Greetings, and welcome to the Industrial Alliance fourth quarter earnings results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded on Thursday, February 17, 2022. I would now like to turn the conference over to Marie-Annick Bonneau, Head of Investor Relations. Please go ahead.
Good afternoon, and welcome to our fourth quarter conference call. All our Q4 documents, including press release, slides for this conference call, MD&A, and supplementary information package, 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 archive webcast will be available for 90 days, and a transcript will be available on our website in the next week. I draw your attention to the information on forward-looking statements on slide two and on non-IFRS and additional financial measures on slide three. Also, please note that a detailed discussion of the company's risk is provided in our 2021 MD&A available on SEDAR and on our website.
I will now turn the call over to Denis Ricard, President and CEO.
Good afternoon, everyone, and thank you for joining us on the call today. As usual, I will start by introducing everyone attending the call on behalf of iA. First, Jacques Potvin, Chief Actuary and CFO. Mike Stickney, Chief Growth Officer and responsible, among other things, for our U.S. operations. Alain Bergeron, Chief Investment Officer. Renée Laflamme, in charge of individual insurance and savings. Sean O'Brien, responsible for our mutual fund business and wealth management distribution affiliates. François Blais, in charge of Dealer Services, Special Markets, and iA Auto and Home. Finally, Éric Jobin, responsible for our group businesses. iA Financial Group reported solid fourth quarter results as demonstrated by the six key performance indicators shown on slide seven.
Starting with profitability, core EPS of CAD 2.01 for the quarter was within guidance, which led to a record annual core EPS of CAD 8.31, CAD 0.11 above the top end of our 2021 guidance range. Core ROE of 14.2% is also above the guidance range. This metric is on a trailing twelve-month basis and demonstrates the strength of our results for 2021. The following two metrics illustrate our strong growth momentum, which continued in Q4. First, premiums and deposits total a solid CAD 4.2 billion, up 6% above a very strong quarter last year. As for AUA/AUM of more than CAD 221 billion, this represents a significant increase of 12% over the last twelve months.
Our capital position continues to be very robust, with a solvency ratio of 134%, up by 3 percentage points, in addition to which are our distinctive macroeconomic protection, now equivalent to 12 percentage points. Finally, book value growth is a telling indicator of the real value created for our shareholders, and we are therefore very pleased that it has grown by 12% in 2021. Now, turning to slide 8. 2021 has been the most profitable year in iA Financial Group history. In addition to profits exceeding expectation and a solid capital position, sales momentum was quite strong throughout the year, and I want to highlight in particular the strength of our Individual Insurance sales. As an illustration, the most recent industry data shows that in 2021, about 1 in 4 Individual Insurance policies sold in Canada was issued by iA.
Also noteworthy are the net fund entries of nearly CAD 4.5 billion in retail wealth management and sales in our Dealer Services division that remain above expectations regardless of low vehicle inventories. Our strong 2021 results have enabled us to create value for our shareholders, as demonstrated by the growth in book value and the substantial increase in the quarterly dividend per share of 29% as announced last November. Moreover, we reinitiated the NCIB program during the fourth quarter, under which we have already begun to buy back shares. An important success factor in 2021 was the superior client experience provided by our employees and advisors, and I want to take the time today to thank them and to emphasize how much I value their engagement. Our employees are key to our success, as are our distributors and advisors.
Indeed, at iA, client experience is based on a three-way relationship between the client, the advisor, and iA through its employees. Therefore, by taking good care of our employees, we're also taking care of our clients and advisors. This is one of the many reasons why we are committed to offering a great employee experience through good working conditions, flexibility, support, and a rewarding career. With this approach, it is no coincidence that in 2021, at the same time as we ranked number one for the overall company rating in the Advisor Perception Survey, the satisfaction of our clients as measured by internal surveys was well above expectations. This is a solid foundation for continued growth in 2022 and beyond. Driven by this momentum, we are very pleased to increase this year our core ROE target range to 13%-15%.
This enhanced guidance comes one year earlier than the roadmap presented at our March 2021 investor event. Also, we're targeting strong organic capital generation again in 2022, with the upper end of the range at CAD 525 million. As we continue to be focused on the execution of our strategy, we are well reserved with additional macro and pandemic protections totaling nearly CAD 1 billion. Regarding IFRS 17 now, our favorite topic, as the transition to the new accounting regime is just around the corner, we want the market to know that we are already managing our business with the new regime in mind, and that we will be transparent and proactive in our communications on this topic throughout the year.
In this context, based on the currently available information, we are pleased today to share a positive outlook and therefore express our confidence as we continue to prepare for the transition. Based on the strength of our balance sheet, the flexibility of our investment portfolio, and our overall financial solidity, we expect near neutral to favorable impacts on several key metrics. These include the book value, a meaningful indicator of a company's value. In conclusion, this morning, we released our first Sustainability Bond Framework. This is a step forward in our sustainability agenda and our ambition to make a positive difference both environmentally and socially. This ends my remarks. I will turn it over to Mike, who will comment further on business growth. Following Mike, Jacques will provide more information about the future outlook and Q4 results. Mike?
Thank you. Thank you, Denis, and good afternoon, everyone. Business growth during Q4 was no exception to the very strong performance recorded throughout 2021. Long-term value creation depends on the ability to generate new business, and we are pleased to see that our focus on growth in recent years is paying off. Now please refer to slide 10 as I will comment on Q4 sales results by line of business. In Individual Insurance, the strong momentum continued with total sales of CAD 87 million during the fourth quarter, a significant increase of 21% year-over-year. As Denis mentioned, 1/4 of individual policies in Canada were sold by iA in 2021. This further demonstrates our leading position in the mass/mid-market. Growth was supported by the strength of our distribution networks, our superior digital tools, and our comprehensive range of products.
On the last point, we continue to expand our product shelf as we launched the new iA PAR product during Q4. Now looking at Group Insurance, employee plan sales for the quarter amounted to CAD 15 million, compared to CAD 30 million for the same period last year. Sales for the full year were about the same level as in 2020. In Dealer Services Canada, sales of CAD 266 million increased by 7% from a year earlier, a good performance in the context of vehicle inventory shortages. In the Special Markets division, the addition of new blocks of business and the pickup in travel insurance sales led to a significant year-over-year increase of 69% from the same period a year earlier.
