Q3 2023 iA Financial Corp Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to <unk> Financial Corporation 2023.
At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference. Please press star zero full parity assistance at any time.
I would like to remind everyone that this call is being recorded on November eight 2023, I would now like to turn the conference over to Matthew.
Please go ahead.
Okay.
Good morning, everyone and welcome to our 2023 third quarter Conference call. All our Q3 documents, including press release slides for this conference call and Jimmy and supplementary information package are posted in the Investor Relations section of our website at.
He got to see this.
This conference call is open to the financial community have been made in the public I remind you that the question <unk> reserve for financial analyst.
A recording of this call will be available for one week starting this evening.
<unk> webcast would be available for 90 days and a transcript will be available on our website in the next week.
I draw your attention to the forward looking statements information on slide two as well as among our U S and additional financial measures information and then regarding 2020 to restate as a result under Ias 17 and are your first line on slide three.
Also please note that a detailed discussion of the company's risks is provided in our 2022 MD&A available on SEDAR and on our website with an update in our Q3 2023, MD&A Randy yesterday, I will now turn the call over to Daniel <unk>, President and CEO.
Good morning, everyone and thank you for being with us on the call today.
As usual I will start by introducing everyone attending on behalf of <unk>.
First Erie jumping Chief financial Officer, and Chief Actuary.
I think those are all chief investment officer.
Stefan book, but it <unk>.
Responsible for our wealth management operations.
Does any of that flow in charge of individual insurance and annuities.
Okay, Amy Hall, Chief growth officer of lower contingent operations and responsible for Ddos services, Canada, and our U haul.
Shawn O'brien and charter Hall group businesses.
And Mike Stickney, Chief growth officer of our U S operation and co head of acquisitions.
Starting with slide eight for an overview of our third quarter results yesterday, we reported a solid core EPS of $2 60.
10% higher than a year earlier.
Driven by strong profitability in almost all business units.
This represents a core or a weak quarter annualized or 15, 4% a very strong result, which led to a core ROE for the last 12 months up 14, 8%.
Very close to our midterm target medium term target of 15% plus.
Our capital position is very solid with a solvency ratio of 145%.
And we continue to generate significant organic capital in line with our 2023 target.
Sales momentum continued in the third quarter.
With double digit growth in many business units.
Strong sales along with good redemption of enforced business supported the solve at 17% year over year increase in premiums and deposits as well as the 7% year over year increase in the level of assets under management and administration and a very good result, given market conditions.
Finally.
Our book value is $65 25, which represents a 4% increase since the beginning of the year.
Turning to slide nine for our year to date results relative to midterm guidance.
The core EPS for the first nine months is 7% higher than last year.
Core ROE is close to mid term guidance, the solvency ratio is well above our operating.
Yes.
And we are well positioned to meet our 600 million.
Organic capital generation objective for 2023.
Finally, do down the payout ratio of 33, sorry, 32% of core earnings is within the target range.
Now to slide 10 to look at Q3 business growth.
Starting with individual insurance in Canada, which recorded another solid performer with sales of $96 million during the third quarter.
For a third year in a row, we ranked first overall company rating.
Advisor perception survey.
Confirming our ability to effectively meet our distributors expectations.
Okay.
In group insurance net premiums increased by 6% to $407 million of sales and installs business retention were very good.
Sales were also strong.
The Ddos services division, reaching $193 million up 10% over the previous year.
Our leading position in Canada, our comprehensive product range and our extensive distribution networks contributed to this very solid result, despite higher financing costs for car buying customers.
Finally.
Doing home direct written premiums reached $142 million for the quarter supported by the strong retention of installed as far as business.
This represents a strong increase of 15% compared to the same period last year.
Looking now at slide 11 to comment on the wealth management sales results the sector for which the environment continues to be challenging.
We performed very well in six months.
We remain the leader in both gross and net six on sales.
With gross sales up 13% year over year, and net sales of $216 million.
While many clients continue to favor cash equivalent products mutual fund sales were softer.
Sales of insurance annuities, and other savings products almost doubled year over year, reaching $618 million.
Finally, and group savings and retirement sales of $522 million in the third quarter were up 8% year over year. This good performance was mainly supported by sales of accumulation products.
Now looking at slide 12 regarding our business growth results in the U S.
And our individual insurance division strong business growth momentum.
Record sales of $44 million U S.
This is a solid 26% increase from a year earlier.
Vince driven by our strong distribution channels and our portfolio of products.
This division solid growth story.
<unk> has the potential of this market as we continue to strengthen our presence in the U S. For example, with the recently announced acquisition of various cities.
In the Ddos services Division third quarter sales amounted to $248 million compared to 261 dollar U S. A year here.
Higher financing costs for customers.
Continue to have a negative impact on sales.
Meanwhile, we are adding dealers and continuing our digital transformation.
Be ready to seize growth opportunities when the environment will become more favorable.
I now want to briefly comment on the acquisition of <unk> announced at the beginning of October. Please go to slide 13.
There is a D comprises an insurance carrier and a digital agency.
With synergies in between.
Both servicing the middle the Midland market life insurance space.
This medium sized acquisition with the purchase price of 170 million dollar U S.
