Q2 2024 iA Financial Corp Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the second quarter results conference of the Industrial Alliance 2024. At this time, all lines are in listen-only mode.
Speaker Change: Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator.
Speaker Change: This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Marie-Anne Bonneau. Please go ahead.
Marie-Anne Bonneau: Good morning, everyone, and welcome to our 2024 second quarter conference call.
Speaker Change: All our Q2 documents, including press release, slides for this conference call, supplementary information package, and quarterly MD&A are posted in the investor relations section of our website at ia.ca.
Speaker Change: The conference call is open to the financial community, the major, and the public. I remind you that the question period is reserved for financial analysts.
Speaker Change: A recording of this call will be available for one week starting this evening. The archived webcast will be available for 90 days, and a transcript will be available on our website in the next week.
Speaker Change: I draw your attention to the forward-looking statements information on slide 2, as well as the non-IFRS and additional financial measures information on slide 3.
Speaker Change: Also please note that a detailed discussion of the company's risk is provided in our 2023 MD&A available on CDAR and on our website, with an update in our Q224 MD&A released yesterday. I will now turn the call over to Denis Ricard, President and CEO .
Denis Ricard: 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 IA.
Speaker Change: First, Éric Jobin, Chief Financial Officer and Chief Actuary.
Speaker Change: Alain Bergeron, Chief Investment Officer.
Stéphane Bourbonnet: Stéphane Bourbonnet, Head of Wealth Management Operations.
René Laflamme: René Laflamme, in charge of Individual Insurance Savings and Retirement.
René Laflamme: Pierre Miron, Chief Growth Officer of our Canadian operations and responsible for Dealer Services Canada and IOTone Home.
Sean O'Brien: Sean O'Brien, Chief Growth Officer of our U.S. operations.
Speaker Change: And finally, Louis-Philippe Pouliot in charge of our group businesses.
Speaker Change: We are pleased to report solid second quarter results on all fronts. Our Q2 performance is a tangible demonstration of the value we are creating by implementing our growth strategy with discipline and care.
Speaker Change: By leveraging our distinctive strengths, such as our extensive distribution networks and diversified portfolio activities, and by deploying capital, we achieved strong sales momentum, record core EPS,
Speaker Change: Substantial Organic Capital Generation and Core ROE Expansion.
Speaker Change: Now to the results, starting with slide 8 for an overview of main financial KPIs.
Speaker Change: Core EPS of $2.75, up by 15% year-over-year, reached a record level.
Speaker Change: Trailing 12-month CAR OOE of 15% is already meeting our midterm target thanks to strong earnings growth and capital deployment initiatives.
Speaker Change: Business growth continued to be very strong in Canada and in the U.S., with virtually all units recording good sales growth.
Speaker Change: As a result, we concluded the quarter with premiums and deposits up 15% year-over-year and assets under management and administration up 12% over 12 months.
Speaker Change: Our capital position remained robust with a solvency ratio of 141%, supported by continued strong organic capital generation and good risk management practices.
Speaker Change: Our book value per share, which stood at $69.92 at June 30, increased by over 9% when we exclude the impact of share buybacks.
Speaker Change: Now, to slide nine, to look at second quarter business growth for Insurance Canada, which recorded another solid quarter with all business units posting strong sales results.
Speaker Change: In individual insurance, we continue to lead the Canadian mass mid-market in number of policies sold.
Speaker Change: with strong sales of $98 million during the second quarter, up 10% over last year. This result is attributable to the performance of our distribution networks, our advanced digital tools, and our comprehensive range of products.
Speaker Change: In group insurance, sales increased by 26% year-over-year, along with good retention, leading to premiums and deposits at $510 million, which is 10% higher than a year ago.
Speaker Change: In the Dealer Services Division, second quarter sales of $194 million were up 2% year-over-year.
Speaker Change: This is a good result as growth was tampered by the macroeconomic environment that continued to impact vehicle affordability and by the temporary outage at CDK Global, a dealership software provider, which occurred from June 19 to July 4.
Speaker Change: Finally, IOTO and HOME also recorded very strong sales, with direct written premium in the second quarter reaching $188 million, a solid increase of 15% over the same period last year.
Speaker Change: This result was supported by good retention of in-force business, strong new sales, and the impact of premium increases implemented in 2023.
Speaker Change: Turning to slide 10.
Speaker Change: to comment on sales results for Wealth Management, which posted, again, very solid results, notably with net fund inflows of more than $400 million.
Speaker Change: SEC fund sales reached nearly 1.3 billion euros, up over 53% year-on-year, and a net inflow of 6.8 million euros was generated during the second quarter.
Speaker Change: With this solid performance, which demonstrates the strength of our distribution networks, iA continues to rank first in both gross and net SEC fund sales.
Speaker Change: Mutual fund sales of $468 million were up 26% year-over-year, though inflows were lower than outflows as the mutual fund industry continued to be challenged.
Speaker Change: Moreover, even though investor optimism in financial markets and asset classes offers a higher return potential than guaranteed sales favored by investment, sales of insurance annuities and other savings products remain high, reaching 541 million dollars.
Speaker Change: This is good performance that compares to a very strong quarter a year earlier.