In the U.S. now, individual sales of $33 million were up 6% year over year, mainly from growth in the family and government worksite markets. In the Dealer Services division of our U.S. operation, sales for the fourth quarter were 4% higher than a year earlier, which is good performance considering the vehicle inventory challenges that the industry is facing. Sales for the full year 2021 were up 49%. These good results were mainly attributable to the synergies between DAC and IAS. Note that the low vehicle inventory situation persists and that sales growth may continue to be slower in early 2022 for both the Canadian and U.S. Dealer Services divisions. Now turning to slide 11 for Individual Wealth Management.
Guaranteed product sales for the quarter amounted to CAD 228 million and ended 2021 with a total of CAD 891 million of sales. 2021 was also a record year for iA, both Segregated Funds and Mutual Funds. Combined net inflows amounted to nearly CAD 4.5 billion in 2021. Looking at Segregated Funds, the company ranked first in 2021 in net sales, solidifying its strong leading position in the industry. During the quarter, gross Segregated Funds sales exceeded CAD 1.2 billion, up 41% year-over-year. While net sales totaled CAD 823 million for the quarter, a strong increase of CAD 276 million over the same period last year. As with Individual Insurance sales, distribution networks and digital tools have been key to our success.
As for mutual funds, gross sales totaled CAD 715 million. Net sales recorded for the quarter were solid, with inflows of CAD 242 million, showing continued momentum and bringing net sales to a record level of CAD 1.2 billion for the year. This is thanks to the strong performance of the fund lineup, which we continually enhance to better meet the needs of our investors. On this note, in January, iA Clarington launched three new portfolio solutions, including additional socially responsible investment portfolios. In Group Savings and Retirement, good sales of CAD 620 million, compared with a very strong quarter of CAD 879 million last year. As you know, sales in this sector tend to vary considerably from one quarter to another, depending on the size of the contract sold.
Finally, direct written premiums in our P&C affiliate, iA Auto and Home, continued their steady growth and increased 6% year-over-year. Overall, premiums and deposits, a key indicator of our success in growing the business, totaled nearly CAD 4.2 billion during the fourth quarter and concluded the year with a very strong annual growth of 18% over the excellent year of 2020. Most sectors contributed to this solid result, especially Individual Wealth Management. In addition, net fund entries and growth of the financial markets led assets under management and administration to a record level and resulted in a 12% increase over the last twelve months. Please now turn to slide 12 to summarize the growth story for the quarter.
Q4 sales were solid and concluded a year of very strong growth, marked by records in several sectors and surpassing the already excellent results of 2020. Individual Insurance and Wealth Management stood out by adding another strong performance in the recent string of successes. Also, both Dealer Services divisions in Canada and the U.S. showed resiliency and performed well in the context of vehicle inventory shortages, allowing for continued growth in this capital light business. I will now turn it over to Jacques to comment on Q4 earnings and capital strength and the outlook for 2022 and 2023.
Thank you, Mike. Good afternoon, everyone. Strong profitability was achieved again in the fourth quarter, concluding 2021 on a positive note. Starting with slide 14, which compares our results with the guidance that was provided at the beginning of 2021. Our results were generally in line with or better than the guidance. Noteworthy are the core EPS and core ROE, which both exceed their target range for the year. I also want to underline our very strong organic capital generation throughout the year, well above the guidance with a total close to half a billion CAD in 2021. Slide 15 compares core earnings to reported earnings. Items adjusted for Q4 reported earnings include favorable market-related impacts, the small favorable outcome from the year-end actuarial assumption review, and the small net gain related to acquisitions and disposition, which essentially results from the disposal of PPI Benefits.
Slide 16 presents the source of earnings for the fourth quarter on a core basis. Expected profit was 50% higher than a year ago. Policyholder experience was also favorable, with the main exception of expenses, which were higher than expected, primarily due to higher variable compensation as a result of our strong performance in 2021. Strain on new business was within our target range, only slightly higher than expected. Income on capital was higher than expected, with a positive contribution from iA Auto and Home. Finally, the tax charge was higher than expected, mainly due to tax adjustment related to prior years. More details on these items are provided on slides 31-34 in the appendices. As a result, core EPS for the quarter was CAD 2.01, a very good result, near the middle of the target range.
However, this result is different from the guidance I gave you on our last call because of unexpected higher expenses and taxes. I now want to comment on our year-end assumption review, starting with an update on the additional protections put in place for the pandemic uncertainty. Please refer to slide 17. The additional protection for mortality was at the right level for 2021, as reflected in the slightly lower than expected additional mortality. For 2022, we have decided to strengthen this additional protection for our U.S. business by $13 million. As for the additional protection for policyholder behavior, it has been reduced at year-end, taking into account that management took action to reduce the risk. As shown on slide 18, the overall impact of the 2021 actuarial review on earnings was a small net positive.
The result of the year-end review, based on our internal risk studies and the latest experience recorded, is a good indication that our reserves are well-positioned. Moving to slide 19, our solvency ratio increased again during the quarter to reach 134% at year-end. The increase was supported by very strong organic capital generation, management actions, and investment strategies. The solvency ratio, along with the different metrics presented on slide 20, are indicative of our robust financial position. In particular, our distinctive macroeconomic protections are worth the equivalent of 12 percentage points that add to our solvency ratio. Also, the macroeconomic sensitivities of our solvency ratio have been updated, and they remain low. For more information about capital sensitivities, I refer you to slide 43 in the appendix of the slide deck.
Finally, we reinstated our an NCIB program in December, under which up to 5% of our outstanding common shares can be redeemed until December 2022. I now refer you to slide 21, as I will comment briefly on the investment strategies that contribute to the increase in our solvency ratio in Q4. Taking a step back, you will remember that during our March 2021 investor event, my colleague, Alain Bergeron, explained that with the coming of IFRS 17, there are opportunities to realize the full potential of our scale and capabilities. As the transition to IFRS 17 approaches and the constraint of IFRS 4 are about to disappear, our investment portfolio adds flexibility to seize opportunities, and we took actions to optimize it.
