Q3 2024 iA Financial Corporation Inc Earnings Call
and welcome to the Industrial Alliance Insurance and Financial Services Incorporated 2024, their quarter results.
and his time aligns and listening to me now.
Following the presentation, we will conduct a question in the session.
[inaudible]
This call is being recorded on Wednesday, November 6, 2024.
Speaker Change: I would now like to turn the conference over to Maria Nick, Head of Investor Relations.
Speaker Change: Please go ahead.
Maria Nick: Good morning and welcome to our 2024 third quarter conference call. All our Q3 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.
This conference call is open to the financial community, the media, and the public. I remind you that the question period is reserved for financial analysts.
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&E, available on CDAR and on our website, with an update in our Q3 2024 MD&E release 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.
Speaker Change: As usual, I will start by introducing everyone attending on behalf of IAEA.
First, Eric Jobin, Chief Financial Officer and Chief Actuary.
Speaker Change: Alain Bergeron, Chief Investment Officer
Stéphane Bourbonnet, Responsible for Wealth Management Operations
Speaker Change: René Laflamme, in charge of individual insurance savings and retirement. Pierre Miron, chief growth officer of our Canadian operations and responsible for Dealer Services Canada and IA Autonome.
Speaker Change: Sean O'Brien, Chief Growth Officer of
And finally, Louis-Philippe Pouliot, in charge of Group Benefits and Retirement Solutions.
I'm very pleased with our solid results for the third quarter, both in terms of profitability and business growth.
This strong performance, consistent with our year-to-date results,
reflects the disciplined execution of our growth-oriented strategy and underscores the strength of all our distribution networks.
Starting with slide 8 for an overview of Q3 2024 key results.
Core EPS increased by 17% year-over-year to a record $2.93 per share.
while EPS was higher at $2.99.
Trailing 12-month core ROE of 15.3 percent, supported by a Q3 annualized core ROE of 16.6 percent, exceeded the threshold of our midterm target.
Speaker Change: Robust sales growth and capital deployment initiatives were instrumental in achieving this strong result.
Speaker Change: In the third quarter, nearly all business units delivered robust sales growth with continued momentum on both sides of the border. This translated into year-over-year increases of 25% in premiums and deposit.
Speaker Change: and 22% in assets under management and administration.
Denis Ricard: Our solvency ratio of 140% illustrates the robustness of our capital position supported in Q3 by organic capital generation of 180 million dollars.
Our book value per share, which stood at $71.63 at September 30th, increased by 10% over 12 months, or more than 12%, excluding the impact of share buybacks.
Denis Ricard: Now turning to slide 9 to look at Q3 Business Growth for Insurance Canada. Once again, this segment recorded a solid performance with all business units posting strong sales results.
Speaker Change: In individual insurance, we further strengthen our leading position in the number of policies sold in Canada with strong sales of $103 million during the quarter, up 7% over last year.
Speaker Change: This growth was driven by the high performance of our distribution networks, our distinctive digital tools, and our comprehensive range of products.
In group insurance, the 21% increase in sales year-over-year combined with good retention resulted in premiums and deposits over 508 million dollars which is 10% higher than a year ago.
Speaker Change: In dealer services, third-quarter sales of $197 million were up 2% year-over-year.
Speaker Change: Finally, IU Atomic Home also recorded very strong sales, with direct written premiums in the third quarter reaching $164 million, a robust increase of 15% over the same period last year.
Denis Ricard: This is attributable to our success in generating new sales and to the impact of recent premium increases.
Turning to slide 10 to comment on sales results from for wealth management, which were again, very solid, notably with net fund flows of more than $600 million.
Denis Ricard: IE continued to rank first in growth and NETSEC fund sales.
Speaker Change: During the third quarter, gross sales of SICFUN amounted to more than $1.3 billion.
Denis Ricard: a significant increase of 51% year-over-year and net inflows of 781 million dollars were generated during the same period. This robust performance once again demonstrates the strength of our distribution networks.
Denis Ricard: Mutual fund sales of $385 million were up 33% year-over-year although inflows were lower than outflows.
Denis Ricard: As for sales of insured annuities and other savings products, they remain high, reaching $483 million during the quarter. This is a very good result, especially considering investors' increased optimism toward financial markets and the appeal of riskier asset classes offering potential higher returns.
Denis Ricard: Finally, in group savings and retirement, both insured and released, and accommodation products perform well, resulting in solid sales of $900 million, up 62% year over year.
Denis Ricard: Now looking at slide 11 regarding our sales results in the U.S. In individual insurance, we achieved record sales of $68 million U.S. This strong 55% year-over-year increase reflects a solid overall performance as well as the addition of sales from Varicity.
