Greetings, and welcome to the iA Financial Group second 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 one followed by 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, July 28, 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 2022 second quarter conference call. All our Q2 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'll start by introducing everyone attending on behalf of iA. First, Jacques Potvin, Chief Actuary and CFO. Mike Stickney, Chief Growth Officer and responsible, among other things, for 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. Eric Jobin, responsible of our group businesses. Earlier today, we released our second quarter results. These are very good results, with core earnings above guidance, positive core experience, continued sales momentum, and strong organic capital generation. As we move forward to transition to IFRS 9 and IFRS 17, our outlook remains positive, even more so than at the beginning of the year.
Indeed, based on preliminary estimates, the impacts of the macroeconomic variation of the first six months of the year, including rising interest rates, would be favorable for iA under the new accounting regime. More specifically, as Jacques will explain in the next few minutes, while we expect a transition, at transition, a significant increase in the solvency ratio and a nearly neutral impact on the book value, the impact of IFRS 17 on book value at June 30, 2022, would have been favorable. Move to slide seven for some comments on Q2 key financial metrics. We're reporting core EPS of CAD 2.37 for the second quarter. This result is just above the guidance and is largely due to good EPIF growth, combined with positive core experience.
As for core ROE over the last 12 months at 14.1%, it confirms our solid profitability, as it is slightly above the middle of our target range of 13%-15%. Our financial position is robust, as evidenced by our solvency ratio of 130%. This is the result of our sound and prudent management and our long-term vision. Noteworthy is our strong organic capital generation of approximately CAD 160 million during the second quarter. Organic capital generation is an important metric that takes into account both profitability and the impact of risk management on capital requirements. As such, it will continue to be a key measure of our performance under the new accounting regime.
Our strong capital position allows us to focus on growing the business, moving forward thoughtfully and confidently with the execution of our digital transformation and growth strategy. This is all the more important when the macroeconomic environment is volatile as it is this year. In some respects, this volatility can be good for us. For example, among the macro volatility factors in the first half of the year was the rise in interest rates, particularly long-term rates, which has a positive impact on our long-term value. On another note, I would like to comment on employee experience, as in today's environment it is more than ever a key strategic focus for iA to attract and retain talent. Our strong commitment to our employees has always been rooted in iA's values.
We recognize the importance of employee well-being through initiatives such as flexible work model, allowing employees to choose the workplace that will allow them to be the most effective while achieving a better work-life balance. We continually strive to provide a first-class employee experience that foster both professional development and fulfillment. In conclusion, in addition to the good results disclosed this morning, we're pleased to announce an 8% increase in the dividend paid to common shareholders. This dividend increase, together with our active buyback program, demonstrate our commitment to returning value to our shareholders. 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 Q2 results as well as an update on the IFRS 17 transition. Mike.
Thank you, Denis, and good afternoon, everyone. Our good sales momentum continued in Q2, particularly in Individual Insurance in Canada, where sales were again very strong. The Wealth Management sector, supported by Segregated Funds sales, recorded net inflows amidst declining financial markets. Also, sales in both our Dealer Services divisions outpaced vehicle sales and demonstrated resiliency, especially in Canada, despite the persisting shortage of new and used vehicles. Now please refer to slide 10 as I will comment on business growth in the second quarter. Premiums and deposits totaled more than CAD 3.6 billion in Q2, a good result to which all lines of business contributed, showing year-over-year growth, with the exception of the individual Wealth Management sector where the industry is facing a difficult environment.
Assets under management and administration of CAD 194 billion at the end of the quarter, compared to CAD 211 billion a year earlier due to the unfavorable market conditions and rising interest rates. Growth of AUA and AUM for the remainder of the year may continue to be tempered by the volatile macroeconomic conditions. In individual insurance, second quarter sales totaled CAD 98 million, building on the strong momentum of recent quarters and resulting in a sizable increase of 34% year-over-year. Once more, growth was supported by the strength of all distribution networks, our superior digital tools, and our comprehensive range of products, including our PAR products. In addition to these key growth drivers, the increase in average premiums for policies sold also contributed to the significant increase over last year.