In addition to their favorable impact on our solvency ratio in Q4, these changes improve the ROE of the investment portfolio without taking on more economic risks. Finally, these changes reduce the combined sensitivity of the IRR and URR, the most relevant metric available for assessing our interest rate sensitivity in preparation for IFRS 17. As we are already acting on the basis of the new accounting standards, we will present today some of our expectations for the upcoming transition to IFRS 17. Please refer to slide 22. Thanks to our long-term management approach, our sound risk management, and our well-positioned actuarial reserve, we are in a great position for the transition. Based on currently available information, we expect impacts ranging from near neutral to favorable for all the key measures presented at the top of the slide.
That is, core EPS, core EPS growth, core ROE, book value, solvency ratio, and the level of capital available for deployment. Under IFRS 17, there will be increases and changes on core earnings measures, as they will exclude the macro volatility resulting from the new accounting regime, and will therefore be the best indicator of the company's ability to generate recurring and sustainable revenue. This outlook that we provide today is preliminary, as the items displayed at the bottom of slide 22 are not finalized or remain uncertain. In view of the transition to IFRS 17, we want to proactively communicate educational information to the markets on a regular basis. With this in mind, moving to slide 23, I will take a few minutes of your time today to discuss briefly about the contractual service margin or the CSM.
CSM represents all costs and risks included in the pricing of insurance products that are not captured in the IFRS 17 current estimate or risk adjustment. This notably includes expenses that are not directly attributable to contracts under IFRS 17 and the risk of asset liability mismatch. Both of these items are reflected in IFRS 4 liabilities to date. An unearned profit or free profit, which is similar to the current concept of value of new business, is the remaining component of the CSM. It is also important to understand that risk adjustment should be considered along with the CSM to better predict future IFRS 17 insurance profit. When future assumptions will realize as expected, risk adjustment and CSM will both flow to the P&L.
It should also be noted that the establishment of the CSM and transition may or may not impact a company's equity. For more information, I invite you to look at slide 27 and 28 in the appendices, which provide details on the link between CSM reported earnings, core earnings, and capital generation. To conclude, I will share our targets for 2022 as presented on slide 24. Building on 2021's strong performance, we are significantly increasing our core EPS target range, with the midpoint being 14% higher than in 2021. Our core ROE target is also increased to 13%-15%. As for the impact of new business, we are pleased to target a strain very close to zero, particularly as we prepare to transition to IFRS 17.
Organic capital generation will remain strong with a target range of CAD 450 million-CAD 525 million. Finally, as disclosed at the end of 2021, our dividend payout ratio target of 25%-30% is now based on core earnings. This completes my remarks. Operator, we will now take questions.
Thank you. Ladies and gentlemen, if you would like to register a question, please press the one four on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question comes from Doug Young with Desjardins Capital Markets. Please proceed.
Hi. Good afternoon. Just a question on the IFRS disclosure, Jacques. I mean, you don't expect any negative impact on the book value. I mean, Industrial Alliance has CAD 1 billion of macro protection embedded in your reserves. I think, Denis, that's what you mentioned. I assume the two are related in that. Is the assumption here that you are going to release those excess provisions at the transition and essentially move that out of the liability into the CSM as part of the setup of the CSM? Is that the mechanics right? That's where I'm getting a little confused because I would have anticipated there to be some form of equity impact.
Thank you. Thank you, Doug, for the question. We can say that IFRS 17 is a really different construct from IFRS 4, so I really like to look at it from the slide 23 perspective. When you have the current liabilities, you have the risk adjustment, and those two are really looking at best estimate, I would say, commitment you have towards your clients, as well as, I would say, the equivalent of PfAD or protection or margin for actuarial assumptions. So the CSM is really covering, I would say, ALM risk, unattributable expenses, and what we consider free profit. For iA, of course, under the current accounting regime, we have those extra protection. We're very proud of them. They've been very useful to eliminate volatility.
They have absorbed volatility over the past few years, and this will certainly flow through into the CSM because we cannot front-end all the profit we have in our product.
When I think of that, I mean, the biggest part of the excess provisions right now, I believe, is the equities that are backing your long-duration liabilities. Correct me if I'm wrong on that. To the extent that those excess provisions are released, because as you mentioned, they did temper volatility in the past, that would tell me is that one of the consequences of releasing these extra provisions is that there's gonna be a little bit more volatility in your results, and then I would imagine you're gonna back that out when you calculate the core number. I'm just wondering if do I have that right? Is that should we expect some more volatility because of the release of these excess provisions?
how are you gonna back that out, or how do you think of defining core?
Yeah, that's a really good point, Doug. Actually, that's one of the limitation we find of the IFRS 17 regime. It use, what I use in the investor day, I will use the same expression. It use a very short-term lenses for all businesses, whether the businesses is long-term, mid-term, or short-term. Here that's a good example you're providing. In fact, we will continue to manage business with long-term. You're totally right. Reported earnings will be more volatile because in the past that stock market protection was absorbing that volatility. Now it will be in reported earning, and that's why it's so important, the definition of core earning, to remove that short-term volatility because those NFI, we own them for the long-term liabilities. It's a buy and hold kind of strategy. You're totally right.
Okay. I think I get that. Just the second question, you changed the investment portfolio in advance of the shift to IFRS 17, but you didn't talk about what changes were actually made. It did cause a little bit of wonky impact on your IRR sensitivity, at least for 2022. Can you talk a bit about what the changes were and how will that create some additional volatility as we and I know 2022 is gonna be under IFRS 4, but we still have to think of that before we go to IFRS 17. Should we expect some additional volatility from those changes as well?
That's a good question again, Doug. Actually, what we've done with our assets, we lengthened the duration of our asset portfolio. We also added some credit. When you look at 2022, we have market protection. If you go at the bottom of the slide, we have CAD 900 million of protection to absorb the volatility in 2022. That's why we felt pretty comfortable doing those transactions. We're very pleased with the risk profile. When we look at IFRS 17, I wouldn't target that way. We have always and will continue always to optimize, I would say, our economic view of our business because it is an accounting regime change. It's not the underlying business that is changing.
However, when you do that optimization, you need to take into account the constraints that the accounting regime and the regulatory capital regime are putting on yourself. With those transactions, with the choices we're making with IFRS 17 because that's a standard, principle-based standard on which we can make choices. We are making choices to bring the accounting as close as possible, closer actually, to the economic view. It will help. Those transactions will help us in regard of the diversification of risk for under IFRS 17.
