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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, and welcome to the Great-West Lifeco's Fourth Quarter 2017 Results Conference Call. I would now like to turn the call over to Mr. Paul Mahon, President and Chief Executive Officer of Great-West Lifeco. Please go ahead, Mr. Mahon.
Thank you very much, Michael. Good afternoon, and welcome to Great-West Lifeco's Fourth Quarter 2017 Conference Call. With me on the call today are Garry MacNicholas, Executive Vice President and Chief Financial Officer; Stefan Kristjanson, President and COO of Canada; Bob Reynolds, President and CEO of Great-West Lifeco U.S.; and Arshil Jamal, President and COO, Europe. There are also a number of other senior officers available to respond to questions as required. Before we start, I will draw your attention to our cautionary notes regarding forward-looking information and non-IFRS financial measures on Slide 2. These cautionary notes will apply to today's discussion as well as to the presentation material that we've provided. I'll provide an overview of Lifeco's fourth quarter results, including headlines from our Canadian, U.S. and European businesses, and Garry will then provide a more detailed financial review. After our prepared remarks, we'll open up the line for questions. The company saw solid operating performances in the fourth quarter with strong top line results and controlled expense growth driving a 5% increase in adjusted earnings year-over-year. Reported results in the quarter were impacted by 2 onetime items that we announced last week. One was a charge related to U.S. tax reform and the other was a net charge on the disposal of an equity investment. The makeup of our fourth quarter results is similar to that of the past 2 quarters, strong underlying performances impacted by onetime items. Some of those items were outside our control like the impacts of U.S. tax reform, while others were the result of deliberate, strategic actions taken by the company. While having a negative effect on reported results, these actions set the stage for stronger earnings growth in the future. The Canadian segment had a great fourth quarter with healthy premium and deposit growth, lower adjusted expenses and adjusted earnings growth of 10% year-over-year. The transformation we undertook earlier in 2017 is having a positive impact on our productivity and profitability as you've seen in our numbers. It's also having a positive impact in other meaningful ways like improving our interactions with customers and advisers and enhancing our competitiveness. In fact, I'd like to take this opportunity to acknowledge the great work of Stefan Kristjanson and the team across Canada whose efforts led to Great-West Life being named Life and Health Insurer of the Year at the 2017 Insurance Business awards in November. Moving to the U.S. Empower Retirement is showing great momentum with growth in sales, assets and participants and operating earnings that have more than doubled since the fourth quarter last year. The sales pipeline remained strong, and we continue to evaluate acquisition opportunities in the DC recordkeeping space. Turning to Putnam. Scale remains an issue, and we continue to actively assess M&A opportunities to address this challenge. Putnam continues to sustain strong investment performance relative to its peers. As of December 31, 2017, 93% of Putnam's fund assets performed at levels above the Lipper median on a 1-year basis, and 85% of Putnam's fund assets for performed at levels above the Lipper median on a 5-year basis. As announced last week, reported results in the U.S. were impacted by 2 charges. One reflected the reevaluation of deferred tax balances and insurance contract liabilities resulting from U.S. tax reform. The other charge related to the disposal of an equity investment in Nissay Asset Management. At the same time, we acquired Nissay's minority interest in PanAgora. PanAgora is a quantitative institutional asset manager, majority owned by Putnam. It is a fast-growing entity, and we're pleased to increase our stake to 100% of the voting shares. In Europe, we saw solid performance across regions and businesses in the fourth quarter with double-digit earnings growth in Ireland and Germany. We completed the integration of Irish Life Health, which exceeded our annual pretax cost-savings target, and on January 2, we closed the acquisition of Retirement Advantage in the U.K. This acquisition reinforces our already strong position in the U.K. payout annuities and as a great new retirement income solution, equity release mortgages to our product lineup. Our capital strength allows us to pursue organic and inorganic growth opportunities. In addition to investments across our operating companies to drive organic growth, we continue to pursue M&A opportunities in the U.S. asset management and DC recordkeeping spaces, as noted earlier. Also of interest are acquisitions that add a capacity or extend our position in the chosen market like the recent Retirement Advantage and Financial Horizons acquisitions. Finally, we're pleased to announce that the board has approved a 6% increase in our quarterly common dividend to $0.389 per share. This represents our fourth consecutive year of dividend increases. And now please turn to Slide 