Presents a strong strategic fit with <unk>.
Among other things it strengthens our geographic footprint in the U S. It complements our existing activities.
And it Diversifies our distribution capabilities.
Okay.
We expect this acquisition to be accretive to core EPS starting in year two to increased core EPS by <unk> 10 cents in year, three and to rapidly meet our ROE target.
With our strong capital position.
Investing in our organic growth.
We continue to actively monitor opportunities, while making smart choices and staying disciplined.
I will now turn it over to Eric who.
Succeeded Jacques as CFO on August 21.
Eric will comment on Q3 profitability and capital strength and we will then take questions.
Okay.
Thank you Denis and good morning, everyone.
I am pleased to be year to date to explain our results for the third quarter of 2023. These are good results has almost all business units performed well.
Please go to slide 15 for an overview of true tree profitability and financial strength.
Core EPS.
And <unk> is 10% a year than during the same period in 2022.
This performance was driven by 10% year over year increase in both car insurance and non insurance results, which reflect well the strong quality of our operating results.
At 14, 8% core Roe.
He is also strong and close to our mid term target of 15% and above.
Net income, which is more sensitive to short term macroeconomic valuations under the new accounting standards and then it was under Ias <unk> amounts to $55 million.
From quarter to quarter core results are linked to better assess the company, earning power by removing short term market volatility while the average reported earnings should converge to walk called they're called earnings overtime.
In terms of capital our financial position continued to be very solid and flexible.
The book value has increased by 4% since the beginning of the year.
Now turning to slide 16 for our results by operating business segments.
In insurance cannot duck core earnings of 91 million, 8% higher than in the previous year.
Risen by 9% growth in expected insurance earnings.
The core insurance experience for the segment was a loss of 6 million yen attributable mainly to a European see claims.
<unk> <unk> to <unk>.
Due to a storm and increased severity of auto claims.
It is worth noting that visibility had morbidity experience was favorable and that results were slightly better than expected mortality claims.
In the wealth management segment Q3 core earnings of 82 million.
26% higher than for the same period of 2022.
In addition to lower expenses this solid performance achieved through 16% year over year growth in expected earnings for sick funds and 29% year over year growth in core non insurance activities as our distribution issued yet once again delivered strong results.
How strong our U S operations core earnings amounted to 32 million in the third quarter compared to 26 million during the second quarter of 2023, and 37 million a year ago.
The results were quite good in jeans mutual insurer.
<unk> Division.
Evidenced by the 9% increase in the core insurance service results.
In the dealer service decision core non insurance activities improved slightly during the year, but remained below the previous still level as how your financing cost in vehicle prices continue to.
Consumer affordability.
Yeah.
Continuing to slide 17, Q3 core earnings for the investments segment were 93 million, which compares to $97 million a year ago.
This call results depend among other things on the level of interest rate and the yield curve at the start of the quarter.
Accordingly, the interest rate at June 30, yet had the negative impact of $90 million on core earnings during the third quarter.
This more than offset the favorable impact of the portfolio optimization, which took place mainly at the end of 2022 and the good performance of our auto finance.
Looking forward the level of interest rates and the slope of the curve improve during the third quarter, which would be positive factor for the Q4 core net investment results.
Finally, our corporate segment recorded after tax expenses of 42 million, which is the same amount as Q3 2022.
Now looking at non core adjustments, which are represented on the right side of the slide.
Most of the Q3 adjustment or due to unfavorable market really doesn't impact differing from management long term expectations. These impact amounted to $169 million during the quarter.
And the asphalt this adjustment relates to investment properties.
The cap rate was increased across the board.
The specific fundamentals of our investment properties portfolio.
Very good and the valuation now reflects current macroeconomic condition and third by external appraisals.
Please.
Slide 26 for more details on market really doesn't impact in slide 34 information about our investment properties.
Now turning to slide 18 regarding our robust capital position.
Our solvency ratio of 145% at the end of Q3 is when above our operating target that's 120%.
Most of the Q3 by Ria share is due to the debenture redemption desktop cured in September.
The company generated 165 million.
<unk> kept adult during Q3 call that a total of $440 million during the first nine months of the year. We are therefore on track to achieve our 600.002 million 23 target.
Capital generation.
Finally at the end of September.
One 6 billion in capital deploy your ball was attended both for Guinea grow digital transformation and future acquisitions.
These conclude my remarks, operator, we are now ready to take questions.
Thank you ladies and gentlemen should you have a question. Please press the star followed by the one on your Touchtone phone if you'd like to withdraw your question. Please press the star followed by the two if you're using maybe kessel. Please Mr. Hence refurbishing any keys.
Please for your first question.
Your first question comes from many Roman <unk> from Scotiabank. Please go ahead.
Hi, good morning on the subjects of investment properties.
You are probably 100% of your holding did I get that correct.
Yes.
Please go.
Go ahead Eric.
Okay.
I said, yes.
Okay, Great and then.
Want to add color.
Yes, the one color I would say is that there is a process that looks at their real estate to where each property is evaluated.
Once a year.
But.
I would say than wind material event arise then we reflected in the valuation and that's what's that's what's happened this quarter with the cap rates.
