GWLIF - Great-West Lifeco Inc.

Operator: Thank you for standing by. This is the conference operator. Welcome to the Great-West Lifeco Second Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now 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 Rahman Khan: Thank you, Eileen. Hello, everyone, and thank you for joining the call to discuss our second 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 index -- 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 us today are David Harney, our President and CEO; Jon Nielsen, our Group CFO; Fabrice Morin, President and COO, Canada. Ed Murphy, President and CEO, Empower; Lindsey Rix- Broom, CEO of Europe; Jeff Poulin, CEO, Reinsurance; and Linda Kerrigan, Senior Vice President and Appointed Actuary. We will begin with prepared remarks followed by Q&A. With that, I'll turn the call over to David.
David M. Harney: Thanks, Shubha. Please turn to Slide 5. As I step into the role of CEO, I want to begin by reaffirming our direction. Our strategy is clear, consistent, and it's working. Over the past several years, we've built leading market positions, delivered solid earnings growth and shifted towards a more capital-efficient business mix. We remain focused on executing the strategy outlined at our recent Investor Day to drive growth and deliver lasting value for our stakeholders. Our teams remain central to our success. I'd like to highlight a few recent leadership updates. Jon Nielsen has assumed responsibilities as Interim Chief Investment Officer in addition to his role as Chief Financial Officer. This will ensure continuity as we continue to drive value from our global investment capability. Lindsey Rix-Broom, formerly CEO of Canada Life UK, has joined our global leadership team as CEO of Europe. Emma Watkins will join Lifeco in September, succeeding Lindsey as CEO of Canada Life UK. We're making strong progress against our medium-term objectives. Our businesses are well on track to meet or exceed those ambitions. We delivered another record quarter of base earnings, supported by broad-based organic growth and healthy capital and cash generation. The U.S. has been a key growth engine, and Empower continues to perform strongly. We've taken further steps to enhance Empower's value proposition, expanding their product lineup to better meet evolving participants' needs and sharpen our competitive edge in the market. Ed will share more on this shortly. Our balance sheet remains a core strength. Despite ongoing macroeconomic and trade-related uncertainty, we're in a strong financial position. This has enabled us to return capital to shareholders through our normal-course issuer bid and raised our full year buyback target to $1 billion, all while preserving the flexibility to invest in future growth. Please turn to Slide 6. Looking ahead, we have the strategy, priorities and positioning to win by offering our clients simple technology-enabled experiences. Our strategy continues to be guided by the playbook we introduced at Investor Day. It builds on our market leadership, expands into adjacent growth areas and emphasizes disciplined, capital-efficient investment in our brand and capabilities. Where it makes sense, we'll continue to use M&A to accelerate progress and strengthen our competitive position. To bring this strategy to life, I'm focused on 4 execution priorities. Number one, our customers are at the heart of everything we do. We're deepening our understanding of their needs and continuing to deliver solutions that build trust and affinity. Secondly, we will leverage technologies to transform how we serve clients, make decisions and operate. AI and digital innovation will help enable more personalized and intuitive experiences, making us a more human financial services company. Thirdly, as we mentioned at Investor Day, we're investing significantly over the medium term to strengthen our operating leverage and execution. We're doing this by driving efficiency, agility and discipline to simplify processes, reduce friction and deliver consistent, scalable quality outcome. And finally, we continue to invest in leadership culture and capability to ensure teams are empowered to lead, innovate and deliver. We have an exceptional team with deep experience, and we are an attractive destination for market talent. Please turn to Slide 8. As outlined at Investor Day, there are strong tailwinds supporting growth in our markets. These demographic, economic and social trends, combined with our strategic playbook and our 4 execution priorities, give us confidence in delivering on our medium-term financial objectives of 8% to 10% EPS growth, 80%-plus capital generation, return on equity of over 19% and a dividend payout ratio of 45% to 55%. Now turning to our results on Slide 9. We are pleased to report a strong second quarter, driven by solid execution across our business. We delivered double-digit base earnings growth, with base EPS up 12% year-over-year and a strong base ROI. Our financial position remains healthy, supported by a robust balance sheet as well as strong regulatory capital and leverage ratios. We continue to take a disciplined approach to capital allocation. So far this year, we've repurchased $432 million in common shares, and we're raising our full year buyback target to $1 billion, reflecting confidence in our growth outlook and commitment to long-term shareholder value. Please turn to Slide 10. We delivered solid performance across our Retirement businesses this quarter. Excluding credit-related impacts and a onetime fee income adjustment in 2024, base earnings grew by 12% year-over-year. Empower was a key driver, supported by a growing asset base and number of participants, along with enhancements to its value proposition for sponsors and participants, which, as I said, Ed will speak to shortly. Our Wealth businesses remained strong, with base earnings up 15% year-over-year driven by fee growth. Empower delivered exceptional net flows and sustained momentum in personal wealth, reinforcing that our strategy to capture money in motion through rollovers and crossovers is working. In Europe, we saw healthy retail flows. While partially offset by onetime institutional withdrawal, our focus on serving the mass- to-mass affluent markets continues to gain traction. In Canada, our Wealth platform continues to advance, and we've enhanced our offering to better meet client needs, including a new partnership with ClearEstate to support estate planning. Please turn to Slide 11. The quality results from our insurance businesses this quarter highlight the strength of our diversified portfolio. In Group Benefits, base earnings rose 17% over the prior year. We continue to lead the Canadian markets with steady growth across the business. Our disability offering remains a key differentiator, delivering results and reinforcing our leadership position. We've maintained a disciplined approach to pricing in this business, ensuring long-term value for both clients and stakeholders. Capital and Risk Solutions continue to grow organically, supported by deep expertise and market demand. We also made a strategic decision to exit U.S. traditional life mortality reinsurance market, reflecting our strategy of focusing on areas, including Capital Solutions business where we see clear path to leadership. In the U.K., we continue to expect to see healthy growth in both individual and bulk annuities, and our focus remains on optimizing and growing this portfolio in a disciplined and sustainable way. I'll now pass it to Ed to cover the performance of Empower in a bit more detail.
