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Markets are due for a near-term correction due to overextended technicals, exuberant valuations, and a more hawkish Federal Reserve. Despite short-term caution, I remain bullish on the U.S. economy and high-quality stocks for the intermediate and long term.
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Operator: Thank you for standing by. Welcome to the Great-West Lifeco Third Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would like to turn the conference over to Mr. Shubha Khan, Senior Vice President and Head of Investor Relations at Great-West Lifeco. Please go ahead. Shubha Khan: Thank you, Morgan. Hello, everyone, and thank you for joining the call to discuss our third quarter financial results. Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at greatwestlifeco.com under the Investor Relations tab. Turning to Slide 2. I'd like to draw your attention to the cautionary language regarding the use of forward-looking statements, which form part of today's remarks. And please refer to the appendix for a note on the use of non-IFRS financial measures and important notes on adjustments, terms and definitions used in this presentation. And turning to Slide 3. I'd like to introduce today's call participants. Joining today -- joining us today are David Harney, our President and CEO; Jon Nielsen, our Group CFO; Jeff Poulin, CEO, Reinsurance; Ed Murphy, President and CEO, Empower; Fabrice Morin, President and CEO, Canada; Lindsey Rix-Broom, CEO, Europe; Linda Kerrigan, our appointed Actuary; and John Melvin, our new Chief Investment Officer. We'll begin with prepared remarks, followed by Q&A. With that, I'll turn the call over to David. David Harney: Thanks, Shubha. Please turn to Slide 5. We had a great third quarter delivering very strong results and executing effectively on our strategic priorities. Base earnings reached a new record high, but more importantly, I am very pleased that we saw good earnings growth in all our 4 segments, including double-digit base earnings growth in the U.S., Europe and Capital and Risk Solutions and mid-single-digit base earnings growth in our Canadian business. This performance underscores the strength of our market positions and the ability of our teams to meet evolving customer needs. This quarter also [Technical Difficulty] and continued to return capital to shareholders through our normal course issuer bid. Given our robust cash flows and balance sheet flexibility, we are announcing a further increase to our target repurchases for 2025. Today, in addition to remarks from myself and Jon Nielsen, Jeff Poulin will provide more insights on our Capital and Risk Solutions business, a strongly performing business and a key contributor to Great-West's ongoing success. Please turn to Slide 6. As I said, we are pleased to report a strong third quarter, driven by solid execution across our business. We achieved record base earnings up 15% year-over-year and a base return on equity of 17.7%, also a new high for Great-West. Our financial position remains very strong with solid capital and leverage ratios, giving us significant financial flexibility to enable future growth. As at November 5, we had repurchased just under $1 billion in common shares. And given the strength of our business, we are raising our total 2025 target buyback by $500 million to $1.5 billion. Jon Nielsen will elaborate on this shortly. Please turn to Slide 7. Our results reflect successful execution of growth strategies in Wealth, Retirement, Group Benefits and Insurance. We are proud to serve over 40 million customers globally, and we work hard to deepen these relationships. In the U.S., our Retirement business had a fantastic quarter with net plan inflows of USD 30 billion which I'm sure we will discuss later in the Q&A. Empower's Wealth business also achieved a very significant milestone, crossing USD 100 billion in client assets reflecting the continued momentum of the business since its launch in January 2023. In Canada, continued investments in technology and digital capabilities are enhancing customer and adviser experiences, improving operational efficiency and positioning us for further growth in Group Benefits, Wealth and Retirement. In Europe, we consolidated asset management operations, increasing its scale and competitiveness, which is an important enabler to our strongly growing Wealth and Retirement businesses in Europe. And our CRS business continues to capitalize on global opportunities delivering tailored solutions and attractive returns. Jeff Poulin will discuss further in a moment. And finally, I'd like to welcome John Melvin, who joined us on first of October as our new Chief Investment Officer. John's experience and expertise will help shape our global investment operation, and we're delighted to have him on board the Great-West team. Please turn to Slide 8. I am particularly pleased that the results this quarter reflect the strong market positions in each of our 4 segments. We are delivering on our medium-term growth ambitions through organic growth. Our teams are working hard to meet the retirement, wealth and insurance needs of customers, and our market-leading positions continue to be well placed to benefit from favorable demographics, socioeconomic, commercial and public policy tailwinds. I'll pass it now to Jeff to speak to our Capital and Risk Solutions business in a bit more detail. Jeff Poulin: Thank you, David, and good morning, everyone. Please turn to Slide 10. The Capital and Risk Solutions experienced a very strong quarter with base earnings up 20% year-over-year. This was primarily fueled by our Capital Solutions business where we closed several deals in the quarter. The capital we invested to underwrite these transactions drove a 36% increase in the run-rate insurance results for our Capital Solutions business. The pipeline in that business remains strong, and we continue to expect new deals in the coming quarters. Favorable mortality