Okay. So just wondering in terms of that $101 million impact.
Is it weighted to certain geographies or certain types of properties that youre holding if you could give us a little more detail in terms of what's what's driving that impact in terms of the details of your portfolio.
Sure.
I'll take this one in terms of the cap rate increase it was across the board of our office property.
Now of course.
That's.
About 85% of our portfolio is and isn't.
Office.
Now most of our office are in Quebec, and Ontario, not exclusively but mainly.
And the reason I say across the board and rather than specific fundamentals.
Pacific properties I think the best way I think to make that point is to give you. An example.
We have a property.
In the province of Quebec, It's all leased to government provincial government, we have a lease with them until 2047.
The cap rate that we got from the external appraiser is similar to the rest of the portfolio. So I think that just gives you a sense of.
<unk>.
What's really happening this quarter in the portfolio.
And maybe since maybe a sub bullet of this of course is.
I've said, a few times, we've put that in our slides that.
The quality of the portfolio is relatively high when it comes to the our office like it's Unlevered $99 eight is in Canada. The occupancy is higher than the market rate long term lease. The reason I bring this up is then when you link hip too.
An increase in cap rates. So when you have a high quality portfolio and increase in cap rate that means one decrease in valuation today and Thats, what you are seeing but.
But it also means an increase in economic expected return in the long term.
So hopefully that helps give you a bit of context around this quarter on the investment properties.
Yes. Thank you and then just a question on <unk>.
The Q4 actuarial review Im wondering if theres any outlook you can provide at this stage in terms of what to expect and.
Maybe start there and I have a follow up on that.
Okay.
Yes Manny.
Thanks for the question.
In fact, we are still working on it as you may suspect.
We're not done yet completely.
Right now.
What what im looking at is mortality. The big question is what what is what has happened since the beginning of the year with respect to mortality in Canada.
To see that we add that turned around in Q3, So I will look carefully at this one.
Therefore at year end to see if I need to make any adjustment to that so that's still that's still an unknown. So the next couple of months, we'll provide guidance to.
What we need to do with this so the other indicators that I look to make up my mind is the gain and loss when you look at the entrance.
Experienced this year.
Slightly negative.
Gain and loss since the beginning of the year and when you look at gain or loss on the CSM. It's neutral so the way I look at this at 30000 feet is that high.
Im expecting some things slightly slight seem to get to year end in terms of the laser change all inclusive.
And then just a follow up just in terms of conceptually.
Right to think of and I think we talked about this in the past the change in <unk> for 2017 for you, giving you less ability to offset chart actuarial charges.
So just wanted to understand.
If I have that correct in terms of this new reality.
Yes in fact, what is happening many is that how.
Paul.
It Couldnt Mick.
The change.
Change of assumptions goes through P&L.
Every quarter. So this item is now removed from the radar.
Of a basis change at year end, so what will happen with basis change that will be reflected in the CSF.
It will not be all <unk>.
<unk> be a small part in P&L.
But most of the basis change that will be happening at year end will go through CSM and it will reflect the contingencies on the on the insurance risks.
Thank you very much.
Your next question comes from Doug Young from Deutsche Bank. Please go ahead.
Hi, Good morning, Alan maybe back to you just on the investment property I think and thanks for the response to the the first question on the details, but I think last quarter you talked about.
Pursuing value creation opportunities with this portfolio, you've obviously made a mark in terms of the cap rates you didn't elaborate last quarter I'm. Just wondering if there was any updates on what that value creation opportunity would be on your thought process around that.
Yes, sure happy to give us some more context on that so good color on <unk> by the way for the comment of last quarter last quarter.
Yes so.
High level.
We continue to work on.
Colin significant.
We're working on significant opportunities to create value with some of the buildings.
Changing the entitlement for more density so different so various projects are very hard to various properties that are at various points of the approved of the approvals some are closer than others.
So although there is no certainty I think.
We're optimistic and some are progressing well so within between the next two years, we expect that this was favorably.
This was.
They go forward, which we expect they will favorably affect the valuation of these properties.
But I don't think I can tell you theres not enough progress between now and the last quarter I don't think I can give you more but it's I would say this is very nice debt. Despite the headwinds that there are these this potential.
This potential tailwind would that portfolio and frankly could do to the team.
That has found some of these exceptional I would say opportunities. So I look forward I look forward, Doug too to.
To give you updates as these materialize.
Okay. So, but there is nothing I guess Marty the point is this is that going to come in and Andrew last yes, nothing imminent, Okay, nothing and then.
I appreciate the color and then just maybe Eric on core expenses down quarter over quarter.
Is this a blip is this any run rate or was there anything unusual in that expense line can you maybe elaborate a bit.
Yes Manny.
On this one.
I remind you that.
You know we've been trending well since the beginning of.
The year on overall expense management when you look at this culprit.
Expense segment. It is just one part of the equation.
Why not.
Look at expenses since the beginning of the year, we've been trending just slightly under plan and.
And we've done that by making choices along the year. So youll remember that we got some.
Regulatory and compliance project to complete for September.
And when we make those choices along the year to stay within our envelope.
Those choices some time in fact.
More corporate expense segment, sometimes it's more opex than capex. So.