Okay. I will leave it there. Thank you very much.
Our next question comes from Tom MacKinnon with BMO Capital Markets. Please proceed.
Yeah, thanks very much. Good afternoon. Kinda wanna look at this slide 27, where you talk about the movement in the CSM. You know, it looks like, you know, you certainly make the point it's great to see the CSM growing, and you wanna see the CSM growing. Yet, if I look at that kind of waterfall chart, the things that are actually you're showing is making it growing, and the biggest box is new business. If I look at, you know, your strain has actually been a negative, and then you're forecasting it just to be zero. I'm wondering how you get a big plus here for new business and on that waterfall chart, and then you talk about an uptick from changes in assumptions.
I mean, it was CAD 0.02 in total for the year for changes in actuarial assumptions. Under IFRS 17, the investment assumption review wouldn't be in that. It would actually be negative under that. Traditionally, you've been negative to zero at best in those two things that are making this waterfall chart go up. I'm wondering, are you doing something different when we move into IFRS 17 to make this new business nicely positive, in particular? How should we be thinking about that?
Thank you, Tom. I just can say that I don't know if you were in and out close to your mic, but it was cutting a lot. I will try to answer. If ever I don't get your question right, never hesitate to ask it again, please. No, absolutely not. Actually, the business we're selling today is very profitable, and it will shows when we will add new business year in and year out, there will be CSM there. Like I said in my opening remarks, CSM, there's three component to it. It's not only free profit. There's free profit is certainly a big part of it, but there's some margin there that we are pleased to have to cover unattributable expenses as well as the ALM risk.
Compared to what we have in the business change, I would say it will flow there. That's simply what will happen. I see that as pretty much the same thing we have done in our way of managing with IFRS 4. That management actions were not part of the core earnings. They were used to manage business change when there were bad news coming our way. Here it could be the same. We're very pleased with where our assumptions are based, but you never know how it will evolve in the future. New business, it will really show the added value of new business, but that's where I see it.
Tell me if I got your question right, and if ever you ask another question, please try to be closer to your mic.
Yeah. Is this better here? My question really is you haven't had any impact on new business being positive before, but now you're talking about it being positive under IFRS 17. What's changing here?
Okay.
That's really the thing I'm looking for.
Okay, perfect. The sound was much better. Thank you very much for that, Tom. Actually, it's because we've been conservative with our view on new business. We knew IFRS 17 was coming. For us, it was appropriate to limit the profit at sale. We used very conservative assumptions, and that's why we have never shown, I would say, negative strain. This is the only reason. Under IFRS 4, it's not because businesses are having a strain that the business is not profitable, not at all. What you're seeing here is really under IFRS 17, that the CSM becomes, all of a sudden, completely visible, and you see it.
Okay. No ALM, PfAD to the business anymore, so that's why you're gonna get a positive impact from new business under IFRS 17.
At our product in Canada, they are very profitable. In the U.S., they are very profitable. We are pleased with that. Strain under the current regime, even if it's not negative, it doesn't mean our profit is not there. It's only that we book higher reserve and that profit will flow into the future. Here, when you see that slide, the new business, and you see the CSM, it comprise the three component on slide 23. I can tell you that the free profit is the biggest part of that.
Okay. With respect to currently you have these excess reserves, and they don't count as capital in your solvency capital ratio. As you move those excess reserves now into CSM, are they so they don't count as available capital as well under IFRS 17 for your capital formula. Is that correct?
No, actually, that's why we're showing that our capital ratio will increase, okay? Those reserves. The stock market protection is not taken into account. That's what we are disclosing. We've been disclosing since Q3, I believe, 2019. This will now be part of CSM and other reserves. It will now be part of the solvency ratio.
You mentioned your solvency ratio are not changing as you go to IFRS 17. The fact that you are at least talking about adding the CSM to your equity, wouldn't that imply that your solvency ratio would go up under IFRS 17?
That's what we expect. At the same time, the fact that, related to Doug's question earlier, volatility of reported earnings and volatility of the capital ratio will be higher. Our target operating ratio will also increase, okay? This is, something that we have to factor in. What we expect with the information we have now is really that the deployable capital will increase as well. Net-net, we should be positive.
Okay. My last question is, it seems like you kinda had, almost like excess reserves that aren't really excess reserves, and you move them to IFRS 17, so you put them in with the CSM. Why didn't you just release them as equity?
At the end of the day, we can release them as equity, but like I said in my earlier, those extra reserves have been very useful to absorb volatility, short-term volatility and allow management to really concentrate on managing the business with a long-term view. It has been very useful. I can release them now if I want, but I will have to book them again at the CSM when we will do the transition.
You have to put them into CSM. Is that what you're saying under IFRS 17?
Exactly.
Don't you have the choice to release them to equity under IFRS 17?
At the end of the day, Tom, I will say that those reserves are part of future profit. It's not a one-on-one here. Here we're speaking broadly. We're speaking about near neutral. We're still in unknown because the capital formula is not formalized. So far we have made some choices, but we will revisit those choices if ever there's a surprise there. But ballpark, I will say that that CSM will flow through. Not the CSM, but that stock, those extra reserves will flow through the CSM because they are part of future profit of the product.
Okay. Thanks very much then.
You're welcome.
Our next question comes from Gabriel Dechaine with National Bank Financial. Please proceed.
Hi, good afternoon. I wanna stay away from getting too technical here, but I just wanna paraphrase or clarify something you're saying and you've made a strategic decision over the past few years, you've been selling more and more products that are short duration, capital light. In theory, you guys could have or your company, I should say, could have been recognizing new business gains, but you didn't so that you would be better to, you know, avoid downside risk, I guess from IFRS 17. Is that sort of the thing?
It's a fair statement, Gabriel.
Okay. Just the rate sensitivity thing. The IRR sensitivity that went from, like, virtually nothing, to a CAD 25 million downside when rates go up 10 basis points. Can you just explain that to me, what changed? I guess there was a change in the portfolio. Why, you know? Why does that have an impact, if we can try to keep it at a high level? Is that sensitivity gonna be a bigger number under IFRS 17?
Okay. This is the same answer I provided earlier, Gabriel. We lengthened the duration of our asset portfolio, and we added some credit.
Right.