5. Adjusted earnings this quarter were $734 million, up 5% year-over-year. As noted, adjusted earnings exclude the charge for U.S. tax reform of $216 million and a net charge on the disposal of an equity investment in Nissay of $122 million. Lifeco maintained its strong capital position with Great-West Life's MCCSR ratio at 241% compared with 233% last quarter. Please note that the MCCSR ratio includes a positive 6 point impact of capital activity in advance of the closing of the Retirement Advantage acquisition. Lifeco cash was approximately $500 million at quarter end and is not included in our MCCSR ratio calculation. Moving to Slide 6. Canadian sales decreased by 3% year-over-year with higher individual and group wealth sales and a return to normalized Individual Insurance sales as compared to Q4 2016. The decline in Individual Insurance sales year-over-year reflects the new business surge we experienced in the back half of 2016 and Q1 2017 due to changes in life insurance policy taxation. U.S. sales were up 4% and 9% on a constant currency year-over-year basis. Empower Retirement sales increased 20% in local currency, while Putnam saw higher mutual fund sales, partially offset by lower institutional sales. In Europe, sales increased 66% or 60% on a constant currency basis with higher fund management and pension sales and a large bulk annuity sale in Ireland and higher wealth sales in the U.K. Turning to Slide 7. Fee income for Lifeco increased 4% year-over-year. Looking at the segment results. Canada's fee income was up 9% due to higher average assets under administration driven by higher average equity markets and positive net cash flows. In the U.S., fee income was flat year-over-year and up 4% on a constant currency basis due to asset growth at Putnam and Empower. In U.S. dollar terms, Empower's fee growth of 3% was impacted by a reclassification adjustment in last year's fourth quarter. Excluding that adjustment, which had no bottom line impact, Empower fees were up 13%. While equity markets experienced strong growth year-over-year, particularly in the U.S., fee income at Putnam was impacted by a decrease in performance fees and asset mix. In Europe, higher asset management fees in Ireland and Germany and higher other income in Ireland drove an 8% increase in fee income, 4% on constant currency year-over-year. And now referring to Slide 8. Adjusted expenses for Lifeco were up 1% year-over-year. As a reminder, we define adjusted as excluding restructuring charges. In Canada, adjusted expenses declined 3% year-over-year, reflecting savings related to our business transformation initiatives. We've achieved $123 million of pretax annualized expense reductions as of year-end and remain on track to achieve $200 million of annualized reductions by the end of Q1 2019. In the U.S., expenses were flat year-over-year and up 5% on a constant currency basis. Expenses at Putnam increased 4% in U.S. dollar terms, driven by performance incentive compensation related to our strong fund performance. In Europe, adjusted expenses increased 10% and 7% in constant currency mainly due to business growth and expenses related to charges -- changes to defined benefit plans. I'm now going to turn the call over to Garry. Garry?
Thank you, Paul. Starting with Slide 10. Adjusted net earnings in the fourth quarter were $734 million, up 5% year-over-year, equating to $0.74 per share. As noted, reported results included $0.22 per share charge for U.S. tax reform and a $0.12 per share net charge on the disposal of the equity investment in Nissay Asset Management. In Canada, earnings increased 10% year-over-year primarily due to higher fee income, strong group health and disability results, the favorable impact of repricing activity in Individual Insurance and lower expenses from transformations. In the U.S., adjusted earnings declined 3% year-over-year and were up 2% in constant currency. As Paul noted, Empower results were strong with earnings of USD 30 million compared to USD 12 million last year. Putnam's results were impacted by higher expenses and less favorable tax-related items but benefited from the write-off of an intangible of USD 10 million. Europe's adjusted earnings were flat year-over-year and down 1% in constant currency with higher earnings in Ireland and Germany, offset by lower U.K. and Reinsurance earnings. Turning to Slide 11. Note that, here, we are showing the source of earnings on an adjusted basis, which excludes the impact of U.S. tax reform, the net charge on the sale of the equity investment in Nissay and restructuring costs. These items are shown after-tax at the bottom of the display. We have included the source of earnings on reported earnings in the supplemental package, breaking out those impacts by line and category so that you could see the pretax view as well. And as a reminder, the source of earnings category is above the line our shown pretax. Lifeco's year-over-year expected profit increased $9 million for 2016 mainly due to underlying business growth across the segments. You may recall that in Q1 last year, we spoke about a realignment in our approach to expected profit for 2017. In effect, in 2016, the expected profit was too high and the experience gains were too low. That change explains the more muted increase you see in expected profit this