in the Empower platform positions us well to be a consolidator and to grow organically by delivering a great experience to plan sponsors and their participants.

Our investment in Wayfinder in Canada is helping us grow our business with current group customers with plans to deploy it to new under-served segment of the Canadian market in the future.

And finally, our capital strength and financial flexibility put us in a solid position to act on attractive acquisition opportunities.

So, with that, Michael, we’ll now open up the line for questions from analysts. And I would like to ask analyst to direct the questions to me, so I can either answer or steer them accordingly. Thanks.

Question-and-Answer Session

Operator

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

Steve Theriault

Thanks very much. A couple of questions, if I could start with Europe, if I take the $54 million out of the European earnings for the U.S. Tax Reform charge, you get to relatively unchanged year-on-year numbers. So, Paul, I imagine you’ll refer that to Arshil, but is that how you suggest we should look at it or is there any other noise in the quarter, something I am missing and then sort of related there was mentioned of higher other income in Ireland, is that the bulk annuity sale that was mentioned somewhere in the release?

Paul Mahon

I am going to refer that one over to Garry actually to say.

Garry MacNicholas

Okay. Sure. Just on the later points on the other income in Ireland that will be more of the Health business that we’ve added to Irish Life Health.

Steve Theriault

Okay.

Garry MacNicholas

And then, yeah and Steve relative to there’s really no other significant noise in the quarter.

Arshil Jamal

So just to give you a little bit of color year-over-year, I think, year-over-year we’ve seen very strong growth in the earnings both in Ireland and Germany as the underlying businesses are both in Ireland and Germany continue to benefit from strong flows and high levels of persistency. We also had a modest tax contribution in Germany this year that added to that result, and so, again, as Paul mentioned in his introductory comments, very strong growth in Ireland and in Germany.

And in the U.K. it was more of a mixed picture quarter-over-quarter this fourth quarter ‘17 against fourth quarter ‘16. We did see some better investment experience, but our morbidity experienced in the U.K. was a disappointment in the fourth quarter and we also had very favorable mortality experience in the prior year. So while we weren’t unhappy with the mortality experience that we had in the fourth quarter but previous years saw very strong contribution from mortality.

So, again, the underlying business trends in the U.K. I think are favorable and positive, and we have the Retirement Advantage acquisition closed on January 2nd, and that will start to contribute in the latter half of this year. So, yeah, we are very pleased with the quarter’s result and particularly the full year results where all of the business lines continue to perform very strongly.

Paul Mahon

Yeah. And Steve, I think, it also speaks to the diversity of the overall European reinsurance business, we are little bit off in quarter in the U.K. because of those dynamics, but we are seeing good strength out of Ireland and Germany, and we really like the fact that we are expanding these businesses in all those different areas.

Steve Theriault

And does the strength in Ireland have to do somewhat with the bulk reinsurance transaction?

Arshil Jamal

No. I mean, certainly the sales performance in Ireland reflects…

Steve Theriault

Yeah.

Arshil Jamal

… that large bulk annuity transaction €335 million that closed in quarter. But that didn’t really have a material impact on earnings in period that will contribute over the life of that transaction. What’s really driving that situation in Ireland is all of the Wealth Management and Fund Management businesses have been benefiting from very strong flows.

So fee income has been going up. We did get a very good contribution from the Health Insurance business. So we concluded the integration activities there, but the underlying experience has been very favorable. We did cut prices because we are trying to build market share there, so some of that favorable morbidity going forward is getting shared with the customers.

And then, again, we’ve had an external environment where the markets have been doing well and the credit environment has been relatively benign. So, all of those things have been helping us to put very strong sales and earnings growth in Ireland and in Germany.

Steve Theriault

Okay. Thanks very much.

Paul Mahon

Thanks, Steve.

Operator

Thank you. The next question is from Gabriel Dechaine at National Bank Financial. Please go ahead. Your line is now open.

Gabriel Dechaine

Good afternoon. Just on that the Europe segment before moving on. It was the only business where we had a pretty big increase in expenses, constant currency or as reported, I guess. And then talk about DB expense some -- I am butchering this, but can -- was there some sort of one-time expense in there that that’s going to go away?