Note that according to the latest industry data, iA remains the leader in terms of number of individual life policies issued in Canada. Turning to slide 11 for individual wealth management, the company continued to rank first for gross and net segregated fund sales, solidifying its position in the industry. Gross sales amounted to CAD 924 million, and net fund inflows of CAD 390 million were recorded despite a challenging context for the industry as a whole. In this environment, mutual funds results were unfavorably impacted by gross sales of CAD 375 million and net outflows of CAD 237 million recorded for the quarter. Lastly, guaranteed products amounted to CAD 230 million, up 5% year-over-year.
In Group Savings and Retirement, total sales of CAD 695 million in Q2 were up 3% year-over-year, driven by the growth of both Accumulation Products and Insured Annuities. Moving to slide 12, Group Insurance employee plans premiums increased by 11% year-over-year, primarily due to good retention of in-force business. As for sales during the second quarter, they amounted to CAD 12 million. In Dealer Services Canada, sales of CAD 355 million were up 14% from a year earlier, driven by P&C insurance sales and car loan originations. This is a strong performance, especially given the vehicle inventory shortages mentioned earlier. In the Special Markets division, the pickup of travel insurance sales continued and resulted in a significant increase of 57% over the same period last year.
As for iA Auto and Home, our P&C affiliate, direct written premiums continued to grow steadily and increased by 4% year-over-year. Now to slide 13 to comment on U.S. operations. Good sales in Individual Insurance of $38 million were up 3% year-over-year, mainly from the growth in the family and government worksite markets. In the Dealer Services division of our U.S. Operations, sales amounted to $266 million compared to a very strong result of $285 million for Q2 2021. 7% decrease in sales compares favorably to the new and used light vehicle sales, which were down 17% over the same period. Overall, we are pleased with the sales results for Q2, which ends the first half of 2022 with some areas of strong growth and other areas showing resiliency.
I will now turn it over to Jacques to comment on earnings, capital strength and IFRS 17.
Thank you, Mike, and good afternoon, everyone. Today we are quite happy to report strong second quarter results and positive core experience. This, along with solid expected profit growth, resulted in core EPS being above guidance as shown on slide 15. As for core EPS for the first half of the year, it is well within guidance. Core ROE for the last twelve months is just above the middle of the guidance, and all other metrics are in line with or better than guidance. In this context, we remain confident of achieving our 2022 guidance, but given the low level of the market as of June 30 and their impact on wealth management profitability, we now expect 2022 core EPS to be in the lower half of the target range. Slide 16 reconciles core earnings with reported earnings.
Non-core items adjusted for Q2 reported earnings include charges related to recent acquisitions which were lower than expected, in addition to CAD 0.31 for unfavorable market-related impact. These charges were offset in large part by the exclusion of a CAD 0.25 tax gain for prior years, resulting in strong core EPS of CAD 2.37 for Q2. Slide 17 presents the source of earnings for the second quarter on a core basis. Expected profit was 11% higher than a year ago on a reported basis, and 9% higher on a core basis. Core experience was positive, with a CAD 0.05 gain during the quarter from favorable policyholder experience, particularly for insurance in Canada, and in the US, and for Group Insurance. The impact of new business was also favorable, resulting in a gain of CAD 0.08.
As guided on the Q1 earnings call, we factor into the Q2 strain calculation a portion of the interest rate increase that has occurred since the beginning of the year to reflect our view that some of this increase should persist through the end of the year. Higher sales than expected also contribute to this gain. Income on capital was near expectations during the quarter, as higher investment income was offset by higher financing costs and unfavorable experience at iA Auto and Home. The latter can be explained in part by the severe storm in May in Quebec. Finally, on a core basis, the tax charge was a little bit higher than expected. Higher taxation from the company's multinational insurer status more than offset the favorable impact of our tax position refinement in 2022.
As shown on slide 18, mortality experience during the second quarter was better than expected in the U.S. and higher than expected in Canada. The experience rating Canada was recognized in the result as an experience loss, whereas the excess provision in the U.S. is carried forward. This favorable impact was therefore not recognized in the Q2 result. As for the additional protection for policyholder behavior, it remains intact. Moving to slide 19. Our solvency ratio stands strong and comfortably above our target range at 130%. The solvency ratio continues to be supported by ongoing organic capital generation, which totaled CAD 160 million in the second quarter. This strong capital generation adds to the company's financial strength and leads to future value creation.