Speaker Change: Finally, Group Savings and Retirement posted solid sales of $858 million in the second quarter, up 6% year-over-year.
Speaker Change: Now looking at slide 11 regarding our sales results in the U.S.
Speaker Change: In individual insurance, we achieved record sales of $49 million US, an increase of 14% year-over-year, reflecting good performance in all our markets.
Speaker Change: The continued high activity in this business unit, in partnership with the recent acquisitions of Varicity and the two existing blocks of Prosperity Life Group's insurance business, illustrates our ability to achieve strong growth in the U.S. life insurance market.
Speaker Change: In dealer services, second quarter sales amounted to $279 million, up 13% over the same quarter the previous year.
Speaker Change: Sellers continue to place more emphasis on F&I product sales, while vehicle sales are increasing and the profit margin on vehicle sales tends to decrease.
Speaker Change: Meanwhile, as in Canada, sales were tempered by the macroeconomic environment, which continued to impact vehicle affordability, and by the temporary outage at CDK Global.
Speaker Change: Moving to slide 12, where year-to-date results compare favorably with all our midterm targets.
Speaker Change: More specifically, core EPS has increased by 16% compared with the same period in 2023, and is well above the targeted 10% plus annual average growth.
Speaker Change: CAR ROE met our mid-term target of 15% plus.
Speaker Change: Our solvency ratio of 141% is significantly higher than our operational target.
Speaker Change: Our good profitability has contributed to the generation of 305 million dollars in organic capital, which has so far generated more capital than in the same period last year.
Speaker Change: Ultimately, our dividend payout ratio is well beyond our target.
Speaker Change: Turning to slide 13 to discuss our capital deployment priorities and recent initiatives.
Speaker Change: At June 30, 2024, we had $1.1 billion in deployable capital following an active second quarter in terms of capital deployment, mainly through share buybacks and acquisitions.
Speaker Change: To create additional value for our shareholders, our focus continues to be profitable organic growth with new sales having an ROE above 15% as well as disciplined acquisitions.
Speaker Change: We recently announced the closing of the VeriCiti acquisition and the acquisition of two blocks of life instruments business from Prosperity Life Group in the US life market. In Canada we also completed the acquisition of the Laurentian Bank Securities assets in the wealth management sector.
Speaker Change: Going forward, in addition to growth initiatives, we will continue to steadily increase our dividend and to buy back shares.
Speaker Change: In conclusion, we enter the second half of the year confident in the resilience of our diversified business model.
Speaker Change: and in our continued ability to create value and increase profitability.
Eric Jobin: I will now hand it over to Eric, who will comment on the second quarter profitability and capital strength.
Eric Jobin: Following Eric's comments, we will take questions. Eric.
Eric Jobin: Thank you, Denis, and good morning, everyone.
Eric Jobin: Starting with slide 15 for an overview of Q2 profitability and financial strength.
Speaker Change: After a solid first quarter result, second quarter was even stronger with core EPS growth of 15% compared to last year.
Speaker Change: Key favorable drivers of this performance include 14% increase in core insurance service results and 19% increase in core non-insurance activities.
Speaker Change: Insurance experience was positive for a third quarter in a row. As for expenses, they were lower than last year in line with management's expectations.
Speaker Change: Indeed, at the end of Q2, the 12-month trading ROE was 15% and the annual ROE was 15.9%.
Speaker Change: In the wealth management segment, core earnings of $98 million were 29% higher than a year earlier.
Speaker Change: This robust performance is the result of 25% year-over-year increase in the core insurance service results for SIG funds and 29% increase in core non-insurance activities.
Speaker Change: Also, good financial market performance continues to have a positive impact on this segment's profitability.
Speaker Change: The higher SIGFUN result was driven by strong net sales over the past 12 months and an increase in the CSM recognized for service provided.
Speaker Change: As for non-insurance activities, our distribution affiliates recorded, again, a solid performance, mainly due to higher commissions and better margins.
Speaker Change: In the U.S., second quarter earnings, although higher than the first quarter, were lower than in the same period last year.
Speaker Change: Lower Q2 core other expenses contributed to profitability, but the impact of new business due to higher sales and more onerous contracts, as well as insurance experience, were unfavorable.
Speaker Change: Now turning to slide 17 with the investment segment result first.
Speaker Change: Expected investment earnings of $113 million were higher than in the previous quarter, mainly because of interest rate increase in the first quarter of 2024.
Speaker Change: Q2 credit experience was unfavorable, with an increase in the provision for credit loss at Payee Auto Finance and, to a lesser extent, more downgrades than upgrades in the fixed income portfolio.
Speaker Change: In the corporate sector, pre-tax expenses amounted to 64 million during the second quarter, in line with the quarterly expectation of 65 million plus or minus 5 million.
Speaker Change: Now, looking at the right side of the slide for non-core adjustment.
Speaker Change: Please go to page 18 to see the position of the capitalized company.
Speaker Change: The favorable impact of strong organic capital generation and the $350 million LRCM were more than offset by high level of capital deployment through share buybacks and the acquisition of Verisity.
Speaker Change: As a result, the ratio declined by one percentage point during the three-month period.