So this is what is bringing a little bit of volatility when you look at this.
Segment.
Preferred to look at the overall picture, which to me and can pass everything.
Okay. So it sounds like this is more of a normal kind of as we think of kind of trying to put something in for this line item for in our models. Like this is kind of you've kind of gone through some of the bigger bumps in expenses. This is this quarter is more normalized is that a way to kind of think about it.
Yes, that's okay.
That's a good way to look at it.
Okay, and then maybe lastly.
Danny for you just on various city.
Thanks for the accretion numbers, it's helpful to think about but.
<unk> core EPS accretion in year, three can you talk a bit about what's driving that accretion is this all revenue is this all expenses redoing reinsurance treaty can you talk a little bit more about this and then I guess my overarching question is how do I think about this because if I look at the economics. It looks like it's a 4% return on capital deployment.
Three years out, but maybe I'm missing something.
There's a lot there, but just hoping to get some color.
Yes, thank you for that so.
I might ask Mike to provide more insight, but let me just first say that this is.
Very consistent with our strategy right now in terms of developing the U S life business and the U S.
Obviously, I mean distribution is something that we're always looking at and in particular this company has specific expertise in terms of digital I would say capabilities in terms of distribution it was quite attractive for us to get into that.
And at the same time inherit some some manufacturing capabilities as well.
But at the end of the day.
It is a mix of both.
Increase in revenue with a growth story basically.
And Mike might want to comment on that and so it's a mix of growth and our mix of expense synergies that.
Is is bringing those those equities.
Chris I'm just over the years, Mike you might want to comment about the overall strategy here.
Sure. Thanks Sidney.
<unk>.
So as Denny said.
And the way I would think about it is the most important thing here.
We want this to be a growth story.
From whatever marketing and strategic standpoint, it gives us exposure to a digital.
State of the art digital platform distribution platform.
Secondly, we believe we can grow the business. That's why we wanted to do this and in many ways.
It actually reminds me of American amicable.
Go on a bit of a segue here for a minute.
Many of you know we acquired American now for 13 years ago now for $145 million. It was a small company back then did about $25 million of sales had private equity ownership.
The owners of don't want to put more money in it so the sales were flat.
And so when we showed up we said we want to grow this business and management.
Sure.
Went to work that we've done a great job.
Was that business was breakeven for the first shares.
Today, when I look at it we've grown sales by more than a multiple of six times and the earnings as you know.
Pretty good we've got pretty good margins, so turning to diversity.
It's quite a similar situation.
Their sales are about $40 million in our flat primarily because of capital constraints. The majority owners of private equity firm and did not want to put in more capital and as many of you pointed out the business is breakeven so in terms of moving forward.
<unk>.
Our number one priority.
Yes.
The math is simple if you can grow revenue faster than you grow expenses, you're going to create margins and thats, what I have in American abaca Walnut supply in here.
Beyond that the second issue, we expect to generate some expense synergies sort of in the neighborhood of $5 million to $6 million by by the third year.
We also expect to generate some gains by improving their capital management.
Activity, they've been using primarily reinsurance and that all needs to be reviewed and one other thing to keep in mind. When you look at their results as they pay $20 million of Covid claims from.
2020 to 2022.
So having said all of that the biggest contributor I expect will be growth, but yes.
Yes, we're optimistic so I hope that helps.
I appreciate the color. Thank you.
Okay.
Your next question comes from Gabriel <unk> from National Bank. Please go ahead.
I'd like to.
Follow on that the lineup.
<unk> line of questioning actually.
You mentioned that the American amicable is nicely profitable, but having.
We put a number on that just so we can kind of give a bit more weight to this.
Previous acquisition as a case study and then the things that you mentioned there the expense synergies the reinsurance recapture.
It seems like a likely strategy that is that.
Those things included in your current the accretion figures.
Yes.
So rich then you here.
I mean, we don't disclose specifically the results in the U S that maybe between let's say the dealer business and the life business, but you can't I mean.
Certainly when I look at the individual like this in the U S in terms of target Roe.
Actual Roe from that business, it's higher than our targets.
ROE So we're very pleased with that business and could you repeat the second part of your question.
Gabriel.
The second part of the question.
It would be helpful. If we couldnt get those numbers at some point.
On American amicable and dealer services profit split.
<unk>.
Expense synergy number that.
You put out there.
Reinsurance recapture strategy. These are in year three of them in the 10 cents accretion figure.
I can take that Danny if you want.
Yes go ahead.
Yes, I mean expense synergies, yes reinsurance no reinsurance needs more work. We did was we didn't have the time to go.
And.
We've got to talk to a number of people to sort all that out it's relatively complex but.
Yes.
Because theres room for improvement.
Like how long are those contracts typically.
I can't tell you right now and it's probably confidential anyway okay.
Uh huh.
When you just switching over.
The mortality discussion.
We saw a couple of quarters, the first half where there were losses and then this quarter you had gains it sounds like youre still keeping an eye on it.
Makes sense to me I'm, just wondering what are some of the observations that you've been making because it sounds like.
Maybe just sort of a good but you might not be sustainable.
Okay.
Yes, I'll take it.
