Good afternoon, everyone. We're now moving over to Industrial Alliance. I'm pleased to have Denis Ricard, the President and Chief Executive Officer of Industrial Alliance. Denis, thank you very much for being here.
Pleasure to be with you, Mario.
Thank you to everyone for joining us for another session. Denis, I'd like to get into just a quick overview of the quarter, what your impressions were of the quarter, the good, the bad. Why don't you get us started with that?
Sure. Thanks for the question. I was pleased with the quarter, in general. There are key indicators for the company that went pretty well. The main key indicator that I'm looking at, at the end of the day, is always the increase in book value and our capability to generate capital. Because at the end of the day, capital is key. And, I mean, we all know that the life company results, you know, you have to dig in and be... Sometimes it's a bit complicated, you know, with the reported earnings, core earnings, and then we got some volatility.
But at the end of the day, when I look at the, you know, the, generation of capital - organic generation of capital that we had, when I look at the increase in book value, the EPS, core EPS was pretty good, 17% increase. Compare, you know, with, when I always compare that with the average, that, we aim for in the, you know, long term, which is 10%+. So all in all, it, it went pretty well. I, I would say that the, US dealer business is showing some, some sign of, recovery. I would call it that way. So I was pleased with, where we are at the first quarter. Am I pleased with the actual result in, in general? I say no, but, the direction is good.
I mean, that's what I'm gonna say. At the end of the day, growth is very, very important, and we've seen strong sales momentum. We had an 11% increase in the asset, 8% increase in premium and deposit, so I was quite pleased with that. And as you know, we've also amended our NCIB program to... Because we are basically buying back more shares than we had expected at first. And we think at the actual price, you know, it's a deal. I mean, it's the discount is huge right now, and so we are taking advantage of that.
Okay. I wanna remind everyone that you're welcome to submit questions. I'll look over my left shoulder once in a while to see if any questions come through. I'll review them and then relay them to Denis. But let's get started. First, Canada had its first rate cut yesterday. Might be more to come. Rates always matter to financial services companies, including, or maybe especially, life insurance companies. Help us think through what that means, this first rate cut and more to come. What does that mean for Industrial Alliance?
Well, you know what? I sleep very well when I look at the movement of interest rates. For iA., it's a long-term business we're in, I mean, for the most part. So to me, it's really the long-term interest rates that is key, and it's obviously relating to inflation, as we've seen over the years. So to me, the Bank of Canada change doesn't really mean that much. It's small, and it's short-term interest rates. Our sensitivity to a short-term interest rate is not very, very high. So really, it's the trend on a long-term basis that is key to our organization. And in general, it's been positive. Although we've decreased significantly, I would say the sensitivity of our results on interest rates.
So to me, I sleep very well when the interest rates of the Bank of Canada is moving from one way or the other, by the way.
Okay. So I would have thought that with rates moving down a little bit, perhaps some of these charges that we've seen across the life insurance companies, in commercial real estate, for example, could reverse. But I appreciate this is at the short end. Presumably, it has to be more at the long end. Is that what you would point me to, the longer end, for the reversal?
Yeah
... of some of these commercial real estate charges?
Yeah, yeah. To me, it's really the... I mean, obviously, the fact that the short-term rates is going down, it's going to help in some areas, okay? So for example, when I look at the U.S. dealer business, that would be probably the one, or the Canadian dealer business in general, it, it should be positive because we've, we've suffered to the fact that it increased over the last couple of years, and it, the affordability of clients to buy cars has decreased, so we had that impact on our sales. So there are some pockets of, you know, basically some profitability, whether it's goes up or down. I mean, in the wealth management side, for example, when rates are down, I mean, it puts some pressure down on profitability, although, you know, 25 basis points won't make a difference.
But there are, like, deposit in clients' account, where we earn obviously a spread on that, and so there is more pressure on that when it goes down. But on the other end, as I explained on the U.S. dealer. So there are some kind of hedges, when I look at all the businesses. So we are not very much sensitive to the short-term interest rate in total.
I see. I wanna go back to the capital. You made an important point there, and it's one I certainly support and subscribe to myself, that capital and capital strength might be one of the most important differentiators across financial services companies, and then even across sectors. When there's a difference when the banks look like they're strong on capital and the insurers are weak, you're gonna see a difference in performance. It's been the other way. The insurers look really good from a capital perspective. But I will say this: For someone that's been around Industrial Alliance for a long time, it is unusual to see Industrial Alliance buying back 8% of the stock. This company, in the past, under previous accounting regimes, under previous management, would never have bought back 8% of the shares.