Denis Ricard: The continued strong business growth of this business unit, along with the recent acquisition of Vericity and of two blocks of business from Prosperity Life Group, demonstrate our ability to grow in the U.S. life insurance market, both organically and through acquisitions.
Denis Ricard: In dealer services, third quarter sales amounted to $286 U.S. million, up 15% over the same quarter last year.
Speaker Change: Dealers continue to place greater emphasis on F&I product sales in the context of improved consumer profitability resulting from lower interest rates and reduced vehicle prices.
Speaker Change: Ladies and gentlemen, we seem to be experiencing some technical difficulties.
Speaker Change: Please remain on the line and the call will continue in just one moment.
Speaker Change: [music]
Speaker Change: Okay, it seems that the technical difficulties are over, hopefully.
Speaker Change: Moving to slide 12, where year-to-date key financial KPIs compare favorably with all our mid-term targets. Among these, in addition to core ROE exceeding 15%, I want to highlight core EPS, which is 16.5% higher year-over-year after nine months.
Speaker Change: well above the targeted 10% annual average growth.
Speaker Change: This good profitability contributed to the generation of $485 million in organic capital since the start of the year, which is on track to reach our 2024 target of over $600 million.
Speaker Change: Turning to slide 13 to discuss our capital deployment priorities and recent initiatives at September 30th, 2024.
Speaker Change: We had $1 billion in capital available for deployment following another active quarter of capital deployment initiatives, which included acquisitions, dividends, share buybacks, and IT investments.
Speaker Change: In September 2024, the EMF published a draft revised capital formula, the Carly Guideline, which would become effective January 1st, 2025.
Speaker Change: If the guideline is adopted as published, we expect our capital available for deployment to increase by around $700 million on January 1, 2025.
Speaker Change: This positive impact on our financial flexibility will increase our ability to deploy capital, a top priority in delivering our growth strategy.
Speaker Change: Indeed, capital deployment is a key catalyst for increasing our ROE and creating long-term value for our shareholders.
Speaker Change: To this end, we continue to prioritize investing in our growth, both organically through sales with ROE above our 15% target, and through acquisitions.
Speaker Change: Our Acquisition Strategy focuses on creative acquisitions that fit well with our culture and business model, and rapidly contribute to ROE expansion.
Speaker Change: In Q3 alone, we strengthened our footprint in the U.S. life market with the integration of Vericity, acquired at the end of June 2024, and the acquisition of two blocks of business from Prosperity Life Group.
Speaker Change: We also completed the acquisition of assets from Laurentian Bank Securities in the wealth management sector in Canada.
Speaker Change: To conclude, I want to highlight that we renewed our NCIB program to buy back up to 5% of outstanding shares and announced a 10% increase in our dividend to common shareholders.
Speaker Change: These decisions reflect the high priority we place on returning value to our shareholders through dividends and share buyback, while actively investing in organic growth and pursuing acquisition opportunities.
Speaker Change: I will now hand it over to Eric, who will comment on the third quarter profitability and capital strength.
Speaker Change: Following Eric's comment, we will take questions.
Eric Jobin: Thank you, Denis, and good morning everyone. Starting with slide 15, which highlights our solid performance in the third quarter, with favorable results across all key financial indicators of profitability and financial strength.
Speaker Change: The strong profitability recorded in the first half of 2024 continued into the third quarter.
Speaker Change: In fact, Q3 annualized ROE of 16.9% and core quarter annualized ROE of 16.6% well exceeded our mid-term guidance of 15% plus.
Speaker Change: resulting in a trailing 12-month core ROE of 15.3%.
Speaker Change: Core EPS for the quarter was up 17% year-over-year, reaching $2.93, while the reported EPS was even higher at $2.99.
Speaker Change: This solid growth is mainly due to the strong increase in the insurance service results driven by a substantial increase in premiums and deposits and in assets achieved both organically and through recent acquisitions.
Speaker Change: Our capital position is robust, with a solvency ratio well above our operating target, and strong ongoing organic capital generation.
Speaker Change: Thanks to our favorable financial situation and sustained profitability, as announced yesterday, we are raising our dividend by 10% and renewing our share buyback program for the coming year.
Speaker Change: Now, moving to slide 16 to take a closer look at our Q3 results by segment.
Speaker Change: First, Insurance Canada reported a solid 16% year-over-year increase in core earnings to reach $106 million in the third quarter.
Speaker Change: Most of this increase was attributable to higher expected insurance earnings reflecting the strong sales in recent quarters and the favorable impact of pricing adjustment over the last 12 months.