quarter compared to Q4 last year. Note, expected profit increased $22 million from the prior quarter due to the underlying business growth and currency gain. New business strain of $18 million in Q4 2017 improved by $25 million compared to the prior year, largely due to repricing actions in Canada. Strain was broadly in line compared to the prior quarter, notwithstanding that Q3 included the benefit of 2 large longevity swaps in Reinsurance. Experience gains of $83 million in Q4 reflected investment gains of $81 million, with other experience variances essentially netting each other out. Favorable group health and disability experience in Canada and Ireland and favorable fee income and expenses in Canada was largely offset by negative disability experience in the U.K., policyholder behavior experience in Canada and higher expenses in Europe, largely related to the pension plan changes noted earlier. Assumption updates and other management actions resulted in a release of $125 million this quarter. The implementation of new actuarial standards resulted in a release of $105 million for mortality improvement assumptions reflecting our diversified portfolio and a charge of $38 million for reduced ultimate reinvested rate assumptions, as noted in earlier quarters. Positive updates of economic assumptions and group disability assumptions in Canada and Europe were partially offset by strength in loss assumptions primarily in Reinsurance. Other of $20 million includes the write-up of the intangible asset in the U.S. Earnings on surplus of $1 million were $13 million higher than last year. This is primarily due to higher gains on seed capital in Canada and Putnam and higher OCI gains. All this comes together in the adjusted net income before tax shown in the middle of the page, which is up 5% year-over-year. Turning to Slide 12, and this shows the source of earnings for the full year in 2017 as of the end of the year. Again, this view is showing adjusted net earnings which excludes the impact of U.S. tax reform, the net charge on the sale at Nissay and restructuring costs. These items are again shown after-tax at the bottom of the display. Lifeco's expected profit of $2.7 billion in 2017 was $30 million higher than in 2016. The increase is a primary result of good underlying business growth, partially offset by currency movement and that realignment of experience gains, as discussed earlier. Strain of $115 million in 2017 was lower than 2016 as a result of repricing actions in Canada and gains on large annuity sales and longevity swaps in the Europe segment. Experience gains of $341 million in 2017 were $155 million higher than 2016. The gains in 2017 were primarily a result of investment experience, includes yield enhancements, in all the segments, with the other gains and loss largely offsetting. Management actions and changes in assumptions contributed $359 million to pretax earnings in 2017 compared to $547 million in 2016. And earnings on surplus of minus 4 this year was $62 million lower than 2016, primarily due to lower OCI gains and the gain on the sale of an investment in 2016. Turning to Slide 13. Lifeco's uncommitted cash position remains strong at $0.5 billion. Our cash position is lower than prior quarters as we downstream funds to the U.K. prior to year-end for the closing of the Retirement Advantage transaction in early January. Our book value per share was up 2% year-over-year at $20.11. Adjusted return on equity was 13.4% or 14.3%, excluding the catastrophe and reinsurance loss in the third quarter. Reported ROE was 10.9%, reflecting restructuring charges, last quarter's reinsurance losses as well as the charge for U.S. tax reform and the disposal of the Nissay investment in the current quarter. Turning to Slide 14. Assets under administration were $1.3 trillion, up $102 billion or 8% year-over-year, driven by market performance and overall business growth. That concludes my formal remarks. Back to you, Paul
Thanks, Garry. I'll refer you to Slide 15 now. And before we take questions, I just would like to say that we're quite pleased with the momentum we're seeing in our businesses and confident that the strategic actions taken throughout the year are setting the stage for stronger earnings growth at Lifeco. Our transformation initiatives in Canada are driving organic growth. Acquisitions like Retirement Advantage, which expanded our portfolio and brought new capabilities, and Financial Horizons, which extended our distribution reach further into the independent MGA space, bring important new growth levers. Investments and innovation in technology will continue. Our investment in the Empower platform positions us well to be a consolidator and to grow organically by delivering a great experience to planned sponsors and their participants. Our investments in Wayfinder in Canada is helping us grow our business with current group customers, with plans to deploy it to new underserved segments of the Canadian market in the future. And finally, our capital strength and financial flexibility put us in a solid position to act on attractive acquisition opportunities. So with that, Michael, we'll now open up the line for questions from analysts. And I would like to ask analysts to direct the questions to me so I can either answer or steer them accordingly. Thanks.