I think you can agree with me on that. This is not normal. So let's talk about what gives you that confidence, and how did things change for a company that would never buy back stock to buy back 8%? What changed?
... So, let me, let me be clear. It's, it doesn't have anything to do with management. It has to do with the environment that has changed. And when I say environment, I mean, I was there 15 years ago or 20 years ago. I was the chief actuary at the time, and during the 2010s, interest rates were going down. A lot of pressure on the generation of capital under the previous regime on the IFRS 4. The MCCSR formula was very punitive when interest rates were going down. So when we look historically, our capability to generate excess capital on a yearly basis, it was very, very minimal at the beginning of the last decade. And then what happened is that, prices changed to reflect the interest rate decrease.
The MCCSR formula changed to become the LICAT formula, better reflect the risk management practices. It helped us significantly when it happened. So we are in a much better situation today than we were, like, 10 or 15 years ago, and because we can generate so much excess capital. So it's I mean, the previous management would, I would think, do exactly what we're doing right these days because we are generating I mean, it's very profitable. I mean, in terms of the pricing, the ROE on our new sales is all about I mean, for all businesses, they are above our target of 15%. That wasn't the case when the rates were going down, you know, like 10-15 years ago.
The environment is very, very favorable to our business model right now. That's what's happening.
Now, let's focus on what we do or what you do with all this capital. Clearly, there's the NCIB, as we discussed, and it sounds like you're committed to that, but there's also been an allocation of capital to the U.S., inorganic allocations. Let's talk about, first broadly, is the U.S. the more attractive market to allocate capital to today for Industrial Alliance?
Okay, so, let me just talk about, you know, we have a problem, which is we have too much capital to some extent. I mean, you might say it's a problem. It's a nice problem to have.
Sure.
Obviously, capital allocation is the key, is my key priority, I mean, going forward. It's pretty clear. To me, priorities is first and foremost organic growth. And I say it to all my leaders, I mean, if we can grow the current businesses even faster than we're doing right now at the current pricing that we're having, let's go for it in all businesses because of what I said before. ROE above our target. So that's the first priority. It includes all the, you know, technology investments that we're making, that, you know, at some point are going to bring some synergies or additional revenue. That's organic growth. Second is about acquisition, and in terms of acquisition, obviously, you can never predict if you will be able to allocate capital.
We've done some acquisition, like Vericity, we're doing some tuck-in acquisition. You've, you've seen that, lately, but nothing in the size of what we are generating on a yearly basis, which is CAD 600 million. I mean, we, we're working on more sizable acquisition. We're looking at a lot of acquisition, to be honest with you. We're, we're putting more executive attention to it. But, I mean, to do one, you might work on 20, you know. We, we try to stay disciplined. At the end, at the end of the day, if the prices are not what we think is the right price, I mean, we're going to use other alternatives. So it, so it brings the next, the next allocation, I would say, activities, which are like dividends.
We increased dividends last year by more than 20%, and then NCIB, and this is where, at the end of the day, that's one way to allocate capital. It's going to be very ROE accretive going forward, and this is why we believe that we can generate an ROE above 15%, I mean, on a midterm basis, once we're able to allocate that excess capital.
So I'm gonna get into Vericity in a moment. Before we do, you mentioned ROE, and that's obviously very close. That, that's one of the important indicators, that and book value growth, that drives how I look at insurance companies. So I am very much in tune with the way you're describing how you run the business, but let's now talk about that ROE. Industrial Alliance's ROE is 200 basis points lighter than your peers, and that might be business mix, it might be excess capital. When you benchmark yourself against those other large insurance companies, what do you assign that 200 basis point gap in ROE to?
There are two things, I would say. The first one is that you have to go back to the transition of IFRS 17.
Right.
I mean, our book value has not been impacted by IFRS 17. Guess what? We could have done some other choices where we would have decreased the book value. But when we do that, had we done that, that would have meant that we would have, you know, put profit that were, let's say, recognized in the past, before IFRS 17, that would count, double count after IFRS 17.
I understand.
And that's not what happened at iA. That's why I'm saying the key PI that we all should look at is the long-term growth of book value. Because it's easy. It would have been easy for us just to decrease the book value and generate more, let's say, profit at that on the second time. We haven't done that. We haven't played that game.
I understand.
So that's one reason. The second reason is that we've got the capital that to deploy, and we've made all the calculation, and, we would be very close to, let's say, the target ROE of our peers if we are, you know, allocating that capital. So to me, those are the two reasons why, today we are, you know, shy of where our competitors are.