Edmund Francis Murphy: Thank you, David, and good morning, everyone. Please turn to Slide 13. I'll begin highlighting the strong performance of Empower this quarter, followed by a deeper dive into a few of our recent product launches that differentiate Empower from the competition. Empower delivered another quarter of strong base earnings growth despite elevated market volatility. Base earnings increased 13% year-over-year, excluding the credit-related impacts in Q2 of this year and last as well as a favorable onetime fee adjustment in the prior year quarter. The core operations continue to perform in line with our expectations of sustained double-digit growth over the medium term. Despite a large plan deconversion in the quarter, workplace client assets grew 10% to USD 1.7 trillion while the number of participants we serve increased by 500,000 to 18.5 million. Empower has a track record of winning market share. And despite the impacts of the deconversion in the second quarter, we expect to generate at least USD 25 billion in net plan inflows through the remainder of 2025, supporting continued growth in client assets. Empower Wealth continued its solid track record of inflows, which increased 83% and to $2.9 billion. This was driven by continued strength in rollover and crossover sales as well as strong customer retention. Please turn to Slide 14. As Empower has continued to deliver strong base earnings growth, we've been working hard to keep strengthening the value proposition for plan sponsors and participants alike. I want to take this opportunity to highlight some of Empower's recent initiatives. In April, Empower announced the first-ever zero-fee S&P 500 Index Fund for our workplace customers. This product is a significant win for clients with zero management fees, trading fees and no hidden account fees. We are setting up clients for their best chance to maximize their investment returns. At the same time, it allows plan sponsors to better fulfill their fiduciary responsibilities. In addition to its public markets offering, Empower is now at the forefront of democratizing access to private market investments for Americans. In May, we announced the launch of a new program to offer private market investments to the nearly 19 million defined contribution plan participants that we serve, enabling access to an asset class previously reserved exclusively for institutional and high-net-worth investors. We believe strongly that the attractive risk-adjusted returns these strategies have generated historically offer significant upside to client retirement portfolios. We are committed to providing responsible access to these solutions, which means they will only be offered when approved by plan sponsors after a thorough due diligence process and only when selected through an advisory relationship with clients and within appropriate exposure limits. We have partnered with 7 top-tier global investment managers to bring compelling investment strategies at attractive price points to our growing client base. The zero-fee index fund and private market announcements build on other in-flight initiatives, including the administration of health savings accounts and equity compensation plans. With almost 19 million participants on our platform, we have a tremendous opportunity to increase product penetration with our industry-leading partner. We believe health savings accounts represent a significant growth opportunity as we move forward. With the acquisition of OptionTrax in September last year, we have also added a leading digital stock plan administration platform to our suite of services. In aggregate, we have significantly enhanced Empower's appeal to plan sponsors as a one-stop shop for workplace financial solutions that allow them to better fulfill their fiduciary obligations. And our expanded product offering serves to enhance the client experience for participants, making us more likely destination for rollover assets. This gives us significant confidence in the double-digit growth outlook for the business over the medium term. With that, I'll turn it to Jon Nielsen to discuss Lifeco results for the quarter. Jon?
