Good morning, ladies and gentlemen, and welcome to iA Financial Corporation 2023 third quarter results conference call. At this time, all lines are in a listen-only mode. Following the presentation, we'll conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this call is being recorded on November 8, 2023. I would now like to turn the conference over to Marie-Annick Bonneau. Please go ahead.
Good morning, everyone, and welcome to our 2023 third quarter conference call. All our Q3 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 1 week, starting this evening. The archived webcast will be available for 90 days, and a transcript will be available on our website in the next week.
I draw your attention to the forward-looking statement information on slide 2, as well as the non-IFRS and additional financial measures information, and the notes regarding 2022 restated results under IFRS 17 and IFRS 9 on slide 3.
Also, please note that a detailed discussion of the company's risk is provided in our 2022 MD&A, available on SEDAR and on our website, with an update in our Q3 2023 MD&A released yesterday. I will now turn the call over to Denis Ricard, President and CEO.
Good morning, everyone, and thank you for being with us on the call today. As usual, I will start by introducing everyone attending on behalf of iA. First, Éric Jobin, Chief Financial Officer and Chief Actuary. Alain Bergeron, Chief Investment Officer. Stéphane Bourbonnais, responsible for our wealth management operations. René Laflamme, in charge of individual insurance and annuities. Pierre Miron, Chief Growth Officer of our Canadian operations and responsible for Dealer Services Canada and iA Auto and Home.
Sean O'Brien, in charge of our group businesses, and Mike Stickney, Chief Growth Officer of our U.S. operations and co-head of acquisitions. Starting with slide 8 for an overview of our third quarter results. Yesterday, we reported a solid core EPS of CAD 2.50, 10% higher than a year earlier, driven by strong profitability in almost all business units.
This represents a Core ROE, quarter annualized of 15.4%, a very strong result, which led to a Core ROE for the last 12 months of 14.8%, very close to our medium-term target of 15% plus. Our capital position is very solid, with a Solvency Ratio of 145%, and we continue to generate significant organic capital in line with our 2023 target. Sales momentum continued in the third quarter, with double-digit growth in many business units.
Strong sales, along with good retention of in-force business, supported the solid 17% year-over-year increase in premiums and deposits, as well as the 7% year-over-year increase in the level of assets under management and administration. A very good result, given market conditions.
Finally, our book value is CAD 65.25, which represents a 4% increase since the beginning of the year. Turning to slide 9 for our year-to-date results relative to midterm guidance. The core EPS for the first 9 months is 7% higher than last year. Core ROE is close to midterm guidance. The solvency ratio is well above our operating target, and we are well positioned to meet our CAD 600 million organic capital generation objective for 2023. Finally, the dividend payout ratio of 32% of core earnings is within the target range. Now to slide 10, to look at Q3 business growth.
Starting with individual insurance in Canada, which recorded another solid performance with sales of CAD 96 million during the third quarter.
For a third year in a row, we ranked first for overall company rating in the Advisor Perception Survey, confirming our ability to effectively meet our distributors' expectations. In Group Insurance, net premiums increased by 6% to CAD 407 million, as sales and in-force business retention were very good. Sales were also strong in the Dealer Services division, reaching CAD 193 million, up 10% over the previous year.
Our leading position in Canada, our comprehensive product range, and our extensive distribution networks contributed to this very solid result, despite higher financing costs for car-buying customers. Finally, at iA Auto and Home, direct written premiums reached CAD 142 million for the quarter, supported by the strong retention of in-force business. This represents a strong increase of 15% compared to the same period last year.
Looking now at slide 11 to comment on wealth management sales results, a sector for which the environment continues to be challenging. We performed very well in seg funds, where we remained a leader in both growth and net seg fund sales, with growth sales up 13% year-over-year and net sales of CAD 216 million. While many clients continue to favor cash equivalent products, mutual fund sales were softer, whereas sales of insured annuities and other savings products almost doubled year-over-year, reaching CAD 618 million.
Finally, in group savings and retirement, sales of CAD 522 million in the third quarter were up 8% year-over-year. This good performance was mainly supported by sales of accumulation products. Now looking at slide 12 regarding our business growth results in the U.S.
In our individual insurance division, strong business growth momentum led to record sales of $44 million. This is a solid 26% increase from a year earlier, a performance driven by our strong distribution channels and our portfolio of products. This division's solid growth story confirms the potential of this market as we continue to strengthen our presence in the U.S., for example, with the recently announced acquisition of Vericity.
In the dealer services division, third quarter sales amounted to $248 million, compared to $261 million a year earlier, as higher financing costs for customers continued to have a negative impact on sales. Meanwhile, we are adding dealers and continuing our digital transformation to be ready to seize growth opportunities when the environment will become more favorable.
I now want to briefly comment on the acquisition of Vericity, announced at the beginning of October. Please go to slide 13. Vericity comprises an insurance carrier and a digital agency with synergies in between, both servicing the middle market life insurance space. This medium-sized acquisition, with a purchase price of $170 million, presents a strong strategic fit with iA. Among other things, it strengthens our geographic footprint in the U.S., it complements well our existing activities, and it diversifies our distribution capabilities.