So you wouldn't not... Like, I mean, I understand completely the reference you made to the accounting allocations that were made. Setting up the contractual service margin was a big deal for the other life insurance companies, but Industrial Alliance also set up a contractual service margin, but that was offset by something else. And forgive me for being a little bit technical, but why did the establishment of the contractual service margin for Industrial Alliance not lead to a reduction in the book value?
Because in our reserves, there were some margins that were not recognized under the previous regime for the volatility of the equity market. We had an extra margin in our reserve, never recognized in capital. All of a sudden, under the IFRS 17, we could not kept that extra margin. It had to be released, let's say. But then we had other things that, at the end of the day, put the book value at about the same level.
I see.
So that was a big difference, you know, us versus our peers. At last, the regulators, at the end of the day, recognized that extra margin.
For sure. And for-
That's why... I mean, Mario, that's why we went from $ 300-something million of capital to deploy to $ 1.5 billion we are today. That's why.
I saw that. Yeah. No, I appreciate that. Now let's get into Vericity. That deal, I don't know if the word surprise is right, but, yeah, there were a few people that were surprised at that transaction. I think we expected something else. Can you talk about what Vericity does, and why that seemed like the right decision for you?
Okay, so I think I have to... Just to go back to the strategy in the U.S. In the U.S., we try to be in businesses where we don't compete head-on against the big life cos. So in 2010, we bought American-Amicable, which is in a niche market, final expense market. We are a leader in that market. We bought a company where we thought, and we think, and it happened in fact, that we could add value by... Because there were some constraints. The previous owner didn't want to put capital, there were capital constraints. And they were not profitable at the end of the day. There were some issues in terms of financials. So we fixed it.
It took a couple of years, but we took our skills, competence in that business, we brought it in the U.S., and basically we made a great success of that. 15% increase CAGR over the last 13 years, went from $25 million of sales to $170 million last year. And an ROE that is way above our 15%, you know, target. So it's a great success story. We want to reproduce that in another, let's say, let's call it a niche market, in a sense that we have bought a distributor in a... It's a digital distributor that basically distribute simple products. So they have a contact center of 200 people that basically sell online. I mean, so they...
So their skill is to get the lead, on a digital basis, send it to their contact center, and basically sell the product. A bit like we're doing in Canada for P&C products. That's what we're doing in Quebec here, but on the life side in the U.S. So for us, it's a new expertise, something that at some point we would like also to expand across all the organization. And we knew that also, coming back to the analogy with the American- Amicable, there were constraints. There were constraints in capital, so they basically had some reinsurance deals that were costly, that we're going to obviously terminate. So that's gonna help. They had some expenses, because they were public, that were, you know, very expensive, so we're gonna cut expenses as well.
At the end of the day, we're gonna make that company profitable doing those changes and, at the same time, acquiring skills in the digital world.
Does that... You mentioned, I think, briefly, that you wanted to spread it to the rest of the company. Does that model exist in Canada? I'm not aware of a digital sales model for life insurance.
There are distributors.
Yeah.
In this case, what we're buying is the combination of the digital distributor plus a manufacturer.
Yes.
Because we buy eFinancial, which is a distributor, and Fidelity Life, which is a manufacturer. That's what we call Vericity. In Canada, you will find some small, let's say, equivalent of eFinancial, not very profitable, I must admit, in Canada right now. I don't think they've developed the scale that, let's say, we have with eFinancial. So for us, you know, it's... You know, it's not something that is exist as is in Canada.
Yes.
There are some small version of that, but not to the same scale.
If this transaction, this U.S. Vericity deal, if this proves to be a successful strategy, are there gonna be opportunities to roll up a sector? Are there other companies of this ilk that you could also roll into a strategy?
Well, in fact, I would say that organic growth is probably be the most, the best way to, to, to grow that business. Because one of the constraint of that business is really the manpower on contact center. So we're gonna grow the contact center across the, the, the whole U.S. much more than, than they are right now, so that's a constraint that they're having. So we're gonna do it smoothly over time. Obviously, we wanna do it, properly. But there are some constraints right now in their growth that we're going to remove. So we see much more opportunity on the organic growth than on the, than on the, on the acquisition side.
So let's focus now on U.S. Dealer Services. This came in with a lot of... I think there was some excitement on U.S. Dealer Services. I felt it, I think the company felt it. And then, of course, COVID hit, a lot of things changed, made it less... The timing wasn't perfect. We all know that. So let's talk about what are some of the signs today that we have turned the corner? And I appreciate you're gonna be cautious on this one. It seems to be your nature. As a former chief actuary, I'm not surprised you're gonna take a cautious approach here. But talk about what is sort of-... inflecting to the positive in the U.S. Dealer Services?