[Operator Instructions] And the first question is from Steve Theriault at Eight Capital.
A couple of questions. If I could start with Europe. If I take the $54 million out of the European earnings for the U.S. tax reform charge, you get to relatively unchanged year-on-year numbers. So Paul, I imagine you all referred that to Arshil, but is that how you suggest we should look at it? Or is there other noise in the quarter, something I'm missing? And then sort of related, there was mention of higher other income in Ireland. Is that bulk annuity sale that was mentioned somewhere in the release?
I got to refer that one over to Garry, actually, to take.
Sure. Just on the latter point on the other income in Ireland, that will be more of the health business that we've added to Irish Life Health.
And then -- yes. And, Steve, relative to it, there's really no other significant noise in the quarter.
So just to give you a little bit of color year-over-year, I think year-over-year, we've seen very strong growth in the earnings both in Ireland and Germany as the underlying businesses both in Ireland and Germany continue to benefit from strong flows and high levels of persistency. We also had a modest tax contribution in Germany this year that added to that result. So again, as Paul mentioned in his introductory comments, very strong growth in Ireland and in Germany. In the U.K., it was more of a mixed picture. Quarter-over-quarter, this fourth quarter '17 against fourth quarter '16, we did see some better investment experience, but our morbidity experience in the U.K. was a disappointment in the fourth quarter. And we also had that very favorable mortality experience in the prior year. So while we weren't unhappy with the mortality experience that we had in the fourth quarter, the previous year saw very strong contribution from mortality. So again, the underlying business trends in the U.K., I think, are favorable and positive, and we have the Retirement Advantage acquisition closed on January 2. And that will start to contribute in the latter half of this year. So we're very pleased with the quarter's results and particularly the full year results where all of the business lines continue to perform very strongly.
Yes. And, Steve, I think it also speaks to the diversity of the overall Europe and Reinsurance business. We're a little bit off in quarter in the U.K. because of those dynamics, but we're seeing good strength out of Ireland and Germany. And we really like the fact that we're expanding these businesses in all those different areas.
And did the strength in Ireland have to do somewhat with the bulk reinsurance transaction?
No. I mean, certainly, the sales performance in Ireland reflects that large bulk annuity transaction, EUR 335 million, that closed in quarter, but that didn't really have a material impact on earnings in period. That will contribute over the life of the transaction. What's really driving that situation in Ireland is all of the wealth management and fund management businesses have been benefiting from very strong flows, so fee income has been going up. We did get a very good contribution from the health insurance business, so we concluded the integration activities there. But the underlying experience has been very favorable. We did cut prices because we're trying to build market share there. So some of that favorable morbidity going forward is getting shared with the customers. And then, again, we've had an external environment where the markets have been doing well and the credit environment has been relatively benign. So all of those things have been helping us report very strong sales and earnings growth in Ireland and in Germany.
Thanks, Steve.
The next question is from Gabriel Dechaine at National Bank Financial.
Just on the Europe segment before moving on. It was the only business where we had a pretty big increase in expenses, constant currency or as reported, I guess. And then talk about some DB expense. I'm butchering this, but were there some sort of onetime expense in there that's going to go away?
Yes, it was related to pension curtailment in Ireland, and it was an expense related to implementing that. And I would note that the pension curtailment is really about derisking our pension liabilities. It's really transitioned from DB to DC, and it's quite consistent with market practices that you can see going on across really all the industries in Europe. And that was really the majority of the expense drag. But we are also seeing growth in business in Ireland, so you'd see a bit of a rise there in expenses as well.
Were this part of your external business? Or to me, it read like you had a pension expense in your own business.
In our own business. This is curtailing our Irish life pension.
Okay. How much were that?