Speaker Change: Other positive items included the lower impact of new insurance business from employee plans compared to a year ago, the favorable impact of higher distribution results on core non-insurance activities, and lower core other expenses.
Speaker Change: As for core insurance experience, apart from the August weather event at AYE Omenoto, the net result was positive mainly due to favorable morbidity and mortality experience.
Speaker Change: In the wealth management sector, car earnings of also $106 million were 29% higher than a year earlier.
Speaker Change: This solid increase is the result of good financial market performance, as well as an increase in the expected insurance earnings for SIGFUN from strong net sales over the last 12 months.
Speaker Change: Mortality experience was also favorable leading to an insurance experience gain.
Speaker Change: Finally, the increase in core non-insurance activities reflect a solid performance, once again, from the distribution affiliates arising mainly from higher net commissions and better margins.
Speaker Change: In the US, core earnings were $31 million, close to the $32 million recorded for the same period last year.
Speaker Change: The increase in expected insurance earnings is mainly due to the addition of varicity and prosperity blocks of business. It is worth noting that the overall results of these two acquisitions were slightly more favorable on core earnings than expected.
Speaker Change: Core insurance experience for U.S. operations was also positive, mainly from favorable mortality experience.
Speaker Change: In core non-insurance activities, the unfavorable impact of last year lower sales and a less favorable business mix were only partially offset by strong sales in 2024.
Speaker Change: Finally, corridor expenses increase mainly from the addition of various cities' expenses.
Speaker Change: Now turning to slide 17, starting with the results for the investment segment. The Q3 corn and investment result before tax was 3% higher than during the previous quarter.
Speaker Change: This result was supported by the good performance of our high-quality investment portfolio bolstered by the unfavorable impact of interest rate variations.
Speaker Change: However, taxes were higher and IEA auto finance results was lowered due to credit losses and an increased allowance for credit losses.
Speaker Change: In the Cockroach Segment,
Speaker Change: Q3 core other expenses of $60 million pre-tax.
Speaker Change: We're in line with the quarterly expectation of $65 million plus or minus $5 million as we continue to focus on operational efficiency, cost-conscious execution, and disciplined project and workforce management.
Speaker Change: Now looking at the right side of the slide for non-core adjustment, the net income to common shareholders exceeded core earnings by $6 million, reaching a quarterly record of $283 million in the third quarter.
Speaker Change: This was due to favorable market-related impacts, partly offset by adjustments mainly related to acquisitions.
Speaker Change: Since the transition to IFRS 17, this is the third quarter in seven in which our net income has exceeded our core earnings, confirming the credibility of core earnings as a reflection of our recurring operating performance.
Speaker Change: Please go to slide 18 to look at the company robust capital position.
Speaker Change: Our excellent organic capital generation in the quarter almost paid off for all capital deployment activities.
Speaker Change: including share buybacks and acquisition of blocks of business.
Speaker Change: In this respect, our very good profitability led to strong capital organic generation of $180 million for the quarter.
Speaker Change: With a total of $485 million generated since the start of the year, we are well positioned to exceed the minimum target of $600 million for 2024.
Speaker Change: As for capital available for deployment, it amounted to $1 billion at September 30, 2024.
Speaker Change: In addition, as Benny mentioned, if the proposed changes to the AMF capital formula
Speaker Change: are adopted as published in September 2024 in the draft revision of the CARLI guideline. We expect the capital available for deployment to increase by around $700 million on January 1, 2025.
Speaker Change: In summary, our third quarter results testify our ability and commitment to generate growth through quality earnings.
Speaker Change: With our increased ROE, our strong financial position, and the significant amount of capital available for deployment, we are well positioned for future growth.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad.
Speaker Change: Your first question comes from the line of Manny Roman with Scotiabank.
Manny Roman: is basically making this result from an ROE perspective unsustainable.
Speaker Change: Yeah, I'm going to start, Manny. Thanks for the question.
Manny Roman: We are very proud of the results of this quarter.
Manny Roman: We have not I have not used the word exceptional because exceptional would mean that it's not repeatable We believe they are very strong And we've we've made so much so many initiatives over the last 10 years in our organization. You know, for example
Manny Roman: diversifying our product mix, business mix, investing in the discipline acquisition, returning some of the capital to our shareholders through NCIB. I think we've got a very balanced approach.
Speaker Change: targeted towards improving the value to shareholders that at the end of the day leads to a better ROI going forward. So I'm very pleased with the trend it's going right now, probably a bit too early to call for.
Speaker Change: a higher target for ROV, it may come.