experience in our U.S. traditional life portfolio also supported strong earnings growth in the quarter. Turning to Slide 11. In recent years, our business mix has increasingly shifted to Capital Solutions or structured reinsurance, as it's often called in the industry. This business helps clients to more closely align their capital to the inherent risk of the underlying business and at a more reasonable cost relative to alternative solutions. Demand for Capital Solutions has increased significantly over time. In the last 30 years, the reinsurance market has evolved from one purely focused on risk sharing to one where primary insurance carriers are increasingly looking for help with capital management. More recently, insurance markets around the world have experienced increased inflationary pressures with premiums rising to offset the increase in claims. As required capital is sometimes directly proportional to premiums, these pressures have further spurred demand for Capital Solutions. And CRS has been able to capitalize on this opportunity. By contrast, our Risk Solutions business, which involves more traditional reinsurance transactions, has grown at a more measured pace of late. Margins on certain types of business have become less attractive due to increased supply of traditional risk transfer solutions. We have, therefore, pivoted Capital Solutions -- to Capital Solutions in recent years, where market conditions are significantly more favorable. Turning to Slide 12. I want to take this opportunity to demonstrate how we create value through Capital Solutions given the particularly strong growth in that business this quarter. Each transaction is unique, and we look to help clients with their capital needs by identifying opportunities to more closely match their capital with the inherent risk of the underlying business. Traditional financing solutions such as raising debt or equity capital are less efficient. They improve available capital at a potentially higher cost of financing than solutions that more closely align capital to risk. By contrast, Capital Solutions involves optimizing required capital which has a more favorable impact on capital ratios and returns on a per dollar basis. Since insurers hold a multiple of their required capital, it is more efficient to reduce the required capital and to add to available capital. Overall, this makes our products more attractive to clients than traditional forms of financing. CRS is a very experienced team that tailors each transactions to the clients' needs. We spend time with clients and use a variety of treaty mechanisms to transfer risk in a managed way that provide capital relief at an attractive price. The goal is to have structures that transfer the risk to CRS but allow the client to retain more of the underwriting economics of the business reinsured. Turning to Slide 13. CRS is well positioned to capture a meaningful share of the growing demand for Capital Solutions, thanks to several competitive advantages. These include support from Lifeco and a strong credit rating, both of which make us a reliable counterparty, deep and enduring customers relationships, having helped clients manage through insurance cycles and changing regulatory environments for more than 3 decades and an opportunistic and selective approach to new business, reflecting a strong risk management culture. Combined with the favorable market outlook for Capital Solutions, our competitive strengths may give me confidence that CRS will continue to deliver earnings growth in the mid-single-digit range or better over the medium term and continue to be significantly accretive to the ROE of Lifeco overall. With that, I will turn it to Jon to discuss Lifeco's results for the quarter. Jon Nielsen: Thanks, Jeff. Please turn to Slide 15. Lifeco again delivered record base earnings in the third quarter, supported by constructive global equity markets, strong new business volume, insurance experience gains and modest credit experience. Base earnings grew 15% year-over-year with all lines of business growing double digits. This helped drive base ROE to 17.7%, up 40 basis points year-over-year. Earnings quality continues to be high as net earnings were within 5% of base earnings largely on account of modest impacts from assumption changes and management actions as well as favorable market experience. Please turn to Slide 16. Exceptionally strong insurance experience and modest credit experience bolstered results this quarter. Insurance experience gains were $112 million, nearly twice the 4-quarter average of $58 million. This was primarily driven by mortality gains across all operating segments. As you recall, in the first quarter, we experienced exceptionally weak mortality experience, and we would expect this volatility to continue. Additionally, credit experience was minimal this quarter and well below our 10-year average of 3 basis points. Going forward, we expect credit experience as a percentage of non-par fixed income assets to be in the range of 4 to 6 basis points post tax on an annual basis, based upon long-term industry-wide loss experience. In normal conditions, we'd expect credit experience to be at the low end of this range. However, we would expect volatility period-to-period as a result of idiosyncratic events. Turning now to our results by segment, starting with Slide 17. Empower saw double-digit growth with base earnings up 10% year-over-year in constant currency. This reflected strong organic growth in both the Retirement and the Wealth business. The Retirement business capitalized on strong markets as well as USD 30 billion in plan inflows this quarter, which more than offset participant activity. We continue to expect plan inflows for the second half of 2025 to be largely in line with the USD 25 billion that we shared on the second quarter earnings call. Empower Wealth delivered base earnings growth of 39% year-over-year. This was driven by record net inflows of USD 3.4 billion, up 43% over last