Speaker Change: Year-to-date, $305 million has been generated and we are on track to exceed the minimum annual target of $600 million for 2024.
Speaker Change: The strong capital generation supports our solid capital position and the continuity of our capital deployment initiatives.
Speaker Change: Lastly, at June 30th, the capital available for deployment was $1.1 billion and our leverage ratio was at a low and flexible level of 16.4%.
Speaker Change: These very good results conclude the first half of 2024 on a positive note.
Speaker Change: Our strong profitability combined with our capital deployment initiatives has led to an increase in core ROE, which we expect to continue over the coming quarters.
Speaker Change: These conclude my remarks. Operator, we will now take questions.
Speaker Change: Thank you, ladies and gentlemen. If you would like to ask a question, please press star 1. To withdraw your question, press star 2. One moment, please, for your first question.
Speaker Change: Your first question comes from Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman: Hi, good morning.
Speaker Change: Thanks for taking my question.
Speaker Change: I just wanted to ask about U.S. dealer services. Sales there improved sequentially again, but I'm wondering what the impact of the CDK outage was.
Speaker Change: Was it material to that sales number?
Speaker Change: And then in terms of the...
Speaker Change: like the impact going forward is there anything that you expect sort of knock-on impacts anything either positive or negative and in terms of impacting that sales number going forward?
Speaker Change: No, I mean, we took advantage of the opportunity to, you know, to work close to the dealers and, you know, highlight the technology we have to a lot of contract, you know, outside of the DMS that we did, but I don't think there'll be any particular long-term impact. [inaudible]
Speaker Change: And then just as a follow-up, in terms of understanding the dynamics during that number...
Speaker Change: There was discussion about definitely growing the number of dealers on the platform. So when we see this improvement here, are we seeing just success in terms of getting dealers on the platform, or are we seeing something more fundamental in terms of...
Speaker Change: Dealer level growth something changing in the market that's actually allowing That to improve beyond just the overall growth in the number of of dealers on the platform
Speaker Change: coming back on the on the EPINAY side. So the dealers are pushing it, or seeing our wind rate is higher on products with existing stores, we're also padding some stores, so the combination of the two I think that are that are impacting us. But it's pretty much just regular growth, I take for work based on our plan.
Speaker Change: And then just finally for me, just on the same subject, just in terms of the expectations going forward. You know, we saw improvement in Q1 already, Denis, you were, I would say, conservative in terms of your outlook, but did what you see in Q2, was that better than what you expected? And have you changed your outlook here?
Speaker Change: In terms of what to expect for the dealer services business in the U.S.?
Denis Ricard: Well, maybe this question is for me. I would say that I've not changed my position. I still want to be prudent at this point. We turned a corner. I still need a couple of additional quarters before I can say that.
Speaker Change: Your next question comes from Doug Young from Desjardins Capital Markets. Please go ahead.
Doug Young: Hello. I have a few questions, several questions, about the United States as well. So, I will be able to answer them in order. You have negative screening experiences. I assume it's just for the insurance company.
Speaker Change: I'm just trying to understand, because I understand the products you carry.
Speaker Change: I don't think they're lab-supported, but can you just kind of flesh that out, what that's related to?
Speaker Change: Yes, hello Doug, it's Rick. These damages are related to long-term damages for our products. So we have a few more people damaging the policies in, let's say, the first year of the contract than expected.
Speaker Change: Is this on the term products?
Speaker Change: It's, you know, in the U.S., it's mostly final expense, so it has to do with mostly final expense.
Doug Young: That's mostly on the Palestine side. Okay.
Speaker Change: And then...
Speaker Change: There's a negative dealer or negative claims experience at the dealer side, and you talked a bit about this in previous quarters.
Speaker Change: I wonder if you can provide some context as to what you're seeing in terms of, I don't know if it's a loss ratio today in that business versus pre-COVID or...
Speaker Change: The Inflation Pressures that you're seeing on that business, is it, you know, you're seeing inflation of 8% and price increases of 4 or 6%, so you're seeing some erosion there.
Speaker Change: I don't know if that's something you can kind of give a little bit of context to.
Speaker Change: And maybe I can lead this in and you can kind of maybe set me straight, but I think the U.S. Dealer of Services, like, you're split between what you reinsure and what you keep, the 75-25. That's evolved. I thought it was 90-10 before. Maybe that, I don't know if those numbers are right, but are you retaining more risk and as a result you're seeing more claims pressures? Just kind of trying to get a sense of all of that.
Speaker Change: Yes, Doug, it's Eric again.
Speaker Change: The percentage that you add is still valid in terms of split between risk-taking and administration. So the 25%, 75% is still valid.
Speaker Change: That being said, what we see is a bit of pressure from inflation, as you may suspect inflation is trending higher on the parts and on the fix and repair costs.
Speaker Change: And also, something that is happening is that with the technology in vehicles.
Speaker Change: It has become more and more complex. I used the analogy of the window at one point in the meetings to say that we were paying $1,000 to replace a window and now it costs $2,000 to $3,000.
Speaker Change: So, it's an easy example of what's happening there. So, we just need to adjust and the good thing with our product is that we are just processing the experience rating and we will reprice the product as we adjust with experience.