Speaker Change: But for the time being, I mean, we are very pleased and proud of the results that we've got so far. And I don't see a cloud in the sky that would prevent us to be able to generate that kind of ROE going forward.
Speaker Change: Okay, that's very clear. And maybe if I can ask just on the capital available for deployment, so you're signaling quite a meaningful increase. I guess the question is, does that change?
Speaker Change: The way you look at capital deployment, does going from $1 billion to $1.7 billion change that at all?
Speaker Change: Thank you. Thank you.
Speaker Change: Thanks Denis again. Last year at about the same time we had capital for deployment that was around 1.8 billion dollars.
Speaker Change: and obviously I got that question all the time and the the answer last year is the same as this year basically. We are looking at the
Speaker Change: all the way that we can to increase value to shareholders and in terms of the priorities, organic growth is really the one that is...
Speaker Change: Our main focus and investments in technology is included into that.
Speaker Change: And then the dividend, I mean, we've increased dividend by 10%. It's really a confidence call that we made on our results.
Speaker Change: And lastly, NCIB is, you know, we try to be opportunistic on the NCIB side and returning some of the excess capital to the shareholders. So it's really a balanced approach that we had like last year and it's continuing going forward.
Speaker Change: Got it. Thanks so much.
Speaker Change: The next question comes from Lorraine of Gibraltar, the same, with National Bank Financial.
Speaker Change: Please go ahead.
Speaker Change: Hello?
Lorraine: Yes, sorry, just to understand the, good morning by the way, the, you know, the regulatory change
Lorraine: So essentially you're holding company, there's a lower capital requirement, I guess the core ratio probably, that threshold for, you know, regulatory intervention has been lowered or is proposed to be lowered and that's what frees up some capital that you're holding back to meet that requirement, is that the gist of it?
Speaker Change: Gabriel and Eric, you're exactly right. That's the intention of our regulator.
Speaker Change: In Quebec right now, what we have in terms of...
Speaker Change: of Game Rules was to use the same target for operating companies as for old co-companies.
Speaker Change: and we understand from our regulator that they wanted to create some harmonization with the federal level, which has different constraints.
Lorraine: for Old Co. compared to operating companies. We need to understand that the regulator focus is more to get the consumer protection.
Lorraine: at the OPCO level, so the quality or the structure of capital for OPCO can be less stringent than it is for OPCOs.
Lorraine: So what is happening right now is just this harmonization
Lorraine: level playing field and this is this is resulting in additional
Speaker Change: for available for deployment for us at this point. Right, so you're also stating that it harmonizes with OSPI than the AMF move does.
Speaker Change: I'm on ice with...
Speaker Change: Okay. And sorry, Denny, I wasn't quite clear on your answer to the last question. I mean, the M&A, I'll go with the M&A route. This company, and I think you stated in your MD&A there, or your press release, you've made 30-plus acquisitions over the years.
Speaker Change: The last few have not been, and by your own omission, and I appreciate the candor, they weren't well-timed like the IAS or whatever.
Speaker Change: Does that factor into your outlook for M&A, I guess, is my question. Are you taking a different approach now? Because I do expect you're going to be an inquisitive company in the future. You have been in the past, but is your approach changing at all?
Speaker Change: Well, it's interesting, guys, the question, because I had a conversation with my board recently.
Speaker Change: and I said that obviously the IAS results are disappointing and timing was not really good and we had some challenges and we're working on them. I think it's what is important is to make issues visible and work on them. Now, with that said, one of the risks that an organization has when...
Speaker Change: 1 acquisition, and again it's one of the most many of them if one acquisition doesn't go the right way as expected the risk is that then from that point on the risk adverse
Speaker Change: to a point where it, you know, it makes the company not growing as much as it should. So as far as I'm concerned, I think in this organization we have a culture of being conservative and putting enough in our acquisition.
Lorraine: that, you know, we have to be careful, we have to be conscious, that...
Lorraine: We need to take some calculated risk going forward, but it's also a risk not to pursue acquisition when you think about it, because growing is important. The risk of not growing sometimes may be more important than the risk of growing.
Lorraine: So, my view on this is really to have a balanced view, and the track record for our position, generally speaking, is very positive.
Lorraine: It's not because one of them doesn't grow as expected that we should refrain from growing by acquisition in the future.
Speaker Change: No, no, I wasn't suggesting you would refrain in the future. I'm just wondering if there was a lesson learned there that you know that one didn't go as well as planned and you know, we'll we learned from that experience and what that what that lesson might have been so We have several lessons from from from that acquisition we have we shared with the board
Lorraine: and when I look at the recent acquisitions of Varicity and the Prosperity, I'm telling you we've learned and we've acted on what we have learned.