year, reflecting continued strength and rollover sales. We remain well on track to improve our rollover rate by 30% over the medium term. Both the Retirement and Wealth businesses achieved record operating margins in the quarter, highlighting the scalability of our platforms and reinforcing the double-digit growth outlook for Empower. Turning to Slide 18. Base earnings in our Canadian operations increased 4% year-over-year due to continued momentum in Group Benefits and Retirement. Group Benefits saw strong organic growth and insurance experience gains, while equity markets and improved segregated fund flows supported Retirement and Wealth results. Underlying growth in our Canadian operations was strong with base earnings up 9% year-over-year, excluding earnings on surplus, which have been impacted by lower yields over the last 12 months. And turning to Slide 19. Base earnings in our Europe segment increased 12% year-over-year on a constant currency basis. As in Canada, this was driven by robust growth of the Group Benefits in-force book as well as strong insurance experience and higher fee income in Wealth and Retirement due to strong global equity markets. Turning to Slide 20. As we have said in the past, the organic capital generation of our businesses is significant but underappreciated. For the last 12 months, base capital generation exceeded 80% of base earnings and would have been higher if not for the very strong new business growth in CRS this quarter. We continue to have a high degree of fungibility in the capital we generate. In fact, the cash remitted by the segments to Lifeco exceeded 100% of base earnings for the trailing 12-month period. We expect remittances in the fourth quarter to be in line with our 4-quarter average. This is the result of our business mix as well as the contributions from initiatives to optimize our balance sheet that we highlighted at our recent Investor Day. Turning to Slide 21. Lifeco's strong free cash flow gives us tremendous flexibility for continued capital deployment. As of today, we have largely completed the previously announced $1 billion of share buybacks and have announced our intention to repurchase an additional $500 million before the end of the year. Turning to Slide 22. Despite strong new business volume in our reinsurance business, ongoing dividend payments and substantial share repurchases this year, Lifeco's financial position has continued to strengthen and remain robust against the backdrop of elevated market and economic volatility. Our LICAT ratio remained strong at 131%, only decreasing 1 percentage point from the prior quarter, primarily due to the increased organic reinvestment in CRS. Given the seasonality of the reinsurance business in the fourth quarter, we expect the ratio to decline by 1 to 2 percentage points through the end of the year. Our leverage ratio decreased by 1 percentage point quarter-over-quarter to 27%, reflecting the maturity of a bond, Lifeco's financial position, including the cash balance of $2.5 billion, positions us for continued financial flexibility, including for any compelling M&A opportunities that emerge. With that, I'll turn it back over to David for concluding remarks. David Harney: Thank you, Jon. Please turn to Slide 24. As we closed out the third quarter and look to finish the year strong, we have high-performing teams that are delivering against focused strategies in their markets. Our performance in Q3, including record base earnings reflect strong execution against our strategic priorities. All 4 of our business segments are delivering base earnings growth in line with or ahead of our stated ambitions. Our continued financial strength and flexibility are key enablers of our success, allowing us to navigate changing market conditions with confidence while continuing to invest in future growth. Together, we are on track to meet or even exceed our medium-term financial objectives, all while continuing to deliver lasting value for our stakeholders. And finally, I know many from our teams are listening to the call today, and I want to thank you all for your continued commitment to Great-West. And with that, I'll turn over to Shubha to start the Q&A portion of the call. Shubha Khan: Thank you, David. In order to give everyone a chance to participate in the Q&A, we would ask that you limit yourselves to 2 questions per person, and you can certainly requeue for follow-ups, and we'll do our best to accommodate if there's time at the end. Morgan, we are ready to take questions now. Operator: [Operator Instructions] Your first question comes from John Aiken with Jefferies. John Aiken: I wanted to take a look at the U.S. operations, both the protection as well as Wealth -- sorry, the Empower business as well as Wealth Management. We saw strong top line growth driven by the growth in the assets. But what I was particularly interested in was the improvement in the margins that we saw. Now obviously, I believe this is talking about the scale that you're generating in businesses. But moving forward, are we going to need to see incremental investments in technology? Can you remind me in terms of what we should expect in terms of expense growth moving forward? David Harney: Maybe I'll pass over to Ed. Edmund Murphy: Sure. Thanks for the question, John. I would say on the investment side in technology, we're continuing to invest in efficiency. We have a transformation effort that's underway that's driven very low unit cost over the last several years. And if we look out over the next 4 to 5 years, we continue to see lower unit cost in the business. Much of this is being funded by the tech budget that we have as we continue to redirect more dollars into AI and automate more of our processes. As you know, we have a pretty substantial presence from a global standpoint in terms of application development, operations and the like. So as I look forward, I think we're going to continue to see similar margins. I think that they'll definitely be sustainable on an