Speaker Change: And this is just on the insured business or what you're retaining. That's correct?
Speaker Change: Thank you. Goodbye.
Speaker Change: Yeah, and then, you know, how long does it take for the repricing to offset that claims cost pressure that you're seeing?
Speaker Change: Subtitles created by the Amara.org community
Speaker Change: You know that these guarantees work for 4 to 7 years.
Speaker Change: So, you know, when we initially determined the price, we cannot re-evaluate it. Therefore, we can only re-evaluate the price for the new company. It will take a few quarters and years to stabilize.
Speaker Change: the price in line with the current development. So, that's my answer to your question.
Speaker Change: And then just lastly, and I apologize, Denny, if you've answered this already, but you put in something new in the slide deck that you now expect gradual profit improvement at the U.S. dealer services, and I don't know if Sean or
Speaker Change: or did anyone cover this? I mean, is this the inflection point? Like, is this a, you know, you're comfortable with what you're seeing from a trend perspective, not just top line, but also from the repricing and the, like, is this quarter the inflection point for the profitability of that business?
Speaker Change: I will start and Sean can add, but I will repeat what I said.
Speaker Change: I think it's too early to say that we are at an inflection point. I see some positive, like, you know, increase in sales. We're focusing on organic growth. I mean, you can solve a lot of...
Speaker Change: A lot of issues with growth and this is what we're doing right now.
Speaker Change: regarding profitable growth, organic growth. That has been the goal of our team and maybe Sean, you want to add something to that?
Sean O'Brien: Yeah, I've just, I've, you know, my 60 days in, I'm really taking a lot of time with that business and I do see some opportunity. There is further pricing.
Sean O'Brien: I've also been looking at the team itself and have made a few changes. So there is some, I think a lot of opportunity in that business, but is it at the inflection point yet? I tend to agree with Denis. I'd wait another couple quarters to maybe see where it goes from there.
Speaker Change #100: Appreciate it. Thank you.
Speaker Change #101: Your next question comes from Gabriel Dechaine from National Bank. Please go ahead.
Gabrielle Deschaines: Hey, good morning. Just a question on the expected investment income line item. It's, you know, running around $115 million, just basic.
Gabriel Dechaine: Stupid question. I thought there'd be a fairly bigger sequential increase because of higher rates at the end of the last quarter But didn't get that. Last year if I look it was you know 130 to 140 million What conditions do we need to get back to last year's levels for that particular line item?
Gabriel Dechaine: Yeah, Gabrielle, it's Eric. On this, I think it's better to look at this.
Gabrielle Deschaines: This number on a quarter to quarter basis then comparing to last year because when you look at the story
Speaker Change #104: Year over year, you know, lots of things happen on the macroeconomic side. Last year we had lots of things with curve up, curve down, curve change.
Speaker Change #105: Stock Market Tumbling. So it's a little difficult to compare and the story becomes very complex when you want to compare the over here. So that's why I prefer to add it quarter to quarter. And when you look at it from from quarter to quarter. [inaudible]
Speaker Change #106: We see, remember, that our previous approach of setting the rate for core investment earnings was to use the end-of-quarter rate.
Speaker Change #107: And the rate decreased in Q1, so that's part of the explanation.
Speaker Change #107: The other elements that also have an impact on the results of fundamental investments are
Speaker Change #108: capital deployment activities. You know that there are a lot of activities happening in Q1 with the acquisition, with the NCIB.
Speaker Change #108: and all these things.
Speaker Change #109: So, all in all, those are the items that impacted from quarter to quarter.
Speaker Change #110: And maybe two other quick ones that I'm just thinking of when you think about Q4 to Q2.
Speaker Change #110: To where we are today in Q2, remember that our NFI had some markdowns.
Speaker Change #111: So, since we don't expect a return on those, it necessarily means that core investment result is going down. And also, what we announced in Q1 in terms of interest rate risk.
Speaker Change #112: We have changed the accounting methodology for certain liabilities.
Speaker Change #113: So to properly line up the change in the market value of asset with change of value of liability. So all of those together are positioning us to where we are right now and we're really happy. You will notice also that we have...
Speaker Change #114: Further, reduce the sensitivity with respect to interest rate in the quarter, so when you will look at the core net investment result for Q3, if you use that sensitivity it's the best approach to predict what will be the core investment results.
Speaker Change #115: Okay, revisiting that labs question in the U.S., I don't know if you can quantify that and if I should, you know, even care if it's a small number, but just, you know, conceptually, the final expense business is a, you know, lower-end consumer,
Speaker Change #116: you know, product, I guess. And, you know, that's where, you know, there's a lot of, you know,
Speaker Change #117: at Older I suppose. That's where a lot of the financial stresses being felt in the U.S., we're seeing that the credit cards business are instant. I'm wondering if there's a parallel there that these lapse rate issues might not be a one-quarter thing, they might actually stick around for a while because that consumer is feeling the pain of higher rates and making
Speaker Change #118: Choices like cutting out a product that they they feel like they don't need
Speaker Change #118: Yes, that's one assumption, Gabrielle. We'll see in the coming quarters, but right now what we see is…
Gabrielle Deschaines: is not a big deviation from our assumption, we'll see, and that business is short term as well and we're talking with the distributors and we are repricing the products.