Speaker Change: And looking ahead, in terms of industry verticals, is it, I mean, if I'd asked you this a few years ago, or it would have been an auto warranty, top of the list, is it possible we see more things, more deals like
Lorraine: Prosperity blocks of business that seem to be a little bit, I don't know, scalable in your U.S. business, given the work you've done over the past decade in individual insurance.
Speaker Change: We're looking at both the U.S. life and the warranty business in the U.S. at this point. We don't look at the third leg, let's say.
Lorraine: And yes, we would be open to other deals like that, that are very accretive for the organization, that are much higher than our target ROEs. So we are open to look at several opportunities.
Lorraine: And in fact when I look at it, VeriCities is a great example of, you know, competency that we acquired in a business that we already know in the U.S. Prosperity is really a tuck-in acquisition.
Lorraine: The integration is going very, very well right now, so there's, I mean, it's really to count on our strength in the businesses that we're in right now, and if there are more deals, and we're looking at some deals, we'll do it.
Speaker Change: Okay, and just last one on the U.S. Did you have any lapse experience pop up again in that final benefits or benefits expense, funeral expense business? I know that that arose last quarter. And then what was it about the sales mix? The U.S. warranty sales were up, whatever, 15%, so a good number, but you cited that the mix wasn't as profitable or something like that. Can you give a bit more detail on that?
Speaker Change: Yes, I'll take this one for the sales make profitability, Gabriel. In fact, for the US dealer, in fact, what happened is that, you know, if we if you look at the US dealer
Speaker Change: Sales, there's an insured business and there's fee business.
Speaker Change: and we have slightly more, you know, of course...
Speaker Change: The fee business is slightly less, I would say brings less dollar of profit than insured products.
Speaker Change: and we're feeling a little bit of pressure on margin on the later so that all in it resulted in less profitable business mix in the quarter.
Speaker Change: Okay.
Speaker Change: And the labs, anything there, or was that just a one-off? Oh yeah, on the labs, sorry, I forgot about that. On the labs, the situation is improving on life insurance. It's still something that we're working on, but we're taking management action with distributors.
Speaker Change: to improve the situation, but it's going in the right direction.
Speaker Change: Okay, cool, and congrats on the quarter.
Speaker Change: My question comes from the line of Doug Young with Designing.
Doug Young: Hi, good morning. Eric, just back to the $700 million,
Doug Young: Is this something where the core ratio, which I think is 70%, goes down to 60% or is this more, I think it was back in...
Doug Young: in 2020 when the AAMF came out and changed the capital treatment for their property and casualty subsidiary.
Doug Young: that's held by a life insurance company, and that negatively impacted your deployable capital. And is it more of a reversal of something that's negatively impacting your available capital, or is it actually the core? So I'm just trying to understand how the moving pieces are going to get to that 700 million.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Yes, thanks Doug for the question.
Speaker Change: In fact, I will say that there are three important triggers.
Speaker Change: It has to do with the core ratio, because our capital available for deployment now is a function of the core ratio. This is our most stringent constraint, so that's the first piece.
Speaker Change: Secondly, in terms of target ratios, there are minimum ratios in the industry and just to adjust your comment, it's not 60, it's 55 in terms of minimum ratio. Then there is
Speaker Change: the level where the regulator would step in.
Doug Young: to see what's going on and maybe ask for an action plan from the company. And then there's, on top of that, we don't want, obviously, to operate as companies.
Doug Young: at this level that would be clearly uncomfortable. So we set up according to our risk profile, risk governance and so on, we set up what we call an operating target on top of that.
Doug Young: So, what just happened?
Doug Young: Here is that the regulator
Doug Young: Our regulator, with the harmonization, removed that intervention target constraint.
Doug Young: And this opens up the floor to us to operate like old codes.
Doug Young: on the basis of minimum ratio, but we would not go as low as a minimum ratio because on top of that we need to put some margin for...
Speaker Change: our operations for the risk profile of the company.
Speaker Change: So, clearly, what we will do and what we have done in providing the estimate of the...
Speaker Change: 700 million
Speaker Change: is to calculate...
Speaker Change: What would be the available capital on a basis comparable to other companies in Canada that are subject to the same constraints as we are?
Speaker Change: Does that answer your question?
Speaker Change: It does, and I think your core rate now, you correct me, is at 85. Like, I'm just trying to mathematically think, does that go down to 70? Like, like, or, like, or trying to think of, like, mathematically how this kind of, like, what's your core rate? Like, what is that minimum that you would go to that you'd use to get to that 700?
