I'd like to introduce the next guest, Denis Ricard, President and Chief Executive Officer of iA Financial. Thank you for joining us.
You're welcome.
Nice to have you here.
Yeah.
I thought we could maybe start on the first half, just because it was such a really strong performance pretty much across the board, and obviously, some, you know, even more outsized performance in Q2 on the experience gains. Maybe that comes off a bit, but probably a lot of areas that are going to stay strong in the second half. Maybe talk about that dynamic to start with.
Sure
how H2 is sort of shaping up.
Yeah. Obviously, we were very proud of the results of Q2, and in fact, for the full- I mean, so far for the, for half of the year. I would say I call the Q2 results exceptional in a sense that all our sectors really pushed on the same direction, significant experience gains in all the sectors. Usually, you'd find, you know, one sector having some variability on the negative side, and then the others would offset. But this time, it's been quite exceptional because they all went in the same direction. But at the end of the day, probably some of it will stay over the long term. We are executing on our strategy very, very carefully.
I invite those of you who have not attended the February investor event to listen to it. It's online, because we are basically describing the recipe of success of iA, using what we call the iA Way, and we might go into that later on. I might talk about some of the elements, but we are executing on our strategy. We try to be really focused on what we're doing, and so I feel quite confident that it will continue going forward.
Okay. Maybe dovetailing into the ROE, obviously, you're already at that 17% target for 2027.
Yeah
on a trailing 12-month basis. You sort of blew past it in Q2. Any thoughts on that? I'm not gonna try to pin you on a new guidance or anything like that- but I'm sure you're looking at it, thinking, "If we get continued momentum here in most-
Yeah
of our businesses, it's
Yeah, let's not forget that the guidance is 17% plus.
Very good point.
So we probably are working on the plus side right now. Assuming that the macroeconomic environment stays favorable, as it is right now, we feel quite confident that we can generate the type of ROE that we've produced recently. So we're focusing on the plus. Now, let's keep something in mind here. We want to grow as an organization. We have excess capital. We want to deploy that capital. Our last choice of deployment is just to buy back shares, okay? So we are obviously investing in our current businesses organically, but also we're looking at opportunities inorganically.
So, if we are facing a situation where we are looking at a business that is really, let's say, complementary to what we're doing, you know, fits very well in with our strategy, and, we can get it at a price which lead to a, I don't know, 15% ROE, guess what? We'll do it. Okay? We'll do it. So keep in mind that the 17% is a kind of a obviously, what we are currently producing and what it's gonna take for us to grow going forward. So it might be that, at some point, we are investing in an organization with an ROE which I think will make us grow going forward.
So for us, it's really the idea is to grow the business, and that's why we are prudent in saying that it's 17% plus. If we don't find an opportunity that is, let's say, sizable going forward because we're generating so much capital, yes, we will deploy capital by buying back shares going forward, and it might go that the ROE is going a bit higher. But it's not our end game to be at 18, 19, or 20% ROE. It's 17% for us. We believe this is satisfactory for our shareholders.
Okay, maybe talk about... obviously, you're very focused on the ROE. You're also very proud of the historical performance on the book value per share growth. That's been a pretty amazing trajectory versus industry versus your peers, just the broader market. Maybe talk a bit about that dynamic.
Yeah. I mean, we are in a long-term business, and I find that the best indicator of performance in the long term, forget about the stock price for the moment, I mean, internally, is really the book value growth. Because book value growth over time, over a long period, encompasses all the noises that you can hear from one quarter to the other, volatility in the market, adjustments to the reported earnings. When you look at the book value, it includes everything, when you think about that. So yes, you're right. I mean, when I look at historically, and or even over the last year, we've grown it by 9%, which is way above, you know, anything you find in our industry.
But when you look at it on a long-term basis, which is even more important, again, we have grown it much more significantly than the whole industry.
Okay. You touched on the economy. The macroeconomic environment will obviously drive what happens in the second half. Maybe just touch on your thoughts, anything you wanted to point to. Does it sort of, how does it inform your decision-making, and any specific business lines that maybe stand out in a good way or a bad way, given what you see now with the macroeconomic background?