Our solid solvency ratio, combined with the different metrics present on slide 20, such as our leverage ratio below 24%, are indicative of our robust and flexible overall financial position. As for our NCIB program, 1.2 million shares were redeemed and canceled during the second quarter. Our capital flexibility allows us to keep buying back shares and thereby return value to our shareholders, in addition to the increase in the dividend to common shareholders announced today. Now, please refer to slide 21 for an update on the transition to IFRS 9 and 17. As the company transitioned to these new standards, it continues to be managed with a long-term vision to protect the strength and quality of the balance sheet.
Among other things, under IFRS 4, the company has kept additional protections in the reserving process, has provisioned prudently for financial guarantees, and has positioned assumptions to limit gains on new business. This sound approach put us in a favorable position at transition, and today we are pleased to reinforce our positive outlook for the transition to IFRS 9 and IFRS 17. Based on information available today, we still estimate a near neutral impact at transition to our book value. In addition, we expect that our CSM at transition will be greater than CAD 5 billion. Furthermore, our solvency ratio at transition should increase significantly by more than 20 percentage points, having a very favorable impact on the level of capital available for deployment.
As for the most important profitability metrics shown on the slide, based on our preliminary estimates and after two quarters in 2022, we still anticipate near neutral to favorable impacts. I will conclude by reiterating that we are satisfied with the result after six months, with both core EPS and core ROE well within guidance. The level of organic capital generation is strong, just like our balance sheet and our capital position. Therefore, we have a stable foundation to increase our dividend to common shareholders and to pursue our growth strategy in this environment of high macroeconomic variations. This completes my remarks. Operator, we will now take questions.
Thank you. If you would like to register a question, please press the one four on your telephone. You will hear a three-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. Once again, to register a question, please press the one four on your telephone. One moment please for the first question. Our first question comes from Meny Grauman with Scotiabank. Please proceed.
Hi, good afternoon. Just a question on capital available for deployment. Despite the fact that you're generating a good amount of excess capital, it's continuing to go down CAD 550 million at the end of this quarter with CAD 700 million in Q1. If you go back a year, CAD 950 million. I'm just wondering what's driving that, and if we look towards the rest of the year, could that still go lower? Then, you know, as a follow-up under IFRS 17, you're talking about or you mentioned very favorable impact on capital available for deployment. What could that look like once we transition?
Manny, Jacques speaking here. 2022 is a transition year for us. You know that we have decided to get exposed to IRR, moving our investment strategy to prepare for IFRS 17 because under that future regime, we will improve the value to shareholder, we will reduce the volatility of our earnings, as well as reduce the capital required to support the business. This is a transition year. What you've seen in the reduction of capital available for deployment this year is really because of that, the rising interest rates has an impact, negative impact. If you look at the solvency ratio, it's 7% since the beginning of the year that has reduced our capital ratio. This is really because of that.
Like you mentioned, under IFRS 17, it will be a completely different ballgame because our solvency ratio will increase. There's another element, two other elements considered as well for deployment of capital under IFRS 17. First one is, presently in the current regime, is the core ratio. That is our main constraint. Our core ratio will improve significantly also under IFRS 17. This is important. However, given the fact that we expect our earnings to be more volatile, we will have a higher target operating ratio. All in all, on a net basis, the capital for deployment will increase significantly next year.
Are you able to give us a range in terms of, you know, relative to the CAD 550 that you reported for the end of Q2? Could that be double, or how should we think about that?
I would say much, much more than that actually. Maybe just a rough estimate you can do. You can use that, we mentioned the 20% solvency ratio, you multiply that by CAD 70 million, so it give CAD 1.4 billion. So this is just an approximation. Like we said, we're still working with estimate. At this point, we're confident into our estimate, though, to be able to give that, but it would be significant.
Thank you.
Our next question comes from Tom MacKinnon with BMO Capital Markets. Please proceed.
Yeah, thanks very much. Good afternoon. The strain in the second quarter was better, and you cite interest rates and volume as contributing to that. If we looked at, let's say if interest rates were unchanged in the third quarter versus what they were in the second quarter, and your individual insurance sales volumes and mix was identical in the third quarter as it was in the second quarter, would we expect strain to be the same in the third quarter as it was in the second quarter?