Garry MacNicholas

Yeah. It was related to pension curtailment in Ireland and it was an expense related to implementing that. And I would know that the pension curtailment is really about de-risking our pension liabilities. It really transitioned from DB to DC, and it’s quite consistent with market practices, you can see going on across really all industries in Europe and that was really the majority of the expense rate. But we are also seeing growth in business in Ireland. So you’d see a bit of a rise there in expenses as well.

Gabriel Dechaine

Were this part of your external business or is -- to me it read like you had a pension expense in your own business?

Garry MacNicholas

In our own business, this was curtailing our Irish Life pension.

Gabriel Dechaine

Okay. How much was that?

Arshil Jamal

It’s only -- the one-time cost in Ireland on the order of $10 million.

Gabriel Dechaine

Okay.

Arshil Jamal

It was predominantly extra costs associated with our agreement with the trustees to stop accruals in our own pension plans for our employees in Ireland and move all of our employees fully on to DC arrangements. There were also some extra legal costs in Ireland, but that was a smaller proportion of level, so about $10 million.

Gabriel Dechaine

Okay. Yeah. Nothing major. All right. Great. Canada then that business has been moving along nicely over the course of the year. We are seeing the expenses coming down. But also the group business looks like another quarter of positive morbidity experience. Can you tell me what the experience was in the quarter for morbidity and what it was for the year?

Paul Mahon

Well, Garry is looking into that at this moment. But I would acknowledge, I think, what you’re seeing in Canada as you said, the benefits of the expense improvements we are seeing continuation of good group morbidity in particular. Hi, Garry specifically.

Garry MacNicholas

Yeah. Just morbidity in Canada, this was -- largely the group was contributed $34 million to that experience gain this quarter. I don’t have the year-to-date in front of me, but it was $34 million this quarter and that has been on improving trend through the year.

Gabriel Dechaine

Was it positive for the year, I mean, I just need a magic there, okay?

Stefan Kristjanson

Yeah. It was -- It’s Stefan, it was absolutely positive for the year. We’ll get back to you with the full year number, but I’ll remind you that the disability from a pricing perspective on the group business once you take action, it takes 12 months to run it through your whole block. So there’s an evolving trend and what we are seeing now is the full realization of that pricing action being put into place by the fourth quarter of 2017.

Garry MacNicholas

Yeah. So the full year number was $43 million for morbidity in Canada.

Gabriel Dechaine

Okay. So we are fully re-priced now and is it at that point where you’re confident in its success of the re-pricing and then can move some of that experience gain into expected profits next year?

Stefan Kristjanson

Yes. Yeah. That’s the dynamic and like anything else, it can be volatile benefit. But, as we have said before, it can be volatile and cyclical. And at this stage, we have taken good action, the right action, and I would say that, business persistency is also holding up. So it’s -- we are in good shape with that business right now.

Gabriel Dechaine

My last one is on the expense or the transformation program. The biggest one of which is in Canada and this isn’t exactly the same, but historically from Great-West you’ve had a really strong track record of quantifying an expense reduction target usually in association with an acquisition and then exceeding it and frequently by a large margin. Is this something that we could look forward to from this particular program or maybe not?

Stefan Kristjanson

I would characterize this differently than our typical acquisition where you got in with a fair degree of uncertainty as you think about. You set a target but you look at an acquisition, you are not certain on what your target systems will be, exactly what your target operating model is. This is a far more precise and I don’t think we view this like an acquisition. We have a target in mind and we are very focused on achieving that target.

Gabriel Dechaine

Got you. Great. Thank you and have a good weekend.

Paul Mahon

Thanks.

Operator

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

Mario Mendonca

Good afternoon. Paul, the savings in Canada, I want to see if I can think of a good way to incorporate this into earnings maybe more directly. There is $200 million call it say 75% accrues to shareholders. Would it be appropriate to assume that a good portion of that falls into expected profit over time in 2018 and 2019?