annual basis. Obviously, there's some seasonality variances. It's more acute in the Wealth business, where we tend to upweight the marketing spend in Q1. But I think if markets hold and we don't experience further impairments, we should see continuous improvements in our margins annually based on the investments that we're making to improve the customer experience and drive unit costs lower. Operator: Your next question comes from Alex Scott with Barclays. Taylor Scott: The first one I have for you is to just see if you could extrapolate on some of the things you're doing from a technology standpoint. I mean defined contribution, in particular, seems like a good area where maybe you could really drive even more operational efficiency with some of the new tools that are out there. So I'd just be interested in what are some of the things you're working on there. David Harney: Yes. Look, I'd like to -- sorry, maybe I'll cover on just a particular question, Alex, is just on the business overall rather than any particular segment? Taylor Scott: Yes, I'd be interested in the business overall, but particularly interested in Empower and how you can maybe leverage your ability to consolidate the market, but maybe supercharge that with some of the technology investments that you're making? David Harney: Yes. Maybe I'll start overall and then Ed, if you want to add some color on Empower. Like there's big technology opportunity across all of the business, like we're investing a lot in just the foundational capabilities in each of the business. I think workflow systems and capturing all of our efforts within that are very important foundational tools. And as we continue to invest in that, then AI is going to be a big opportunity in driving efficiency in each of the businesses. We're already deploying AI a lot within our call centers. It's operating behind the scenes to help agents and improve their productivity. And then in each of the operational areas, all of the operation engines behind are starting to use AI capabilities to automate and improve productivity there. And that's going to be a continued journey over the next, I would say, 3 to 5 years and is going to drive down unit costs. So, Ed, I don't know if there's anything you want to call out on the defined contribution business. Edmund Murphy: Yes, just in general, not just defined contribution, but in general, Alex, I would say that we've been an early adopter of AI, and we have several tangible use cases that are in production right now where we're seeing meaningful benefit. I'll give you an example. If you look at our application development efforts, we've taken advantage of the global capability for a while now. We have 2,700 people in Bangalore across all of our functions, including operations and application development, but all of the functions. But if you look at what we've done deploying AI with our app dev team, we're seeing anywhere between 25% to 30% lift in productivity, which is meaningful. We've been driving a lot more throughput as it relates to a very aggressive investment agenda that we have in both the Wealth business and the workplace business. So we think we'll continue to see further lift there. We're also deploying it in terms of customer interactions. So whether it's through our client service managers, automating a lot of what they previously done -- did, which was either by phone or by paper, all those tests are being automated using AI. And to David's point, we've taken our interactive voice response capabilities to a whole new level and leveraging AI there as well. So rep-assisted calls are down dramatically, and it's a much better experience for the customer. So we stood up an innovation lab at Empower about 3 years ago, and we're driving a lot of these efforts forward. And I think to the earlier question that John asked, I think this is very core to our long-term goal of continuing to drive our unit cost lower. And I agree with your hypothesis that as we look out over the next few years, I'm confident we can drive those costs lower than we currently have in our multiyear plan. Taylor Scott: Got it. Very helpful. Thanks for humoring me, add more detail there. I guess the second one I had for you is on the Capital Risk Solutions business. It seems like you're getting a lot of growth. Could you maybe take us into some of the things that you see as good opportunity out there and just how you're viewing the competitive environment for those type of products? And maybe also this quarter, too, if you could talk at all about whether P&C and catastrophes being lower had any impact? David Harney: Okay. I'll hand it over to Jeff. Jeff Poulin: Thanks, Alex. Good question, obviously. We -- on the Capital Solutions side, we see a lot of opportunities both in the United States, in Europe and even in Asia for that matter, the changing requirement or changing regulatory requirements there are going to generate more opportunities for us. We've been very, very good at looking at where we think capital is tight, where people are finding or needing what we're offering for them. And so it's been very good because we've been marketing to the right places, and we're seeing the fruit of that this quarter. I think we've added $80 million of annualized earnings in the quarter in terms of new business in Capital Solutions. So it's been a good quarter. We see that trend continuing. There's a lot of change in regulations. There's a lot of demand for these products. Premiums in a lot of the markets have gone up quite a bit, as I said earlier, and that's generating more required capital. So if you have a book of any business, your premium has grown 20% because it didn't perform very well and you need to make it up the next year, you require typically in most countries, 20% more capital to do that. So we've been helping these companies. We help companies grow and that's what we're focused on. So I feel pretty positive about the outlook for our business. I think your second part was about