Speaker Change #119: Accordingly, so I don't expect this to be a recurring negative impact in the years to come. And it's short term, but that's only like the warranty stuff. It's for new business that any repricing would have an impact, correct?
Speaker Change #119: Exactly. OK. Exactly.
Speaker Change #120: And then last one, again, I think that it's, you know, I'll just put it into context, the credit losses and the PCLs in the non-Prime Auto business line, not a big number, you know,
Speaker Change #121: But just wondering what the outlook is there, is for those provisions over the next year or so.
Speaker Change #122: Could it get larger than what we saw this quarter?
Speaker Change #123: Yes, you are right that it's not a big number. In the overall picture, $4 million loss on the portfolio is quite small, and the way we look at it...
Speaker Change #124: Did you, uh, you know, I'm sorry, I'm just looking at the, uh, I guess in, uh,
Speaker Change #124: and
Speaker Change #125: with the update. So that generated this increase in allowances for the quarter. Okay, so you kind of already pre-provisioned a little bit for troubled times ahead. Okay, great. Thanks.
Speaker Change #126: Your next question comes from Tom MacKinnon from BMO Capital. Please go ahead.
Speaker Change #127: Yeah, thanks very much.
Speaker Change #128: Question about the U.S. and really just looking at the non-PAA business, so I guess that excludes the U.S. dealer services for the most part. How are these numbers going to be moving as a result of diversity and that prosperity life acquisitions?
Speaker Change #129: Particularly looking at bump up in risk adjustment release, bump up in CSM recognized,
Speaker Change #130: Is there any increase in other expenses?
Speaker Change #131: I guess the bottom line is, are the core earnings...
Speaker Change #132: The U.S., which we're at 22, wouldn't those things increase to some extent as you're bringing on both the earnings from those two blocks of Prosperity as well as Vericity here? I guess Vericity would then increase the PAA.
Speaker Change #133: I hope you were able to make some sense of my question there but any color would be great.
Speaker Change #134: Yeah, I think I know where you want to go, Tom, and I will just clarify one point when you refer to the dealer business. Dealer business is showing up on two lines in the drivers of earnings. There is, like you said, on the PAA line and also on the non-insurance revenue line as well.
Speaker Change #135: While the life business is showing up just at the top with the risk adjustment release and the CSM recognized for service provided. So keep those in mind when we talk about our businesses.
Speaker Change #136: So when you talk about what's going to be the impact of VeriCiti acquisition, it's multiple line impact, okay? And you have to bear with me for a second.
Speaker Change #137: So, for the life insurance company.
Speaker Change #138: You will see in the CSM reconciliation that we included in the quarter the impact of the CSM of that business, so that's one part.
Speaker Change #139: So, the insurance company will impact those two lines, plus...
Speaker Change #140: to show up out there. So that's another item of that acquisition. And I would say finally, and I said about that there is a distribution arm, that distribution arm will impact the core non-insurance activities in the US segment.
Speaker Change #140: I hope that answered your question, Tom.
Speaker Change #141: Yeah, yeah, Tom, keep in mind that first, for prosperity, we did not announce any impact. We just talked about the impact on solvency ratio. That's one piece.
Speaker Change #142: The other piece for vericity acquisition is that we said that it would be dilutive to core earnings in the first year, which is 12 months, right? It's not calendar year, it's 12 months.
Speaker Change #143: And we would be accretive to core earnings in the following years.
Speaker Change #144: So, I will take care of these recommendations and the geography of all this will be within the lines I mentioned to you, so it will be spread across these four items for each city.
Speaker Change #145: Okay, thanks. And just as a follow-up,
Speaker Change #146: The marks you took on investment properties, I mean, this is really what ended up happening versus what you would have anticipated the increase should be in the quarter. There was $31 million in the second quarter and it was $23 million.
Speaker Change #147: Marc in the first quarter. So it seems to go up quarter over quarter. Anything to read into this? You know, I would have anticipated that the trend should
Speaker Change #148: start to certainly decline and not be as high as it was in the
Speaker Change #149: ...without the possibility of seeing Office 2.0-2023 on the main map. Euclid spoke about the quick instance, which agrees with 19-1923. Several Reviewnable are there to offer you a choice of people. Thank you.
Speaker Change #150: In the state, Alain Bergeron.
Alain Bergeron: Alain, just a second. I realized that I forgot to mention, Tom, that we've said that for prosperity that the transaction would be accretive in the first year. So just wanted to add on top of my comments regarding vericity.
Alain Bergeron: Alain, you can go.
Alain Bergeron: Hi, Tom. First, I would say I would not put much meaning or I would not read too much into plus or minus $8 million on a portfolio of that size within like a quarter over quarter.
Alain Bergeron: I'd say it's more noise than trend. I mean, if you just go back and then if you add 2023, just actually Q2, when you add Q2 2023,
Speaker Change #153: I think it was 33. So I think with, just to give a bit more details on this quarter, it's several idiosyncratic situations.