Okay, so to me, the way I look at it is that, obviously, like you said to me, the macro environment has not been favorable. Bad timing, but, you know, we had no control on that.
Yeah.
So I look at what we have control, and I look at what we don't have control. What we do have control is, first and foremost, the expense side, and we've made some changes recently. I mean, we've invested, as you know, in the, we call it Apex Project, but it's really about consolidation of the back office. And we've—it's over, and we are benefiting. We've made some changes in terms of eliminating some position in that business. So we're going to see some benefit going forward. So that's the expense side where we are focusing on. And I believe we can do more, okay? I'll tell you this. So that's one side. The other side is about the revenue, and I mean, we have, let's say, put even more energy in trying to gain new accounts.
We've been quite successful because what we do measure is the, let's say, the number of accounts that we win versus the ones that we lose in terms of expected, let's say, revenue. And we've been. It's over one. I mean, if you take the ratio of that, it's on top. It's we want to be above one, obviously. You want more wins than what you lose. And so that's what when you see the increase in revenue in the first quarter of this year, it's because last year, I mean, we are monitoring that, we have had more gains than loss.
That's the part that I see the positive, because at the end of the day, I say that to my people all the time, "There's a lot of problem you can solve when sales are going up.
Sure.
So that's, so that's the second thing. So that's what we can control. The other thing that we cannot control, obviously, we cannot, but I see some positive, like interest rates. I mean, in Canada, it's going down. In the U.S., still not the case. The economy seems to be hotter there, but at some point, you know, the rates will go down. We see already some positive in terms of car sales in the U.S. So I see a bit, some of the constraints are being removed on the macroeconomic environment. So at the end of the day, I would believe that there is more tailwind at this point. I mean, try to be cautious, as you said, but have we turned a corner, as you have mentioned it?
I would like to see a couple of quarters of still a good results before we say we turned the corner.
Now, remind us of the products that are sold in that U.S. Dealer Services business and the dynamics, like the demand for that product. Is it starting to improve somewhat?
Yeah, the products are more... There are two types of products that we sell there. It's the extended warranty product and some other, let's say, ancillary product. Protection, you know, on rims and, you know, tires and stuff like that, appearance. So those are the products. It's really to protect the, you know, the material, the car, the mechanical. And so, one thing to understand also in the U.S. is that most of the business is fee business. Because the dealers in the U.S., for the most part, 75%-ish, they want to keep the risks because it's profitable.
I mean, if we wish, we could keep the risk and have the underwriting risk, but in the U.S. environment, the dealers, for the most part, keep the risk. So we get a fee business, and, you know, the key is really to grow the business because then the fees are obviously higher. So that's pretty much the dynamic in the U.S.
I see. And now, there was a moment there when some of those sales, there was a time there when those sales seemed rather constrained. Has that somewhat improved as well, like the demand for those aftermarket warranties?
What we've seen last year is a decrease in what I call the attachment rate.
Mm.
So, it's across the board. I mean, if you listen to the conference call of the businesses in the U.S. that are public companies that are in that business, they've mentioned it, the attachment rate. So the number of F&I products per car has moved down because of affordability of clients. We haven't seen a full recovery. I see some positive right now, but we are still far from, let's say, where we were before interest rates went up. So, there has to be some decrease in interest rate before we see the attachment rate moving up again.
Let's talk about some other business lines now. The one I want to focus on is individual insurance in Canada, a super important product for Industrial Alliance, a big player there. It's always driven profitability for this business over the long term. Can we talk about what some of the sales trends are there in individual insurance in Canada?
Yes, I'm glad you asked the question because it's a huge portion of our profitability in Canada. The Individual Insurance is really the core business of iA, and we are number one in number of policies sold. I mean, my KPI in that business is really our market share, which turns around 25%-ish. Let's say, I think it's 27%, the last number I saw. So more than one out of four insurance policies in Canada is sold by iA. We are in the mass market. I mean, we are in the, you know, smaller amount of face amount and premium per policy, and we like it. This is our niche business. It's on the high end, it's much more competitive. The profit margin is not as high.
So we like to be in that market, and the reason why we have so much success, and we saw this through the pandemic, is because of a couple of things. The first one is really the distribution. We are a distribution shop, and we've got the relationships with all the spectrum of distributors, from the most loyal to the most independent. I mean, loyal being the career network. We've got 2,800 people that are fully, you know, selling for iA, and we've got all the independents, including the one we own, PPI. So that's a really key. I mean, there's only one...