the current -- the P&C and catastrophe that we feel sorry for the poor people in Jamaica. Our heart goes to them. It was -- it's a big hurricane, big loss. The early -- it's early for us to tell whether we're going to be impacted or not, but the early estimate of the insured loss are such that we don't think we're going to have an effect on it. I think over the last few years, we've been telling you, we've been derisking or getting further away from the risk, so we have been doing that and the result of that is we see less claims as a result. I hope that I didn't miss anything here. Operator: Your next question comes from Paul Holden with CIBC. Paul Holden: So again, thanks for all the additional color and commentary on the CRS business. And I do have a follow-up question then for Jeff is you just mentioned that you added $80 million of annual, I think, expected earnings for the business. But -- and then you talked about all the opportunities and why Great-West is well positioned to capture those opportunities, which is clear in the results. So my question really is like why the mid-single digit annualized earnings growth rate? Like why not something higher? And I guess it's mid-single digits plus, but why not put it something higher at least in the medium term? Jeff Poulin: Thanks for the question, Paul. I -- we obviously want to do better than mid-single digit. I mean, I think that's -- if anybody knows me, that's the goal here. But at the same time, you can look at our historical run rate on the business, and you'll see that we will overachieve that. But the reality is our strength come from the fact that we don't have the pressure to write the business. We want to be very disciplined and very choosy, if you will, in terms of making sure that we only write business that is above our target ROEs. And only when we see those opportunities, will we bring them to the group. If we had much higher targets, I think we would feel compelled sometime to write business that we may not like as much. And so I think that's been the strength of our business and the reason why we haven't had very many hiccups over the years. And we've created a very big diversified portfolio that's running really well, and that's what we want to continue to do. Paul Holden: Okay. And another way to frame the question is, is the growth in Capital Solutions is it being offset sufficiently by the P&C reinsurance and the exit of life mortality such that will bring the growth rate down to mid-single digits. Is it fair to look at it that way? I don't think shrinking those other businesses is -- versus the Capital Solutions will bring me down to mid-single digits, but that's another thing, another angle, I just wanted to explore. Jeff Poulin: No, that's not how we look at it. I think that our mortality business has been pretty flat for a long time. So we've grown despite that, and I think the P&C business is the same way. I think the earnings have been relatively flat on that. So as a result, I'm not sure -- I think we're still looking for Risk Solutions products and Capital Solutions products that are going to help us grow. And we're just very opportunistic in the way we look at it. Right now, on the Risk Solutions side, we don't see anything attractive, and so we're staying away but that could change over time. So it's a matter of being ready when the opportunities come. Paul Holden: Got it. Okay. And then second question, hopefully, it's a quick one. I was just going back and looking at the Putnam transaction and noted that there was a contingent payment of up to $375 million tied to revenue growth target. So wondering if anyone has an update on where that stands, given market performance has clearly been quite strong since then. And I imagine the revenue associated with Putnam likely has been strong. David Harney: Yes. Jon can give an update on that. Jon Nielsen: Thanks, Paul. Really happy with the relationship. As you know, it's a strategic relationship, a partnership. We're working with Franklin to benefit both parties. We're tremendously happy with that relationship. It continues to grow. During the current quarter, our capital generation doesn't include any benefit from contingent capital being reflected from that relationship. And we still see that relationship generating a level of contingent capital over the medium term, but it's not in our numbers this quarter. Paul Holden: Sorry, just when could we expect it to flow through? Is this something that could be reoccurring for a period of time? Or is it kind of on a set end date? Jon Nielsen: I'd call it over the next 2 to 3 years we should start to see some fruits of that relationship. Operator: Your next question comes from Doug Young with Desjardins Capital Markets. Doug Young: I guess a question for Jeff or maybe for David. Are you -- maybe back to the CRS, like how -- are you willing to let CRS become a bigger part of Great-West? And I know there's been some parameters you thought about on that front. How has your view changed on that? And I guess the limitation on that is how fast all your other businesses grow in terms of how much base earnings from CRS can grow to keep it kind of in line. But I'm just wondering, like top level, are you willing to let CRS become a bigger part of the overall business? David Harney: No, I think we like to share that it has at the moment. So it's around 20% of earnings. And I think that's a good share to give us a diversified portfolio. But obviously, our capital-light businesses, particularly in the U.S. are growing stronger overall than our insurance businesses, and we expect that to be the continued direction of the group over the planning period. Like there will be times when CRS, as Jeff explained, does better than the medium-term ambitions that we've set out, and we're going through one of those periods at the moment where there's just attractive opportunities for us in the market, and we expect that to continue into next year as well. But there will be times just over