iA Financial Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 14 speakers on the call.

Operator

Greetings, and welcome to the Industrial Alliance First Quarter Earnings Results 2023 Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded on Wednesday, May 10, 2023. I would now like to turn the conference over to Marie Anne Egbonneau, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to our 2023 First Quarter Conference Call. And all our Q1 documents, including press release, slides for this conference call, MD and A and supplementary information package are are posted in the Investor Relations section of our website at ia. Ca. This conference call is will be open to the financial community, the media and the public. I remind you that the question period is reserved for financial analysts.

Speaker 1

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 will be conducting an IFRS 9 on Slide 3. Also, please note that a detailed discussion of the company's risk is provided and our 2022 MD and A available on SEDAR and on our website with an update in our Q1 2023 MD and A released will be clear today. I will now turn the call over to Denis Ricard, President and CEO.

Speaker 2

Good morning, everyone, and thank you for joining us on the call today. As usual, I will start by introducing everyone attending on behalf of IEA. First, Jacques Podewink, Chief Factory and CFO Mike Stickney, Chief Growth Officer and responsible, among other things, for our U. S. Operations Alain D'Argent, Chief Investment Officer are: Benila Flam, in charge of individual insurance and annuities Stephane Bourbonnais, Executive VP, responsible for our Mutual on Business and Wealth Management Distribution Affiliates and Sean O'Brien, now responsible for our group businesses.

Speaker 2

This morning, we reported our Q1 results, the first ones under the new accounting standards IFRS 9 in 2017. And we can now confirm that the transition to these new standards is positive for IE. Thanks to our long term vision and prudent approach. Please go to Slide 8, while I comment on 3 favorable key favorable impacts. First, our business model is enhanced as we can now have much more capital available to invest for future growth and ultimately to create value for our shareholders.

Speaker 2

Indeed, as at March 31, 2023, we have $1,800,000,000 available for deployment. 2nd, as our core earnings power is expected to be higher under IFRS 9 and 17, were now targeting higher core ROE of 15% plus and a solid core EPS growth with a 2023 target of 10% Plus mid single digit growth over IFRS 4 2022 results. Finally, our financial strength is better reflected under the new accounting standards, which explains our increased solvency ratio of 149% and low leverage ratio of 14.7% as of March 31, 2023. About the Q1 results now. As presented on Slide 9, we reported a good performance today.

Speaker 2

Looking at our main KPIs in terms of profitability, core EPS of $2.08 is 16% higher than a year earlier under IFRS 4. And therefore, are in line with this growth target indication given in February. Our ROE of 14.6% is close to our midterm target. Moving to our financial position. As expected, And it continues to be supported by good organic capital generation.

Speaker 2

More specifically, organic capital generation amounted to $125,000,000 in the Q1. As we continue to invest in digital transformation and employee experience, are 2 key enablers for sustainable growth. We're happy to also return value to our shareholders through a significant 13% increase in the dividend, which is consistent with our higher core earnings power under the new standards. I also want to comment on book value per share an important accounting metric. Following our stable book value at transition, growth in book value per share was very good during the Q1 with an increase of 3%, supported by the record quarterly net income of $270,000,000 achieved in Q1.

Speaker 2

Moving to Slide 10. With the substantial amount of deployable capital of $1,800,000,000 as of March 31, 2023, it is our intent to continue to invest in our growth organically and through acquisitions. Will be more attention and energy will be devoted to growing the business, which is one of the reasons for the changes to the Executive Committee announced this morning. With 2 Chief Growth Officers, 1 for Canadian Businesses and 1 for the U. S.

Speaker 2

And 2 Co Heads of Acquisition, 3 season execution will be dedicated to the execution of IS growth strategy. In addition, Mike's increased focus on the U. S. Market and on acquisitions will enhance our ability to leverage its expertise and capitalize on opportunities to further accelerate our growth trajectory. Among the other changes to the Executive Committee announced this morning, noteworthy is the upcoming retirement of Jacques.

Speaker 2

Indeed, after many accomplishments, including most recently the transition to the new accounting standards, will be leaving his position following Q2 earnings disclosure, but will stay on until the end of the year to ensure a smooth transition with Eric Jabeen, currently Executive VP, Operational Efficiency, who will become CFO and Chief Actuary in August. This concludes my remarks. I will now turn it over to Mike, who will comment on business growth. Following Mike, Jacques will provide more information about Q1 results and our capital strengths. Mike?

Speaker 3

Thank you, Denis, and good morning, everyone. Sales were strong in Q1 for most business units, such as individual insurance in Canada and in the U. S,

Speaker 4

are in the line

Speaker 3

with our Investors Canada, IA Auto and Home and our Group businesses. In light of macroeconomic conditions, we are pleased with Wealth Management sales results. Only U. S. Dealer Services business growth is below expectation as the environment continues to be challenging.