Hello, Tom. Jacques speaking. Yes. Yes, we can. Like I said on the Q1 call, I mentioned that I will recognize that high interest rate. Actually, for the strain calculation, there's a limit to the provision under the conservatism I can get into my IFRS 4 reserve, and that high interest rate is just improving the profit of our business. For sure that we have not recognized it in Q1. Q2 is really the impact of size of Q2, so for Q3 and Q4, with that rate of interest, you can expect similar impact.
Okay, thanks. Just with respect to your comments about guidance, was that for the second half of 2022 that you were talking about being in the lower half of the target range? I was unclear as to what you said. I don't think you would talk about prior results. Is it just the second half of 2022 that you would expect to be at the lower end of the target range? I was really unclear on that.
Okay. Jacques speaking again. Yes, that was what I was referring to. Maybe to give some color, there are elements that are positive and that are negative. When I look at that, this is my opinion, okay? I don't have any crystal ball like any of us. But the thing is that, if you look on the positive side, and you look at the group insurance, actually the dealer business, we have that benefit because of the value of used car. As long as there will be that inventory shortage, we could expect that used car value will continue to be high. We'll expect benefit from that.
We just spoke in your first question about the strain that we expect to be positive. When I look on the negative side, for sure that assets under management in the wealth division will be on the low side, as well as the dealer business in U.S. because of the inventory. We are making our money with administrative fee there, so that's a direct impact. The third one is expenses where we expect them to be slightly negative in Q3, Q4.
Okay, thanks for that.
Our next question comes from Scott Chan with Canaccord Genuity. Please proceed.
Good afternoon. I'll start with Sean, maybe have a question for Jacques after. Sean, just on the wealth management side, obviously a difficult and challenging market in Q2. The other thing you disclosed, the wealth management sales were up 5% year-over-year. Maybe if you can give us an update just on your wealth management segment, net-net advisors in terms of retention improvement and any progress on that AUA to AUM conversion on your previous target.
Yeah. Thanks, Scott. It yeah, obviously started as a tough year. Our strategy continues. You know, the advisory experience has been the focus, and we have a number of sort of tech projects, I guess, that we're really focused on to drive that experience between the client and the advisor. We've executing on a couple of those so far this year, so getting some good feedback from advisors. Retention on the private wealth side in particular has been very strong, which is good, something positive. Recruiting started slow for private wealth, but it's been good on the MFDA side. The AUA to AUM strategy continues. The affiliates in particular in these tough times are definitely outperforming the outside advisors.
It's a tough year, but the teams I think is executing on the plan.
Any gaps in your product lineup on the asset management side that you ought to fill?
Nothing, nothing immediate. No, there are a couple we're exploring, but with the current markets and some of the stuff on the, we're not launching anything immediately.
Okay. Jacques, just to follow up on the solvency ratio, the greater than 20 percentage points, is that all due to the capital deployment comment you made in terms of being much bigger or is there something else involved in that as well?
Yeah. Actually, the capital ratio at transition, there will be different elements, but the two main elements, one is really the macro protection that we've built holding for years. Actually, the transition is on January 1, 2022. If you look at our Q4 slide deck, you will see that the macro protection were worth 11% on the solvency ratio. The other aspect as well is that the regulator get rid of the scalar. The scalar is really a 5% that is applied to the solvency buffer. It has to be removed. Those two by themselves will explain 18% of the increase in ratio. Also, we were provisioning like it's written on the IFRS 17 slide.
We had the prudent provision for future guaranteed future financial guarantees, and those reserves under IFRS 17 will be a little bit lower. This is another element that helps in the solvency ratio.
Great. Thank you.
Our next question comes from Doug Young with Desjardins Capital Markets. Please proceed.
Hi. Good afternoon, Jacques. Can I just go back to that comment on the LICAT benefit? I think you, sorry, I may have missed this, but a good chunk of the LICAT increase, and this ties into the 5 billion CSM as well. How much of the LICAT increase in the 5 billion CSM relates to that market protection and partially relates to the equity market protection for equities backing liabilities? Because it does feel or it does seem like in your disclosure that, you know, since the end of Q4 of last year to this quarter, that protection has come down quite a bit as a result of the equity market decline. I'm just trying to kind of piece a little of that together.
Yeah, that's a good observation, Doug, on that. What is really happening, though, at transition, you can use a number I just provided in the answer I gave to Scott. When you look since the beginning of the year, what is happening, there are two elements. You're right that the stock market protection is reducing for NFI, but at the same time, the long-term interest rates are rising big time. This is certainly helping on the position with the reserve calculator using IFRS 17. This is the element that is helping the ratio during 2022. That's why we're really confident that the ratio is improving. Our estimate is really that ratio is improving in 2022 under the IFRS 17 basis.