We expect this acquisition to be accretive to core EPS, starting in year 2, to increase core EPS by CAD 0.10 in year 3, and to rapidly meet our ROE target. With our strong capital position, while investing in our organic growth, we continue to actively monitor opportunities while making smart choices and staying disciplined.
I will now turn it over to Éric, who succeeded Jacques as CFO on August twenty-first. Éric will comment on Q3 profitability and capital strength, and we will then take questions. Éric?
Thank you, Denis, and good morning, everyone. I'm pleased to be here today to explain our results for the third quarter of 2023. These are good results, as almost all business units performed well. Please go to slide 15 for an overview of Q3 profitability and financial strength. Core EPS at CAD 2.50 is 10% higher than during the same period in 2022. This performance was driven by 10% year-over-year increase in both core insurance and non-insurance results, which reflect well the strong quality of our operating results. At 14.8%, core ROE is also strong and close to our medium-term target of 15% and above.
Net income, which is more sensitive to short-term macroeconomic variations under the new accounting standards than it was under IFRS 4, amounts to CAD 55 million.
From quarter to quarter, core results allow to better assess the company earning power by re-removing shorter market volatility, while the average reported earnings should converge toward quarter core earnings over time. In terms of capital, our financial position continued to be very solid and flexible. As for the book value, it has increased by 4% since the beginning of the year. Now, turning to slide 16 for results by operating business segments. In Insurance, Canada, core earnings of CAD 91 million are 8% higher than in the previous year, driven by 9% growth in expected insurance earnings.
The core insurance experience for the segment was a loss of CAD 6 million, attributable mainly to higher P&C claims at iA Auto and Home due to a storm and increased severity of auto claims.
It is worth noting that disability and morbidity experience was favorable and that results were slightly better than expected for mortality claims... In the wealth management segment, Q3 core earnings of CAD 82 million were 26% higher than for the same period of 2022. In addition to lower expenses, this solid performance achieved through 16% year-over-year growth in expected earnings for Seg Funds and 29% year-over-year growth in core non-insurance activities as our distribution affiliates once again delivered strong results.
As for our U.S. operations, core earnings amounted to CAD 32 million in the third quarter, compared to CAD 26 million during the second quarter of 2023, and CAD 37 million a year ago. Results were quite good in the individual insurance division, as evidenced by the 9% increase in the core insurance service result.
In the dealer services division, core non-insurance activities improved slightly during the year, but remained below the previous year level as higher financing costs and vehicle prices continued to affect consumer affordability. Continuing with slide 17, Q3 core earnings for the investment segment were CAD 93 million, which compares to CAD 97 million a year ago. These core results depend, among other things, on the level of interest rate and the yield curve at the start of the quarter. Accordingly, the interest rate at June thirtieth had a negative impact of CAD 9 million on core earnings during the third quarter.
This more than offset the favorable impact of the portfolio optimization, which took place mainly at the end of 2022, and the good performance of iA Auto Finance.
Looking forward, the level of interest rate and the slope of the inverted curve improved during the third quarter, which will be a positive factor for the Q4 core net investment results. Finally, our corporate segment recorded after-tax expenses of CAD 42 million, which is the same amount as Q3 2022. Now, looking at non-core adjustments, which are represented on the right side of the slide, most of the Q3 adjustments were due to unfavorable market-related impacts differing from management long-term expectations. These impacts amounted to CAD 169 million during the quarter.
More than half of this adjustment relates to investment properties, for which the cap rate was increased across the board. The specific fundamentals of our investment properties portfolio are very good, and the valuation now reflects current macroeconomic conditions inferred by external appraisals.
Please see slide 26 for more details on market-related impact and slide 30 for information about our investment properties. Now turning to slide 18 regarding our robust capital position. Our solvency ratio of 145% at the end of Q3 is well above our operating target of 120%. Most of the Q3 variation is due to the debenture redemption that occurred in September. The company organically generated CAD 165 million in additional capital during Q3, for a total of CAD 440 million during the first nine months of the year. We are therefore on track to achieve our CAD 600 million 2023 target of organic capital generation.
Finally, at the end of September, CAD 1.6 billion in capital deployable was available for organic growth, digital transformation, and future acquisitions. This conclude my remarks.
Operator, we are now ready to take questions.
Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question. Your first question comes from Meny Grauman from Scotiab ank. Please go ahead.
Hi, good morning. On the subject of investment properties, you appraised 100% of your holdings. Did I get that correct?
Hi, Manny, it's Alain. Oh, please, please go ahead, go ahead, Éric.
No, I said yes, Manny.
Okay, great. And, and then-
Alain, do you want to add color?
Yeah, the one color I would say is that there's a process that looks at the real estate where each property is evaluated once a year. But I would say then when material event arise, then we reflect it in the valuation. And that's what happened this quarter with the cap rates.
Okay. So just wondering, in terms of that CAD 101 million impact, is it weighted to certain geographies or certain types of properties that you're holding? If you give us a little more detail in terms of what's driving that impact, in terms of the details of your portfolio.