It's only -- the onetime costs in Ireland are on the order of $10 million. It was predominantly extra costs associated with our agreement with the trustees to stop accruals in our own pension plans for our employees in Ireland and move all of our employees fully onto DC arrangements. There were also some extra legal costs in Ireland, but that was a smaller proportion of level, so about $10 million.
Yes, nothing major. All right. Great. Canada then. That business has been moving along nicely over the course of the year. We're seeing the expenses coming down. But also the group business, it looks like another quarter of positive morbidity experience. Can you tell me what the experience was in the quarter for morbidity and what it was for the year?
Well, Garry's looking into that at this moment. But I would acknowledge, I think what you've seen in Canada, as you've said, the benefits of the expense improvements, we're seeing continuation of good group morbidity, in particular. Garry, specifically?
Yes, just morbidity in Canada, this would have been largely the group, was -- contributed $34 million to that experience gain this quarter. I don't have the year-to-date in front of me, but it was $34 million this quarter and it has been on the improvement trend through the year.
Were they positive for the year? I mean, I just need an adjective, I guess
Yes, it was absolutely positive for the year. We'll get back to you at full year number. But I'll remind you that the disability, from a pricing perspective on the group business, once you take action and take 12 months to run it through your whole block, so there's an evolving trend, and what we're seeing now is the full realization of that pricing action being put into place by the fourth quarter of 2017.
Yes. So the full year number was $43 million for morbidity in Canada.
Okay. So we're fully repriced now. And is it at the point where you're confident in it, the success of the repricing and then can move some of that experience gain into expected profits next year?
Yes. That's the dynamic. And like anything else, it's going to be a volatile benefit. But as we've said before, it can be volatile and cyclical. And at this state, we've taken good action, the right action. And I would say this business persistence is also holding up. So we're in good shape with that business right now.
My last one is on the expense or the transformation programs, the biggest one of which is in Canada. And this isn't exactly the same, but historically, from Great-West, you've had a really strong track record of quantifying an expense reduction target usually in association with an acquisition and then exceeding it and frequently by a large margin. Is this something that we could look forward to from this particular program or maybe not?
I would characterize this differently than our typical acquisition, where you go in with a fair degree of uncertainty as you think about -- you set a target, but you look at an acquisition, you're not certain on what your target systems will be, exactly what your target operating model is. This is far more precise, and I don't think we view this like an acquisition. We have a target in mind, and we're very focused on achieving that target.
The next question is from Mario Mendonca at TD Securities.
Paul, the savings in Canada, I want to see if I can think of a good way to incorporate this into earnings maybe more directly. There's $200 million, call it, say, 75% accrues to shareholders. Would it be appropriate to assume that a good portion of that falls into expected profit over time in 2018 and 2019?
I'm going to actually refer that. In terms of geography of where it's going to fall, I'm going to let Garry speak to that.
Yes. I mean, a good portion of that will fall into expected profit over time, but it also causes -- caution, there's a couple of elements. The costs that are related to the distribution, those tend to fall to the new business gains or they go to reducing your DAC, which reduces your amortization down the road. So you've got the distribution related go on the new business side. And then what you'll see is, as we get a run rate, so we have a run rate of a certain amount at the end of a quarter, that forms the basis for going into expected profit the next quarter. And then, again, as we build up our run rate, it forms that basis that go into an expected profit. And I'll use an example since I think there's been questions on this. We had $69 million of shareholder annualized run rate savings at the end of last quarter. So it's about $17 million expected for this quarter, $12 million went into expected profit and the remainder, the other $4 million or $5 million, went into the new business gains side. So that's how the geography lays out.
Okay. So it would not be unreasonable then for us to assume that the growth in expected profit in Canada, which is picking up but still rather light, that it would not be unreasonable for us to suggest that, that improves meaningfully in 2018?
This will certainly contribute. I mean, there are obviously factors, but the expenses will continue to contribute on a growing basis, presuming that we continue to deliver the same as according to plan.
Okay. My next question or the last question, actually, is, Paul, the quote you offered at the very beginning or in your press release -- in the press release, you start -- you say that you'd expect earnings to be stronger going forward. And that's helpful to hear, but what I'd like to know is stronger than what? What are you referring to? Stronger than last year, 3 years? What is the er in stronger mean?