It has a very nice and great impact on the solvency ratio, but it increased the IRR sensitivity risk. Under IFRS 17, what will be very important for us is the whole liabilities, which is better measured by looking at the combination of high IRR and URR. This is really the metric on which we're reducing our risk. That's why I'm saying that moving to IFRS 17, we are bringing the accounting/capital regime closer to the economic. That's really what's in it here.
Yeah. It's Denis here. I'd like to add something on this. The way I look at it at very high level is that, you know, this accounting change that is IFRS 17, at the end of the day, the question we could ask ourselves, what are the conditions under which, you know, when you look at the long term, I mean, going forward, under what conditions can we have, let's say, at iA, a continuity in terms of the main key indicators like book value, like core EPS, core ROE. Basically, when you combine the changes that basically we did on the investment side, that leads us to a more, let's say, linked, better link between economic, you know, environment versus the balance sheet and the choices we need to make on the investment side.
At the end of the day, it's a win-win for us. Now, the consequence is that we have a situation where we are hedging our, let's say, interest rate, long-term interest rate going forward. By doing that, lengthening the duration of asset, increasing credit, we are in a great position where we can see that the IFRS transition will be either, you know, slightly positive or even neutral for us. That's basically at high level, the way I look at it.
Okay. I kinda wanna move away from this topic. I just wanna talk about group, the loss there, the morbidity. I'm you know looking across the sector here. We're seeing some you know parallels, maybe duration of claim lasting longer, and maybe that's it or maybe something else, if you can let me know what that is, the driver of the negative morbidity, that is. How long do you think these issues are gonna persist?
Okay. Thank you, Gabriel. I think I'm gonna leave it to Éric to answer that. I don't know, Éric, if it's you, the first time you have a question, but, go ahead.
Yes, it's my. I'm ice-breaking here.
There you go.
Thank you, Denis. To answer that question, I would say that it has not been visible last year, but, you know, there are many parameters that at play when we talk about disability, just thinking about short-term, long-term, incidence rate, duration of a disability, and finally termination. Last year, we had some fluctuation in those parameters during the year, but they tended to cancel out over the year, so it did not really impact our experience. What happened in Q4 that we noticed is a slightly higher duration on short-term disability and a bit higher incidence on long-term disability. They line up in the same direction.
when I think about the future, and if we think about what happened in the last two years with respect to those parameters, they have sometimes gone up and then come down. When I look at the numbers right now, there's no reason to believe that they will not come down and in line with our pricing parameters.
Okay, what's the, you know, some analogy type stuff. Not analogy, but just give me some real-world explanation here. Higher duration on STD, that's because hospitals are tied up, so getting care takes longer. The incidence on LTD moving higher, is that mental health or what?
Yeah. It's a bit, when you think about the COVID impact, you know, on the health side, people are trending to take a bit more time to return to work. There is a bit of what I would call a spillover effect between STD that goes into LTD. In the past, they tended to settle and return to work earlier. That's really what's happening there. They will just return sooner than normal on the LTD side.
You expect this stuff to settle out in the near term?
Yes. That doesn't mean, though, that we won't have volatility, but yes, I'm expecting that to settle out.
Thank you.
Our next question comes from Darko Mihelic with RBC Capital Markets. Please proceed.
Thank you. My first question is for Mike, and it has to do with the car sales in the U.S. I just wanted to see if you had any view on this, but I'd read an article that suggested that many dealers in the U.S. are with this inventory shortage trying to make more money on cars that they're selling. One of the ways that they're doing it is they're sort of forcing the car to be sold with a warranty attached. I guess they don't really wanna try and charge more than the MSRP because the dealers don't like it.
What they're doing instead is they're sort of saying to a customer, "Hey, if you wanna buy this car, you more or less kinda have to buy it with a warranty," or they're including the warranty in the price, and they're sort of getting the car sold that way. My question is, are you aware of this? Have you seen it? Is this a risk to your business?
Yeah, thanks for the question, Darko. I'm sure there are dealers out there who, you know, do that sort of thing. It's definitely not recommended to, you know, basically force people to take the warranty. I don't think it's that common. We really haven't run into it, you know, in our business and our, you know, I guess, with our dealer clients, to any extent, you know, 'cause that would obviously could run a risk of consumer complaints and all that sort of stuff. I would say it's a minor percentage of what's going on out there. Just in general, you know, it's a tough market in terms of the inventory shortages.
I've, you know, certainly heard and read reports about dealers charging more than MSRP, which, you know, the OEMs don't like. But where they're really making their money right now is selling used cars. The price of used cars has really skyrocketed, and there's good margins there for them as well.
Just so to make it clear, how is it that you would know if a car warranty was being bundled into the price?
It'd be hard for us to know. You're right.
Okay.
You know, the one way we, you know, it comes to mind that you get some level of consumer complaint, that sort of thing. I certainly haven't heard any from our business.
Okay, thanks. I have a few IFRS 17 questions as well. Maybe first just going back to, I guess the best way to ask this, Jacques, is one of the things that you highlight that is not yet sort of finalized is the tax treatment of the CSM. The first question, I guess, is have you looked at that through a lens of what's the worst case scenario? If you have, would it be material to you if the tax treatment goes against what you're hoping for?
That's a pretty good question, Darko. Maybe I should say that my view on that first, and after that, I will answer the question. I think I was a very young actuary in the early 1990s when I recall my first year-end that we had to calculate tax reserve as well as GAAP reserve, and it changed, I believe, in 1992 or 1993. I really believe that tax regime should work according to the accounting regime. It's very bizarre to recognize profit on the tax side without recognizing on the accounting basis. That's really my view on that. To answer your question, I would say that no, I didn't use the worst case in the metric we set there.
The one that is at risk is more the P&L, the EPS that will be a risk. Book value won't be affected by that because there will be an asset, a deferred tax asset that will be set on the balance sheet for that. We expect if ever the worst happen, that there will be transition at least. That's what we expect. Like I explained on slide 23, it's not all free profit, okay? It has I hope, I really hope that Finance Canada is getting that.
Okay. Okay, thanks for that. My second question on IFRS 17 is, given what I'm reading and the way you're sort of describing this, it sounds like you're not willing or you're not going to take very much of the OCI option, and I'm just wondering why that would be.