Sure, Manny, it's Alain. I'll take this one. In terms of the cap rate increase, it was across the board of our office property. And of course, you know that that's about 85% of our portfolio is in office. Now most of our offices are in Quebec and in Ontario, with not exclusively, but mainly. And the reason I say across the board, and rather than specific fundamentals of specific properties, I think the best way, I think, to make the point is to give you an example. We have a property in the province of Quebec. It's all leased to government, provincial government.
We have a lease with them until 2047, and the cap rate that we got from the external appraiser is similar to the rest of the portfolio.
So I think that just gives you a sense of what's really happening this quarter in the portfolio. And maybe since, maybe a sub-bullet of this, of course, is, I've said a few times, we've put that in our slides, that the quality of the portfolio is relatively high when it comes to our office, like, it's unlevered, 99.8 is in Canada, the occupancy is higher than the market rate, long-term lease. The reason I bring this up is then when you link it to an increase in cap rate, so when you have a high-quality portfolio, that an increase in cap rate, that means, one, a decrease in valuation today, and that's what you're seeing.
But it also means an increase in economic expected return in the long term.
Hopefully that helps give you a bit of context around this quarter on investment properties.
Yeah, thank you. And then just a question on the Q4 actuarial review. I'm wondering if there's any outlook you can provide at this stage in terms of what to expect and maybe start there, and I have a follow-up on that.
Yes, Manny, thanks for the question. In fact, we are still working on it, as you may suspect. It, we're not done yet, completely. Right now, what I'm looking at is mortality. The big question is what has happened since the beginning of the year with respect to mortality in Canada? We're happy to see that we had a turnaround in Q3, so I will look carefully at this one for year-end to see if I need to make any adjustment to that. So that's still an unknown. So the next couple of months will provide guidance to what we need to do with this. So the other indicator that I look to to make up my mind is the gain and loss.
When you look at the insurance experience this year, we have slightly negative gain and loss since the beginning of the year. And when you look at gain and loss on the CSM, it's neutral. So the way I look at this at thirty thousand feet is that I'm expecting something slightly, slightly negative for year-end in terms of basis change, all inclusive.
And then just to follow up, just in terms of conceptually, am I right to think of, and I think we talked about this in the past, the change in IFRS 17 for you, giving you less ability to offset certain actuarial charges? Just wanted to understand if I have that correct in terms of this new reality for you.
Yes. In fact, what is happening, Manny, is that all economic change of assumptions goes through P&L every quarter. So this item is now removed from the radar of a business change at year-end. So what will happen with business change, that will be reflected in the CSM. It will not be, or maybe a small part in P&L, but most of the business change that will be happening at year-end will go through CSM, and it will reflect the contingencies on the insurance risks.
Thank you very much.
Your next question comes from Doug Young, from Desjardins. Please go ahead.
Hi. Good morning. Alain, maybe back to you just on the investment property. I think, and thanks for the, response to the, the first question on, and, and the details. But I think last quarter you talked about, you know, pursuing value creation opportunities with this portfolio. You've obviously made a mark, in terms of the cap rates. You didn't elaborate last quarter. I'm just wondering if, if there's any updates on what that value creation opportunity would be or your thought process around that.
Yes, sure. Happy to give also more context on that. So, good recollection, by the way, for the comment of last quarter. Yeah, so, high level, we continue to work on, I would call them, significant. We're working on significant opportunities to create value with some of the buildings, eventually changing the entitlement for more density. So various projects or various properties are at various points of the approval. Some are closer than others. So although there's no certainty, I think we're optimistic, and then some are progressing well.
So within between the next two years, we expect that this would favorably this would, if they go forward, which we expect, it would favorably affect the valuation of these properties.
But I don't think I can tell you, there's not enough progress between now and the last quarter. I don't think I can give you more, but it's, I would say this is very nice that, despite the headwinds, that there are these, this potential tailwind with that portfolio.
... And frankly, kudos to the team that has found some of these exceptional, I would say, opportunities. So I look forward, Doug, to give you updates as these materialize.
Okay. So but there's nothing—I guess, more the point is this is-
Nothing imminent.
Yeah, nothing imminent. Okay.
Nothing imminent.
Appreciate, appreciate the color. And then just, you know, maybe, Éric, on, on core expenses down quarter-over-quarter, you know, is this a, a blip? Is this a new run rate? You know, was there anything unusual in that expense line? Can you maybe elaborate a bit?
Yes, many. On this one, I remind you that, you know, we've been trending well since the beginning of the year on overall expense management. When you look at this corporate expense segment, it's just one part of the equation. When I look at expenses, since the beginning of the year, we've been trending just slightly under plan, and we've done that by making choices along the year. So, you remember that we had some regulatory and compliance project to complete for September.
And, when we make those choices along the year to stay within our envelope, you know, those choices sometimes impact more corporate expense segment. Sometimes it's more OpEx than CapEx.
So this is what is bringing a little bit of volatility when you look at this segment. But I prefer to look at the overall picture, which to me, it encompass everything.
Okay, so it sounds like this is more of a normal kind of... As we think of, kind of, trying to put something in for this line item in our models, like, this is kind of-- you've kind of gone through some of the bigger bumps and expenses. This quarter is more normalized. Is that a way to kind of think about it?