Jon P. Nielsen: Thanks, Ed, and good morning. Please turn to Slide 16. Following a sharp pullback in early April, global equity markets quickly reversed course over the remainder of the quarter, with many major indices ending near all-time highs. This recovery provided support for solid year-over-year asset growth and, more importantly, positions us well for the second half of 2025. Turning to Slide 17. Lifeco once again delivered double-digit base earnings growth, driven by underlying strength in our capital- light businesses, especially Wealth and Group Benefits. While base earnings included a benefit from a change in tax estimates, it was principally offset by credit-related impacts in the quarter. Base ROE improved year-over-year to 17.4% on higher base earnings and significant share buybacks this quarter. Net earnings were adversely impacted by market experience. Additionally, this quarter, we recorded $121 million of business transformation costs that I'll provide additional context in an upcoming slide. Please turn to Slide 18. Credit-related impacts during the quarter were related to bonds issued by water utilities in the United Kingdom. The government has just completed a review of the sector, which we expect to result in a positive impact for the future -- in the future for our remaining holdings. However, we continue to monitor and work with other senior bondholders on the restructuring of one of the larger water utilities. We'll continue to monitor this situation closely. During the quarter, there were no credit-related impacts in our commercial real estate portfolio in the United States. It is important to put our credit experience in the context -- in context over the longer term. Looking back over the past decade, Lifeco's credit experience has averaged only 3 basis points of our fixed income investments. This experience is well ahead of industry benchmarks, demonstrating our conservative and disciplined investment approach. There will continue to be idiosyncratic events from time to time, but these are expected to be infrequent and of a modest impact. We expect credit-related impacts for the remainder of the year to be more in line with what we've seen in recent years. Further, our full year experience is expected to be well below our long-run, through-the-cycle actuarial assumptions. Turning now to our results by segment, starting with Slide 17 (sic) [ Slide 19 ]. In Canada, base earnings were up 4% year-over-year due to solid performance across our businesses, especially Group Benefits. Base earnings growth was up 17% over the first quarter of 2025. Turning to Slide 20. In Europe, base earnings increased 11% year-over-year, driven by higher fee income in Wealth and the appreciation of the pound and euro. Excluding the impact of lower earnings on surplus due to higher remittances last year, base earnings in constant currency was also up double digits. Most top line drivers continue to perform well, with net flows in our Retirement business doubling, retail net flows in our Wealth business tripling and Group Benefits sales up 29% year-over-year. Bulk annuity sales have moderated in recent quarters, even though the longer-term outlook for the industry remains very robust. Lower bulk annuity sales this year primarily reflect deferred demand in anticipation of regulatory changes. Turning to Slide 21. Within Capital and Risk Solutions, base earnings were up 15% year-over-year on strong new business volumes in Capital Solutions and improved Risk Solutions experience. Turning to Slide 22. Lifeco's efficiency ratio improved 80 basis points year-over-year to 56.7%. We aim to reduce this ratio to below 50% over time through both business growth and expense discipline. As we announced at our Investor Day in April, we've embarked on a number of transformation initiatives designed to improve productivity over time. We expect to incur $250 million to $300 million posttax of charges related to these initiatives, as I disclosed at the Investor Day, with the associated benefits to be recognized over the medium term. As I mentioned, this quarter, we reported $121 million of those transformation costs, the majority of which related to Canada. Turning to Slide 23. Our base capital generation continues to exceed 80% of base earnings during the quarter. This quarter, remittances were below our trailing 12-month average of $1 billion, mainly as we retain cash in the United States to repay a bond maturing in the third quarter. Turning to Slide 24. Lifeco's strong balance sheet results in significant financial flexibility. Our LICAT ratio increased 2 percentage points from the prior quarter to 132% due to strong capital generation outpacing remittances. Our LICAT ratio has a degree of seasonality, which, by the fourth quarter, will reduce our LICAT by around 1 to 2 points. Our leverage ratio remained steady quarter-over-quarter at 28% but is 27% on a pro forma basis, net of the repayment of an upcoming bond maturity of USD 500 million. Lifeco's cash balance of $2.1 billion remains strong despite significant share repurchases completed in the second quarter. Through June, we had repurchased $432 million of the previously announced $500 million of shares. Our strong financial position and highly cash-generative business supports our announcement today of our plan to repurchase an additional $500 million of shares in the second half of 2025. With that, I'll turn it back to David for concluding remarks.
David M. Harney: Thanks, Jon. Please turn to Slide 26. As we enter the second half of the year, we're focused on driving continued growth through a consistent strategy and clear priorities, backed by favorable long-term trends. With strong in-market leadership and a deep bench of talent across the organization, we have the right team in place to deliver. Our performance this quarter, including record base earnings, demonstrates the impact of our strategy and strength of our business. We're on track to meet or even exceed our medium-term financial objectives, all while continuing to deliver lasting value for our stakeholders. We're focused on the right businesses in the right markets and are well positioned to help clients build lasting financial security at a time when it's more important than ever. Empower continues to lead the way, investing in its brands, capabilities and product offerings to meet evolving client needs and make the financial journey simpler and more accessible. Our continued financial strength and flexibility are key enablers of this success, allowing us to navigate changing market conditions with confidence while continuing to invest in the future. Thank you for your continued trust and partnership, and I look forward to reconnecting with you all in the fall. Thank you. And with that, I'll turn it over to Shubha to start the Q&A portion of the call.
Shubha Rahman Khan: Thank you, David. [Operator Instructions] Eileen, we are ready to take questions now.
Operator: [Operator Instructions] Our first question is from Paul Holden with CIBC.
Paul David Holden: A couple of questions for you with respect to capital allocation. So obviously, you indicated you intend to buy back another $500 million of stock through the end of this year. And then also, it looks like you're going through some continued delevering, and I think both good. But just wondering if that has anything to do with what you're seeing on the M&A environment, i.e., lack of opportunity? Or is this really just a matter of your strong cash flow generation?
David M. Harney: Well, I think it's primarily a reflection of our strong capital position and financial position at the moment. I think we've been very clear on our capital allocation priority. So number one is maintenance of a very strong balance sheet, which we have at the moment. Number two is to give us the flexibility in organic growth, and we've ample resources for that. And then it's to pay dividends. We remain open on M&A and keen on M&A. But I think it's important to say our medium-term financial objectives are not in any way dependent on M&A, and M&A done properly and well will add to those. Our recent track record, I think, on M&A points to where we continue to look. Like obviously, we've had very successful large- scale acquisitions and integrations in the workplace. And we've had a number of very successful Wealth acquisitions in the U.S. and smaller ones in Canada and Europe, and all of those continue to be areas as well. So our priority target area probably continues to be workplace in the U.S. We remain sort of focus and open to opportunities there. And I suppose the last thing I would say, maybe just on the size of the share back. Just to put that in context of our financial position, we have $2.1 billion in cash at the moment. Our LICAT ratio is 132%. That will decline slightly in the second half, but at 130%, we'll be well above our operating targets, and we expect our leverage to reduce further with some payback on debt maturities in H2. So $1 billion in the overall context of our financial strength is not that much at the moment and gives us plenty of financial resources should the right opportunity arrive.