Speaker Change: for the two prosperity books. Can you quantify what that contributed to core earnings? And then I think you talked a bit about more favorable to core than expected. Is that something that is expected to continue or is that just more favorable this quarter and you anticipated to go back to more level? Just hoping to get some context there.
Speaker Change: will notice that the trend in the risk adjustment recognition and on the CSM amortization has gone up.
Speaker Change: If you look at the trend, it's quite obvious that it went up by more than 10 million. So that's one clue for you.
Speaker Change: The other one is to look at the core other expense on the same page.
Speaker Change: that did go up. We said in the opening comments that we now factor in the core other expense of vericity. So that's the other part to consider. And when you net those two outs, it's positive.
Speaker Change: Whether this will continue, there is a part of it that will continue, but we're just one quarter in, so we need to remain humble and see how this develops. But for now, we're quite happy with the results of this acquisition and its contribution.
Speaker Change: And was there any impact on the experience and from those two businesses like is like when I look at that experience line Does that factor in some of the better than expected results of those fields or is it just simply in those?
Speaker Change: three lines
Speaker Change: Not yet, you know, I referred you to the expected insurance earnings, Doug. It's too early in terms of experience. You know, we're just one quarter in, so nothing to mention out there that differs from our expectation.
Doug Young: Okay, and then just lastly, the U.S. extended vehicle warranty business and sales were good, obviously.
Doug Young: and have shown some improvement. You talked about the mix, but it looks like the profitability is still down year over year. You didn't mention any negative claims experience. I'm just wondering how things are going from a claims perspective. If there's anything to kind of flush out there.
Speaker Change: the auto parts. So that's one challenge, but you know, we're doing the repricing on the products and you know that those products, you know, when we sell them, they are in the books for a single premium and they are in the books for, let's say, between three to seven years.
Doug Young: So it takes a while to develop. So that's one piece. You see the claims and the price has been fixed. So for the repricing to go through, it will take a while. But we're dealing with it, so that's the important on this.
Speaker Change: The other thing that you have to remember also is that there is some seasonality. When you look at profitability from one quarter to the other, Q porridge is generally the lowest quarter in terms of profitability because
Speaker Change: It just follows the consumer behavior.
Speaker Change: that tends to buy more cars, you know, the biggest quarter normally is Q, is Q.
Speaker Change: Q, the second quarter, sorry, and because people buy cars in May and when spring happens. So that's the best quarter, then the next best one is probably the third, the lowest being the fourth and the first quarter. So the profit...
Speaker Change: is recognized mostly at the point of sale, so the profit on a quarter-to-quarter basis follows this pattern of seasonality.
Speaker Change: Appreciate the call. Thank you.
Speaker Change: Thank you. Bye.
Speaker Change: Your next question comes from the line of Paul Holden with CIDC.
Paul Holden: Thank you. Good morning. Maybe to continue that conversation, you continue to reiterate that you expect
Paul Holden: gradual profit improvement in U.S. dealer services? So, you know, I don't expect it'll take three to seven years to realize that gradual profit improvement, but what would be sort of the key drivers or factors we should look to to drive that improved profitability?
Speaker Change: I would say maybe 12 to 24 months. If we said this year that it would gradually improve in 2024.
Speaker Change: So, it's following the right path, so you're right, it will not take three to seven years.
Speaker Change: We expect the situation to improve.
Speaker Change: to improve gradually in the coming quarters. Sean is really working hard with his team to take management action and strengthen the situation and through repricing and management action. So it's a question of quarters.
Denis Ricard: It's Denis here. I would add that you get much more coverage at the investor event because we want to spend a large portion of that meeting to explaining the driver of earnings.
Denis Ricard: for that business and, you know, you're going to get a bit more color and about our strategy, where's our focus, what actions, initiatives we've made to improve the situation. So, you know, it's something that you guys will be quite interested to hear.
Speaker Change: for sure and I'm assuming the need based on your earlier comments that you are once again interested in doing US dealer services acquisitions that you're generally happy with the way the business is trending
Speaker Change: Yeah, there's no reason for me to say that we will not pursue growth in that business, whether it's organic or by acquisition.
Speaker Change: I will comment on this, Paul, that very little, because the business profile of vericity and fidelity life is termed business, and as you know, those are short-term businesses, so the interest rate sensitivity coming with those is very limited.