our planning period where opportunities may not be attractive, and we like to give the business room to stand back and not be under pressure to grow when we enter into those time periods. And we expect cycles like that over the next 5 years. Jeff Poulin: It's Jeff. I just wanted to add one more thing. I know you and I have talked about this before, but I think one of the big advantage we have in the market is we're part of this big diversified group here with a really strong rating. And you can't undermine that, that's a really big advantage we have in the market. If you compare us to other reinsurers that are very, very dependent on the next catastrophe or very -- like their earnings and their solvability is dependent on the next catastrophe or the next pandemic, we're diversified. We don't have that. And a lot of our clients like that. So I think that we like it where we are. We are a big diversified group, and it's good to be part of that. Doug Young: Yes. So I just wanted to confirm like the philosophy hasn't changed, and that I guess what my question is. Jeff Poulin: No. No. Doug Young: Okay. Yes. Perfect. And then Slide 16, I just want to go back to that, maybe this is for Linda. Like -- it looks like you're guiding to high $50 million like on average positive insurance experience quarterly, that's kind of like your historical trend. And I get that you've done well historically on reserving and positive insurance experience. But why should we expect positive insurance experience? And why should we not expect you to adjust your actuarial assumptions to bring this back closer to 0? Is it just a philosophy? Or am I missing something? Just wanted to kind of explore that. Linda Kerrigan: Sure, yes. Thank you. So when we're -- well, first of all, yes, we would definitely be looking at the 4-quarter average. As Jon said earlier, we are seeing volatility in the mortality results this year between Q3 and Q1. And then when you're looking at that 4-quarter average, really, what we're seeing there is a continuing strong contribution from our group morbidity line in Canada. And their experience gains have some interest rate sensitivity, and they are impacted by the cycle of morbidity. That said, cycles can be long. So over the near term, we're not really seeing any factors that could have a material impact on the Group Benefits experience relative to the levels we're seeing this year. Doug Young: Okay. So it really is hinging on the group side in Canada and what you're seeing in terms of outlook on that business that's giving you confidence in going back to normal, but still remaining somewhat positive. David Harney: That's correct. Linda Kerrigan: That's fair. Doug Young: Okay. just one quick last one on credit. I just -- everyone seems to do something different. And I just kind of want to understand on the credit side, the guidance that you're giving, Jon, is that net of your unwind in the investment line? Or is that gross of that? Jon Nielsen: That's gross of it, Doug. And we think the industry has had some volatility in its results due to idiosyncratic events. We wanted to give some perspective on what you would have seen over the longer term, not reflective of our own underwriting, which has been positive. But if you just look at the industry-wide losses over a 50-year period and then look at a normal kind of conditions, what you might expect. And what we indicated was that's about 4 to 6 basis points post tax annually, and we would expect kind of in most of those years in normal conditions, it to be at the lower end of the range. But quarter-to-quarter, what you've seen in our results is it had some variability. Doug Young: Yes. And then net of the unwind, like that would be basically your best estimates. So net of the unwind, net-net, it would be 0. Is that the way to think about it? Jon Nielsen: It would be -- well, the unwind would be more significant than the 4 to 6 points because it has inherent accounting prudence or conservatism and -- so it would be much higher than that. And you can see that in our expected investment earnings. Operator: Your next question comes from Tom MacKinnon with BMO Capital Markets. Tom MacKinnon: Yes. Jon, just continuing on this credit thing. It looks to be maybe about this 4% to 6% might be somewhere in the area of maybe $80 million to $120 million annually. Do I have that kind of right? Does that seem to be your 4 to 6 basis points after tax? Jon Nielsen: Very close, around $70 million to $100 million, Tom, would be -- we wanted to get basis points because over time, the portfolio will change so that you can continue to think of it in that terms. Yes. Tom MacKinnon: And where does this kind of lie because -- in what segments? Is it largely in Empower? Because that's -- there's no unwind going on in Empower. It's a different accounting construct there. So you don't get offset from unwind there. So if you can tell us where the $70 to $100 million kind of lies. Jon Nielsen: I mean it's proportionate to the portfolio and how much credit is in each of the segments. Empower is the largest of the segments in terms of credit assets. We hold some sovereign type risks in some of our other portfolios for duration purposes. So if you think of the number, you can think of it as around 60% reflective of Empower and the other 40% in the other portfolios, most of that being evenly split between Canada and Europe. Tom MacKinnon: Okay. That's good. And obviously, the 60% that's in Empower has no unwind offset, right? Jon Nielsen: Well, inherently, there is in the spread that we manage to. As you're aware, we earn an interest and we credit a spread. So as we price those products, develop those products, inherently in the spread, we manage to an expectation of credit from prior experience. Tom MacKinnon: Inherent in your pricing spread, is that right? Jon Nielsen: Spread, yes. Tom MacKinnon: Okay. Got it. Has -- there's no discount or anything like IFRS 17 stuff would be on that. Jon Nielsen: Yes, because those are