Okay. You're reading it well. We look at it, we analyze the situation, and of course, I will say OCI. The advantage of OCI will be to move some volatility from the P&L to the OCI. At the end of the day, capital is king, and the capital formula would be the same under both approach. We think that even using OCI, we will have that there will still remain some volatility into the P&L. It will also trigger a core EPS definition. We will have to require core as well. Also, what we think is that it's much more complex to run with the OCI.
One of the drawbacks of OCI for us is really, like I said earlier, the choices we made, we are making there is really to try to align as much as possible the accounting with the economic regime. It's much easier to manage a company with when the two are closer together than when they are far apart. If you use OCI and you focus on P&L only, you may take investment decisions that looks good on the P&L, but that may not be that good for the economic value of the enterprise. That's really where we're moving.
Okay. I think I might follow up with you on that. I have a few technical questions on that.
Would you-
In addition to that question, when I look at your slide 23, you know, and it's obvious, right? I mean, what comes out obvious is that if there's very little, or let's say very close to neutral impact on your shareholders' equity, you're just shifting around. I mean, the reserves are basically just being shifted around.
What I'm struggling to capture or what I'm struggling to understand is if the discount rate now being related to the nature of your liabilities and disconnected from your assets, I would be under the impression that the discount rate might actually be lower than sort of. I know this is a strange concept, but if you bear with me, I would think that the way you discount now would be at a lower rate, and therefore your overall liabilities would have increased and your equity would have dropped. Can you. Is it the opposite? Is it actually that the discount rate is close to where you're currently discounting? Maybe you can also weave into your answer how you are arriving at your discount rate.
Is it a reference portfolio or something like that might help me as well?
Okay. We're using reference portfolio. The way we summarize the answer there, because it's two different construct, the fact that we have had the stock market protection, I would say that we have not been aggressive using. The investment which we are using today is not maybe conservative. I would say that it's conservative because we wanted to have that extra caution to absorb the volatility. That's why rates are comparable. When we construct our IFRS 17 assumption, it's really reference portfolio and the illiquidity premium was built according to the characteristic of the liabilities. That's really it.
If ever your interest rate, the discount rate, you change it, you're just transferring money to the CSM because at the end of the day, you must not front-end profit under the IFRS 17 regime.
Okay. Just two more questions, and I promise I won't hog the puck anymore. Are you finished with the changes to your investment portfolio, or is it possible that you do more changes throughout the year?
Actually, like I said earlier, what we're providing today is with the information we know today. The capital formula is not finalized yet. The CSM taxation not finalized yet. At the end of the day, there could be some changes that we will bring.
Okay. The reason why I ask is it's very curious that you can somehow lengthen the duration of the portfolio but also add credit. Typically, credit would be shorter. How are you actually lengthening the portfolio duration while adding credit risk?
Actually, we're doing both. It's not using the same, like, the same instrument, the same asset, I would say.
Okay.
Maybe, Alain, you want to give some color on that.
Yeah, Darko, there are multiple ways to increase the duration. One is to take physical bonds and change them, and that's one thing that has been part of the toolbox. Another way is to add derivatives or to use derivatives to increase the duration. If you-
Okay, that's what I was.
You can achieve what we've achieved.
Okay. That's as I suspected. One way or another, you're still shifting. I mean, it's very hard to somehow figure out how you can extend the duration and the yield without having risk somewhere in the portfolio. It seems to me like you may have added spread risk. Is that the way I should think of it, and swap risk as well?
You're right.
Am I shifting?
Sorry.
Go ahead, Alain.
I mean, there's a few things to think about. That's true that when you add, for example, derivatives, then you can get exposure to, you've mentioned swap spread, that would be an example, or liquidity, that could be another one. For example, depending how you structure the short end leg. I think if you take a step back, I think the important part is when you start to think of the IFRS 17 or 2023 plus, by making the portfolio changes that we've made, the one thing that. Well, actually, both. Lending duration, it reduces the economic risk because it manages the total or overall interest rate exposure. The other thing is, it's with the credit.
The credit in the new world of IFRS 17, adding to our credit actually reduces ALM risk. That's an important consideration and why we've been making these two. Actually, adding the credit decreases that risk but also increases the portfolio income.
I see. Okay. I mean, I guess at the end of the day, Jacques, I'll have to ask you about the investment result at some other time. Is that a key component of your earnings stream as well going forward? It sounds to me like you're really pushing us on the CSM and the risk adjustment as being the core measure to look at, and net investment result is something that's really pushed to the side. Am I just assuming too much there?
No, everything will continue to be important. Where the unfolding of the CSM and risk adjustment, there will be insurance risk there. There is interest factor into those two calculations. You need a good investment strategy to provide the investment return to compensate for it. It's the same world we're living in today, it's just reported a little bit slightly differently.
Okay. All right. I'll follow up with you after, Jacques. Thank you very much for tolerating my questions.
You're welcome.
Just one thing I would close on this topic is that you're right, that while making changes, you move risks around a little bit, but it's our view that even the composition of the risk have changed, the total economic risk is about in the same ballpark.
Okay.
Our next question comes from Meny Grauman with Scotiabank. Please proceed.
Hi, good afternoon. Just following up on the items you highlighted that are not finalized yet. What's your expectation in terms of timing, both for the tax treatment and the final capital formula? Do you have a good sense of when we should get clarity there?
My understanding is, capital formula will be probably late this spring. About the taxation, I don't know exactly.
If you consider both those items, where do you view more risk being?
I don't know. I don't know how to answer that one, Manny. We, you know, are ready to call the shot when we will see what will be the playing rules. We'll see.
Okay, fair enough. I just wanted to ask another question on expenses, Jacques. You talked about how expenses surprised you in Q4, and just wondering, as you look at 2022, what are you expecting, and how do you gain confidence that you won't be surprised again? Obviously, inflation is a big topic these days. I'm just wondering how you're thinking about expenses in 2022, and especially relative to the surprise that you got in Q4.
Thank you, Manny, for that question. Actually, I was hoping for a question on expenses, because I will take a little bit more time just to explain. I said in my remarks that we guided in Q3 to the top of our guidance, the APS at the top of the guidance. For sure, we didn't achieve that, and expenses was part of that. What surprised us in Q4, actually, bonuses has been a part of that, and two reasons for that. Our net promoter score, Denis spoke about, the survey we're conducting with our clients, client satisfaction, so they were through the roof. We were not expecting that, as well as Q4 growth has been better than what we were expecting.