Yes, that's okay. That's a, that's a good way to look at it.
Okay. And then, you know, maybe lastly, Denis, for you, just on Vericity, you know, thanks for the accretion numbers. It's helpful to think about. But, you know, CAD 0.10 core EPS accretion in year three. Can you talk a bit about, you know, what's driving that accretion? Is this all revenue? Is this all expenses? Are you redoing reinsurance treaties? Can you talk a little bit more about this? And then, you know, I guess my overarching question is, how do I think about this? Because if I look at the economics, it looks like it's a 4% return on capital deployed three years out, but maybe I'm missing something.
I mean, I know there's a lot there, but just hoping to get some color.
Yeah, thank you for that. So, I might ask Mike to provide more insight, but let me just first say that, you know, this is very consistent with our strategy right now in terms of developing the U.S. life business in the U.S. Obviously, I mean, distribution is something that we're always looking at. In particular, this company has a specific expertise in terms of digital, I would say, capabilities in terms of distribution. It was quite attractive for us to get into that and at the same time inherit some manufacturing capabilities as well.
But at the end of the day, it is a mix of both, increase in revenue. It's a growth story, basically, and Mike might want to comment on that.
So it's a mix of growth and a mix of expense synergies that, you know, is bringing that accretiveness over the years. Mike, you might want to comment about the overall strategy here.
Sure. Thanks, Denis. As Denis said, and the way I think about it, the most important thing here is that, you know, we want this to be a growth story. From a whatever, marketing and strategic standpoint, it gives us exposure to a digital state-of-the-art digital platform, distribution platform. And secondly, we believe we can grow the business. That's why we want to do this. In many ways, it actually reminds me of American Amicable, and I'll go on a bit of a segue here for a minute. As many of you know, we acquired American Amicable 13 years ago now for $145 million.
It was a small company back then, did about $25 million of sales, had private equity ownership, and the owners did not want to put more money in it, so the sales were flat. So when we showed up, we said: We want to grow this business. Management went to work on that and have done a great job. Reality was that business was break even for the first few years. But, you know, today, when I look at it, we've grown sales by more than 6x, and the earnings, as you know, are pretty good. We've got pretty good margins. So turning to Vericity, it's quite a similar situation.
Their sales are about $40 million and are flat, primarily because of capital constraints.
The majority owner is a private equity firm and did not want to put in more capital. As many of you pointed out, the business is breakeven. In terms of moving forward, our number one priority is this. You know, the math is simple. If you grow revenue faster than you grow expenses, you're gonna create margins. And that's what happened at American Amicable, and that's the plan here. Beyond that, second issue, we expect to generate some expense synergies sort of in the neighborhood of $5 million-$6 million by the third year.
We also expect to generate some gains by improving their capital management activity.
They've been using primarily reinsurance, and that all needs to be reviewed. One other thing to keep in mind when you look at the results is, they paid CAD 20 million in COVID claims from 2020 to 2022. So having said all of that, the biggest contributor I expect will be growth. But, yeah, we're optimistic. So I hope that helps.
Appreciate the color. Thank you.
Your next question comes from Gabriel Deschênes, from National Bank. Please go ahead.
I'd like to follow on that, line of questioning, actually. You mentioned that the American Amicable is nicely profitable, but can you, can you put a number on that just so we can kind of give a bit more weight to this, previous acquisition of the case study? And then, the things that you mentioned there, the expense synergies, the, reinsurance recapture, which, seems like a likely strategy. Are those things included in your, your, current, accretion figures?
Uh, well-
Sorry, it's Denis here. I mean, we don't disclose specifically the results in the US, they're between, let's say, the dealer business and the life business. But you know what I mean, certainly when I look at the individual life business in the US, in terms of target ROE and actual ROE from that business, it's higher than our targeted ROE, so we're very pleased with that business. And could you repeat the second part of your question, Gabriel?
The second part of the question, I mean, it'd be helpful if we can get those numbers at some point, but are on American Amicable and the dealer services profit split, the expense synergy number that you put out there and the reinsurance recapture strategy, these are in year 3? Are those in the CAD 0.10 accretion figure?
I can take that, Denis, if you want.
Yeah, go ahead.
Yeah, I mean, expense synergy, yes. Reinsurance, no. Reinsurance needs more work. We didn't have the time to work through it. And, you know, we've got to talk to a number of people to sort all that out. It's, you know, relatively complex, but my gut take is there's room for improvement.
Like, how long are those contracts typically?
I can't tell you right now, and it's probably confidential anyways.
Okay. You know, when you just switching over to the mortality discussion, we saw a couple of quarters the first half where there were losses, and then this quarter, you had gains. Sounds like you're still keeping an eye on it. Makes sense to me. I'm just wondering, you know, what are, what are some of the observations that you, you've been making? Because it sounds like, you know, there's some maybe this quarter was good, but might not be sustainable.
Yeah, I'll take it, Gabriel, on this one. You know, mortality can fluctuate quarter to quarter. We've seen it in Canada. So for the U.S., it's the same thing. We're happy, and I'm confident right now with our expected assumption. And when you see fluctuation around, it's just statistical in the U.S. to me.