The macroeconomic environment right now is positive because two things: the stock market is pretty good, so it fuels our wealth management business, as an example. It is also very positive on the individual insurance business because some of the asset is invested in the long term in stocks. But we also, let's look also at the interest rates. Long-term interest rates is up. For us, it's good. We benefit from a, let's say, a positive slope of the yield curve, and specifically if the long-term interest rate is going up. So right now, we are in a very, very good spot. This year, I mean, the long-term interest rates in Canada and the U.S. have gone up significantly, and it's been positive for us.
And so your outlook sounds constructive, you know-
Yep.
Currently constructive. Anything you see on the horizon that might concern you a bit more?
Not really. But, I mean, at some point, there's gonna be some fluctuation on a negative side, for example, but I'm not that worried about that. I mean, our risk appetite has been well measured, and our 10%-plus EPS growth is really a long-term objective that we have. So right now we are way higher than the 10%. It might be that if the market tank, for example, there might be a slowdown into that, but we've delivered 12% EPS growth over the last 10 years, even more than our 10%-plus guidance. So it's really a long-term approach that we have.
How about the sales outlook? So obviously, that's gonna be something that jumps around from quarter to quarter. You talked about how book value matters over the long term. I'm guessing same thing with sales. Trailing 12-month basis, it looks a lot smoother. What's working, and why is it working so well? What areas are you maybe looking to improve upon? in terms of your sales flow right now across your business lines?
I think one thing that is very important that supersedes all the details is the fact that we try to, as an organization, to act differently from our peers. I don't like to compete head-on against the other players in the industry, in their market. So, as an example, in general, we target the mass market or the mid-market. So let's take the example of individual insurance. You might not be aware of that, but 28% of insurance policies in Canada is being sold by iA. 28%. We're number one by far. Second is at 10%. So we really are a company that focuses on that specific market, which we believe is more profitable. This is really the iA way, okay?
The target market, but at the same time, develop the distribution in that target market. So we are present in distribution because we have, for the most part, products are being sold by our distributors, individual insurance, seg funds, and et cetera. And so we try to, I would say, grow our distribution reach across Canada using technology as much as possible, because, again, if we sell 250,000 insurance policies in a year, you better have good technology because your costs will be very high. So we are in at the right place in terms of cost, low-cost producer, investing in technology significantly to decrease our cost in a distribution space that serve our target market. And that leads to great sales because we know that, for example, if we increase our Career Network distribution by 10% a year, guess what?
Next year, our sales in that space will be up by 10%. It's kind of automatic. So we are really, really focusing on these elements: technology, distribution, and in our target market, and that leads to higher sales.
Thanks for that color. Maybe switching over to capital, just maybe remind investors of your priority. Well, you kind of already did. You know, buybacks are the least appropriate use of your excess capital. But on the M&A side, RF Capital, a nice little addition, and it's going to be modestly accretive, adds to your wealth capabilities, obviously. Perhaps investors might have thought the U.S. was more so a destination for your excess capital. How do you think about M&A business lines versus geography, and what should
Yeah
what should the expectation be going?
It's always funny because, yes, you're right. When I was meeting investors, I was saying that we focus on the U.S. because we believe there's more opportunities. And guess what? Next announcement is about Canada. Well, we have to be opportunistic also. But the high-level message that I gave to investors is that we are interested in investing inorganically in all sectors that we're in. If there are opportunities in all sectors that we're in, we are looking at it, and we have a pipeline of opportunities that we're looking at. Obviously, we want to stay disciplined. We want to respect our benchmark of ROE in all sectors. But there are sectors that there are more opportunities.
U.S. Life, for example, is certainly one that I believe that we could have more reach going forward. I like that sector pretty much. We've been very successful identifying organization that basically needed our strength to become profitable or more profitable. That's what we did with American-Amicable. That's what we're doing right now with Vericity in the U.S. So, again, that's really in all sectors that we're in. Going back to your point about capital deployment, one thing that is important to mention is that our first choice is really to invest in our current business organically. We've invested significantly in our technology. We are continuing investing in technology to be at the forefront.
I believe that we are leaders in the industry in terms of technological tools, especially on the front-end side. We see it on the individual insurance side, on the seg fund side. We see it on the wealth management side also. We talked about the RF Capital. Well, for RF Capital, our platform has been, is something that the advisors really appreciate after, you know, we are discussing with them obviously at this point, and they do appreciate our platform.