What I always say is I'm not talking -- I'm not giving you a projection on the next 6, 9, 12 months or 24 months. What I'm saying is that, as we're actually taking actions with things like acquiring a Retirement Advantage, it gives you a new arrow in the quiver. So what you've got is an opportunity to drive higher revenues and better margins and, frankly, to use that product to your advantage. Financial Horizons, we've recently closed 2 tuck-in acquisitions, so we're going to see higher revenues coming from that. So the point of that was that as we're taking actions strategically to invest either in capabilities or in extending our businesses, and fundamentally, we're also focused on, can we deploy capital into whether it's a Putnam acquisition or acquisitions, let's say, in the Empower, and that's going to drive stronger earning. So the er would be taking actions that have the potential to drive top line and bottom line, and that's what we're setting ourselves up for.
But at this point, you don't want to give us a base from which to compare?
No, at this point, I don't choose to do that.
Understood. Okay. But you can understand why I asked.
No, I understand.
The er meant something to me.
Okay. Thank you.
The next question is from Tom MacKinnon at BMO Capital.
A question for Garry and then perhaps a follow-up. Garry, we had significant positive strain in Canada, and I think you spoke of repricing actions. Is that positive strain related to -- entirely to individual life repricing actions? And is it sustainable?
To start, strain is obviously across a number of products, and we've been repricing individual products. So we've obviously done a lot of repricing on group. But I think the strain broadly refers to our individual products. Garry will have the detail.
Yes. We had a couple of things contributing. The majority was this -- the repricing. And I think to the extent rates, interest rates, continually gently tick up, that will persist until such time as these other repricings. But that will be a tailwind for us. And then secondly, we also had some hiring on the group annuity side. We had some good returns there that helped boost the -- on some new sale. So there's a bit in the group annuity side as well as quarter.
I mean, this number has generally just been single -- low single digit at best, and then this 27 pops up in this quarter. I mean, is that sustainable? It looks like you only had about $30 million in terms of nonpar individual life sales in the quarter. I can't imagine you get 27 in a positive strain out of it.
Yes. In terms of the increase, so say, call it a 20 over the normal run rate, of that 20, about half was the group annuity sales, and obviously, that will depend on sales as they come in. And the other half would be, again, continuing on the repricing that's been driving the increases earlier this year as well. So you can sort of [indiscernible] from that, which fits our sustainable. It really depends on the sales flow. But we do have a firm handle on pricing discipline, and that's going to benefit us.
Okay. And then a question with respect to Putnam, the margin just being 1% here. And you're already through your expense reduction program. We would have thought the expense reduction program was going to do something to improve margins here, but we're still back to some pretty low margins. So what's the plan here? And why were these expense reductions -- why haven't these expense reductions resulted in any improvement in the margin?
There's lots of -- it's Paul here. There's lots of moving parts that we've got here. I mean, if we look at fee income at Putnam in the quarter, we saw, obviously, growth in investment management fees, but in particular, this quarter, we saw performance fees that were down year-over-year that was offsetting that. And that was, in particular, driven by 2 funds. Another dynamic, and this is really kind of consistent with market dynamics, where you've had active fixed income flows with active equity outflows, and that's actually had a dampening effect on the overall -- the average asset rate. So you get some dampening effects of those in a particular quarter. And those -- I would view those performance fee as not a something that's going to have continuity into the future, but, in particular, it happened this quarter. Any other comments, Garry?
No. I just note that on the expense side, the benefits of the restructuring were in Q4 last year as well as Q4 this year, so it started on a more level-playing field than perhaps the other quarter-over-quarter comparisons in 2017. And then there was, with the better fund performance at Putnam, and I think Paul mentioned this in his opening comments, with the better fund performance, we did accrue for higher performance-related compensation. So we have put that accrual, and that will have a dampening effect this quarter, more of a timing on 2017. But it's -- yes, it's just important to note that both quarters had the benefit of restructuring [ to the ] year-over-year change.
And then finally, the MD&A made note of some favorable impact of items taxed outside of Canada as well as changes in certain tax estimates. Was that -- was there any other tax thing that kind of boosted the numbers in the quarter?
That, I will refer to Garry.