If you ask me what's the biggest strength of iA, it's really the relationship we built over the years with distributors, that is, that with good products, good digital tools, good service, I mean, the combination of that, and the fact that we are in the mass market, it makes us different from the others, and that it has made up our success. So in all, all in all, we sell tons of policies, small policies to Canadians, and it's really like a, we're less volatile in terms of number of policies we sell because it's really smaller policies. And you don't need to be number one in pricing when you sell smaller policies, because it's really the relationship with the distributors that is key.
And if it costs you $2 per month more, I mean, people don't really shop for $2 more in a month on a life insurance policy.
Now, would I be right in suggesting that momentum in that business has improved recently?
Yeah. Oh, yeah. I'm very, very pleased of where we are. Our career network is fantastic. In terms of the MGAs as well, we've developed a relationship with, I would say, more dedicated MGAs. So because it's, it's a bit the same as the wealth management business. There's a component of our business that is being sold by more dedicated distribution. Very stable. I mean, boring is nice, you know? It's like increasing year after year. You sell more because you have more distributors, and we are recruiting distributors. And then you've got the most independent, and on those one, it's good to have them because you need to be on your toes, you know, have a good pricing and develop the relationship. They are demanding.
So we see, we have all our eyes on all the markets. That's the key. And we know if for some reason we become less competitive in a product, we see it immediately on the independent space, and then we can adjust.
Let's spend a few minutes on wealth management now, another very important part of this business. The dominance you have or the strength you have in individual life insurance is also apparent in wealth management, particularly in segregated funds, less so in mutual funds. So maybe talk about those two separately, how those markets are evolving and the trends there.
Yep. Okay, so you're right to say that they are quite different. The seg fund business. It's different because of the licensing. The distributors that sell seg fund are the insurance licensed people, the same that sell life insurance, critical illness. So as much as we have dedicated distributors and all the spectrum of distribution on the life side, they're selling seg funds, big time. So we are piggybacking on the relationship, and they like what we have. So that's just the seg fund part, and we're number one in Canada. We've been number one since 2015, if I recall. Actually, we are the market in the seg fund business.
This, on the mutual fund side, the way I would look at it in wealth management, we've got distribution and manufacturing, and I would say, roughly two-thirds of our profit is distribution. So to me, the most important part of the wealth management on the mutual fund side is distribution. So what is key there is recruiting, you know, getting more asset under administration. Yes, the market has helped this year. It helps profit as well, I mean, as it grows. But we've had successful results in recruiting year after year. We have a great team there. So that's on the distribution side. On the manufacturing side, well, guess what? Part of it is more stable because it comes from affiliated distribution, the ones that we own, like Investia.
There's a part that is obviously volatile because we are in the, you know, independent distribution, and that's why we see that whenever the market is not favorable, unlike it was not recently, our net sales are moving down because of the independent part. But as the independent part overall for the market is going to shift, we're gonna see improvement there. So I would say that there's more tailwind also on that side.
So let's piece this together. We've got a couple minutes left. We've got a company that has superior book value growth over the long term, producing excess capital, sitting on a good amount of excess capital, producing excess capital, a willingness to use it for buybacks, momentum in their key businesses, even a possible, with a guarded optimism, possible turnaround in the U.S. Dealer Services, but the stock's not behaving like that. I have a theory on what's missing. Do you have a theory on what's missing, the missing piece?
My theory is that what is missing at this point is a couple of good quarters for the market to realize, you know, that we can turn the table. We've done that in the past, okay? If you look at the history of this company, I've seen quarters where there are some businesses that were struggling, you know, a bit, like Group Insurance at some point, iA Auto & Home at some point. We've always fixed what was, let's say, wrong in our businesses or what we did not work as well. We are putting, I'm telling you, we are putting a lot of attention, a lot of executive attention on areas where it's more difficult right now, still growing the other businesses.
So to me, it's a matter of delivering consistent, you know, good surprise to the market, and I feel confident about it. I mean, to me, it's been unfortunate that the dealer business, the macroeconomic, has been unfavorable. The timing of the purchase, the fact that the interest rate went up, which basically decreased the whole business, not only us. It was not only iA specific, it was the whole business. So to me, couple of good quarters, like we did the last quarter, and I believe that the market will recognize that our business model is very strong.
You nailed it. That's essentially what the market needs to see. We need to trust the consistency of the result again. That's what's missing in the multiple. Anyway, Denis, I appreciate you taking the time, being so candid with us on all matters. Thank you, everybody, for joining us. Have a good afternoon.
Okay, you're welcome.
Thank you.