The yen on this one you know mark that you can fluctuate.
Quarter to quarter, we've seen it in Canada, So felt the U S. It's the same thing.
We're at PNM come to them right now with our expected assumption and when you see fluctuation in the round, it's just statistical into your west.
Okay.
Could you final question could you quantify the amount of negative experience in the P&C business this quarter.
Yes.
Yes, <unk> again.
It's about 9 million overall.
Okay.
Yes.
6 million out of the nine coming from the weather.
There are that we add in Germany.
Got it thank you.
Okay.
Okay.
Your next question comes from Tom Mackinnon from BMO. Please go ahead.
Yes, thanks very much.
Two questions here, one really on the.
Hi.
The CSM.
If we look at the impact of new business. It was $134 million is the lowest we've seen in <unk>.
The quarters, so far in 2023 and was certainly lower than the $152 million. We had in the third quarter of last year and this comes despite the fact that appear to have better sales better insurance sales. So.
What's driving that.
Yes, Thanks, Tom for the question I will say two things first remember, it's a business change that we made at the end of last year. So so those changes we're going to get to it. So it's a bit of return to normal for the year.
The CSM that reflected this year of the dose basis change.
To another extent the CSM when you think about it is the present value of future profits.
And that presents that is.
Is done using then the lockton curve from Ifr risks 17, and when the rates are going up the lung.
<unk> curve goes up and the present value goes down so it's just a question of that.
Yogesh and presentation. So we do not worry that this number is going down because keep in mind that long term rate is good in our business. So it will just show up elsewhere.
At some other point in time when you look at the CSM reconciliation youll have aligned that talks about organic financial growth. So that decrease overtime with the increase in interest rates should result in an increased number over the coming quarters and years.
Thank you.
Tom just sorry, it's Danny here just wanted to just one thing to add on this.
Whenever internally, we've talked about CSM I'm always.
I'd like to remind people that the CSM is not inclusive of every business. We're in like for example, the fact that there we have more.
Customers, who are moving into Gic's from let's say your SEC funds.
I mean, obviously it does not help in terms of the CSM, but at some point people will come back and so we always have to keep that in mind. Thank you.
And.
If it's a negative three that was there there was some negative experience in the CSM.
What was that related to.
Yes.
When you look at.
The gain that we add on market <unk> cannot do you know.
We mentioned in the previous quarters that sometimes that youll get actually of gains and losses is different than underwrite. Your actual risks for so we add the little gain on mortality in Canada on the P&L and that's resulted in a little less on the CSM side.
And that was mortality or yes.
Yes, and Thats why as mortality sorry, okay. Okay. So if we net them together.
You would say youre, marking your mortality experience was.
Neutral.
Yes, that's a good way to look at it.
And then the last is on slide 18, the macro economic variations that hurt your capital available for deployment by $200 million.
If I look at the Mark to market impacts that you outlined the 160 Eni the bulk of that was.
The decline in investment properties.
Am I too then.
Infer that the bulk of the $200 million decline in capital available for deployment.
As a result of.
That investment property Mark as well.
Yes, I would say, yes, it's all inclusive of macroeconomic.
Things that happen in the third quarter and no.
Stock market.
Good.
Did stumble a little bit real estate impact at an interest rate change sure we'd say, it's reflective of that.
Everything altogether.
And if I could squeeze one more year your interest rate sensitivity would imply that you would've had a much bigger hit as a result.
Of the big Spike in interest rates, then you actually.
I had in terms of their marks with respect to interest rates I think it was only like 14 or 15 million $14 million yet.
Sensitivities would imply that number to be.
Probably at least north of $75 million or something like that just given the jump in rates why was that different.
Yes.
Another good question when you look at the sensitivity page it says.
That's good.
The interest rate shifts.
And you.
You know we've seen lots of that.
Yield curve changed since the beginning of the year. So so that's really what's making up the difference.
Okay. Thanks for that.
Your next question comes from Nomura pursued some carmike. Please go ahead.
Yes, I just wanted to kind of continue along the discussions on the CSN here from Tom So just thinking about the impact of near term size I think our CSM. So the $134 million. There you did make some refinements to Iqos line last quarter and again this quarter do these changes impact the outlook for new business CSN growth.
High single digit growth still appropriate I understand what you have.
Guys are suggesting that this might be a bit lower in the near term, but what I'm really trying to get at is.
It's a longer term expectation for high single digit still appropriate.
Okay.
Yes, I would say that if everything else stays the same in terms of macroeconomic youre right. It should we we should still expect to see that.
That hydrogel.
Joe I single digit increase.
Okay.
Okay and then.
I just wanted to come back to you.
Potential for M&A and U S dealer services.
Ali.
Seen much consolidation in the space policy Ias deal. So I'm wondering if maybe we could spend some time talking about maybe the long term attractiveness of this business like when do you want to consolidate Atlanta.
We're trying to consolidate in the space and that's a little bit out of favor or is it.
As a long term view on this.
This business is somewhat impaired.
I think I'm going to think that wanted Sydney here.
That business right now.
Is going through obviously some some.
Some are big initiatives in terms of.
Conversion for example, our integration that when we bought Ias. So we are we have invested significantly in technology.