Speaker Change #153: I'll link to specific tenant decisions, or negotiations, or expectations of negotiations.
Speaker Change #154: And look, we had positive re-evaluation in the core. We also had negative re-evaluation, but we had more negative than positive. So that's really.
Speaker Change #155: the uh... what happened and
Speaker Change #156: I think it's important, it's in the context of a market that continues because our property, one of the markets, it's Canadian office property, so it's in the context of a market that continues to be under pressure.
Speaker Change #157: In Q2, and by that I mean the office leasing markets remain very competitive for tenants.
Speaker Change #158: But on the other hand, if you kind of look at the marker for, because this portfolio doesn't operate in a vacuum, it's, there's the environment, things that I watch for in the environment is for how this environment could turn for the better. Things would be interest rate moves. So what's happened in the last few days, unless you...
Speaker Change #158: Weeks or months of deconstructive, the thing that I watch for is presence in the office trends. Price discovery, are there software sellers in the economic group?
Speaker Change #159: Okay, thanks.
Speaker Change #160: Your next question comes from Lemar Persaud from Cormark. Please go ahead.
Speaker Change #161: I want to start off on the auto loan portfolio. Is this something you could potentially sell off or do you view this as a core capability for the domestic dealer services business?
Speaker Change #161: Go ahead, Stinney, you were talking about the strategy behind that. When we bought the portfolio in 2015, there were several reasons.
Stinney: I would say that the most important thing was to add an asset class that would specifically help us match the GICs.
Speaker Change #163: Since IFRS 17, that portfolio has been incorporated into the total portfolio methodology to match all our liabilities into only one block.
Speaker Change #164: And so the way to look at it right now, it's like it represents 3% of our assets.
Speaker Change #165: And it is a class that we're okay and we're glad to have it in our portfolio because it brings diversification. So it brings some positive into our asset liability strategy overall.
Speaker Change #166: Okay. Okay. So what I'm reading between the lines there is that it's something that you...
Speaker Change #167: you still value and, you know, you would not necessarily sell, but it sounds like it's not critical to the Canadian dealer services business. Is that the right way to characterize it or?
Speaker Change #168: No, you are right. I mean, strategically, yes, you are right. I think there is no specific competitive advantage. It adds sales services to the company. It's more of an asset class at this point.
Speaker Change #169: Okay, great. And then just moving on to U.S. Dealer Services.
Speaker Change #170: Could you give us an update on your thoughts on the outlook for this business in the context of broader market forces?
Speaker Change #171: On the one hand, potentially lower rates should be positive for affordability.
Speaker Change #172: Over the past week shifting to you know increase chances for a recession That would be more of a headwind or does it does it feel like regardless of the broader market forces?
Speaker Change #173: Initiatives under my IAG should drive structural improvements in this business regardless of what goes on in the broader markets, hopefully kind of get where I'm going at.
Speaker Change #174: On this point.
Speaker Change #175: So, Sean, do you want to comment on that?
Sean O'Brien: Yeah, I mean, I think the structural improvements you're talking about, there are some nice opportunities to prove that over time. I also believe in the dealer as a distributor. I find that, you know, when auto sales are down, they tend to push harder on their products that they're moving through the F&I department.
Speaker Change #176: Uh, watching how they performed for that CDK outage was impressive to me. And then they've just retooled and continue to find ways to sell cars to the clients. So, uh, you know, I think no matter which way the economy goes, there's probably some opportunities, but we will, uh, the business will, uh, you know, come rising flow a little bit with, uh, with those dynamics. But I, beyond that, I don't know what to say.
Speaker Change #177: Have a good day, everyone.
Speaker Change #178: Okay, thank you. That's it for me.
Speaker Change #179: Your next question comes from Paul Holden from CIBC. Please go ahead.
Speaker Change #180: Thank you. Good morning.
Speaker Change #181: First question is related to IA, Home & Auto, second consecutive quarter, very strong results. First off, can you give us an approximation of how much it contributed to the positive experience in Canada? And then two, based on rates that you've already taken, claim trends, any reason to think that the positive experience does not continue for at least the next couple quarters?
Speaker Change #181: Yes, it's Éric. I will comment on this question. You know, when you look at Insurance Canada,
Speaker Change #182: I would say that close to two-thirds of the insurance gain came from Ayurmenoto.
Speaker Change #183: And on that game, you know, it came, I would say, for two reasons. First, the weather was good, as you may suspect. And the second one is the auto theft that went down. We see that government...
Speaker Change #184: and the efforts of the police to rectify the issue are in the process of rectifying the outcomes, which also improves our results on this matter.
Speaker Change #185: And then in terms of when you reset sort of your base case expectations for this business that would be at the end of the year, correct? So is that correct? And so we might see a different sort of baseline from you on auto and home sort of for 2025 with the Q4 results. Okay. Great.
Speaker Change #186: Yes, the actuary are updating their luxury issue on a yearly basis, you're right.
Speaker Change #187: That's good. Second question is related to Insurance Canada results, I guess specifically on the individual insurance sales.