Paul David Holden: Got it. Got it. Okay. Second question will be for Ed. Just looking at that large plan withdrawal in the Retirement business. So I would say retention is obviously an important part of the objective of growing 2x industry growth. So maybe you can quickly maybe summarize what happened in the situation, give us kind of a history of withdrawals or retention rates and if you feel there's any actions Empower needs to take to minimize future large plan withdrawals.
Edmund Francis Murphy: Sure. I...
David M. Harney: I'll let Ed go to that in a moment. Maybe just to introduce, I'd like to just say that it has been a very strong quarter for Empower again. And I think that the year-over-year performance, I think, is the greatest indication of why we continue to expect double-digit growth for Empower. Net plan performance over the full year is going to be very strong. That goes a long way to offset the participant outflows. And we're seeing good growth -- continued growth in the Retirement and the Wealth. So if you look at the fee income growth, asset-based revenue has grown 1%. Participant fee income, though, has grown by over 10%. We're continuing to increase the rollover rate in the Wealth business, and you'll see Wealth income has grown by over 20%. So all of those add up to the 13% growth that we see year-over-year for Empower at least. I think the shape of that performance is a good map of what we expect to see from Empower going forward. So Ed can talk more specifically just on the net plan performance this year and what's driving that.
Edmund Francis Murphy: Yes. Thanks, David. Thanks for the question, Paul. Look, I feel incredibly confident about our workplace business. Again, if you net everything out, we continue to grow at 2x the rate of the market. Our pipeline is at the highest level it's ever been, $260 billion in pipeline. And when you think about that in the context of our win rates, in our large mega market, not-for-profit, we win 42% of the opportunities. In the government market, we win 60% of the opportunities. And in the Taft-Hartley union market, we have a 65% win rate. So if you look at our retention and you look at it over the last 5 years, let's just say, it's consistently been somewhere between 97.5% and 98% -- between 97% and 98% retention, which is very, very strong. And our Net Promoter Scores are exceedingly high, too. I think the one thing to keep in mind is that particularly in that large mega corporate market, they are typically going out to bid every 3 to 5 years. And despite that, our retention rates remain very, very high. And as I've shared with you in the past and we highlighted a bit further today, we've really expanded our product capabilities, Paul, and effectively built a multidimensional capability that if we deliver for the client, it really becomes more difficult for them to leave in the sense that we have more hooks and more tentacles into the client because we're providing a diverse set of services. And as we outlined earlier, we fully expect net plan sales for the year to be north of $20 billion in terms of net plan sales. So as we've shared historically, we will have some ups and downs. You will have some defections from time to time. But if you look at the overall business, and you look at the health of the business, and you look at the pipeline and the win rates, and the fact that we're growing at 2x the rate of the market, I feel really good about our position.
Operator: The next question is from Doug Young with Desjardins Capital Markets.
Doug Young: I guess the question is for Jeff on CRS, and it was announced that you're no longer going to be writing U.S. traditional life reinsurance business. Can you talk a little bit about why, what you're seeing? Does this all -- at all impact the targets that you said in the Investor Day? And maybe kind of wind in, is there any impact on what you're seeing for the rest of Great-West Life's businesses?
David M. Harney: Straight over to you, Jeff.
Jeff Poulin: Yes. Thanks, Doug. Good question. Yes, obviously, this was not an easy decision for us. We've thought long and hard about it. But to be honest, the last 5 or 6 years, we haven't been very active in the market. We've stayed very disciplined and just couldn't get the return that we're looking for in that type of business. And our plans right now is just the runoff of the business. It's been like that for a few years. So I don't -- I don't expect it's going to affect our results going forward. It won't affect our results going forward. Our plan is to focus on more Capital Solution and other Risk Solutions where we've been able to achieve better return. It's a very competitive market in the U.S., and it's been difficult to achieve the returns we want. And because of that, I think we've had to make this decision. It -- we feel pretty good about it. We intend to run off and continue to provide the same great service that we have to our clients. I think the block business will take 20 to 30 years to run off. So we're very much still in the mortality business for a while, but not from a new business perspective. As far as how it's going to affect the rest of Great-West business, it's hard for me to say. I think that -- I think maybe Fabrice is better to handle that. But we're not in the mortality business in the U.S. elsewhere or -- and I don't believe that's going to have a big effect on us anywhere else. And we're still a provider of capital relief on the group side, and we do a lot of group mortality business, and that's been a good business for us. So I don't expect any effect from this decision really. We will have minimum impact on expenses, but we intend to redeploy most of our employees into other businesses. So hopefully, that answers your question.
Doug Young: No, it does. And then just a follow-up -- sorry. Go ahead, David.