To improve the operations and I would say the motto is ready to do the organic growth.
Difficult environment right now.
We are seeing an increase in financing costs for the customers and obviously it puts pressure on sales.
So the focus right now is truly on organic growth and once deal, let's see profitability is back to the well.
I'd say the standard.
I would say the target that we have.
We might.
Go further and maybe look at some acquisition at the time because.
That market is fragmented there are opportunities to.
We're not going for the big fish right now we might do some tuck in acquisition, but for the time being I would say over the next maybe 12 to 24 months.
We want to make sure that we.
Going back to the level of profitability in line with our target.
Thanks, and then last one for me can you guys just touch on the elasticity of expenses I guess the operating environment is tough do you guys have that flexibility to slow expense growth at with that.
Did that play into the lower expense growth this quarter. Thanks.
Well.
You talked about elasticity of expense.
It's been a while since I heard that word thank you for that.
The extent, we are able to absorb expenses I think that thats. The question Youre asking here I mean inflation right now is obviously a challenge for any organization.
I mean, its forces all organizations to make smart choices in terms, where they invest and all of those things and at the same time, we can that we can adjust some of the pricing of our products going forward.
So at the end of the day, it's for US we believe that we can still maintain our 10% EPS growth when I look at it will be very.
Very high level.
The level of inflation that we're going through right now.
Fact that interest rates have increased accordingly, which is very positive for us when I look at all of the impact of everything here. We are confident that we can increase our EPS midterm by 10% plus.
Plus.
I appreciate the time.
And your next question comes from Paul Holden from CIBC. Please go ahead.
Thank you good morning, so I'm going to continue with the expense line of questioning and maybe try to get a little bit more specific here.
And I guess looking at the U S segment to start though.
Core other expenses were down quarter over quarter for the second consecutive quarter as you've highlighted we are making investments in the warranty business. So just wondering if this is due to some seasonality if theres beans costs.
Reduction actions.
Or maybe again costs were just simply elevated in the first half of the year and should be more similar to Q3 going forward.
Sure.
Yes, Paul Thank you.
Two things really happening here.
First Mike mentioned, yet the team is really working art.
In terms of expense improvement and.
Improving our operating expense. So that's that's one item and the other one that is.
No it's not the seasonality, but it's a yearly review there is a valuable.
Bulk compensation item.
Related to the performance of U S dealer and this.
Hey evaluation is that burning.
In July so you see the positive effect, if I can see of this revaluation on car.
Are there expense of the U S divisions.
On the on this item. So so this time, it's a positive.
In terms of core expenses so.
That's what I wanted to say about those two items.
Understood and then going back to the core other expenses on the corporate segment.
Pretty big decline from Q2, but maybe Q2 is just simply elevated again I guess similar question. There like is there any kind of cost reduction actions that have taken place since Q2 or is it just simply a lower run rate for some of these projects you've you've highlighted.
Yes in reality like I mentioned earlier Paul.
Tracking expenses.
Since the beginning of the year and it's been trending about the same.
Tim.
No.
Percentage under our our plans since the beginning of the year. It's just a question of yogurt a sheet here and decision taken along the year that sometimes impact numbers.
Like in the core.
Expense segment.
You'll see a bit more volatility, but when I look at the overall expense situation of the company, it's been very stable and according to our plan since the beginning of the Paul If you don't mind Sydney here I was just wanted to add some flavor on what if it gets mentioned which is very good.
The way I look at it is that when I look at the last two years like 2022 2021.
For various reasons more regulations digital investment Additionally, digital investments.
The general expenses that we incurred was higher than our budget each year.
But I must say that this year I am very pleased because I guess, we put an additional level of I would say constraint in our operations in a sense that we.
We stick to our budget there is no way, we're going to go over this year and so.
<unk>.
I don't like to see more discipline, it's not the right word but.
But certainly the more attention put into our expense management.
Got it understood. Okay and then last question for me is related to a comment Eric I made earlier regarding interest rate impacts on the business.
Again going back to the CSM discussion of venue.
New business impact on CSM going lower to the PV, but then we should expect.
Interest rate benefit elsewhere. So really the question is where should we be expecting those interest rate benefits because I would expected one of those areas to be the core net investment result, so.
When should we expect that to get better for for higher bond yields and where else on the Doa statement should we be expecting to see the positive.
Yes, Paul if you look at the CSM.
The Asian of our supplemental information package I would guide you to the line just under the impact of new insurance business, it's called organic financial growth.
Page page 27.
So this line should increase at a faster pace going forward because of.
Because of that increase in interest rate, but you are correct that core net investment results should benefit a little bit.
All of it as well because India.
The overall, it's a good news for us that as interest rates increase and now we're in the end with the product that we sell and we have in our in force.
Sydney here.
Thank you for that question actually that was the question I did ask that question myself to my management team I wanted to make sure that okay. We're seeing that the interest rates I mean long term interest rates increases positive where do we see it my conclusion is that we should see it in the net investment results from one quarter to the other that's basic.
And just also added some color on the CSM.
And I'm, sorry, just to clarify that really that's going to be a matter of when there is I don't know if I call it normalization, but a shift in the yield curve, that's more favorable than it will really come through correct.