Paul Mahon

Yeah. I can actually refer that all. In terms of geography where it’s going to fall, I am going to let Gary speak to that.

Garry MacNicholas

Yeah. I mean a good portion of that will fall into expected profit over time. But I’d also caution to the couple of elements. The cost related to the distribution, those tend to fall to the new business gains or they go to reducing your DAC, which reduces your amortization down the road.

So you’ve got the distribution related going in the new business side and then what you’ll see is, as we get a run rate, so you have a run rate of a certain amount at the end of a quarter, that forms the basis for going into expected profit the next quarter. And then, again, as we build up our run rate it forms that base wanted to expect the profit.

And I’ll use the example, I think, there has been questions on this. We had $69 million of shareholder annualized run rate savings at the end of last quarter. So it’s about $17 million expected for this quarter, $12 million went into expected profit and remainder the other four or five went into the new business gain side. So that’s how the geography lays out.

Mario Mendonca

Okay. So would not be unreasonable then for us to assume that the growth in expected profit in Canada, which is picking up, but still rather light. It would not be unreasonable for us to suggest that improves meaningfully in 2018?

Garry MacNicholas

This will certainly contribute.

Paul Mahon

Yeah.

Garry MacNicholas

I mean, obviously there are other factors but the…

Mario Mendonca

Sure.

Garry MacNicholas

…expense -- the expenses will continue to contribute on a growing basis, presuming that we continue to deliver the savings according to plan.

Mario Mendonca

Okay. All right. My next question or last question actually is, Paul, the quote you offered at the very beginning or in your press release -- in the press release, you start -- you say that you’d expect earnings to be stronger going forward. And that’s helpful to hear, but what I’d like to know is stronger than what? What are you referring to? Stronger than last year, three years, what is the -- the er in stronger mean?

Paul Mahon

What I would say is that I am not talking -- I am not giving you a projection of the next six months, nine months, 12 months or 24 months. What I am saying is that as we are actually taking actions with things like acquiring a Retirement Advantage, it gives you a new arrow in the quiver. So what you’ve got is an opportunity to drive higher revenues and better margins, and frankly, to use that product to your advantage. Financial Horizons Group recently closed two tuck-in acquisitions. So we are going to see higher revenues coming from that.

So the point of that was that as we are taking actions strategically to invest either in capabilities or in extending our businesses, and fundamentally we are also focused on can we deploy capital into whether it’s a Putnam acquisition or acquisitions, let’s say, in the Empower and that’s going to drive strong earnings. So the er would be taking actions that have the potential to drive topline and bottomline, and that’s what we are setting ourselves up for.

Mario Mendonca

But at this point you don’t want to give us a base from which to compare?

Paul Mahon

No. At this point, Mario, I don’t choose to do that.

Mario Mendonca

Understood. Okay. Thank you. But you can understand why I asked…

Paul Mahon

I always understand.

Mario Mendonca

… the er meant something to me.

Paul Mahon

Okay. Thank you.

Mario Mendonca

Thank you.

Operator

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

Tom MacKinnon

Yeah. A question for Garry, and then, perhaps, a follow-up. Garry, we had significant positive strain in Canada and I think you spoke of re-pricing actions. Is that positive strain related entirely to individual life re-pricing actions and is it sustainable?

Garry MacNicholas

Yeah. Tom, to start, strain is obviously across a number of products and we have been re-pricing individual products. So we have obviously done a lot of re-pricing on group. But I think the strain broadly refers to individual products. Garry will have the detail.

Garry MacNicholas

Yeah. We had a couple of things contributing. The majority was this -- the re-pricing and I think to the extent, rates -- interest rates continually will pick up that will persist until such time as there’s other re-pricings, but that will be a tailwind for us.

And then, secondly, we also had some higher yields on the group annuity side. We had some good returns there that helped boost on some new sale. So there’s a bit in the group annuity side as well this quarter.

Tom MacKinnon

I mean this number has generally just been singled -- low single-digit at best and then it’s $27 pops up in this quarter. I mean is that sustainable. It looks like you only had about $30 million in terms of non-par individually life sales in the quarter. I can’t imagine you get $27 million in a positive strain out of it?