Speaker Change #188: up 10% in the quarter, but up 4% year to date. And I remember with Q1, you had sort of mentioned some sort of timing impacts. So I guess my question is sort of what numbers should we be thinking about in terms of what may be a more sustainable
Speaker Change #189: Growth rate isn't more the low single digits. It's more something high single digits, low double digits like Q2.
Speaker Change #189: Good morning. This is Renee speaking. You know, I'd refer you back to what we said in the past that we're aiming at growing around 8% year-over-year, you know, on the long-term, so growing faster than our competitors, in fact, faster than the market.
Speaker Change #190: There will be differences, it will not be a smooth ride.
Speaker Change #191: But, you know, we're pleased with our distribution network, the diversity of our distribution network, the technology, our wide range of products, so we think that over the long run we can sustain that growth.
Speaker Change #192: Okay, and nothing in the current economic situation or anything company-specific that would steer you away from sort of an 8% number as looking achievable in the near term?
Speaker Change #193: Well, you know, when you look at the past and you look at the past market,
Speaker Change #194: difficulties when you look at the COVID period. The individual insurance business has been very resilient. So at this point, there's nothing for me to comment on.
Speaker Change #195: Okay, perfect. Last one from me is on the wealth business, obviously very strong seg fund, net sales. Just curious on the mutual fund trajectories, also see very good gross sales, but the net sales a little bit worse quarter over quarter and year over year. So maybe you can talk a little bit about the dynamics that's driving higher gross redemptions.
Speaker Change #196: and if there's any reasons to believe that could improve or really what I'm getting at is there is is there a path do you think to getting at least back to breakeven and maybe even deposit of net sales and mutual funds just given the strong growth sales results? Thank you.
Speaker Change #196: Stéphane, could you perhaps comment on that?
Stéphane Bourbonnet: Yeah, it's just Sunville, isn't it?
Stéphane Bourbonnet: Well, when we look at it, I mean, the performance seems to be consistent with what we've seen in this sector.
Stéphane Bourbonnet: We've been focusing on generating growth sales and obviously looking at adding new supporters of the Clarington.
Stéphane Bourbonnet: In terms of the overall net, obviously what we're seeing is we're doing much better with the affiliate than non-affiliate.
Stéphane Bourbonnet: Part of the initiative that we are looking at is really much doubling down.
Speaker Change #197: on our own distribution over the next quarter and coming up with a focus also on key accounts to help us generate new sales and improve our own numbers.
Speaker Change #198: OK. It's good. That's all for me. Thank you.
Speaker Change #199: Your next question comes from Mario Mendonca from TD Securities. Please go ahead.
Mario Mandelka: Good morning. Eric, can we go to first to you? Your closing comments, or your opening comments, rather, at the very end, you suggested that you'd expect ROE to improve.
Mario Mandelka: from current levels and this may be too fine a point on it, but where are you referring to Improving from the trailing 12 months 15% or the quarter is 15.9% because there's a pretty big difference in those two things
Eric Jobin: Yes, I would say Mario that I am referring to the thrilling 12 months, because this one, you know the quarter annualized.
Speaker Change #202: which gives you an idea of our current ROE capacity. If we deploy more money, it could go north, but with the current level of money deployed that we have, it will tend towards the extreme from the 12-month deployment perspective.
Speaker Change #203: That makes a lot of sense. A different type of question.
Speaker Change #204: Industrial Alliance has really dominated the segregated fund market for some time now. And from my perspective, it almost appears that...
Speaker Change #205: Industrial had the market to itself. Now, we hear a large, pure, very capable and product manufacturing capable in distribution has decided they want their fair share back. So what I'm getting at here is is the segregated fund market, one of those markets where
Speaker Change #206: Flows can swing around pretty aggressively as players re-enter the market with a new product, new pricing structure, a more aggressive distribution strategy.
Speaker Change #207: Like what I'm getting at is are the are the good times over for industrial Are you going to lose share in this business now that another large pair has declared they want back in?
Renee: This is Renee speaking.
Speaker Change #209: I don't think we will lose our leading position. Relationship with distribution is critical and is key. We have the right platform with the diversified product that is needed as well as technology. I can appreciate that competitors wants to come back and look at this very...
Speaker Change #210: interesting product for our clients.
Speaker Change #211: But, you know, in terms of will the fund or the money go from one carrier to another just based on the fact that the new someone wants to come back?
Speaker Change #212: Competition is there, but the advisors will not swing for just for the sake of doing this. So, you know, we'll continue to be competitive.
Speaker Change #212: Yes, I would like to add, Mario, that the relationship between the buildings takes time.
Mario Mandelka: And so we've done it through the years, and we will continue doing it, and we know the recipe. So good luck for the competitor.
Mario Mandelka: One final question relates to the tax gain.
Speaker Change #213: or let's say contribution from taxes in the investment segment of the business. That's a pretty big swing from taxes to gains in one quarter, and I appreciate that it relates to...
Speaker Change #214: The Quantum of Tax and Tax Free Income, Investment Income. Help me understand how that swings so much in one quarter or another. Was there a change in the asset mix toward tax-advantaged products?
Speaker Change #215: or was this a reaction to the idea that insurance companies will not be captured under that rule about dividends, Canadian dividends? Like, what happened in one quarter? I'm trying to piece it together.