Yes, yes, yes, okay. Thank you.
I see that as a future tailwind at some point.
The yield curve is going to go back to some more normal and that's going to be a tailwind for us.
Understood. Thank you.
Okay.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Your next question comes from Mario Mendonca from TD Securities. Please go ahead.
My question is a little it's similar to what you just discussed with Paul.
When I try to look at your net investment income. It's one line at the disclosure is not quite as deep.
Detailed as others.
The company has done a good job of explaining why that's the case, but what I try to model. This number when I think about this number I'm not seeing the returns on this line consistent with.
The changes in interest rates, so I paid attention obviously when you talk about how its last quarter as interest rates for the quarter ending that affects this quarter, let me ask it this way.
When we see interest rates move higher when we see the long end of the curve move higher.
And let's say during Q3.
Is the message then that shift up at the long end of the curve necessarily benefit next quarter and have shipped down at the long end of the curve necessarily hurts. The next quarter is it really just that straightforward.
Okay.
Yes, Youre right, Matt Youll.
The long term rate direction that you mentioned.
Yes, correct.
What that without.
<unk> previous comment about what's happened since the beginning of the year.
It's been a bumpy road on the macroeconomic side since the beginning of the year I've seen more things happening in nine months.
Macro economic side and yield curve and that I've seen over the last 20 years.
I look at the and you try to understand what is happening on core net investment results.
Q1 was a decrease of interest rate the tariff went down than that.
Came in in Q2.
And and then the long end of the curve.
We started.
With removal of removing a little bit of the inversion in Q3, so lots of things out there that kind of create noise on the core net investment result, that's really what's happening there.
And is that going back to the investment properties for a moment.
I can't help but think.
That there was this was a bit of a clean up quarter because the size of the charge was so great relative to any experience I have of industrial alliance.
Was there something about this quarter that really was it just the move in rates or did the company really go above and beyond and then try to really clean up your evaluation. So that you could put this issue behind you.
Am I characterizing that appropriately.
Hi, Mario its Alan speaking.
I could see why you may think that it was the case, but that would.
That would not meet.
The accounting standards and the auditors to try to do a cleanup I know this is a common practice in many institutional portfolios.
When it comes to public company, and we have to reflect independent valuation or inputs. So it's either externally appraised or infer from the externally appraised.
So we can't be biased one way or the other so we're really reflecting the information that we are hearing from or.
Or the actual evaluation from our third party.
The one thing that you may have.
Maybe you're coming maybe one thing youre thinking.
I'm not sure the extent to which everyone is subject to so if you look at institutional portfolio or even the MSCI <unk> index youre not seeing too much of that movement.
That suggests to me that perhaps it's because many institutional portfolios. They are really being properly fully appraised in Q4, so there may be others.
And then we'll kick you three and then have to take a Q4, but just let me be as clear as I can.
Our goal was to take the information from the from the external appraiser and apply it to the overall portfolio.
We're not sitting on information today that we knew what the effect.
The mark to market in Q4, but that being said.
Data from that point on.
The Q4 results into Q1 Q2 in the future they will be driven by how the market condition change.
So we haven't put an extra buffer in that.
Yes.
That's clear and then Eric one maybe one question for you.
Since this conversion to <unk> 17.
The spread between your reported and your core earnings has been particularly wide now I get it relates to the conversion of <unk> 17, and the unfortunate coincidence that that convergence conversion happen at the same time that the market.
Macro volatility reached some some historic levels.
Question I have for you is.
Will there be similar.
Changes or differences to the positive when we eventually see.
A more constructive market what im getting at is.
I want to make clear that there is no bias to the negative that the core will always be greater than the reported.
Or is it is it sort of symmetrical going forward.
Yes, good question Matthew you're.
You're absolutely right.
We will see a just a question of time I can't I can't say, when but we will see quarters, where we might have 400 million profit.
It's it's very volatile.
What we what we expect is that the reported will fluctuate around on both sides and it should converge as toward the.
Our core earnings overtime.
Please go ahead.
He asked any here.
I was going to make a prediction that.
We're going to come up with a quarter with the EPS core EPS.
Over $4 or $5 50.
In the near future when the market, let's see come back.
And it's related to your point to me the way I look at it is that.
We as management, we are creating value for our shareholders for the long term.
Now Unfortunately.
And we've said that many times the accounting regime, the new accounting regime delink, the asset and liability under the previous regime. All the changes that you've seen today with a flow through of the liability and that it would be.
Very very minor impact.
The core earnings that you would have got under the previous regime would be very similar to what we are getting under the current regime. So if we did belief and their core earnings over the last I don't know 15 years right.
Should we read that the core earnings today is good.
Now the problem is the reported earnings because as you said, we're going to see fluctuation and I don't I don't think and I think thats confirmed here.
I don't think there is a bias that.
The core earnings will always be.
Sorry that the reported earnings.
It would be like Lord and then the core earnings all the time and that we have some bias that we built in our process to make it attractive or.
Always positive.
Yes.
Sorry can I.