Okay, thanks for that color. Maybe talking about the different businesses a little bit, and I'd like to start with U.S. Dealer Services. That's an area where, you know, you're looking to improve on. You've had some hiccups lately. That seems to be sort of clearing now. I'm not sure if you're comfortable on that inflection point. I know you've kind of indicated we might- you might be close to that inflection point. Where does it sort of sit right now, and how do you still see the business? And I'm guessing
Yeah
the new insurance you're writing, the new policies you're writing are a lot more profitable than some of the last.
Yeah, what we're writing right now meets our guidance, for sure. It's really, you know, in terms of the I mean, I don't want to do the whole history, but it's been very disappointing because of the timing of that acquisition and all the headwinds of the industry, the auto industry, that's affecting that business, but our team, and we've renewed some of our teams, is working on improving, I would say surgically, that operation. We've made some changes in terms of pricing. We've also right-sized the expense as well. We've decreased by 5% our expense in that business, you know, taking into consideration inflation, and we've invested in technology over the last few years. Now we are reaping the benefit out of it.
We are, we went from six to two systems, and so we've been able to cut expenses based on that. So I see a reversal of situation where the things are improving. What I'm looking really is the increase in business, like the sales and revenues, versus the increase in expense, and right now it's going in the right direction. So gradual improvement is my main message on that business. There's not gonna be miracle in the short term, but I see that it's improving.
Okay, so right now it's all about optimization, and once you get there, is it fair to say then maybe the M&A opportunities
Yeah
will be a bit more appealing to you?
Yeah, you're right. It's gonna take a couple of quarters before I go with, let's say, positive on doing a big acquisition. We're looking at small ones, but, regarding a big acquisition, still need a couple of quarters.
What are the dynamics of the U.S. Dealer Services market? Is it one that's very fragmented where you can opportunistically buy
Yeah, we're top seven.
Are the scalable players winning in the space?
We're top seven in that market. There are a lot of players. It's fragmented. I've always said there are opportunities. I know that there's gonna be some businesses on the block soon. So there are more... I mean, I can see that there are more opportunities in that sector.
Okay, switching over to Canada, the insurance business in Canada, maybe just talk a bit about individual and group, how you sort of differentiate iA from the peers.
Again, we want to be-
Again, I know the iA Way, like
You want to be different. Individual insurance
Yeah
has been a great success story, continues to be a success story. It's all about the iA Way distribution first, technology that supports that in our target market, that we can scale the market. I mean, it's worked pretty well. It's all about execution right now. So there's no change in our strategy. In the group business as well, we target the mid-sized employer business. We take our share. I mean, we are a good player. We can get some good cases that we earned recently. So even though we are not in the top three in that business, I believe that we do a great job right now.
So you do expect potential market share gains? I'm just thinking about the business in Canada. Premiums tend to grow at GDP in individual, maybe a little bit better in group and retirement solutions, but, would you expect to maybe have an opportunity to maybe take some share over time?
Yeah, of course, but I see that, in terms of growth, I mean, high single digit, low double digit is pretty much in, you know, depending on the sectors obviously, is pretty, pretty much the kind of sales increase that you should expect from our businesses.
Okay. What about on the wealth side? Obviously, seg funds, big, big part of your strategy here. You're the top player in Canada. Maybe talk about the mutual fund space, in terms of, net outflows haven't really-
Yeah, I'll talk about mutual fund after I talk about seg funds.
Seg funds first.
If you don't mind.
Sure. Of course.
And not only because seg fund is doing much better, but it's also because if you think about the proportion of our profitability coming from the various businesses in the wealth management space, you know, we've got the seg fund business, the distribution on the wealth side, and at the end, it's really the manufacturing of mutual fund. So on the seg fund part, again, it's insurance insurance license, distribution driven, same as for individual insurance. So the same thing, distribution in our target market with technology that we can scale. Distribution for the wealth management, RF is a great example of a significant tuck-in acquisition we're doing. We are recognized as the number one non-bank distribution channel, independent, on the independent side in Canada.