The equity market side is actually a negative, but the interest rate side is becoming quite a bit of a positive, as you know, once the adoption goes through. That's the way to think about this. If it continues to go in that direction, then, you know, net-net, you're still comfortable with where-
Right.
What you're suggesting.
Exactly. In fact, the correlation, the ratio is positively correlated with rising long-term interest rate and positive market movement. That's really what is simpler to remember.
Yeah. Okay. Just on the CAD 5 billion CSM at transition, I mean, I just, you know, from the comments I've heard, it just seems it's a big number. Can you maybe give a little bit or unpack, you know, where this is sitting right now? Can you give a little bit more of disclosure around that?
I may give some, but it would be easier to provide more details when we'll do an investor event. We're planning to do something in November and to provide with the slides and more information there. What I can say about the CSM is we've always mentioned over the years, over the quarter that we are very confident and very pleased with the profitability of our different products. Also, CSM is supporting economic risks. It's supporting non-attributable expenses, operational risk and also profit. When you look at our portfolio, I would say, we have a huge legacy long-term guaranteed product in Industrial Life. That business is very profitable, is capital-intensive business, so we have great profit to support that business. That contribute a lot to that CAD 5 billion.
Maybe if I could just ask another way, how much of that CAD 5 billion is a result of you not taking new business gains over the years and having that conservatism built into your reserves? Is that 75%? Is that the vast majority of that CAD 5 billion? Just, I don't know if you can give a sense of that.
Yeah. Actually, it's really depends on the angle you want to look at it. What you're referring to is really the impact of not having taken gain on new sales is really that we have no hit on book value at transition. Okay, this is the consequence. It's a very positive consequence because we've not taken those profits in the past. The CSM is really a calculation in regard to what is the profit. We use the cost of capital to establish our risk adjustment. We use a market valuation to establish the CSM, so it's really a different construct. My answer is really based on the construct we have to do. It's not because we didn't take strain that we have a big CSM. It's really CSM because we apply IFRS 17 standard. That's the reason why we have that.
Okay. Just one last one. Just on the LICAT, post-IFRS adoption, can you give specifically where your range is gonna go to? Like, I know where your target range is now, but can you give like, where is that range gonna go to next year?
Not yet. I cannot provide that. I really expect to be able to give more color in November on that.
Okay. Thank you.
Our next question comes from Paul Holden with CIBC World Markets. Please proceed.
Yeah. Thanks. Good afternoon. With the number Jacques provided on the additional CAD 1.4 billion of estimated capital, does that prompt you at all to rethink or reimagine M&A strategy, i.e., does it open up new opportunities for you wouldn't have considered in the past, simply because of the size?
It's Denis here. Thank you, Paul, for the question. It's a very relevant question. Obviously, I mean, the IFRS 17 transition is something that is pretty new. We're discussing internally exactly the question that you are bringing to the table because this is gonna be a very centerpiece to our, you know, plan that we are trying to build right now. Certainly, we have, you know, ambition going forward. We have also areas where we believe where it is that we want to invest that excess capital. At the end of the day, you know, we're putting more attention to acquisition, obviously.
At the end of the day, you know, if we are not able to grow organically or by acquisition to the extent that we want, at some point, you know, we shareholders will get the money back to some extent. Our role here is really to grow the company, and we have specific areas where we want to grow.
Got it. Thank you. That's helpful. Second question, related to that. What we've heard from other life insurers is that the reg capital ratio under IFRS 17 should be less volatile. The reason I ask is just that would give me more confidence that that CAD 1.4 billion estimate between now and actual transition is unlikely to change materially. Would you share a similar view?
Okay. It's Jacques. I will answer that one. Actually, it's all relative. What they've said is compared to what they are living through under the current regime. Our comment has always been that we expect our solvency ratio to be more volatile than what we have experienced over the past few years. I will. The reason is simple. We have had market protections that have absorbed volatility under the current regime, and you can see the evolution of that absorption, I will use as a term, by looking at the number we're providing every quarter at every conference call. This won't be there, those protections won't be there.