Paul Holden: Okay, got it. And then last one for me is kind of continuing on the topic of capital deployment.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Share buybacks, right? You're clearly generating a lot of organic capital every quarter, you know, have a lot of excess deployable capital But but the share price is up Significantly over the last four or five months. So how do you balance those factors in terms of the thinking towards? ongoing share repurchases
Speaker Change: I think you should expect that we will continue doing some buybacks. On this, we have a, let's say, a sizable acquisition in the pipeline, but it's really, you know, for us, one way to return some of the value to the shareholders. So my expectation is that, you know, this is going to continue.
Speaker Change: Okay, thank you. That's it for me.
Speaker Change: The next question comes from the line of Mario Mendonca with TD Securities
Speaker Change: Please go ahead.
Mario Mendonca: Good morning, Eric. I want to go back to the $700 million. I think I understand the math behind it. I think I understand the concept, especially when you refer to another holdco.
Speaker Change: in the country. I think many of us know who you're referring to there. From a practical perspective, though, if you wanted to replicate what that other company does with their holdco, it would involve raising debt at the holdco and then using that to buy back stock, which would, of course, take the leverage ratio higher, but would have the effect of
Speaker Change: Avam.
Speaker Change: Yeah, increase the leverage ratio and you could absorb a reduction in your core like that because the threshold's lower. So what I'm asking from a practical perspective, is that how you exploit this change by raising debt at the Holocaust and using it to buy back stock?
Speaker Change: It's early to call Mario on this. Your strategy is right though, this is something we could do. If we want to keep improving our ROE expansion, we need to have a more comparable cost structure in terms of capital.
Speaker Change: So, we will need to get there at some point, but we don't want to do this suddenly at this point. So, but we'll just be opportunistic with the share buyback we talked about it.
Speaker Change: you know, that's how we see it. Yeah, Mario, I think the ultimate destination is what you described, but, you know, it can take some time to get there.
Mario Mendonca: Okay, so we should expect over, let's say over a longer period of time, a couple of years, that industrial lines will not be operating at 15 or 16 percent leverage ratio. It'll look a little bit like, again, like this other company that you've referred to, like a higher leverage ratio, clearly.
Mario Mendonca: One word? Absolutely.
Speaker Change: Okay, yeah, I mean, it makes sense. Might as well take advantage of it.
Speaker Change: And that's your point then. That's how this company can have an ROE like everybody else's. Once you exploit that room in your leverage ratio, that's the sort of long-term goal here. Might as well have the same ROE as anybody else. Is that the point?
Speaker Change: I would say one word, absolutely. All right, let's move on to something else. There's strain.
Speaker Change: in Q4'23.
Speaker Change: very elevated. Eric, you talked about seasonality in U.S. dealer services. Is there, should we see a similar type of seasonality in Q424 associated with strain and group?
Eric Jobin: Yes, you are right Mario and remember that you and I talked about this earlier this year as of the result of Q4. There is seasonality in group and patterns that result in normally higher strain at some point of the year.
Speaker Change: That being said, you know, we don't expect the strain to be as high as last year for Q4 of this year.
Mario Mendonca: Not as high as Q4.
Speaker Change: Nope.
Mario Mendonca: Thank you.
Speaker Change: Thank you.
Speaker Change: Thanks. I want to come back to this capital for deployment and the $700 million you guys are getting.
Speaker Change: But I want to look at it in terms of the payout ratio. So under what circumstance would Industrial Alliance consider increasing the target payout ratio? Or does it feel like 25 to 35 is the right number over the longer term because, you know, you could.
Speaker Change: say that IAG is becoming a more mature company, it's generating all this organic capital generation, it can fund organic growth and pursue M&A. So maybe we're at the point where it makes sense to bump up the payout ratio. How do you guys think through that?
Speaker Change: Yeah, it's Denny here. I don't consider our company to be mature.
Speaker Change: We see a lot of opportunities. We believe that we are more on the growth side as opposed to the mature side.
Speaker Change: So for us, it will be premature to aim for a higher payout ratio at this point. We prefer to deploy capital in other means through growth, organic and acquisition are the favoured ones.
Speaker Change: Okay, okay. At what point, like, what should we be watching to suggest that maybe it's time to revisit this? Or is this something that, you know, it's just so far away it's not even worth discussing at this point with the board?
Speaker Change: One way to look at it is that our market cap is now maybe at $12 billion, but $10 billion plus right now. Our competitors, which are a bit more mature, I would say are in the $40 plus billion. So I would say that, I don't know, until we reach $20 billion, it's probably not.
Speaker Change: in the option this point, I mean so it tells you that it you know it's several years down the road.
Speaker Change: Okay, that's helpful. Just another question here. I noticed you guys talked about, you know, the regulatory capital requirements for SEG funds in that blurb. Can you help us understand what that's going to mean for the outlook for the SEG fund business?