David M. Harney: Yes. No, I think this is the right decision. Like the U.S. market is just not attractive for us. Mortality in other markets is very good, and we're doing very well on that. And the growth outlook for CRS, absent this mortality, is very strong. So this is just a very good example of discipline as we look at different markets.
Doug Young: And then just a follow-up on the CRS. I know the insurance experience has been -- I mean, it's not a huge negative, but it has been negative for 2 quarters in a row. Is this related to the U.S. traditional reinsurance business? Or is there anything to be concerned with in terms of what you're seeing from an experience perspective in the CRS business?
Jeff Poulin: Yes. I thought our experience was on target this quarter, or if it is negative, it's only slightly negative. I think last quarter, because of the reserve on the California fire and then our mortality was off. But this quarter, we don't have any event that has affected. It's a really good quarter. I think it's a clean quarter from our perspective. And 15% growth year-over-year, so we're pretty satisfied with the quarter. And I don't -- I'm not sure I see what you're saying. I think our mortality was 101% of expected, so right on target, really.
Doug Young: Okay. No, that's fine. And then just lastly, Ed, you talked about net plan sales being over USD 20 billion. I think that's for this year. I just want to confirm when I look -- and this is for the U.S. Retirement business, U.S. dollar basis. Does that include both participant flows and plan ongoing? Because I believe the $25 billion you're talking about is just plan ongoing, but maybe it's net and including plan ongoing and the participant side. Just want to make sure I understand. Was that $25 billion and $20 billion?
Edmund Francis Murphy: That's just the plan number. That's not the participant number.
Doug Young: Okay. And so on the participant side, you have had gradual -- or not gradual. You've had decent net outflows. And I get that -- where that's coming from, that people retiring, pulling their money out. Do you have a line of sight -- like it seems like you have line of sight of what you've won, obviously, on the plan side, that you must model the participant side. Like when do you start to see that net outflow, that natural net outflow on the participant side abating to a greater degree?
Edmund Francis Murphy: Well, I mean, if you look at the long-term demographics, I think the guidance that we've given is we expect it to be somewhere between 0.5% and 1% a year. Just due to the changing demographics and the fact that you have 10,000 baby boomers turning 65 every day in the U.S. But keep in mind, we shared with you the results for the quarter. If you look at the success rate and the capture rate that we have, and it continues to improve and increase, we captured $2.9 billion in net flows in our Wealth business. And most of that is coming from participant flows that are coming off the workplace platform. So there's money that is leaving the complex, but there's also a fair amount of money that's staying within the complex, particularly as our 19 million customers begin to realize the capabilities that we have from an Empower personal wealth perspective. So that's the way I would think about it. I think we've -- our goal is customers for life, right? So they may change jobs. They may retire. But we believe we have a compelling solution for them. Despite the fact that they're no longer actively employed.
Doug Young: Just one quick follow-up. The U.S. Wealth side, what was the capture rate, the rollover rate this quarter? And can you -- and relative to -- I'm just trying to get a trend idea like what was it this quarter relative to last year and where you think you can take it again.
Edmund Francis Murphy: What I would say is that our efficiency and our effectiveness and the strength of our value proposition continues to increase. And as such, the capture rate this past quarter was the highest we've experienced. Now that, too, can ebb and flow. There are events that oftentimes drive those rates higher. But if you just look at the momentum that we have there, and I think it underscores, again, the strength of the value proposition, as we continue to build out our capabilities on the personal wealth side of the business and build out the product set and if you look at it on a full year basis, as I look into the balance of 2025, I think you'll see a dramatic increase in net new assets on our platform. And the only other point I would make, if you look at our performance vis-à-vis the assets that we have under administration and you look at that net new asset calculation, it's very, very high relative to our competitors. I mean we would be top decile of RIAs in the country in terms of net new assets as a percentage of AUA. And I suspect that's going to continue and improve over time.
David M. Harney: Yes. And maybe just to add to that, like I think the last 12 months are just a great example of the performance of the business. Like at an industry level, there's about 2% participant outflow, and that's to do with baby boomers retiring, and we expect that to last for maybe the next 5 to 6 years. Our net plan inflows then mean we reduced that 2% to less than 1% on our own book. And nobody else -- no one else's experience is as good as that. And then what we're also doing is improving the rollover rate. So you'll see our Wealth fee income is up over 20% year-over-year. So like all of those factors are just -- they show the performance of the business and why we expect double-digit growth going forward.
Operator: The next question is from Mario Mendonca with TD Securities.
Mario Mendonca: Maybe a question going back to Ed for a moment here. These initiatives that you outlined on Page 14, they seem that they're not -- this is not a cheap thing to do. This is going to take some spending. The question is, have these initiatives already been -- have the expenses already been incurred? Or are these still on the way?
Edmund Francis Murphy: So I can take them one by one. With respect to offering private asset investments, there's not a material investment associated with that. Obviously, there's distribution support, there's working with our partners. So I would say, for all intents and purposes, the investment there, which is de minimis, is reflected. In terms of the opportunity in the health savings account, which I think is significant. In fact, with the Big Beautiful Tax Bill here in the United States, we expect the penetration to increase by over 20%. So you're going to see a significant amount of Americans adopting health savings accounts as we continue to see the shift to consumer-directed health care and high-deductible health plans. We think that's a tremendous opportunity for us. And I would say, for all intents and purposes, the expense there is largely reflected as well. I don't see -- it's not an incremental expense. We're working through a partnership there. And then with regard to the equity plan admin platform, we built that platform. We are investing in that business. But it's largely -- it's a function of the integration investment that we set aside to create that seamless solution for clients. So I would submit that the expenses are largely reflected in the current year plan and what we expect next year.