Okay. And could you... Final question: Could you quantify the amount of negative experience in the P&C business this quarter?
Yes, Gabriel, it's Éric again. It's about CAD 9 million overall.
Okay.
CAD 6 million out of the CAD 9 million coming from the bad weather that we had in July.
Got it. Thank you. Thank you.
Your next question comes from Tom MacKinnon from BMO. Please go ahead.
Yeah, thanks very much. Two questions here. One, really on the CSM. If we look at the impact of new business, it was CAD 134 million. That's the lowest we've seen in the quarter so far in 2023, and was certainly lower than the CAD 152 million we had in the third quarter of last year. And this comes despite the fact that you appear to have better sales, better insurance sales. So, what's driving that?
Yeah. Thanks, Tom, for the question. I will say two things. First, remember the business change that we made at the end of last year? So those changes were negative, so it's a big, a bit of a return to normal for the CSM, reflective this year of those business change. And to another extent, the CSM, when you think about it, is the present value of future profit, and that present value is done using the locked-in curve from IFRS-17. And when the rates are going up, the locked-in curve goes up and the present value goes down.
So it's just a question of geography and presentation. So we do not worry that this number is going down, because keep in mind that long-term rate is good in our business.
So it will just show up elsewhere and at some other point in time. When you look at the CSM reconciliation, you have a line that talks about organic financial growth. So that decrease over time, with the increase in interest rate, should result into an increased number over the coming quarters and years.
Okay, and the negative-
Tom, just... Sorry, it's Denis here.
Yeah.
Just one thing, just one thing to add on this. Whenever internally we talk about CSM, I'm always-
... I would like to re-remind people that CSM is not inclusive of every businesses we're in. Like, for example, the fact that we have more, customers moving into GICs from, let's say, seg funds. And, I mean, obviously, it does not help in terms of the CSM, but at some point people will come back, and so we always have to keep that in mind. Thank you.
Yeah. If the -3 that was there, there was some negative experience in the CSM. What was that related to?
Yeah, it's when you look at the gain that we had on mortality in Canada, you know. We mentioned in the previous quarters that sometimes the geography of gains and loss is different than under IFRS 4. So we had a little gain on mortality in Canada on the P&L, and that resulted in a little loss on the CSM side.
And that was mortality or.
Yeah, yeah.
Okay.
That was mortality. Sorry.
Okay. Okay, so if we net them together, you would say your mortality experience was neutral?
Yes, that's a good-
Okay, thanks.
way to look at it.
And then the last is on slide 18, the macroeconomic variations that hurt your capital available for deployment by CAD 200 million. If I look at the mark-to-market impacts that you outlined, the 169, the bulk of that was, the decline in investment properties. Am I to then infer that the bulk of the CAD 200 million decline in capital available for deployment was as a result of, that investment property mark as well?
Yeah, I would say, it's all inclusive of macroeconomic things that happened in the third quarter. You know, stock market did stumble a little bit, real estate impacted an interest rate change. So we'd say it's reflective of everything altogether.
If I could squeeze one more. Your interest rate sensitivity would imply that you would have had a much bigger hit as a result of the big spike in interest rates than you actually had in terms of the marks with respect to interest rates. I think it was only like 14 or 15 million—14 million, yet your sensitivities would imply that number to be, you know, probably at least north of 75 million or something like that, just given the jump in rates. Why was that different?
Yes, that's another good question. When you look at the sensitivity page, it says that it's for parallel interest rate shift. And, you know, we've seen lots of yield curve change since the beginning of the year, so that's really what's making up the difference.
Okay, thanks for that.
Your next question comes from Lamar Persaud, from Cormark. Please go ahead.
Yeah, I just want to kind of continue along the discussion of CSM here from Tom. So just thinking about the impact of new insurance business in your CSM, so the CAD 134 million there, you did make some refinements to what goes through this line last quarter and again this quarter. Do these changes impact the outlook for new business CSM growth, or is high single digit growth still appropriate? I understand the what you guys are suggesting, that you know, this might be a bit lower in the near term, but what I'm really trying to get at is, is the longer term expectation for high single digits still appropriate?
Yes. I would say that if everything else stays the same in terms of macroeconomic, you're right, it should, we, we should still expect to see that, that high digit, high single digit increase.
Okay. Okay, and then I just want to come back to the potential for M&A and U.S. dealer services. We haven't really seen much consolidation in the space post the IAS deal, so wondering if maybe we could spend some time talking about, you know, maybe the long-term attractiveness of this business. Like, wouldn't you want to consolidate it when, wouldn't you want to consolidate in the space when it's a little bit out of favor? Or is the long-term view on this business somewhat impaired?
I think I'm going to take that one. It's Denis here. That business right now, it is going through obviously some big initiatives in terms of conversion, for example, or integration, that we--when we bought IAS. So we are--we have invested significantly in technology to improve the operations, and I would say the motto is really to do the organic growth in this difficult environment right now. We are seeing an increase in financing costs for the customers, and obviously it puts pressure on sales. So the focus right now is truly on organic growth.