Yes, there was a -- we had -- in addition to the fact that we obviously earn income in a number of jurisdictions, so depending on which jurisdiction income rises in, you saw good results in Ireland and the German operations. So certainly, the Irish operation, lower tax rate, that would contribute. There was 1 specific matter in Germany and that was a -- we reduced the provision for -- it's a tax [ default ] actually between 2 countries that we're holding a provision against. So we've reduced that in the order of, I think, EUR 16 million.
The next question is from Doug Young at Desjardins Capital Markets.
Just wanted to clarify a few things. Just, I mean, in Canada, expected profits up 2%. U.S., if you exclude Putnam, looks like expected profit is down 13%. I think, Garry, you mentioned the reorganization of how you approach expected profit and experience in 2017 relative to 2016. So is there any way to get a sense of what those would be if you kind of normalized?
Yes. I think there's 1 driver that I think I referenced in my earlier comments, but I'll let Garry speak to that one.
Yes, on the -- I did note that realignment. So if you -- and this was really the -- 2016 expected profit was anticipating savings that were in plan. And to the extent we got delayed on some of those -- realizing some of those savings, we end up calling it an experience clause. So now we've got a rigor where we want to see the lower run rate that I was describing earlier to a question. When we see the low run rate, then it goes into expected profit. This was -- and it was particular to the U.S. segment last year, so that's the only number adjusted. But it was about a $53 million switch on -- this is the pretax expected profit, Canadian dollars, in the U.S. So that overall $53 million in Q4 last year would change the U.S. dynamic from being a reduction of 13% to quite a good increase. That should -- $53 million is the number I think you're looking for.
Yes, and that's just for Q4, right?
That's for Q4. It was $77 million for the full year. It really was getting -- we did -- recall, we took some restructuring action at Empower in Q1, and I think we got ahead of ourselves on the expected profit in the back-end of 2016.
Okay. And then in Canada, was there anything abnormal? Or was that 2% just a function of some challenges in the business that wasn't really related to the reorganization?
Correct. It was not related to realignment. That had some -- just the various pluses and minuses in the businesses just went through 2017.
Okay. And then the $20 million write-up in the intangible asset in the U.S., was that one of the items that you backed out to get to your adjusted EPS? Or was that not backed out?
Garry?
That was not backed out. It was not related to those other items.
Okay. So that wasn't backed out. And then just earnings on surplus looked about $20 million, $30 million lower than normal. Was that just you took losses on AFS or AFS gains were less than normal? Can you give a little detail around that?
Yes. There was nothing unusual on the earnings in surplus in the quarter. I think the gains on the seed capital might have been a little lower than prior quarter. And I think the prior year, we also had -- certainly, year-over-year, we would have had earnings in Elion, Thailand. We sold that stake during the year. That's another aspect that would have impacted the results.
Is there kind of a normalized earnings on surplus that we should be thinking about on a quarterly run rate basis? And I fully appreciate it's going to bounce around, but it just seems to have been nonexistent over the last few quarters.
Yes, I don't think -- it is going to bounce around. That's the reality. And it'd be hard to sort of lock in a number and say we should be expecting a constant when it's going to be bouncing.
But if we look over the last 8 years in average, is that a fair way to kind of consider what may be it would be?
Yes, I caution looking over the last 8 years because you're going to have -- obviously, we've been at period of declining interest rates, so some of the assets in surplus would be declining. Also, we have all of our financing costs in there, so it's -- the -- that's why the number is not a large number to start with in terms of the overall. And Paul was right, it does bounce around period to period, it's got the seed capital results, gains or losses on assets and any of the other equity accounted investments.
Yes. And I do think tracking a declining interest rate environment during that period. And we're in a different interest rate environment now. So I wouldn't want to be -- try to put a marker on that.
[Operator Instructions] And the next question is from Sumit Malhotra at Scotia Capital.
I just want to make sure I'm thinking about this expected profit versus experience gain issue correctly. First off, Garry, was it -- that $77 million number, I think, you quoted to Doug for the full year, was that for one of the geographies? Or was that a total company number?
It was a total company number, but I think it actually all occurred in the U.S.
All occurred in the U.S. And then maybe more specifically. So over the course of this year, as the benefits of the restructuring have had a bigger impact, we've seen your expense numbers across segments decline. I think there's a slide you show here on Page 8. So when we look at the expenses, particularly in Canada, down sharply. As that takes place during the year, would that have been a benefit to expected profit this year? Or is that, I think, what you were referencing, that now that you've started to see the reduction, it will move from experience to expected profit in 2018?