Speaker Change: Yes.
Speaker Change: In fact, it won't change much, we don't expect, in fact, any impactful...
Speaker Change: change to our SEC funds because, as you may know, we already have the internal model used and we're using a dynamic hedging to protect the downside risk of those products. So our capital will not change with those rule adjustments.
Speaker Change: Thanks, that's it for me.
Speaker Change: The next question comes from the line of Tom McKinnon with BMO Capital Markets.
Speaker Change: Please go ahead.
Tom McKinnon: Thanks, good morning. Just a couple of things. First, on the dividend increase, you guys typically increase your dividend every...
Tom McKinnon: every three quarters as opposed to annually. And this 10% dividend increase, if you analyzed it, would be more like a 13, above your 10% core earnings growth target.
Tom McKinnon: If you just walk me through some of the thinking there, and I assume none of the $700 million that you additionally got works its way into that thinking, but that's the first question, and I've got a follow-up.
Speaker Change: I will comment on that.
Speaker Change: if you want to add. No, I don't think it's related to this $100 million. Basically, as I mentioned before, we target about around 30% payout ratio.
Speaker Change: and because our profitability is very strong with 10% increase in dividend we you know we're about in the middle of that of that range right now so that's really the rationale behind it nothing more.
Speaker Change: Okay, thanks. And then into the U.S. I mean you had...
Speaker Change: You had three months in the quarter of ricidity, but you only had two months from prosperity.
Speaker Change: Thank you.
Speaker Change: from the Blocks from Prosperity. So is there any additional uptick?
Speaker Change: that you would anticipate in either, I'm sure there's lots of CSM, and you only got two-thirds of that CSM from Prosperity.
Speaker Change: So just help us think through that.
Speaker Change: and Risk Adjustment Release 2 from Prosperity because you only got two months of that.
Speaker Change: And then, what is the impact on expenses of only having the prosperity block in for two months? Just help me think some of that. Would we anticipate that net-net, you said it did better than you thought, but you only had two months of prosperity in the quarter as opposed to three.
Speaker Change: You are right. Tom on disk.
Speaker Change: What will happen is that, obviously, next quarter we'll have a full quarter in terms of risk adjustment, release.
Speaker Change: as well as CSM amortization. So that will contribute to slightly more of those two items. And in terms of cost...
Speaker Change: We are fully integrating this business with the American Amicable business so cost will stay the same. The cost increase that we see in core corporate expense is solely due to VeriCity acquisition.
Speaker Change: because it comes with people and operations so those costs are just a reflection of the recipe.
Speaker Change: Perfect. And then the final one.
Speaker Change: is really with respect to the other core expenses in Canada.
Speaker Change: Look, just they've been trending. They were 16 in the first quarter, 17 in the second quarter, and now just 11 in the third quarter. Is there anything unusual there? What should we be thinking about for that? Because it seems to be down, you know, at least...
Speaker Change: significantly year-over-year and then down significantly quarter-over-quarter.
Speaker Change: You're absolutely right, Tom, on this. We had kind of one-time items that were favorable for core other expense in Insurance Canada, so what I expect at this point is this to come back to normal in the next quarter.
Tom McKinnon: Okay, thanks so much. And normal meaning the kind of run rate we had in the first half of the year?
Speaker Change: Exactly.
Tom McKinnon: Okay, appreciate that. Thanks so much.
Speaker Change: I'll now turn the call back over to Dennis Ricard for closing remarks. Please go ahead.
Tom McKinnon: Okay, thank you
Denis Ricard: I think it would be understatement to say that we are pleased with the results this quarter. Very solid profitability with an ROE much above.
Speaker Change: Our target
Speaker Change: and what makes me confident about the future is really
Speaker Change: Not only the current profitability and the discipline of our organization, but it's the growth that our businesses have brought. We haven't talked that much during the question period.
Speaker Change: about the business, the growth of our businesses, but I can tell you that our leaders are putting all their attention and focus on growing their businesses.
Speaker Change: in the 20% over the quarter, and that's the results of their hard work and all their teams.
Speaker Change: Thanks to all of us. Thanks to all of them. And one last comment is about the creation of value. We've been a leader and we are a leader in creating value to our shareholders.
Speaker Change: We've made so many actions over the last decades and you can see that our journey is not over and we will continue performing going forward. Thanks a lot for everyone and see you next time.
Speaker Change: Ladies and gentlemen, this concludes today's call.
Speaker Change: Thank you all for joining and you may now disconnect.
Speaker Change: Thank you so much.