Speaker 3

Will now please refer to Slide 12, as I will comment more specifically for each business unit. Starting with our Insurance in the Canadian Business segment individual insurance sales totaled $89,000,000 which compares to a particularly strong quarter a year earlier. This year's result is 53% higher than the sales achieved in the Q1 of 2021. This year's solid level of sales is mainly attributable to the strength of our distribution networks and the excellent performance of our digital tools. Our performance sorry, our comprehensive range of products was also a key driver as sales were notably strong for participating insurance, term and living benefit products.

Speaker 3

The company continues to lead the Canadian market in terms of number of policies issued based on the latest industry data. For Group Atturance results, strong growth in sales combined with good retention of in force business drove net premiums up 10% year over year to reach $407,000,000 Sales of the employee plans divisions were nearly doubled compared to a year earlier and amounted to $21,000,000 Sales for Special Markets totaled $91,000,000 up 23% year over year. In the Dealer Services division, sales amounted to $143,000,000 are up 19% from the same period in 2022. Good sales results were driven by P and C Products, up 31% are in

Speaker 5

the range of $1,000,000

Speaker 3

year over year, a solid result given the current reduced affordability for consumers. As for our P and C affiliate, IA in auto and home direct written premiums were also strong with an 11% increase when compared to the same period last year. Turning to Slide 13, to the Wealth Management Business segment. In the Retail Businesses, although clients continue to favor cash equivalent products over funds. ISegregated Fund sales are doing quite well as the company continues to rank 1st in Canada in gross and net segregated fund sales, solidifying our leading position in the industry.

Speaker 3

More specifically, segregated fund gross sales totaled just over $1,000,000,000 and net sales resulted in inflows of 368,000,000 Mutual Fund results were unfavorably impacted by market volatility resulting in gross sales totaling $479,000,000 and net outflows of $88,000,000 Together, total net fund entries amounted to $280,000,000 in the 1st quarter, have very good results in the current context. For insured, annuities and other savings products, 1st quarter sales reached an all time high of $716,000,000 tripling last year's results. We believe that many clients of these other savings products are likely to switch to our seg fund and mutual funds when markets become less volatile. Finally, sales of group savings and retirement amounted to $787,000,000 in Q1. This represents a solid 26% increase year over year, mainly driven by a large transaction in accumulation products during the quarter.

Speaker 3

Going to Slide 14 for our U. S. Operations business segment. Sales in the individual insurance division amounted to $42,000,000 and were up 27% for the same period in 2022. The solid growth was driven by overall good performance in all of our niche target markets.

Speaker 3

In the Dealer Services division, 1st quarter sales amounted $230,000,000 compared to $243,000,000 a year earlier, a decrease mainly attributable to reduced affordability resulting from have higher financing costs for consumer and persisting inventory constraints, although the latter has begun to show signs of improvement. In view of the impacts of the prevailing macroeconomic environment on the U. S. Vehicle warranty industry in the short term, we expect very modest growth from this otherwise high potential growth business unit. In the meantime, we are currently reviewing our business operations to improve efficiency and to strengthen our fundamentals such as will be available on our website, new partnerships and enhancements to our systems for greater efficiency and client experience.

Speaker 3

This will position us well for rapid growth when market conditions approve. Overall, we are generally pleased with sales results for the beginning of 2023 with some areas of very strong growth and others showing resiliency. Now I'll turn it over to Jacques to comment on Q1 earnings and capital strength.

Speaker 6

Thank you, Mike, and good morning, everyone. Today, we are pleased to report good results for our first disclosure under IFRS 9 and 17. The long term vision and prudent approach with which we manage the company have resulted in a smooth transition to the next accounting standard and good performance in the Q1. Starting with Slide team, which presents an overview of our profitability and financial strength for Q1 2023. Core earnings per share is 16% higher than the previous year IFRS 4 results, which is in line with our increased call EPS growth target for 2023.

Speaker 6

Also net income of EUR 270,000,000 is a quarterly recall. Moving to our solvency ratio, which at 149% is significantly higher following the transition to the new accounting standards, given the better recognition of our financial strength and to a lesser extent Book value is an unbiased indication of value creation and as such, it is an important component of are in the Investor story to which we will continue to pay attention. Lastly, I want to comment on the value returned to our and shareholders, during the Q1, we deployed more than $111,000,000 to buy back shares. Moreover, we have announced today a significant 13% increase in our dividend to reflect our increased are earning power under the new accounting regime. Now turning to Slide 17.