Speaker Change #216: Is it an asset mix change? Is it a tax change? What drove that?
Mario Mandelka: It's a couple of items, Mario. We mentioned in the report that you're right about the non-taxable investment income. So that's one piece and probably the bigger, there is some also capital gains that did flow in there.
Speaker Change #217: that are less taxable, and to some other extent, in Q2, we also have what we often refer to as the true opt, you know, when we file...
Speaker Change #218: The final report on our income taxes with the government authorities. We always have a little difference between the provisions forecasted and the reality, so that did flow in there as well.
Speaker Change #219: So the tax rate should just return to normal next quarter then, is that fair? Exactly, yeah, yeah, exactly, the guidance is still the same on the tax rate.
Speaker Change #219: Alright, thank you.
Speaker Change #220: Subtitles created by the Amara.org community
Speaker Change #221: Your next question comes from Darko Mihelic from RBC Capital Markets. Please go ahead.
Zarco Mielek: Hi, thank you for squeaking me in here. Just a couple of questions. First,
Zarco Mielek: I did want to touch on, also on the SEG fund business a little bit, and what I wanted to touch on was potentially any changes from a regulatory perspective on SEG funds, and how I understand
Speaker Change #223: OSPI is doing some work on that, but I'm not sure if the AMF
Speaker Change #223: will differ. Denis, is there anything that I should be thinking about with respect to...
Denis Ricard: Capital Changes on the SegFund file.
Speaker Change #224: Yeah, there are some work being done in the Canadian landscape right now. I know that philosophy is supposed to bring some new changes.
Denis Ricard: AMF is looking at it as well, but I have no indication right now that it might have an impact on our businesses at all, so that would be my guideline.
Speaker Change #225: Okay, thank you for that. And my second question, just going back to the discussion on VeriCiti,
Speaker Change #226: and its impact on results. And thank you for the roadmap. And I understand.
Speaker Change #227: Conceptually that it will be accretive, but it was losing money.
Speaker Change #228: not too long ago. So, is this something that could sort of just come in, in the first quarter and actually have a negative impact and then progressively get?
Speaker Change #229: positive throughout the year to the point where it gets accretive. Is that how I should think about it or should I think about it as really very neutral at the beginning and turning accretive later?
Speaker Change #229: Yes, it will. It's Eric again.
Speaker Change #229: It will improve over the coming years.
Speaker Change #230: And, you know, we have a number of management actions that we contemplate. Of course, if we agreed to pay that price, it's because we had a plan behind the acquisition. And we've mentioned that we would look at reinsurance.
Speaker Change #231: for the new business, re-entrance for the enforced, the word, they were heavily using that.
Speaker Change #231: And so that's the first thing that we will be looking at in the coming quarter.
Speaker Change #232: We are also focusing on repatriation and investment.
Speaker Change #233: activity with us, so that will create other positive management action as well. So lots of things going on to make this profitable, and we'll just be executing our plan to get accretive in year two.
Speaker Change #234: Okay. Yeah, to be clear, in the first year, it's dilutive to earnings. And like Eric said, there are several initiatives, both on the increasing revenue side and decreased expenses.
Speaker Change #235: That will, you know, change the situation to a positive and keep also in mind that prosperity is going to be positive in the first year, so a creative to EPS. So all in all, you know, it should be, I mean, my view is that it should be quite neutral. So.
Speaker Change #236: Okay, great. That's very helpful. Thank you very much.
Speaker Change #237: Your next question comes from Tom MacKinnon from BMO Capital, please go ahead.
Tom McKinnon: Yeah, just to follow up on the tax, can you just remind us what is your guide for your core tax rate?
Tom McKinnon: Frank Faward,
Speaker Change #239: Yeah, you know, between 22% and 22% is in the appropriate range.
Speaker Change #240: Between 22 and 23 percent.
Speaker Change #241: 21, 22, 21, yeah, it's in that range.
Speaker Change #242: 21-22. Okay, thanks so much.
Speaker Change #242: And there are no further questions at this time. I will turn the call back over to Denis Ricard, CEO , for closing remarks.
Denis Ricard: Okay, thank you. Thank you for all your questions and I'd like to remind everyone that we have had very good results for the quarter.
Denis Ricard: Notwithstanding all the questions.
Speaker Change #243: Maybe my comment would be around the fact that...
Speaker Change #244: You can see that the allocation of capital, I mean, the way that we do it efficiently.
Speaker Change #245: is improving, there is an expansion of our OUI.
Speaker Change #246: We are delivering on our 10% plus EPS growth. That's pretty, pretty significant. We've got some very significant growth of our business in the quarter.
Speaker Change #247: And the sensitivity of our results has also decreased.
Speaker Change #247: So, we are in a very, very good position, and I would say, I think, at the end that
Speaker Change #248: Our stock deserves, I would say, a favorable price to book ratio compared to where it is right now. And you might see that with the current price, we will still be active in the NCIB. So that would be my closing remarks.
Speaker Change #249: Thank you all.
Speaker Change #250: Ladies and gentlemen, this concludes today's conference call, you may now disconnect, thank you.