We had a CAD 0.04 impact, higher CAD 0.04 impact than expected when I guided you in November on that aspect. There's also a fight we have with Québec with one of our life insurance distributor. On that one, we decided to be prudent in December and took a provision for that, so it's CAD 0.02. Also, we had a lower proportion of tax-deductible expenses that cost us CAD 0.03 in Q4, and we have provision all year long with an assumption there, and we discover in Q4 that we didn't provision enough. It added those three elements add to CAD 0.09. The tax true-up, I was not expecting the tax true-up, so CAD 0.04 there.
Although there again, losses are pretty much in line. Overall, it's CAD 0.13 lower than what we're expecting. This is to reconcile Q3 guidance to Q4. Q4 by itself, when I look at expenses, it's really CAD 0.24, and from those CAD 0.40, CAD 0.24, there are actually at least CAD 0.10 on bonuses that really should be linked to the first 3 quarters. It's really related to the overall yearly performance, strong performance on both the top line, bottom line, and the client satisfaction. Also, I spoke about earlier about the tax about the non-deductible expenses. This part also has to be spread over the year. The tax provision is really a one-time item.
Actually, in Q4, when I look at it, there's probably CAD 0.11 that we can say as being normal expenses for Q4. That's really the way I see it. On that CAD 0.11, there are expenses that are there because of compliance. With IFRS 17, and I'm pretty sure it's the same in all other companies, we are spending, we have an army of people that help putting IFRS 17 in place, and we need to be ready to run parallel tests and so on. It's really putting additional costs. Also, we have made an adjustment to our sales compensation to make sure that we continue to attract and retain the talent we need to execute and to transform.
Also, the main impact is really we have had tremendous growth everywhere, so we need people to support that growth, that business. This is very important. The bottom line, and I'm coming to your question, 2022 guidance is taking into account everything we know today, so what is recurring into on the expense side.
Okay. That's a lot of detail. Thank you so much.
Our next question comes from Mario Mendonca with TD Securities. Please proceed.
Good afternoon. Before I get into my series of IFRS questions, let me just quickly run something by you on Segregated Funds. The company is obviously dominating the market there. It's been a long time since we cared about the risk that Segregated Funds pose to any life insurance company. Perhaps you could just take us through the nature of the guarantees on these Segregated Funds relative to where your peers are today. Like, are you offering anything that others might think is outsized risk? Then relative to what you did before the big financial crisis of 2008 and 2009.
Okay, Mario, it's Denis here. It's, I'm so glad you asked the question. I used to be the appointed actuary in those years, so I'm very pleased to answer that question. You were there at the time as well, so it may remind you some of the discussion we had. I mean, when you look at it at high level, at iA, the best, I would say, guarantee, or not the best guarantee, but the best protection against, let's say, macroeconomic negative movement is in the design of the products. That's basically where it starts, before even thinking about investment strategies. At iA, when you look at the design of our products, it's been less risky than anything you found in the industry.
I'll give you one example, or two examples. One is, let's say, our guarantee is by contract, not by deposit, where you would find guarantees across the other companies that were by deposit. Also, you know, like the ten-year guarantee, we used to have, you know, the guarantee that we sold were, let's say, for the at age between 55 and 65. The average duration of the guarantee was significantly higher than 10 years. This, combined with the fact that we had some of those 100% guarantee that we had on our portfolio, put us in a very good position.
In fact, so much so that when the regulator changed his formula and, let's say, recognized the hedging strategies at that time, I'm thinking maybe five years ago, I can't remember exactly how many years, we were able to release some capital at the time. But it's not that it would have been the same for the whole industry. It's because our design was less risky and also that we had a great, let's say, hedging strategy. Hopefully that answer your question, Mario.
Yeah, I think so. You still add value to your customers, but you're careful in your design, so you don't have to necessarily overcharge them. That's combined with your distribution is what's driving these strong sales. I guess that's a fair way to put it?
Well, nowadays, the guarantees or most of the guarantees are sold at, let's say, at the lower level of guarantee. There are less and less a 100-type of guarantee in our portfolio. For the rest you said, it's a fair comment.
Let's go into IFRS for a moment. I listened to all this, and I'm certainly coming to understand what you're telling us. There's gonna be a regular level of income, like investment income, and that regular level of investment income will be the interest income, the dividend income. Assets, all assets, virtually all assets have a lot more value to an investor than just the regular income. They must also have gains, like realized and unrealized gains. What I'm hearing is that to the extent that this creates volatility, that will be removed from your core earnings. Help me think this through. When you think about your investment portfolio, what is the regular yield then?
When you take the cash, let's say dividends and interest income, you gotta add some amount for realized and unrealized gains. Probably this is best for Jacques. How do you decide how much to include there for realized and unrealized? In a way, you know, I'm sure you're aware that Manulife includes CAD 100 million of gains every quarter on their alternative long duration investment. There's an analogy here then for Industrial Alliance. Industrial Alliance will also have a certain amount of return that you'll include every quarter. So how do you get there?
Actually, we are—that's a very fair question, Mario, here. We have not gone through the math yet, but the principle you're explaining is exactly that. Actually, we will have to look at what's our long-term view. I will use stock, okay, the common stock as an example. What's our long-term view on the dividend plus the market rate that should increase? That's probably this long-term view that we will put as being recurring, expecting core earnings. Anything that will be above or below will be considered as being non-core. That's probably the mindset we will have here.
Okay. Using long-term averages then for equity market returns and let's say long-term averages for real estate and everything else, I think that's all that's entirely fair because it's objective, it's verifiable. I can kind of look at long-term returns and say, okay, that makes sense. Where the problem arises, and I'm just looking at the 2023, 2024. If I were running one of these companies and I knew that the analysts and investors would play ball with me and accept some kind of regular return, then I would just increase risk. I would extend duration, I would add credit risk, pretty much what you've done. I would do that to make sure that I maximize my core earnings on the assumption that everybody's gonna play along with me and I'll exclude all the bad stuff. What then is the governor?
What is the thing that's gonna stop a life insurance company from taking that? I know this is a very cynical question, but what's gonna stop a life insurance company from just going too far and adding so much credit risk and duration risk, knowing very well that the analysts will just ignore it anyway? What's the governor?