Garry?
Yes, it is the latter. There has been some benefit in expected profit already this year. But as we're at the early stages of -- particularly in Canada, then, as I mentioned, it would have been $12 million benefit to expected profit in the fourth quarter. So it's gradually working its way in as opposed to last year. It -- we had just, say, gotten ahead of ourselves in some of the other [ countries ]. You will see it in Empower zone. As we've realized those run rate savings, we do put it in expected each quarter.
But it's going to be the annualization over time as it's building.
Yes, it will build over time.
I think maybe the bigger question here is like to the extent that, at least from my perspective, I look at expected profit as the best indication of the future growth for the company, in Canada specifically, that line has been quite flat for GWO for a few years now. So expenses is a part of it. I think you talked before about some of the pricing initiatives. Maybe directed to you, Paul. What do you think has been the governing factor that's held the underlying performance in Canada and expected profit back for a few years? And more importantly, what makes this turn going into '18?
Yes. I think the 2 dynamics that I believe will drive expected profit forward have been the thing holding it back. So we've seen our group disability results, in particular, group morbidity, held back because of underpricing and in part due to, say, market conditions in terms of claims rate. And so as we reprice that business and set those prices, and as Stefan outlined, it takes -- it's going to run -- from the date you actually reprice, it takes 12 months to get your last repricing in. So frankly, it's a full 24 months is when you see the full effect. That is one back in. The other dampening effect was, as you'll recall, we've had expense growth rates that were into almost the double digits in Canada as we were really investing heavily in some technologies and other capabilities. If you go back a couple of years, that had a dampening effect. Again, as we go through this transformation, we've got the opportunity then for that to come back into the frame. But the reality is both those things take time, and these are very disciplined actions we're taking around transformation and restructuring and around repricing.
Last one for me is going to be on Empower and maybe, more specifically, looking at your Slide 19 in this presentation. So Empower was another area where your expense initiatives have certainly been visible this year. And I think we see that again this quarter with operating costs down. It does seem like the revenue side though has or at least the way you measure it here via fee income, we've once again had one of those issues where it hasn't necessarily been keeping pace with sales. I know you've talked about there's a lag from the time that a sale is enacted to when the fee income starts to pick up. I was of the view that the company was now in a position where those 2 would be more tied, but at 3%, the fee income did seem to decelerate. What's the disconnect, if I can call it that, between sales and fee income? And is it reasonable to expect those 2 to move at a -- more in line with one another?
Yes, actually, the reality is that the fee income growth year-over-year you're seeing that, is there's a reference point there where you really need to refer to an adjustment. I'm going to let Garry speak to that.
Sure. And Paul, I mentioned this [ to you before ]. We had a -- in Q4 last year, and it was in our MD&A last year, again, this quarter, in Q4 last year, we had a reclassification. We had not been counting fee income. We changed the classification. And so what we've done is there's a $23 million adjustment, there was a catch-up last year. So the $265 million included a full year's catch-up on this issue where we've been understating our fee income. And so that number, on an apples-to-apples basis, is $23 million too high, so. It's a $242 million on -- if you looked on Page 19 that you're looking at. And then you'll see a 13% year-over-year growth. That's just we had understated our fee income throughout 2016, did a catch-up in Q4 last year. So on an apples-to-apples basis, it's a 13% growth, which I think is more in line with what you would expect. There was no impact on the bottom line. It was just a reclass.
Okay. So I'll let Paul back in. But from what you're telling me, that it's -- the underlying fee income growth is more on par with the sales trends in this business?
Exactly. On par with the sales trend and what's happening with equity market levels. So -- but the reality is yes. So if you go through that adjustment, I think you've got it right.
There are no further questions. And Mr. Mahon, I would like to turn the conference back over to you.
Well, thank you, Michael. With that, I'd like to thank you all for joining us for the call today. I'd invite you to please contact our Investor Relations area if you have any follow-up questions or if you'd like to speak to anyone about any more detail. And in the meantime, we look forward to connecting with you at the end of next quarter. Take care.
Thank you. Ladies and gentlemen, your conference has now ended. All the callers are asked to hang up your lines at this time, and thank you for joining today's call.