Speaker 6

Will now begin the presentation. Let's dig a little into Q1 results through the new drivers of earnings. The coinsurance service results increased by 11% year over year, supported by a similar solid increase in expected insurance earnings, which arise mainly from our strong business growth in the last 12 months. Which was completed during the Q1 of 2023 and the higher interest rate environment between the two quarters. Finally, results from non insurance activities were up 6% from very good performance of our well and distributors, which was partly offset by soft results from U.

Speaker 6

S. Dealer Services. Now looking at Slide 18, which present the performance of our operating business segments. Per year increased in core earnings, driven mainly by the favorable impact of our strong last 12 month business growth expect the insurance earnings and by the favorable experience for disability and home insurance during the quarter. As for mortality, higher claims experienced during the quarter were more than offset the ability and home insurance favorable experience contributing to a $6,000,000 net insurance experience loss for the segment.

Speaker 6

It is worth taking a moment to point out that the new accounting standard recognized mortality claims in P and L, While the corresponding reserve release are reflected in the CSM, where they generate a gain in Q1. Moving to the Web Management segment, core earnings for the Q1 were 10% higher than a year earlier. This performance is essentially due to good results from the distribution affiliates, higher results from group saving and a good growth in expected insurance earnings for Segg Fund. These are very good results given that the equity market levels are lower than a year ago. As for our U.

Speaker 6

S. Operation, results in the Industrial Insurance division were good. However, the results for non insurance activities was lower than expected were impacted due to an unfavorable business mix and lower sales in the U. S. Dealer service division.

Speaker 6

Results were also impacted by higher expenses, mainly attributable to digital investment will be available to improve efficiency and client experience as well as salary and benefits for employees. Continuing on Slide 19 with the Investment segment for which core earnings of EUR 108,000,000 were 29 will be subject to the financial results and results in the quarter. This performance, which was achieved in spite of lower equity markets than a year ago is the result of the investment portfolio optimization that occurred throughout 2022 and during the first in the quarter of 2023 and of higher interest rates. Our corporate segments report All expenses that are not allocated to other segments ended at EUR 47,000,000 post tax in Q1 compared to EUR 32,000,000 a year before. The year over year increase is attributable to accelerated digital transformation, enhance employee experience to support talent retention and regulatory compliance projects, including the transition to IFRS 17.

Speaker 6

Finally, in addition to the strong core insurance service result and solid core net investment result, market related impacts were favorable in the quarter, pushing net income to a record EUR 270,000,000. Are now on Slide 20, which shows our robust capital position following the transition to IFRS 9 and 17 are at 149 percent at quarter end, our solvency ratio is well above our target are in the range of 120%. Organic capital generation continues to be strong as it amount to EUR 125,000,000 during the quarter. Our financial leverage ratio, including post tax CSM at March 31 is very low at 14.7%. As a result, our business model is enhanced with have much more capital to support our growth strategy with €1,800,000,000 of capital available for deployment.

Speaker 6

Finally, Slide 31st presents the progress of 5 important KPIs towards our medium term targets, are showing their favorable position after 1 quarter. To conclude, the results reported today confirm that under the new standards, Our earnings power is increased, our capital position is better reflected and the relative performance of our book value is solid. Operator, we will now take

Speaker 2

questions. Thank you.

Operator

Our first question comes from Gabriel Dechaine with National Bank Financial. Please proceed.

Speaker 7

Hi. Good morning. Just wanted to start with the U. S. Business.

Speaker 7

And when I first saw the Profit decline there, I thought it was mainly tied to the sales of warranties, but it looks more of an expense issue. And you lay out some of the initiatives that you're spending on. I'm just wondering about the timeline of this level of expenses. Is it going to persist for a while? Will it come back to a normal level or is this a new run rate?

Speaker 6

Gabriel, Jacques speaking. Actually, we are transforming our client experience, dealer experience, employee experience. We are just starting actually we did the integration last year. And by doing that, we have made some analysis in which we need to develop those systems to provide those better experience that will support Future growth, we're in that business for the long term. That's the way we see it.

Speaker 6

I will expect that it will last for will be at least a couple of years. And it will I don't see that as being a run rate because at one Investment in technology will have to will slow. However, the thing that is tough to say today is, if you recall, last year, we discussed about the accounting of, We say IT development, if you use cloud computing and all those kind of stuff that you can no longer match the expense with the revenue, so that creates some noise. So bottom line, we will continue to have a level of spend and invest for at least 2 years, but after that the runway, it's a little bit tough to call, but I will say it will be lower than what you see as the total today.

Speaker 2

Maybe one thing, Gabriel, also I would like to add. It's Denis here. Hi, Gabriel. The one thing that I would say is that we are obviously are taking a closer look at our expenses in that particular business considering the fact that the results are soft this quarter. And so more attention, we believe that there are opportunities to have some gains in certain areas of the So at the same time, as we are investing significantly in technology to bid for greater efficiency and greater client experience.