I see two things here, Mario. The first one is risk appetite and tolerances, okay? When we work those, there's two different views on that. We have an economic view, and we have the accounting regulatory capital view. Everyone has to be on board, all executives as well as the board. This gives us in check in regard of the return you can provide because you have to factor in all the risk you're taking into those two. Like I said, regulatory capital as well will catch you at one point in time if you're too risky because the capital, the way the capital solvency ratio is working, it is stress testing all liabilities, all assets.
At one point in time you will have to have the capital to support that risk.
The last thing I would add is that, you know, traditionally, iA has had, let's say, less corporate credit than their peers. I mean, we're still in a good situation here.
Yeah. You know, I think those are all great answers. You know, to quote, I think it was Ronald Reagan said, you know, "Trust but verify." I think one of the things we're all gonna have to do is have all the life insurance companies be very, very transparent in how they come up with these expected or recurring returns. Because as investors and analysts, if we can't get really comfortable with that, it's gonna be awfully difficult to ignore all the bad stuff. One final thing then is on.
Mario.
Yeah.
Mario, it's Alain. Can I just add something? As you think about this and you challenge the industry and you challenge us, don't forget the impact that these decisions have also on the ALM risk, in the true economic ALM risk. In a way, it links to what Jacques mentioned, which because the capital formula also includes that. That's an important consideration, the risk and the return.
Totally get you. Like an answer like, "We're good guys, trust us," that's not gonna fly over the long term. I know where you're going with this, that you manage your ALM risk and capital, but we're gonna really need to get comfortable with these recurring yields. Otherwise it's not gonna be acceptable to just ignore all the bad stuff. One final thing then. Sorry, go ahead. I was just gonna say one final thing, if I may then. I can see how the LICAT will be adjusted to X this out. I can see how core earnings will be adjusted to X this out. You know, some investors really care about book value and book value growth.
In fact, you at the beginning of almost every one of your presentations, you're fond of saying, "Hey, we've grown our book value better than our peers." What happens in a world where there's this massive volatility, we're all ignoring it from an earnings and capital perspective, but the book value is getting crushed every quarter. How do we deal with that volatility?
No, actually we will have to live with it. At the end of the day, that's exactly why we are working and we are paid to minimize the risk, to optimize the value of shareholder by minimizing the risk, having the best diversification of risk on the liability side as well as with our investment strategy, our ALM strategy. Down the road, as an insurance company, we are taking risk on all that, so it's diversification there that will be key. There will be volatility there that we will have to live with.
Thank you. I mean, suffice to say, this is gonna be a really tough go in the first few quarters of 2023. I appreciate you giving us the information so at least we know what questions to ask. Thanks.
Thank you, Mario.
Our next question comes from Lemar Persaud with Cormark Securities. Please proceed.
Hi. Thanks. Just on IFRS 17, it sounds like some of the issues that still need to be finalized are pretty material. I'm just wondering, is there any risk that implementation gets pushed out beyond 2020 to 2023 or does it feel like we can get all the ducks in line and, you know, by January 1?
I hope not. With all the work we've been putting there and all, insurance companies that have got to be prepared for that date, let's hope that it won't be delayed again.
Okay. Very simple answer there. I have some,
There is no indication. Sorry. Denis Ricard here. There is no indication that there's gonna be any delay. In fact, the industry would be very upset if there was to be any delay, which is different than, let's say, three or five years ago where the industry wanted to have some delays. Now it's time to implement that. It costed enough money. It's just accounting, right? I mean, it's just accounting at the end.
Okay. That's fair. My next question, could you just talk to the decline in the capital available for deployment versus last quarter? I think last quarter you guys had
In this quarter it's 900. I'm just a little bit surprised to see a decline in a quarter where the company generated CAD 150 million. Like, does that all relate to Surex and I guess some of the buybacks are. Just help me bridge the gap there.
Jacques speaking. Actually, the acquisition of Surex has used CAD 100 million there. That's part of it that went there. Also, we are in a situation in which one of the constraints, which is Tier 2 capital, you cannot recognize more Tier 2 capital than Tier 1 capital, so we are a little bit limited on that. This situation will improve under IFRS 17, so this is the reason why it has not increased as much even if our capital ratio has increased.
Okay, thanks.
We have a follow-up from Darko Mihelic with RBC Capital Markets. Please proceed. Mr. Mihelic, your line is open. Please proceed with your question.
Apologies. I'm still hitting that mute button a little too often. I just wanted to come back to one last question. Maybe you can help me understand something just from a technical perspective, Jacques, on the URR under IFRS 17. It's my understanding that it's frozen until October of 2023. But it is a URR that's way out there, like year 70. My suspicion is that I think the maximum move is 15 basis points either side. My suspicion would be that if they're gonna change it, they're gonna change it by 15 basis points either side. First, can I just take your 10 basis thing, 10 basis point sensitivity and consider it linear?
Secondly, is there still a chance that the URR can be changed before implementation? Because my understanding is people really wanna change it, but maybe you can just give me some ideas there on the URR.
The only thing I can say, Darko, at this point is that sensitivity of URR on the IFRS 17 will be different from what we are showing on the IFRS 4. About the setting of URR, my understanding is that it is set like you said, and we will see where it will go. Here we're really speaking not about the URR of iA, we're speaking about the CIE. I suppose you're speaking about the CIE guideline here.
Yes.
I don't know. I'm not close enough to that to see what will happen there.
Okay, great. Thank you very much. Cheers.
Mr. Ricard, there are no further questions at this time. Please continue with your presentation or closing remarks.
Yeah, I'm not sure if I should talk about IFRS 17 in my ending remarks. It's been a great discussion today. Well, the one thing I would like you to keep in mind is that, you know, in my career it's the third time that we're changing accounting regime. Each of these three times, I mean, the company has adjusted and, accounting is accounting. The true value is really through the pricing of our products, you know, the management of the company, management of the investment strategy. This is what we're doing. We've been doing that forever. I think the investors should be reassured that we can say today that, you know, going forward, even under IFRS 17, our main metrics are in good shape.
I think that's the message I would like you to understand today. That includes the fact that we've increased the core ROE target from I mean to a range of 13%-15%, which is a great achievement. With that said, thanks a lot, guys.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.