However, at the same time, we are implementing an investment strategy that will reduce our economic risk, our accounting risk, and it will also help in the ratio. Bottom line, net-net, we will have a higher volatility, and our target operating ratio will re-increase because of that. I can tell you that the 1.4 is very strong. If I'm telling you today that number is because I strongly believe in it, even if we're working with estimate.
Got it. Okay. Yeah, that's helpful. Last question from me is just on Individual Insurance. It was a bit of a step function, quarter-over-quarter, in expected profit on in force. Just wondering if there are particular factors that explain that quarter-over-quarter change in sort of the annualized growth rate.
Yeah, it's a good observation. Actually, it was in Q1. It was a seasonality factor. Actually, it's an improvement in our modeling. There are some bonuses on the compensation side that we are paying in Q1. The actuarial model, the model is split by quarter, so that's why we have adjusted the expected profit for that. There are a few other things. You expect business to grow quarter-over-quarter as well. Overall for the year, we're expecting the life to be around 7%, so pretty close to what we have in Q2. Q2 is more reasonable, but that's really what happens during that year quarterly guidance.
Got it. That's helpful. That's it from me. Thank you.
Our next question comes from Lemar Persaud with Cormark Securities. Please proceed.
Thanks. My first question is probably for Jacques. Just, maybe I'm misunderstanding one of your earlier answers, but it sounds like to establish the CAD 5 billion CSM, it's not coming out of equity because you didn't take the gains in the past. If that's the case, and it's not coming out of equity, hence the near neutral impact on book value, then where is it coming out of?
Okay, sorry for that. I'm trying to be as concise as possible, but it's a tough one. Actually, the CSM is calculated under the IFRS 17, with the IFRS 17 standard. When we migrate from IFRS 4 to IFRS 17, there is an impact on book value, EPS, and all that kind of stuff. When we say that the past equity protection, okay, our macro protection, they are helping to finance the CSM. Actually what we're saying is that at transition, we don't have a hit on book value before, because under IFRS 4, we were conservative with that macro protection. That's really what we mean by that. I don't want people to understand that the CSM has been calculated to be equal, and it's the addition of that margin.
We have followed the IFRS 17 rules. We have calculated according to the standard. I just want to make sure that it's two distinct elements. Maybe I'm too technical, but I thought it was important to mention.
Okay, thanks. Just on the CSM, I appreciate the CAD 5 billion figure at transition, but wondering if you could talk about how that's, if you were to freeze time, how would that CAD 5 billion kind of amortize into income?
Okay, it really depends on the business it's supporting. You can expect that for insurance, the portion that is related to life insurance will be amortized over, actually over the life of the different businesses, so according to the standard. That is the way it's calculated. For shorter line of business, the CSM will be amortized over the shorter period.
Yeah, that makes sense. There's no estimate then, like, if you were to freeze time of that CAD 5 billion could come in, like maybe CAD 500 million a year sort of thing. That's probably enough to boil it down to.
It's Denis here. I think what you're trying to do, and maybe I'm wrong here, but to try to model or rationalize the amortization of the CSM and, you know, how it translates into profit over time. Keep in mind that the CSM is only part of the future profitability of our organization. It's a good indicator. The reason why we are showing the CSM today is because we wanted you, analysts and investors to realize that the size of the CSM is quite significant based on the size of the organization. That's the reason why we are disclosing it today. Keep in mind that it's only part of future profitability.
Okay. Thank you.
Our next question comes from Gabriel Dechaine with National Bank Financial. Please proceed.
Hey, good afternoon. I just wanna go, you know, very high level, stupid even in terms of how we kind of think about the CSM under the current accounting, the liability, the policyholder liability, the best estimate, and then a PFAD. Under IFRS 17, we'll have best estimate, this risk adjustment thing, and a CSM. You know, it's just a change of label, basically. You had, and you know, the proportion of the liability that's future profits, which was PFAD before, just has different labels on it, but it's basically the same proportion. Is that anywhere close to reality?
Yeah, actually, you're right, Gabriel. Okay, you have best estimate assumption, you have risk adjustment for any actuarial decrement. After that, everything goes to CSM. You are not allowed to front-end profit under IFRS 17, so you put the rest on, in the CSM. That CSM will, like Denis Ricard mentioned, flow through profit as well as risk adjustment down the road. Those will be the two source of profit of expected profit.