Once the, let's say, profitability is back to the, I would say the standard that, that or the, I would say, the target that we have, we, you know, we might go further and maybe look at some acquisition at the time, because, you know, still that market is, is fragmented. There are opportunities, but we're not going for the big fish right now. We, we might do some, let's say, tuck-in acquisition, but for the time being, I would say over the next maybe 12-24 months, we want to make sure that we are co- going back to the level of profitability in line with our target.
... Thanks. And then last one for me. Can you guys just touch on the elasticity of expenses? Like, if the operating environment is tough, do you guys have the flexibility to slow expense growth? And with that, did that play into the lower expense growth this quarter? Thanks.
Well, you talk about elasticity of expense. That's, it's been a while since I heard that word. Thank you for that. I mean, to what extent we are able to absorb expenses, I think that's the question you're asking here. I mean, inflation right now is obviously a challenge for any organization. I mean, it forces all organizations to make smart choices in terms of where they invest and all those things. And at the same time, you know, we can adjust some of the pricing of our products going forward. So at the end of the day, for us, we believe that we can still maintain our 10% EPS growth.
When I look at it, I mean, at a very high level, with the level of inflation that we're going through right now, and the fact that interest rates have increased and accordingly, which is very positive for us. When I look at all the impact of everything here, we are confident that we can increase our EPS midterm by 10% plus.
Appreciate the time.
Your next question comes from Paul Holden from CIBC. Please go ahead.
Thank you. Good morning. So I'm gonna continue with the expense line of questioning and maybe try to get a little bit more specific here. And I guess looking at the U.S. segment to start, those core other expenses were down quarter over quarter for the second consecutive quarter. Yet, as you've highlighted, you're making investments in the warranty business. So just wondering if this is due to some seasonality, if there's been costs reduction actions, or maybe again, costs were just simply elevated in the first half of the year and should be more similar to Q3 going forward.
Yes, it's Éric, Paul. Thank you. Two things really happening here. First, Mike mentioned it, the team is really working hard in terms of expense improvement and improving our operating expense. So, that's one item. And the other one that is, you know, it's not a seasonality, but it's a yearly review. There is a variable compensation item related to the performance of a U.S. dealer, and this reevaluation is happening in July. So, you see the positive effect, if I can say, of this revaluation on core and other expense of the U.S. divisions, on this item.
So, this time it's a positive on... in terms of core expenses. So, yeah, that's what I wanted to say about those two items.
Okay, understood. Then going back to the core, other expenses on the corporate segment, pretty big decline from Q2, but maybe Q2 is just simply elevated. Again, I guess similar question there, like, is there, are there any kind of cost reduction actions that have taken place since Q2, or is there just simply a lower run rate for some of these projects you've highlighted?
Yeah, in reality, like I mentioned earlier, Paul, we're, we're tracking expenses since the beginning of the year, and it's been trending about the same, same, you know, percentage under our, our plan since the beginning of the year. It's just a question of geography here and decision taken along the year, that sometimes impact numbers, like in the core, expense segment. So, you see a bit more volatility, but when I look at the overall expense situation of the company, it's been very stable and according to our plan since the beginning of the year.
Paul, if you don't mind, it's Denis here. I just want to add some flavor on what Eric has mentioned, which is, you know, very good. When the way I look at it is that when I look at the last two years, like 2022, 2021, for various reasons, like, you know, more regulations, digital investment, additional digital investments, the general expenses that we incurred was, I would say, higher than our budget each year. But I must say that this year, I'm very pleased because I guess we put an additional level of, I would say, constraint in our operations, in a sense that we stick to our budget.
There's no way we're gonna go over this year. And so there's, there, there's I don't like to say more discipline.
It's not the right word, but certainly there are more attention put into our expense management.
Got it, understood. Okay. Then last question for me is related to a comment Éric made earlier regarding interest rate impacts on the business. Again, going back to the CSM discussion of the new business impact on CSM going lower because of PV, but then we should expect interest rate benefits elsewhere. So really, the question is, where should we be expecting those interest rate benefits? Because I would expect one of those areas to be the core net investment result.
So when should we expect that to get better for higher bond yields, and where else on the P&L statement should we be expecting to see the positives?
Yes, Paul, if you look at the CSM reconciliation of our supplemental information package, I will guide you to the line just under the impact of new insurance business. It's called organic financial growth. Page 27. Yeah. So this line should increase at a faster pace going forward because of, because of that increase in interest rate. But you're correct that core net investment results should benefit a little bit of it as well. Because in the, in the overall, it's a good news for us, that interest rate increase in our - in the end, and with the product that we sell and we have in our in-force.
Paul, it's Denis here. It's Denis Ricard here. Thank you for that question. Actually, that was the question—I, I did ask that question myself to my management team. I wanted to make sure that, okay, we're seeing that interest rates is, I mean, long-term interest rates increase is positive. Where do we see it? My conclusion is that we should see it in the net investment results from one quarter to the other. That's basically it. And, Éric had just also added some color on the CSM.
Okay. And sorry, just to clarify that. Really, that's going to be a matter of when there's, I don't know, if you call it normalization, but a shift in the yield curve that's more favorable, then it'll really come through, correct?
Yes.
Yes, yeah. Okay. Thank you. That's it.