It's been our focus. It's been our recruiting pitch. It's working very well, and RF is just going to add on that. And lastly, mutual fund manufacturing. The whole industry on the mutual fund side is more difficult with obviously pressure on fees, the ETF pressure as well. We're in the same, you know, bag as the other. So we try there to, I would say, provide solutions to our distribution channel that encompasses a portion of our mutual fund manufacturing capability. So that's how we focus our strategy.
So, how do you sort of fix that dynamic if the industry trend does-
It, it's tough. It's tough on the manufacturing side. We are improving, but it's tough.
So is that something that you might look at maybe as not being a big focus for you if things don't improve in this trend?
I wouldn't say that. It's not in our radar, let's say, for example, to divest in that business. I think, we're doing pretty well in terms of profitability. It adds to our profitability on the wealth management side. So, I'm happy where we stand right now.
Okay, and then, and maybe going back to the seg fund space, maybe talk a bit about the competitive dynamics, because obviously, you're doing well there.
Mm-hmm
but maybe there's an element of it's not quite as crowded, like the mutual fund production space would be. Maybe talk about that a little bit. Is it a benefit to you that
Yes, um
it's less crowded?
So we're number one, as you said, in gross sales, net sales. Now we're number one in assets in that business. So we're really the leader in Canada. We've been for the last at least 10 years. And again, it's insurance distribution driven in our target market. So give you an example, okay, we've got a client, let's say, of CAD 50,000 of savings somewhere that is not really earning any return because it's sitting in an, you know, I don't know, GIC. And so our guys go there, and at some point, diversified fund, long-term horizon for the client in a seg fund, business, that's great. This is really the training that we provide to our distribution network on the. And again, it's insurance license-driven, network.
So it's complementary to what we're doing on the individual insurance side. So it's really been a focus in our target market. And again, it's a market that is less crowded. It's more profitable. That's why we focus on that market.
So how do you sort of see that playing out over time with, you know, different practices in Canada?
It's going to grow with distribution. It's going to grow with distribution. So our key, our key focus is increasing distribution. So it's, to some extent, it's not, let's say, it's a demand problem. It's more like an offer problem. I mean, in Canada, there are a lot of Canadians that are not well-served, either on the insurance side or even on the, I would say, the retirement planning side.
What about the distribution side? Obviously, that's a big focus on seg funds or mutual funds, more broadly. Like, just distribution more broadly, how do you compete in a market that tends to be dominated on the wealth side by the large Canadian banks?
Because we provide an alternative to the bank. We focus on distributors that are entrepreneur in what we call independent space. I mean, to some extent, banks forces their advisors to provide some kind of solutions, right? And what we have is an open architecture. So if you are an entrepreneur and you want to work in an environment where you have more independence, higher payout, but, you know, you're going to pay for your stuff, you come to us. We are recognized as the number one players in that field. This is how we differentiate from bank.
What's the sort of market share for that part of the market?
We're number one. We're
No, not your market share, but in terms of the out of the entire market, what space does that occupy, that entrepreneur? And is that sort of growing? Do you see that growing better than industry overall? Like, will it? Is there an opportunity to get maybe more share of the overall pie?
Yeah, well, if you compare with the bank, banks are huge, okay? So I mean, the whole market, when you think about it, banks are dominating the market, okay? This is not where we want to play. We want to play as an alternative for those advisors that have, are more entrepreneurial, more independent, and we, this is really where we want to focus. So in that space, we're number one.
Got it, got it. Okay, maybe switching over to expenses, corporate expenses year to date, roughly in line with your expectations. I think Q2 came in slightly higher. Any commentary on expenses and how big of a focus is efficiency?
I'm very pleased there. I've got my Chief Financial Officer with me. Sometimes I call him the cheap financial officer. But, because I mean, I'm telling you, we put a lot of focus on our expense management, in the previous, let's say, the recent years, and we're having fun, but at the end of the day, we have very serious discussion internally. I would say that, two things. The first one is about this, operational leverage indicator that we have. In all our businesses, we really target an increase of revenue higher than increase in expenses, over, let's say, not only one year, let's say a three-year or five-year period. So it's really been a focus. We follow that very carefully, and everyone has a target on that.