Garry MacNicholas

Yeah. I -- in terms of the increase, so I’d say call it a $20 million over the normal run rate. Of that $20 million, about half was the group annuity sales, and obviously, that will depend on sales as they come in and the other half would be again continuing on the re-pricing, that’s been driving the increases earlier this year as well. So you can sort of…

Tom MacKinnon

Okay.

Garry MacNicholas

… compare from that which fits our sustainable, really depends on the sales flow. But we do have a firm handle on that pricing discipline and that’s going to benefit us.

Tom MacKinnon

Okay. Thanks. And then, question with respect to Putnam, the margin is just being 1% here and you’re already through your expense reduction program. We would have thought the expense reduction program was going to do something to improve margins here, but we are still back to some pretty low margins. So what’s the plan here and why were these expense reductions, why haven’t these expense reductions resulted in any improvement in the margin?

Paul Mahon

Yeah. There is lots of myths fall here. There is lots of moving parts that we have got here. I mean if we look at fee income at Putnam in the quarter, we saw obviously growth in investment management fees, but in particular this quarter we saw performance fees that were down year-over-year that was offsetting that and that was in particular driven by two funds.

Another dynamic and this is really kind of consistent with market dynamics, where you’ve had active fixed income flows with active equity outflows and that’s actually had a dampening effect on the overall the average asset rate.

So you get some dampening effects of those in a particular quarter and those -- I would view those performance fee as not a something that’s going to have continuity into the future, but in particular happened this quarter. Any other comments, Garry?

Garry MacNicholas

No. I just noted on the expense side, the benefits of the restructuring were in Q4 last year, as well Q4 for this year. So it started on a more level playing field than perhaps the other quarter-over-quarter comparisons in 2017.

And then there was with the better fund performance at Putnam, and I think, Paul mentioned in his opening comment, with the better fund performance we did accrue for higher performance related compensation. So we put that accrual and that will have a dampening effect this quarter, more of a timing on 2017. But it’s just important to note that both quarters has the benefit restructuring year-over-year change.

Tom MacKinnon

And then finally, the MD&A made a note of some favorable impact of items taxed outside of Canada, as well as changes in certain tax estimates. Was that -- was there any other tax thing that kind of boosted the numbers in the quarter?

Paul Mahon

For that I’ll refer it to Garry.

Garry MacNicholas

Yeah. There was a -- we had -- in addition to the fact that we obviously earn income in number of jurisdictions, so depending on which jurisdiction income rises. We saw good results in Ireland and the German operation. So certainly the Irish operates at lower tax rate that would contribute.

There was one specific matter in Germany and that was a -- we reduced a provision for -- it’s a taxed actually between two countries that we are holding a provision against and we have reduced that in the order of, I think, €16 million.

Tom MacKinnon

Okay. Thanks.

Paul Mahon

Thanks, Tom.

Operator

Thank you. The next question is from Doug Young at Desjardins Capital Markets. Please go ahead. Your line is now open.

Doug Young

Good afternoon. Just wanted to clarify a few things, just I mean in Canada expected profits up 2%, U.S. if you exclude Putnam, looks like expected profits down 13%. I think, Gary, you mentioned the reorganization of how you approached expected profit and experience in 2017 relative to 2016. So is there any way to get a sense of what those would be if you kind of normalized?

Paul Mahon

Yeah. I think there’s one driver that I think I referenced in my earlier comments. But I’ll let Garry speak to that one.

Garry MacNicholas

Yeah. On the -- I did note that realignment. So if you -- and this was really the 2016 expected profit was anticipating savings that were in plan and to the extent we got delayed on some of those -- realizing some of those savings, we end up calling an experience clause. So now we have got a rigor where we want to see the lower run rate, as I was describing earlier to a question, we see the low run rate then it goes into expected profit.