Mario Mendonca: A quick follow-up then. It appears that the fees generated in U.S. Retirement -- and I'm just talking about a rudimentary calculation of your fee income to average assets. It seems like it did take a bit of a step down. Is this more of a -- is this a seasonality issue? Is it mix? Is it competition? Or maybe let me start by saying, do you agree with the notion that the fee income relative to the assets is moderating somewhat?
Edmund Francis Murphy: Yes, it's a good question. I mean it's primarily driven by mix and the diversification of our revenue stream. So if you think about the growth in the business that we're experiencing, a lot of it is fixed fee, per participant fee, particularly in that large mega market. It's not asset-based fees. And so that's where you're seeing mix play out and you're not seeing the correlation as you're indicating. And then as we've said over time, we continue to diversify the revenue stream. So if you go back several years ago, we were probably 60% asset based. Now we're sub-50% asset based. So that's really what you're seeing play out there in terms of that differential.
Operator: The next question is from Tom MacKinnon with BMO Capital.
Tom MacKinnon: Just a question with respect to the credit hit. If I look in the U.S. Empower, you got Canadian dollar figure about $80 billion in kind of spread-based account balances. Largely, that's related to stable value product. And on that, you took CAD 63 million pretax credit from this U.K. water utility. But in Europe, you've got nearly $50 billion in balance sheet assets, probably mostly U.K. spread- based again from U.K. bulk and payout annuity business, yet you don't have any -- well, correct me if I'm wrong, you don't have any exposure to this U.K. water utility, and you've actually had positive credit experience. So please help me understand a bit of the disconnect between these 2 spread-based businesses. And is there any accounting differences with respect to how you're accounting for credit hits at Empower versus credit at -- in Europe? And just confirm that there's no exposure to the U.K. water utility in your Europe book?
David M. Harney: Thanks, Tom. I'll hand over to Jon.
Jon P. Nielsen: Tom, thanks for pointing that out. So just to start with, in terms of our exposure to that particular utility, it's around -- after the credit hits that we've taken, it's around CAD 180 million, so less than 1% -- or 1.1% of the overall portfolio. So it's a fairly small holding. As we mentioned, the whole sector has undergone a review by the government. We think that review is overall net positive for the sector. And in terms of the outlook outside of that name, it's fairly positive. We do hold a number of exposures within our U.K. portfolio for other water utilities. This one was held across portfolios. Obviously, financial markets are becoming global, and we're becoming a more global investor as they globalize. So these issuers are issuing in different currency, and we're originating these assets and putting them against liabilities across our balance sheet. So it's not unusual that we hold securities across portfolios where it meets our ALM standards. But in principle -- principally, our balance sheets will be local issuers, but it's not unusual to have them across the portfolios. There is an accounting nuance between our European and U.S. balance sheet. From a European standpoint, you would have seen us take credit experience on these holdings over the prior quarters as we mark-to-market those securities. Whereas in the U.S., it's more of a judgment call as to collection of principal and interest. And as a result of the unwind of the private solution this quarter, we made the judgment in our U.S. portfolio that the security was not going to be fully collected in terms of principal and interest, and we wrote it down this quarter. As we look at this situation, we're monitoring it closely. We're sitting with the senior -- other senior bondholders. There is a level of binary outcome in terms of how that works out, either a senior creditor solution, which we think could provide some upside, and you've seen the security trade upwards since June 30 in anticipation of that probability, or the downside scenario is a special administration government workout. Now we think it's the probability of a private solution more likely. So we anticipate some resolution of this in the third quarter as that solution and the government makes a call in terms of private solutions. So down to 0.1%. And you're right to point out a slightly different accounting nuance between the segments.
Tom MacKinnon: Yes. Okay. And just a quick follow-up on that. So can you confirm there's no exposure to this U.K. water utility that you took a hit on at Empower, there's no exposure in your Europe book to that?
Jon P. Nielsen: No. As I mentioned, there was exposure. We had taken the credit experience as the credit spread had changed in our European book in prior quarters. So we're now fully mark-to-market at the estimated market value. We've taken all of the experience to date through June.
Tom MacKinnon: And how come you don't use that -- that's IFRS 17 methodology. How come you don't use that methodology for your U.S. business then? Why isn't it mark-to-market with the liability that has a credit spread impact on it?
Jon P. Nielsen: It is -- those are investment contracts. So our particular methodology looks at when is the principal and interest recoverable, and it was a judgment of the team with the restructuring that occurred this quarter.
Tom MacKinnon: All right. And maybe just one thing on Canada Wealth. We've got -- we have assets kind of up, but we've got base earnings before tax down, both year-over-year and year-to-date. What are you seeing there with respect to fees or margin? It seems to be down a little bit. Is there any outlook you can give us for Canada Wealth?