IFRS 9. Tom MacKinnon: Yes. Okay. Now then just a question just with respect to rollover recapture. I think is the rollover recapture rate somewhere around 15%? Do I have that right? Is that what it would be in the quarter? Or where you're kind of running? David Harney: Yes. We don't disclose rollover capture rates. They are improving and shares are above 15%. Like the better metric to track just the performance of the Wealth business is the net inflows. They've performed very strongly year-over-year and quarter-over-quarter. And I think why that's a better measure is it obviously captures the business that's coming out of the Retirement business. It captures business that we're winning elsewhere. It captures crossover sales. And it also reflects the retention within the Wealth business. So I think the key metric to look at in assessing the Wealth business is those net inflows, and we're performing very strongly on that. Tom MacKinnon: And would -- is the money in motion? I think you've kind of -- out of Empower that you'd be able to recapture, is that somewhere around 8% of Empower's total assets? Would that be a correct gauge of looking at that? David Harney: And we don't disclose that. But like for the mature sort of DC business, and I think what all of the players would see in the U.S. like disbursements typically are about 10%. Tom MacKinnon: Okay. And would all of those be potential rollovers or would some of it not be rollovers? David Harney: Ed can add on this. Like we -- I suppose one of the things we're very proud of in the U.S. is we have an open platform. Sponsors, participants are free to make choice while they're saving for retirement and then they have a full range of options once they come to retirement or when they're moving jobs. So like we have to work very hard and have a very good offering to capture our share of that, and that's what we're doing at the moment. So Ed, you might want to add some more color? Edmund Murphy: The only thing I would say is, no, that's not the numerator. It would be less than that due to cash outs and de minimis type accounts. So it would -- that's not the numerator, it would be less than that. Tom MacKinnon: Would it be more like 6% to 8%, Ed? Edmund Murphy: I think that's a good marker, somewhere in that range, yes. Yes. You have people that just take cash, right? They're just going to take cash. They're -- they've got bills to pay or if they're under 59, they have to pay a penalty, they pay a 10% penalty and then they pay ordinary income taxes on it. But -- so you will get some cash outs for sure. Tom MacKinnon: The plan participant outflows are pretty heavy in the quarter. Do you think it's just because the amounts were high? Or were people like just saying, okay, maybe I'm feeling pressure taking money out? Edmund Murphy: No, it's pretty rate driven. The markets had a good run, as you know, Tom. And so if we look at the outflows, 90% of it is rate driven, only 10% volume driven. So we haven't seen a marked increase in volume. It's been more rate. We also had a couple of large institutions in the quarter that had what I would characterize as sort of de minimis small account cash out type efforts that contributed to the flows in the quarter, which were $12.8 billion, so up from Q3. So there was sort of a onetime event there. But if you look in general, it's largely driven by the fact that the account balances are much higher due to the increases in the market. Operator: Your next question comes from Mario Mendonca with TD Securities. Mario Mendonca: Can we go back to Capital and Risk Solutions? The business -- what I'm asking about now is the duration of the business because I can appreciate that the new business you've written is driving some pretty strong growth. But it really depends on how long this business is on the books for. I appreciate you can always generate new business, and I think that's the message you're offering us. But the existing business, this -- the business that's put on more recently, what is that duration of that business before you'd have to sort of regenerate even more new business to keep that trend going? Jeff Poulin: Thanks for the question. It's a good one. It's one I explain internally all the time. So it is shorter-term business. We typically look at it like we lose 10% to 20% of it every year. And so we have to replace it every year before we start growing. That's why you need a big diversified block of business. And obviously, the Risk Solution business is better from a long-term perspective. The Capital Solutions bring much higher returns. But I would say, if you use 10% to 15% has been really the run rate that we've seen on how much we lose every year. So that gives you an idea of what we need to replace to start growing every year. Does that make sense? Mario Mendonca: That's a longer duration out -- it does. But it's just longer than I would have expected. Like -- so you're saying that some of these capital solutions could run out for 5 to 10 years then? David Harney: Well, it's probably duration would be shorter, like I say, it's maybe 4, 5 years might be typical, but then certain cases will renew and just continue on and then you have a percentage that [ falls off. ] Jeff Poulin: [indiscernible] 1-year deals, they renew. There's -- on average, I would say they're 4 or 5 years deals, as Dave said. But we have clients coming back and renew them. So that -- so some of them tend to last 15, 20 years. Mario Mendonca: I see. So you were quoting more of like an effective duration, including the sort of expected renewals when you offered that outlook? Jeff Poulin: That's right. Yes. Mario Mendonca: Okay. If we could go to the U.S. now, clearly, the Empower business is delivering, as you described at your Investor Day and in previous discussions. I'm looking back, though, a few years to Q2 '22, when a large deal, and I've forgotten which one it was, whether it was Mass or whether it was -- I've just -- I've forgotten, back in Q2 '22, $310 billion of