This was -- and it was predicted to the U.S. segment last year. So that’s the only number adjusted. But it was about a $53 million switch on this is the pre-tax expected profit Canadian dollars in U.S. So -- that overall about $53 million in Q4 last year would change the U.S. dynamics from being a reduction of 13% to quite a good increase. That should $53 million is the number I think you’re looking for.

Doug Young

Yeah. And that’s just for Q4, right?

Garry MacNicholas

Half for Q4, it was $77 million for the full year.

Doug Young

$77 million.

Garry MacNicholas

It was getting -- we did -- recall we took some restructuring action at Empower in Q1. I think we got ahead of ourselves on the expected profit in the back end of 2016.

Doug Young

Okay. And then in Canada was there anything abnormal or was that 2% just a function of some challenges in the business that wasn’t really related to the reorganization?

Paul Mahon

Correct. It was not related to the realignment that had some just the various pluses and minuses in the businesses which went through 2017.

Doug Young

Okay. And then the $20 million write-off in the intangible asset in the U.S., was that one of the items that you backed out to get to your adjusted EPS or was that not backed out?

Paul Mahon

Garry.

Garry MacNicholas

That was not backed out. It was not related to those other items.

Doug Young

Okay. So that wasn’t backed out. And then just earnings on surplus, look about $20 million, $30 million lower than normal. Was that just you took losses on the AFS or AFS gains were less than normal, can you give a little detail around that?

Garry MacNicholas

Yeah. There was nothing unusual on the earnings and surplus in that quarter. I think the gains on the seed capital might have been a little lower than prior quarter. And I think the prior year we also had -- certainly year-over-year we would have had earnings in Elion, Thailand, we sold that stake of during the year. So that’s another aspect that would have impacted the result.

Doug Young

Is there kind of a normalized earnings on surplus that we should be thinking about on a quarterly run rate basis and I fully appreciate it’s going to bounce around, but it just seems to have been non-existent over the last few quarters?

Paul Mahon

Yeah. I don’t think, it is going to bounce around not the reality and it’s pretty hard to sort of lock in the number, and say, we should be expecting a constant when it’s going to be bouncing.

Doug Young

But if we look over the last eight years in average, is that a fairway to kind of consider what maybe it would be?

Garry MacNicholas

Yeah. I cautioned looking over the last eight years, because you’re going to have, obviously, we have been period of declining interest rates, so some of the assets and surplus would be declining. Also we have all of our financing cost in there. So it’s a -- that’s why the number is not a large number to start with in terms of the overall. And Paul is right, it does bounce around period-to-period. It is seed capital results, gains or losses on AFS assets and any other equity accounted investments.

Paul Mahon

Yeah. And I do think that tracking a declining interest rate environment during that period and we are in a different interest rate environment now. So I wouldn’t want to be try to put a marker on that.

Doug Young

No. That’s fair. Okay. Thank you very much.

Operator

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

Sumit Malhotra

Thanks. Good afternoon. I just want to make sure I am thinking about this expected profit versus experience gain issue correctly. First off, Garry, was it that $77 million number, I think, you quoted to Doug for the full year, was that for one of the geographies or was that a total company number?

Garry MacNicholas

It was a total company number, but I think it actually all occurred in the U.S.

Sumit Malhotra

All occurred in the U.S. And then maybe more specifically, so over the course of this year as the benefits of the restructuring have had a bigger impact. We’ve seen your expense numbers across segments decline. I think there’s a slide you show here on page eight. So when we look at the expenses particularly in Canada down sharply. As that takes place during the year, would that have been a benefit to expected profit this year or is that, I think, what you are referencing that now that you’ve started to see the reduction, it’ll move from experience to expected profit in 2018?

Paul Mahon

Garry?

Garry MacNicholas

Yeah. It’s the latter. There has been some benefit in the expected profit already this year, but as we are in the early stages of pick in Canada than, as I mentioned, it would have been $12 million benefit to expected profit in the fourth quarter. So it’s gradually working its way in as opposed to last year it’s we had just gotten ahead of ourselves in some of the other transfer that you will see it in Empower as we have realized those run rate savings, we do put it in expected each quarter.