Fabrice Morin: Yes. Thank you. Fabrice Morin here. Thanks for the question. We're very pleased with the performance of our Wealth business in Canada. As I mentioned on our Q1 call, there was a onetime expense reallocation at the beginning of this year for -- between our Wealth business and our other businesses, not an increase in expense. Just as we've acquired businesses in Wealth, these businesses are attracting more of our group overhead. So you need to correct for that. You also see in our supplemental that our spread income is down a little bit in Wealth Management. The sum of these 2 things would account for about $14 million pretax, I believe, and would more than offset the decline that you see year-over-year. So if you adjust for these onetime items, we actually see growth year-over-year. Again, we're pleased with the performance of our Wealth business. Our seg fund net flows are improving markedly on the back of investments that we've made in experience, on the back of new programs that we have with advisers, on the back of partnerships like the one we have with Primerica that I've talked about in prior calls. So we see the fundamentals of our Wealth business being very positive.
Operator: The next question is from Gabriel Dechaine with National Bank Financial.
Gabriel Dechaine: Can I ask you to repeat or maybe get a bit more detail on a comment you made earlier. I believe you were talking about the -- all the whole money leaving the Retirement business in the U.S., but the retention. Did you quantify any retention rates that are getting reflected in your Wealth -- U.S. Wealth business inflows, which have been pretty consistent and moving higher?
David M. Harney: Yes, do you want to comment, Ed?
Edmund Francis Murphy: Yes. I was just saying that generally, we haven't given specific statistics on retention other than to say that the capture rates continue to increase. And we expect that to continue. And I think what I said was that the key metric that we focus on in our personal wealth business is net new assets. So that's gross sales minus redemptions and terminations, excluding market performance. And on a full year basis, we expect that to be up significantly year-over-year.
Gabriel Dechaine: Okay. Great. Now as far as the Canadian business goes, if I look at the Group Benefits, in particular, looked pretty solid this quarter. Earnings up 19% year-over-year. I recall seeing some mention of morbidity gains. Are you able to quantify those, if at all?
David M. Harney: Yes. Look, we're very pleased with performance this quarter in the Canada Group Benefits business. So Fabrice, if you want to add a little bit of color on the experience?
Fabrice Morin: Yes. I think that's absolutely right. The performance of our group business is driven by strong morbidity performance this period. As we've seen in past periods, this performance tends to persist over time. This was not necessarily onetime, 1 quarter. We are very disciplined in the way we price this business. We're very disciplined in the way we underwrite this business. I think our track record over a long period of time would show this, and we remain focused through cycle on providing a very good client and member experience and also being disciplined in the way we approach the business.
Gabriel Dechaine: Yes. No, I get that. And I'd agree, but just wondering if there's any -- if this was a particularly strong quarter or there's some seasonality that you might want to flag.
Fabrice Morin: Well, it's been stronger than other quarters. I wouldn't point to any specific seasonality that relates to morbidity experience. And the experience -- the positive experience factor is mainly long-term disability morbidity.
Gabriel Dechaine: Okay. Then on the other hand, so the outlook for the business, and correct me if I'm wrong, but your market focus historically has been mid- to smaller case sizes. So on one hand, for driving profit growth, it's your underwriting capabilities, which you demonstrated over time are quite strong. But then on the other hand, the top line is maybe facing a bit more of a challenging outlook because of lower employment and growth in Canada. I'm wondering if -- is that something that you're factoring into your outlook as you look at the 2026 budgeting? Or anything along those lines? That would be, I think, interesting to hear about.
Fabrice Morin: We're insuring many Canadian employees. So we're exposed to the Canadian economy. We're not seeing right now a significant headwind, at least in our current block. Our current block continues to grow with the economy, but we continue to watch the economic trends in Canada, and we would be exposed to that. You may see in our expected profit growth. We're also disciplined in the way we reflect experience into expected profit. We tend to be very cautious and conservative in the way we do this. And we're cautious and conservative on our pricing as well. So you will see a slightly slower expected profit growth that would reflect these 2 factors. But we're not seeing -- worry at least in our current results, and we continue to watch the outlook for employment and economic growth in Canada.
David M. Harney: And more broadly, as we plan for next year and budget for next year, like we're firmly committed to the financial objectives we set out. So Fabrice, in Canada, our expectation is mid-single digit growth, to do slightly better than that in Europe and CRS and then double-digit growth in the U.S. So no change in expectations from any of the segments.
Operator: The next question is from Alex Scott with Barclays.
Taylor Alexander Scott: I had one for you on Empower and just wanted to see what your thoughts are on in-plan annuities as an offering in 401(k)s. Do you see that as something that ends up building as an allocation? Isn't that a product that you'd potentially partner with somebody on or manufacture yourself? I'd just be interested in your views.
David M. Harney: That's an area we're excited about. Like obviously, it's an area we have a lot of expertise in our different segments. And I think as people transfer into retirement, we're going to see increasing demand for that project in the U.S. Others are experimenting much with different offerings. So I think that's something we have the expertise to add. I think we're probably likely to partner with somebody in the short term as a route and see what sort of demand is there for the product. And then if there is strong demand, we could potentially move into manufacture ourselves.