Yeah, I see that as a future tailwind. I mean, at some point, the yield curve is going to go back to some more normal, and that's going to be a tailwind for us.
Understood. Thank you.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Mario Mendonca from TD Securities. Please go ahead.
Good morning. My question is a little... It's similar to what you just discussed with Paul. When I try to look at your net investment income, it's one line, the disclosure is not quite as detailed as others. And I, the company's done a good job of explaining why that's the case. But when I try to model out this number, when I think about this number, I'm not seeing the returns on this line consistent with the change in interest rates. So I paid attention, obviously, when you talked about how it's last quarter's interest rates or the quarter ending that affects this quarter. Let me ask it this way.
When we see interest rates move higher, when we see the long end of the curve move higher, let's say, during Q3, is the message then that a shift up at the long end of the curve necessarily benefits the next quarter, and a shift down at the long end of the curve necessarily hurts the next quarter? Is it really just that straightforward?
Yes, you're right, Mario. The long-term rate direction that you mentioned is correct. What I would add on your previous comment about what happened since the beginning of the year, you know, it's been a bumpy road on the macroeconomic side since the beginning of the year. I've seen more things happening in nine months on the macroeconomic side and yield curve than I've seen over the last 20 years. You know, when I look at the and you try to understand what is happening on core net investment results, you know, Q1 was a decrease of interest rate.
The curve went down, then it became inverted in Q2, and then the long end of the curve raised without, you know, with remove, removing a little bit of the inversion in Q3.
Lots of things happened that kind of create noise on the core net investment result. That's really what's happening there.
I understand. Now, going back to the investment properties for a moment. I can't help but think that there was this was a bit of a cleanup quarter because the size of the charge was so great relative to any experience I have with Industrial Alliance. Was there something about this quarter that really... Was it just the move in rates, or did the company really go above and beyond and try to really clean up your valuation so that you could put this issue behind you? Am I characterizing that appropriately?
Hi, Mario, it's Alain speaking. I could see why you may think that it was the case, but that would not meet the accounting standards and the auditors to try to do a cleanup. I know this is a common practice in many other institutional portfolios, but when it comes to public company and we have to reflect independent valuation or inputs. So it's either externally appraised or infer from the externally appraised. So we can't be biased one way or the other. So we're really reflecting the information that we are hearing from or the actual evaluation from our third party.
The one thing that you may be thinking of is, I'm not sure the extent to which everyone is subject to.
So if you look at institutional portfolio or even the MSCI Real Estate Index, you're not seeing too much of that movement. That suggests to me and that perhaps it's because many institutional portfolios, they're really being properly, fully appraised in Q4. So there may be others that may have an okay Q3 and then have to take a Q4. But for... Just let me to be as clear as I can. Our goal is, was to take the information from the external appraiser and apply it to the overall portfolio so that we're not sitting on information today that we know would affect the mark-to-market in Q4.
But that being said, from that point on, you know, the Q4 results and the Q1, Q2 in the future, they will be driven by how the market conditions change.
So we haven't put an extra buffer in that.
Okay. That's clear. And then, Eric, one maybe one question for you. Since this conversion to IFRS 17, the spread between your reported and your core earnings has been particularly wide. Now I get it. It relates to the conversion to IFRS 17 and the unfortunate coincidence that that conversion happened at the same time that the market, macro volatility, reached some historic levels. The question I have for you is: will there be similar changes, differences to the positive when we eventually see a more constructive market?
What I'm getting at is, I want to make clear that there's no bias to the negative, that the core will always be greater than the reported, or is it sort of symmetrical going forward?
Yes, a good question, Mario. You're absolutely right. You-- We will see it's just a question of time. I can't, I can't say when, but we will see quarters where, where we might have CAD 400 million profit, you know. It's, it's very volatile, and, what we, what we expect is that the, the reported will fluctuate around on both sides, and it should converge as toward the, the, our core earnings, over time.
So it really was-
Yeah, please. Go ahead.
Yes, Denny here. I was gonna make a prediction that we're gonna come up with a quarter with a EPS, core EPS of over CAD 4 or CAD 4.50, you know, in the near future, if when the market, let's say, come back, and it's related to your point. To me, the way I look at it is that we, as management, we are creating value for our shareholders for the long term. Now, unfortunately, and we said that many times, the accounting regime, the new accounting regime, they link the assets and liabilities.
Under the previous regime, all the changes that you've seen today would have flowed through the liability, and it would be a I mean, very, very minor impact.
The core earnings that you would have got under the previous regime would be very similar to what we are getting under the current regime. So if we did believe in the core earnings over the last, I don't know, 15 years, well, we should believe that the core earnings today is good. Now, the problem is the reported earnings, because as you said, we're gonna see fluctuation, and I don't, I don't think, and Éric has confirmed here, I don't think there is a bias that, you know, the core earnings will always be, you know.
Sorry, that the reported earnings would, would, you know, would be, like, lower than the core earnings all the time, and that we have some bias that we've built in our process to make it, you know, attractive or, you know, always positive. Yeah.
So I guess-
Sorry, I would add.
Yeah.