Paul Mahon

But it’s going to be the annualization over time as it build.

Garry MacNicholas

Yeah. It will build over time.

Sumit Malhotra

I think, maybe the bigger question here is, like to the extent that at least from my perspective, I look at the expected profit as the best indication of the future growth for the company. In Canada specifically that line has been quite flat for GWO for a few years now. So expenses as a part of it I think you talked before about some of the re-pricing initiatives. Maybe, yes this is directed to you Paul, what do you think has been the governing factor that’s held the underlying performance of Canada and expected profit back for a few years, and more importantly, what makes this turn going into ‘18?

Paul Mahon

Yeah. I think the two dynamics that I believe will drive expected profit forward have been thing holding it back, so we have seen our group disability results in particular group morbidity held back because of under pricing and impart you could say, market conditions in terms of claims rate and so as we re-price that business and set those prices. And as Stefan outlined, it takes -- it’s been around from the date you actually re-price, it takes 12 months to get your last re-pricing, and so frankly, it’s a full 24 months until we see the full effect that is flowing back.

And the other dampening effect was, as you recall, we had expense growth rates that were into almost the double digits in Canada as we were really investing heavily in some technologies and other capabilities. If you go back to couple of years that had a dampening effect. Again as we go through this transformation, we have got the opportunity then for that to come back into the frame. But the reality is both those things take time and these are very disciplined actions we are taking around transformation and restructuring and around re-pricing.

Sumit Malhotra

All right. Thank you for that. Last one for me is going to be on Empower and maybe more specifically looking at your slide 19 in this presentation. So Empower is another area where your expense initiatives have certainly been visible this year, and I think, we see that again this quarter with operating costs down. It does seem like the revenue side though has at least the way you measure it here via fee income, we have once again had one of those issues where it hasn’t necessarily been keeping pace with sales. I know you’ve talked about there’s a lag from the time that a sale is enacted to when the fee income starts to pick up. I was of the view that the company was now in a position where those two would be more tied, but at 3% the fee income did seem to decelerate. What’s the disconnect if I can call at that between sales and fee income, and is it reasonable to expect those two to move at a more in line with one another?

Paul Mahon

Yeah. Actually, the reality is that the fee income growth year-over-year you’re seeing that is -- there’s a reference point there we really need to refer to an adjustment and let Garry speak to that.

Garry MacNicholas

Sure. And, Paul, I mentioned [inaudible] (46:50) we had in Q4 last year and it’s been MD&A last year again this quarter. In Q4 last year we had a reclassification, we had not been counting the -- counting fee income. We changed the classification. And so what we have done is there’s a €23 million adjustment, there was a catch-up last year. So, the $265 million included a full year to catch-up on this issue where we have been understating our fee income. And so that number on an apples-to-apples basis is 23 to high, so it’s a $242 million on, if you looked on page 19, that you’re looking at.

Sumit Malhotra

Okay.

Garry MacNicholas

And then you’ll see a 13% percent year-over-year, that just we had understated our fee income throughout 2016, did a catch up in Q4 last year. So, on an apples-to-apples basis it’s a 13% growth, which I think is more in line with what you would expect. There was no impact on the bottomline, it’s just a reclassification.

Sumit Malhotra

Okay. So, yeah, thanks for that. So I’ll let Paul back in, but from what you’re telling me that it’s the underlying fee income growth is more on par with the sales trends in this business?

Paul Mahon

Exactly. Yeah. On par with the sales trend and with -- and what’s happening with equity market level. So, but the reality is, yes. So if you go through that adjustments, I think, you’ve got it right.

Sumit Malhotra

Okay. Thank you for your time guys.

Paul Mahon

Thanks.

Operator

Thank you. There are no further questions Mr. Mahon. I would like to turn the conference back over to you.

Paul Mahon

Well, thank you, Michael. With that, I’d like to thank you all for joining us for the call today. I’d invite you to please contact our Investor Relations area if you have any follow-up questions or if you’d like to speak to anyone about any more detail. And in the meantime we look forward to connecting with you at the end of next quarter. Take care.

Operator

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