Edmund Francis Murphy: Yes. I would just add, we have a partnership today with TIAA. I would say the demand has been somewhat tepid at this point. But clearly, it is an emerging need. A lot of the surveys indicate that people want guaranteed income solutions. They want longevity insurance. And to David's point, we are looking at it within Empower. We'll take the same approach, open architecture, but we'll likely have our own solution. We'll underwrite the offering.
Taylor Alexander Scott: Got it. Okay. The other question I had is on Empower as well. The average AUM will be up a fair amount going into the back half of the year just because of what the market has done, and I appreciate that a little over half is fee based. So not all of it indexes to that. But you've got a pretty solid tailwind for top line going into the back half of the year. I'm just interested in how you view that extra flexibility from an expense standpoint. Is that something you take advantage of to invest more back into the business? Or would it flow through more in the margin?
Edmund Francis Murphy: Do you want to take that, David?
David M. Harney: Yes. I think it will give us some flexibility. I think we want to continue to invest so we can improve the efficiency of the business. And I think there's AI, digital innovation that can both improve the member experience and improve our own efficiency and continue to drive down participant cost. So that's a win-win and an obvious invest area for us. And then I think the other thing we're learning about the business, the key to improving the rollover rate of Retirement is to maximize the member experience through their journey and saving for retirement. You see the things we're doing on the product expansion that plays to that, continued investment in the brand plays to that. So as we look to plan for next year, we want to try and create room for both of those investments in the Empower business, and the top line growth will give us some flexibility to do that.
Operator: We have a follow-up question from Mario Mendonca with TD Securities.
Mario Mendonca: Might be best for Jon, it could be. Over the years, I don't recall a time when Great-West Life was as focused on reducing leverage and buying back stock. Often, when I think about it, I think about the holding company just not being a regulated insurance company and differences between Great-West Life and some of the other LifeCos. So it appears to me that something has changed. So perhaps you could talk a little bit about what you're trying to solve for in taking the leverage ratio down? Is the goal to get it down to 25% and the buybacks? So what's changed that's sort of changed Great-West Life's strategy around capital?
Jon P. Nielsen: Yes. Well, thanks for the question, Mario. I think we're going to be active in our management of capital going forward. I think it was underappreciated when I joined just how capital efficient this company is. We've put out a lot more disclosures about the sources of those cash flows and the uses of those cash flows and also complemented that with an outlook on capital generation being more than 80% of earnings. We think this is top tier in terms of the sector. And we're continuing to push our businesses to become more capital efficient, whether it's strategic decisions around like what you saw this quarter around exiting the life market in CRS or whether it's being disciplined in terms of our product underwriting and generating just every dollar of cash we can get and making the velocity of that cash as quick as possible. So we're excited about that outlook, and we're doing a lot of work to make sure that we continue to improve just how much we generate. Then in terms of uses, as I mentioned, being more active. We're just kind of ensuring that we have a strong balance sheet for M&A. There's nothing imminent in terms of M&A. So you've seen us take action as we roll forward quarter-by-quarter with buybacks. This quarter, we announced another $500 million. You should expect us to continue to be active quarter-by-quarter and looking at what's the M&A outlook. And if there isn't something imminent or if there's not something within a reasonable period of time, we'll look to buy back shares on an ongoing basis. So I think it's just becoming more clear about just how strong our position is and using that as a leverage to grow the business over time. So that's what I'd say about that, and you should consider this just to be BAU now for Great-West in terms of how we operate.
Mario Mendonca: So nothing's changed. It's just that you, Jon and David and the folks there at Great-West Life have decided this is a more urgent priority or this is now a priority of the company and perhaps previous management teams have focused on something else. Is that fair?
Jon P. Nielsen: I wouldn't call it a change in management philosophy. I would say if you look at the evolution of the company, the strategic positioning of our U.S. business has changed materially. We made disciplined capital allocations to get out of asset management and life insurance and reallocate into a growth business, our Retirement segment. That business is now generating substantial cash flow. If you look back to the previous position, I wouldn't say it was a strong cash contributor. We had nice businesses, but not great businesses from a cash generation. At the same time, our other businesses has now grown to scale, Mario. If you think back 10 years where our CRS business was, our European business was, they weren't any near -- anywhere near the scale they are now. So I would say it was a benefit of the decisions that the management that came before us made strategically that puts us in this position now that we can harness it and really take it forward in a really positive way. And we're still -- I don't want to give the position that we're changing our leverage ratio over time. We have a maturity, we're going to pay it down. We would still actively look to be around the 30% leverage ratio over time in the event that there was inorganic opportunities. And given that we have excess cash, there's no need to issue in the debt markets right now. So it's just active management of the position that the prior generations of management endowed us to, and we're going to be active in managing that very hard.
David M. Harney: Yes, I think that's it exactly. It's a natural maturing of the business. Like we've repositioned to capital light. That's over 60% of our earnings now forecast to grow to over 70% over the planning period. So this sort of capital deployment priorities just fit perfectly with that.
Operator: This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Khan.
Shubha Rahman Khan: Thanks, everyone, for joining us today. Following the call, a telephone replay will be available for 1 month, and the webcast will be archived on our website for 1 year. Our 2025 3rd quarter results are scheduled to be released after market close on Wednesday, November 5, with the earnings call starting at 9 a.m. Eastern Time the following day. Thank you again, and this concludes our call for today.
Operator: This concludes the conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.