And the second thing is about, I mean, to some extent, how do we do that? Technologies is a very key point there, and we have a, I would say, a high-level governance on technology that is very strong, where we do, for each of the significant technological, let's say, project, we have a governance. There have to be There's a business case, like any acquisition to some extent, okay? Except for, let's say, regulatory, projects that really need to be done, which sometimes is very difficult to measure the ROE. But for all other, let's say, IT projects, there is a business case. There is an ROE that is associated with that. There is a follow-up that we do after that. And so it really fuels the operating leverage that I was talking about.
We've been very successful. You see, you saw that over this year in terms of the objective of our expenses. We are pretty much in line with the objective, except maybe for the fact that we have a higher compensation because there's part of our compensation that's obviously linked to our performance. Our performance has been outstanding, so if the year continue as is, it will probably be a bit more compensation based on our performance. But if we remove that, everything else is really in line with our expectation, very tight management. And we are doing on a regular basis some comparison with the market. There are some survey that are being done on the individual side, not everywhere, but on individual side.
In terms of acquisition cost, administration cost, we are on the right spot. We mean, i.e., lower than our competition.
Okay, and that's from independent analysis that you've seen on competitors'.
Yeah
numbers. Got it.
Yeah.
Maybe talk about the expenses in terms of technology. Obviously, we're hearing that a lot more from the lifecos, say more so in the sort of more traditional business lines that are sort of being impacted and is disrupted by technology, improvements, and the service delivery to the end client. Maybe talk about that tech side and how that impacts your views on expenses, how that informs your views on expenses going forward.
I mean, we have no choice to invest in technology. We invest about CAD 400 million a year in technology. And as I said, I mean, I cannot say that we spend, like, CAD 2 billion a year in technology. I mean, we don't have the means for that. So we have to make smart choices, and we've done some smart choices. We choose IT projects where it fits, where it reinforce our iA Way. Meaning, for example, distribution, we focus on building tools for our distributors that will serve their clients in the target market that we're in, as an example. So we try not to be distracted by a lot of demands because obviously, you can spend a lot in technology.
We're really, really laser focused on reinforcing the iA Way and reinforcing our strategic intent. So that's the way that I look at it. AI is also something that we put more attention right now. I'm telling you, each of our employees can use ChatGPT, for example, as an example. This is one area where we put some emphasis over the last year, reinforcing the training, the knowledge of our employees to be more productive as individuals using some AI tools. That's one thing. And then the last thing I will mention is that we have use cases on AI.
Still in its infancy, there's no revolution at this point, but both on the cost side and on the revenue-generating side, we have use cases with a great governance body that decides where it is that we're gonna spend time and energy.
Okay, thanks for that color. Maybe just one quick follow-up. So, on the sort of tech dynamic, clearly, you don't see that as a disadvantage, given your smaller scale versus your larger peers. You mentioned making smart decisions. Is there any fintech dynamic, any partnership dynamic that's utilized as well, or is it just all in-house?
No, I mean, we're using an external provider, obviously, because you cannot build all the technology, but at the end of the day, I mean, we have to be very careful who we choose as partners. That's something that is. I would say in the industry these days, using external provider and managing external provider is a challenge. So you have to be very careful of that, and we don't, as much as possible, we don't do things in-house unless there is a competitive advantage that we can draw from. For example, our tools on underwriting is something that we built in-house because we believe we can have a competitive advantage out of that using AI, but for the most part, we try to use, you know, off-the-shelf technological tools.
Okay, and maybe just one quick question on leverage, obviously very low. Is that purposeful? Is there any sort of, you know, anything you wanna offer on where you might be heading on leverage? It seems like there's an opportunity to maybe, maybe utilize it a bit more and would give you a lot more capacity.
Yeah, we are at the low end of, let's say, the leverage side. We should increase it over time. You should expect the leverage to increase over time. I think it's good management of the capital, and it's consistent with everything we've been saying in terms of deployment of capital going forward. I mean, so do expect that.
Okay. Okay, thanks for that. Last 30 seconds here, I just wanna turn it back over to you, Denis, if you have any key messages you wanna convey.
No, we've covered pretty much the iA Way. We've covered the book value, which is important. Also, we have a great momentum on the sales side. So right now, the company is doing very well, and so, thank you for all your support. I'm talking to investors here.
Awesome. Thank you very much for joining us today, Denis. Thank you for all your insights.
Thank you.
It was very nice to have you here, and thanks for coming. Thank you.