Just add one thing just because it's the third quarter today, where we're underwriting for 2017. So it's a very small sample, but nonetheless Q1 was actually reported was hired in court. So I know, it's a small sample, but it's just one example.
So the advice you would give for me outside looking in as I have to measure this over an extended period of time, so whether that several years. Several years from now I can look back and say, yes. It was the accounting that's absolutely nothing more that would be your advice to me then look at it over the long term.
Yes exactly.
That's what I mean, when I see that the average should converge toward the core.
Okay, well I'm sure it will be around long enough to see that thank you.
So do we.
Pardon me, we have one more question from Jacksonville Me, Alex from RBC capital. Please go ahead.
Hi, Thank you can I can I. Please ask a couple of questions with respect to capital and looking specifically specifically at slide 18.
The first question is a very simple one if you can just help me understand why the.
The capital required for organic growth is much lower than the last couple of quarters.
Yes, so two things that go on on that front I would say that that's happened.
The business mix all the product portfolio mix was slightly favorable in the in Q3.
That has mostly to do with respect to the lower sales that we have done the SPR your side of the group savings.
Those are those sales that comes usually with investment.
Consume a bit of capital. So if you connect with the sales.
That we made in the quarter.
It kind of gave a great tool required capital.
This quarter.
And I would say the second item is related to group insurance.
And it's the fact that most of the business.
Can you also go in force in the first half of the year. So again, it's a question of seasonality on this one because most of the business required capital goes into our books, if I can see in the first half of the year.
Yes.
Okay, I think I'll have a follow up for you afterwards on that as well as the organic CSM growth, which was a little bit late but I guess the.
Net of my real question, where I really want to take this.
Once we consider the acquisition of <unk>.
Various city.
Let's call that $230 million Canadian.
And we take into account the NCI.
Depending on where stock prices, we can sort of come up with a number let's say that's another $500 million of capital.
We get to the point, where we're under a $1 billion left for deployment.
So the question for Danny is really somewhere around.
Given your earlier commentary.
That you might be looking for tuck in acquisitions, but certainly nothing.
<unk> in the U S is it fair to say that.
We really should be looking at a company that's essentially.
Going to be buying back stock.
<unk> in the current environment.
And that you can actually.
165 of organic capital generation. This quarter, you can essentially pay that pay for that with the organic capital generation quarter in quarter out.
Am I thinking about that correctly or is there a possibility.
That you.
You would you would consider even larger buybacks.
Given that we arent looking for larger.
Yes.
Acquisitions, and perhaps bring down the capital even more aggressively my thinking about that correctly. Dan here, maybe you can give me some idea conceptually about how youre thinking about the CIB.
Yes. Thank you for the question.
Yeah.
Actually this is one scenario I mean, one scenario would be that.
If we are not able to find at the right price right targets.
That's our sizable obviously, we will be more aggressive on the NCI because at the end of the day, we want to give it back to value to our shareholders now ill preferred.
Route is really to grow the company and.
More so on the individual insurance side right now in the U S or there might be other opportunistic or.
Sorry opportunities in other sectors.
Like I said on the U S dealer for the time being I mean, we are on the hold.
There might be some other.
Other sectors, so that that comes up.
And the.
The size might be might be high I mean, it could go let's see.
As to what we did for for Ias, We could go as high as that if we are truly believed that there was a strategic fit and it's good for us I mean, we have the means to do that right now and we are generic thinking about excess capital. So.
I don't want you to think that we will only do tuck in acquisition.
But we will stay very disciplined I must tell you that.
We want to make sure that we return value when we build value to the shareholders.
Okay, I think that touches on everything that I wanted to get from that conversation, which is good. Thank you for that Denny, but but just to be clear.
Your strong capital.
Generation <unk>.
<unk> of that is actually that you will get your required capital is low and your organic CSM growth as well.
Is that is that something that I should.
Think about is changing going forward in other words.
We should see more.
Required capital.
For organic growth I mean, the $39 million.
Is low and I think you should think more in the lines of something around 140 to 150 per quarter of actual capital generation am I correct in thinking that way.
Well no I think that.
We put a lot of attention to be as capital efficient as possible.
And as far as I'm concerned we're doing everything around $600 million right. Now this is a reasonable level right now while we do not intend to two let's see.
And as the market changes, obviously, I mean, you never know maybe some competitive reasons for that but everything else being the same you Shouldnt expect the 600 to go down.
Okay, Alright fair enough great. Thank you very much.
And there are no further questions at this time I will turn the call back over to Dennis <unk> for closing remarks.
Well, thanks a lot.
Quite the quarter to quarter with all the macroeconomic environment and I think we've made it very clear to all of you that this management team is really keen to build long term value for their shareholders and their short term fluctuation does not distract this management team.
We are focusing on our core.
Keep your eyes, whether it's the ROE.
Whether it's the generation of capital, which all the I would say the two most important.
<unk> for us so a good quarter and when I look at all those kpis.
Roy.
Let's see annualized over 15%.
Generation of capital in line with the target.
And at the end of the day growth is important and so the last thing is that we've seen significant growth in almost all of our businesses, we're very proud of that.
The company is doing well and we continue to do so going forward. So thanks, a lot for attending this call and see you next time.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
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Yes.
Okay.
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