Okay. You know, the proportions of expected future profit of the total liability is not changing that much, is it?
No, actually, we've mentioned it over the current quarter. Actually, we said this on the EPS level. It's near neutral, favorable, and all that kind of stuff. It's all in considering CSM release, all that kind of stuff, the investment gain as well that has to be factored into the total profit of the company. We have also considered the other businesses that are not under IFRS 17.
Okay, perfect. Good enough for me. Now as far as the, you know, just looking at the numbers this quarter, so I understand them a bit better, expected profit was up 11%. In the explanations, one of the explanations was the impact of high net fund entries in recent quarters is that just, I guess you had strong inflows in AUM growth in prior quarters, so you kind of pre-programmed the expected profit, but then that gets netted out in the experience losses. Is that, so maybe the 11% expected profit growth is a little bit of a, you know, not really 11% if you factor in the experience losses by the market performance?
Actually, when you look at the expected profit on in force, you have to consider it's year-over-year, we're comparing Q2 2022 over Q2 2021. If you recall, last year was simply wonderful in regards of our net sales.
Yeah.
in both mutual fund and seg funds division. This is part of the growth in that. I would encourage you to look at Q1 expected profit on that division. It was around 16, 17%, if I recall well. If you look at it, the fact that the market has decreased in Q1, the AUM has decreased, so that's why the growth. It's still a growth because year-over-year, last year was so great, but it's a lower growth than in the first quarter because of the negative-
Okay.
market.
Okay. Last one, just, I guess it was very helpful giving the, you know, what you're seeing as positive and negative drivers for EPS growth, as we move into the second half. On the negative side, I hate to be the heavy downer here, but you didn't, unless I missed it, you didn't have expense inflation listed, and then you didn't list, you know, P&C business, because, you know, obviously there's a bit of shortfall, but I guess in reverse order, the P&C, you're treating this quarter's shortfall as a bit of a one-off. You know, expense inflation, what's going on there? Because I know that was topical in Q1.
Gabriel, I mentioned expense as being a source of probably negative.
Okay.
I would say pressure on the EPS for Q3, Q4, so current inflation is part of that. About
Okay.
iA Auto and Home, there will be the expense side, because we're starting a digital transformation there to improve customer experience. This will be factored in there. About the experience of iA Auto and Home, if you look at the claim experience, there was a big storm in Quebec during Q2. We expect the remainder of the year to be pretty much in line with that. Our best estimate is still the guidance actually for this one.
Okay. Thank you. That's all for me.
Our next question comes from Darko Mihelic with RBC Capital Markets. Please proceed.
Hi. Thank you. My questions are all related to IFRS 17, Jacques, so bear with me. I guess the first question is, you decided to tell us the contractual service margin. Why did you opt not to tell us about the risk adjustment?
Nobody are speaking about risk adjustment, but actually, nobody has asked the question, so this is a good question, Darko. Overall, they are pretty much in line with the, I would say, the PFAD we already have over the actuarial decrement. What we're providing is really when we say that on the core ROE, the core EPS level, the core EPS growth is favorable, it's factoring in everything that we expect as being released from CSM investment return, risk adjustment, growth of the business. For us it was, all in, all in all net-net, and I think that was the best way to convey the message to the market.
It's Denis here. I would add also to that we received comments that the fact that we had some, positive development in terms of the book value at transition, you know, meaning i.e., no real impact. I mean, there were comments that it, you know, it could have been that, you know, the CSM of the organization would be small, and that's that's one of the reason why we are showing it, because that's not the case. I mean, we have a strong CSM, and by the way, the transition has been, has been quite positive development for iA.
Okay. That's fair. I mean, I guess, you know, it harbors a lot of questions though, right? Because the contractual service margin at CAD 5 billion as a proportion of your year-end liabilities is extremely high. It's like 13.7%. I don't think any of the other life insurers will have something similar. You actually mentioned it, Jacques. You said a portion of the CSM is a legacy product.
I think optically, the fear I have is that if you have a legacy proportion of CSM, then the growth of your CSM going forward may be difficult and may in fact, I mean, I don't know, I'll open the door or I'll open the question up and say, is it possible that CAD 5 billion will actually be in runoff or decline over a period of time because you'll have to sell an awful lot of the other products to make up for the CSM that's running off of the legacy block?