Can I just add one thing, Mario? Just because it's at the third quarter today where we're under IFRS 17, so it's a very small sample, but nonetheless, Q1 was actually, reported was higher than in core. So I know it's a small sample, but it's, it's just one example.
The advice you'd give for me outside looking in is, I have to measure this over an extended period of time. Whether that's several years, several years from now, I can look back and say, "Yeah, it was the accounting, essentially, and nothing more." That, that would be your advice to me then, look at it over the long term?
Yes, exactly, Mario. That's what I mean when I say that the average should converge toward the core.
Okay. Well, we'll, I'm sure I'll be around long enough to see that. Thank you.
So do we.
Pardon me. We have one more question from Darko Mihelic, from RBC Capital. Please go ahead.
Hi, thank you. Can I, can I please ask a couple of questions with respect to capital and looking specifically, specifically at slide 18? The first question is a very simple one. If, if you can just help me understand why capital required for organic growth is, is much lower than the last couple of quarters.
Yes, two things that go on the, on that front, I would say that, that happened. You know, the, the business mix or the product portfolio mix was, slightly favorable in, in Q3. That has mostly to do with respect to the lower sales that we had on the SPIA side of group savings. Those, those sales comes usually with, investment that, consume a bit of capital. So if you connect with the sales, that we made in the quarter, it, it kind of gave a break to required capital, this quarter.
And, I would say the second item is related to group insurance, and it's the fact that most of the business renewals or go in force in the first half of the year.
So again, it's a question of seasonality on this one.
... because most of the business required capital goes into our books, if I can say, in the first half of the year.
Okay, I think I'll have a follow-up for you afterwards on that, as well as the organic CSM growth. It was a little bit light, but I guess the net of my real question, where I really want to take this is, once we consider the acquisition of Vericity, let's call that $200 million, and we take into account the NCIB, which, you know, depending on where your stock price is, we can sort of come up with a number. Let's say that's another $500 million of capital. We get to the point where we're under $1 billion left for deployment.
So the question for Denny is really somewhere around, you know, given your earlier commentary, that you might be looking for tuck-in acquisitions, but certainly nothing significant in the U.S.
Is it fair to say that, we really should be looking at a company that's essentially going to be buying back stock aggressively in the current environment? And that you can actually, CAD 165 of organic capital generation this quarter, you can essentially pay that, pay for that with the organic capital generation quarter in, quarter out. Am I thinking about that correctly, or is there a possibility that you would, you would consider even larger buybacks, given that we aren't looking for larger, acquisitions and, and perhaps bring down the capital even more aggressively?
Am I thinking about that correctly, Denny? Or maybe you can give me some idea or conceptually about how you're thinking about the NCIB.
Yes, thank you for the question. Actually, this is one scenario. I mean, one scenario would be that, if we are not able to find at the right price, right targets, that are sizable, obviously we will be more aggressive on the NCIB, because at the end of the day, we want to, you know, give back the value to our shareholders. Now, our preferred route is really to grow the company and, more so on the individual insurance side right now in the US, or there might be other opportunistic or, sorry, opportunities in other sectors.
Like I said, on the US dealer for the time being, I mean, we're on hold, but, there might be some other, in other sectors that comes up. And it...
The size might be high. I mean, it could go, let's say, close to what we did for IAS. We could go as high as that if we truly believe that there is a strategic fit and it's good for us. I mean, we have the means to do that right now, and we are generating a lot of excess capital. So, I don't want you to think that we will only do tuck-in acquisition, but we will stay very disciplined. I mean, I must tell you that we wanna make sure that we return value and we build value to the shareholders.
Okay. I think that touches on everything that I wanted to get from that conversation, which is good. Thank you for that, Denny. But just to be clear, your strong capital generation, a function of that is actually that your required capital is low and your organic CSM growth is low. Is that something that I should think about as changing going forward? In other words, we should see more required capital for organic growth. I mean, the CAD 39 million is low, and I think I should think more in the lines of something around CAD 140 million-CAD 150 million per quarter of actual capital generation.
Am I correct in thinking it that way?
Well, no, I think that, I mean, we put a lot of attention to be as capital efficient as possible, and as far as I'm concerned, we're generating around CAD 600 million right now. This is a reasonable level right now, but we do not intend to, let's say, unless the market changes, obviously, I mean, you never know. I mean, there may be some competitive reasons for that, but everything else being the same, you should not expect the 600 to go down.
Okay. All right, fair enough. Great. Thank you very much.
There are no further questions at this time. I will turn the call back over to Denis Ricard for closing remarks.
Well, thanks a lot. It's quite... It was quite a quarter with all the macroeconomic environment, and I think we made it very clear to all of you that this management team is really keen to build long-term value for the shareholders, and the short-term situation does not distract this management team. We are focusing on our core KPIs, whether it's the ROE, whether it's the generation of capital, which are the, I would say, the two most important with the KPIs for us. So good quarters. When I look at all those KPIs, ROE quarter, let's say annualized over 15%, generation of capital in line with the target.
At the end of the day, growth is important, and so the last thing is that we've seen significant growth in almost all of our businesses. We're very proud of that. The company is doing well, and we continue to do so going forward. Thanks a lot for attending this call. See you next time.
Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.