new assets brought on. And I kind of thought that was going to be one of the important themes of this business that you'd continue to add. So what I'm getting at is, given this more aggressive pace of buybacks, are you signaling that its organic growth from here in this business? Or is there still opportunities to add $200 billion, $300 billion of assets of this business through acquisitions? David Harney: Yes. So like on our Investor Day ambitions they can all be achieved through organic growth, like we continue to invest in the business to position ourselves very strongly and that's just a great position for us to be in. So we're very confident about the organic growth in the U.S. and the Empower business. But clearly, there's opportunities for further add-ons, and we will continue to look at that. I guess we're doing share buybacks at the moment, but we have a lot of financial flexibility and strength and if opportunities come up, and we like them, we're ready to move on them. Like we're very disciplined when it comes to M&A. We have our internal return targets. They need to be earnings accretive within a very short period of time, and we continue to measure and look at opportunities against those targets. But certainly, we're in a great position, I think, to further add-ons, if we can get opportunities at the right price. Mario Mendonca: But do you believe, David, that there are still opportunities in that $200 billion to $300 billion range in this business? Or have those been consolidated away? David Harney: No, there's still a number of large opportunities, I would say, and lots then of smaller opportunities that you could add up. So yes, it's still a very spread market with, I think, further consolidation to come. Operator: Your next question comes from Gabriel Dechaine with National Bank. Gabriel Dechaine: Similar line of questioning, but maybe from a different angle here. You've got $2.5 billion of cash at the holdco. In the U.S. sub, you're paying down $690 million debt instrument, can you give me a sense of what cash resources you have, including excess cash in the U.S. and then whatever appropriate figure would be from that holdco cash that you would want to retain, I guess? Jon Nielsen: Yes. Thanks, Gabe. As you might expect, when it gets to the holdco, it's very fungible from a shareholder capital allocation perspective. Historically, we've usually kept about $500 million for liquidity purposes. That's varied a little bit over time. So the remainder at the holdco is clearly available and flexible from a capital allocation. I'd also call out that we have reduced our leverage. First, we've repaid all of the acquisition leverage that we took on and committed to repay, and now we started to buy into the ongoing leverage of the group. And our equity is growing over time. So there's a reasonable amount of flexibility we have from a capital instrument perspective. And then you rightly point out, we do manage to generate all this cash flow, retaining good, healthy regulatory capital positions, both in our LICAT-based regulated entities as well as our U.S. regulated entities. In terms of the U.S., we like to stay around or just north of 400% in terms of an RBC ratio. And what we're really pleased with, and I shared this on the last call is if you look back 5 years, we had 3 really nice businesses in the U.S., they were contributing a level of capital, but nowhere near the business that we have now. The U.S. has sent back cash this year or will send back nearly in line with its base earnings, and that's driving, as we shared, more than 80% of our earnings turns into cash. And as we also shared this quarter, we will remit over 100% of our earnings in cash flow to Lifeco this year. So that puts us in a very advantaged position. Gabriel Dechaine: Okay. All right. And then just the budget that came out -- the Canadian budget that came out this week, there was some section there on, I forget what they call it, tax fairness or something like that. There was a component aimed at reinsurance transactions, I guess. And my question is not for CRS, but is there any -- what are your early thoughts on how the Feds are looking at Canadian risks being reinsured offshore and the earnings that those generate in those offshore entities. I don't know if there's anything to note there with regards to your business. Jon Nielsen: Gabe, it's an excellent question. And there -- we continue to evaluate the federal budget. It's obviously new. We haven't been able to get through the thing in deep detail. But -- so we're evaluating any financial impacts from that. But we would note the budget does propose to tax any investment income on assets that are held by foreign affiliates and back Canadian insurance risk. If you assume -- and this is early stages that, that proposal is passed as written, we'd expect the impact on our base earnings to be immaterial, but roughly around 1% or $0.03 per share with an increase in about 0.5 percentage point in our effective tax rate on our base earnings and that would be related to our Canadian operations. So that's what we know so far as we evaluate all the provisions of the budget. And that's an early estimate. So we had to go through further work on it, but I appreciate that you asked the question. Gabriel Dechaine: Okay. Great. It doesn't sound like it's too big of a deal, but I appreciate that it's still early. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Khan. Shubha Khan: Thanks, everyone, for joining us today. Following the call, a telephone replay will be available for 1 week, and the webcast will be archived on our website for 1 year. Our 2025 fourth quarter and full year results are scheduled to be released after market close on Wednesday, February 11, with the earnings call starting at 9:30 a.m. Eastern the following day. Thank you again, and this concludes our call for today. Operator: This concludes today's call. Thank you for attending. You may now disconnect and have a wonderful rest of your day.