Okay, we'll answer it from two angles. The first angle is you can expect our CSM growth to be in a high single digit number. Okay, so for both new sales and for the in-force. We have no worries whatsoever in regard to our capacity to do good business in that industry. This is the first answer. The second part of it about CSM, at the end of the day when we price product, we have to factor in what would be the capital required to support that business, and the profit goes according to the capital that is needed. We are selling more capital-light. We have intentionally diversified our operations to be more capital-light, but I don't mind at all because we're asking less capital to support that business and it's profitable.
At the end of the day, it's pricing for each product that matters here, and that's what we're doing.
Yeah, I just want to add, it's Danny here. I mean, I mentioned it before, but it's very important. CSM is only part of the future profitability in our organization. For example, if we decided to go only in, I'm just saying, you know, distribution business just for the sake of the discussion here, that's not what we want to do. But just for illustration here, I mean, obviously if we don't build the insurance business and, you know, there could be a runoff in the CSM over time, but you know, other businesses would strongly, you know, replace that business and then profitability would come from another source. Keep in mind that the CSM is only for a portion of the business. It is still strong.
We still believe that it's going to go, you know, up significantly over time because we are in the core insurance business, but it's only part of the story. Just keep that in mind.
Okay. Okay. That's fair. Jacques, what do you think of the approach of taking the contractual service margin and the risk adjustment and putting that as a proportion of total liabilities? You know, that would give me a sort of a sense of, I don't know, maybe conservatism, maybe the profitability of the underlying product. Do you think that's an okay ratio?
I think I will prefer really to look at the organic capital generation because in the two metric you mentioned, this is an indication for sure, but you don't factor in what's the cost of capital to support the business. So what's the business behind it? Is it capital intensive or not? When you look at the organic capital generation, you factor in the capital required to support the business, which is really all inclusive. So that's why, that's what we prefer to look at.
Isn't it? I mean, so when I think of a capital intensive business, you know, my spidey sense goes up, right? Because capital intensive might mean risky. Yeah? So, and isn't it possible, for example, somebody's underwriting insurance in another jurisdiction that has a much lower capital requirement, is not as risky, but has a high CSM? So, am I thinking about it incorrectly? Do you think that just because it's capital intensive, it's not necessarily risky?
No. What I wanted to mean here is really that if you price a long-term guaranteed product, okay? You will ask for a great profit, a higher profit than if you price a one-year GIC, which you have less risk. All proportion kept, you will try to get this. For the same ROE, you will have a huge CSM because of the economic risk of that long-term product. That's the only thing I want to convey here as a message is CSM by itself doesn't tell a lot if you don't look at the business behind and the risk behind. There are different businesses we are in. There are different businesses in different country, and the profitability of each businesses could be different. There could be better ROE on certain business.
What you're saying is also true. You can have higher CSM on some businesses that have low capital light because ROE is better. It may happen as well. The message I want to convey is we prefer to look at the whole thing together. It give us a better indication really on the way we use the capital of our shareholder.
Thank you very much for those answers, and I apologize for diving into this, but I look forward to the event in November for sure. Thank you.
Mr. Ricard, there are no further questions at this time.
Okay. Well, thanks a lot. Maybe the message to conclude, I think you realize that, one of the big message today has been, one, that, we've been able to deliver a, an EPS above the target, our target range, and we're very, very pleased with that. We see that, you know, going forward, there's a capability for this organization to really perform. Strong organic capital generation. I think it's a theme that is very important because at the end of the day, you know, capital is king. The last thing I would mention is the IFRS 17, and, I just want to reemphasize, one of the message that we've given here, and, we are seeing that capital is very important.
Well, Jacques mentioned that on a net basis, you know, our preliminary calculation implies an addition CAD 1.4 billion in capital to be deployed. That's net, that's net of the increase in the target LICAT ratio. That's quite an achievement. I think one thing to remember is that we've been telling investors and analysts for years that we manage conservatively the balance sheet of this organization, and today, you really see the result of it with the very positive development under IFRS 17. Because all those conservatism under that new regime has to be, quote, released, unquote, and they are being shown in the book value, they are being shown in our capital, they are being shown in the future earnings of this company.
It's very positive development for iA going forward. At the end of the day, that's why we were very pleased to increase the dividend by 8%, probably more than one would expect, going forward. With that said, thanks to all of you. Bye-bye.
That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.