Speaker 2

We are also reviewing some of the operations to get some synergies.

Speaker 7

Got it. Thanks. Moving to the investment experience, positive from interest rates and also positive from equity markets and real I'm just wondering, I mean, I forget the numbers off the top of my head like $70,000,000 combined. Is that were they all This quarter because I see that real estate doesn't seem like that would be a positive outcome just on valuation and occupancy trends which are heading downward.

Speaker 5

Hi, Gabriel. It's Alain Bergeron here. Hi, Alain. So your numbers are right. And But you have to look at and think about this as a diversified portfolio if we focus on the equity and investment properties.

Speaker 5

So There are some headwinds that our FIST portfolio is subject to like in the sector in general. But I think in the past, and you see that in the slides, there's many characteristics that shows that this is a fairly are fairly high quality portfolio, that's number 1. But number 2, the exposures are fairly are broad. So you'll see in our private or you can I don't think you can see from the disclosure, but on our private equity, on our infrastructure, We had very solid returns? So net net, it shows the power of diversification and the quality of the assets that we have.

Speaker 7

Okay. Excuse me. Organic capital generation, is this more of a ramp up to the because 125,000,000 $500,000,000 so that would be shy of the full year target, but are you expecting that to ramp up over the course of the year? And I guess tying into that, Given the comments I just heard about expenses and maybe some other headwinds, still the 13% to 18% EPS growth, you're still confident in that range this year?

Speaker 6

I will take those 2, Gabriel. So Jacques speaking. So the way I look at our results in Q1, I will on the returns side, earnings side, I will say 3 buckets. I split that in 3 buckets. Things that I strongly believe will continue during the year, things that our tax tax calculation and a comment on expenses will be the third element.

Speaker 6

So for things that we expect to continue, there are 2 positive and one negative. Actually, the EBITDA experience that show through life the Canada insurance bucket will continue to be positive. We were expecting that the market concern will help us more and now then will continue to have positive during the year. Atelier distribution in well, we continue we will continue to do well are above what we were expecting. In the U.

Speaker 6

S, we expect that what we have had in Q1 will continue throughout the year. So bottom line for those three buckets, it's a slight positive and we expect that to continue. When I look at what I call statistical fluctuations, so experience gain and loss, The one that we've been hit on during Q1 is mortality. And mortality, if we were under IFRS 4, We will have had the impact of CSM and P and L all in the same in the earnings that it will have been a slight positive, okay? But here, with the geography of that new standard, it's just the impact on the claim that happened there, and it's are negative for us.

Speaker 6

It's a significant negative actually. And we had some small positive. So At the moment, I see that completely as a scale fluctuation. We just increased make a business changed according to our mortality study. So this, I would expect it will reverse back during the year because I don't expect it's a trend that start will be on those different elements.

Speaker 6

And on the expenses, we were expecting and we told you so at the Investor event that expense will be higher. During the quarter, there are a couple of things that are one time element and some of them, I would say, related to the huge stock performance during the quarter. And there are element, I would say, probably EUR 5,000,000 to EUR 7,000,000 that it's just a question of timing, they will revert back in the future. So 2 elements have been negative in the Q1 that I expect will be much better in the future. And the permanent one, the slide posted, I expect it to be there.

Speaker 6

So So to answer your question, yes, we still believe what we said at the Investor event. So that 13% to 18 were sent to be the bottom. We said it would be more the low end of that trend, so we still strongly believe in that. And about the capital organic generation, Q1 is always a softer quarter than the other one. So we still believe in the $600,000,000 for sure.

Speaker 7

Okay. So that's the ramp up for capital. Anyway, I'll leave my questions there. And Jacques, I'll wish you good luck in retirement, I guess, on the next call. I'll

Operator

Our next question comes from Meny Grauman with Scotiabank. Please proceed.

Speaker 8

Hi, good afternoon. Just to continue on the discussion of the U. S. So it sounds like you're pointing to some improvement in the inventory picture, but still the overall outlook doesn't seem to be improving based on your previous comments. So I'm just wondering what you see is sort of offsetting that inventory improvement.

Speaker 8

Is that just a comment on the rate environment? Or is there something else going on? Or is it also just comment also on the elevated expense level continuing. Just wanted to clarify the outlook there.

Speaker 2

I think at this time, I'll leave it to Mike to comment on the business.

Speaker 3

Sure. Yes, good morning, Manny. Yes, the inventory situation, in, as you said, is improving a bit. It's not we're not back to the old days or anything, but it is showing signs of improvement. But the offsetting issue or the thing that I'd say we're dealing with Now is kind of an odd combination of slowing economy in the U.

Speaker 3

S, higher interest rates And high car prices. And you could just think of a financial equation going on there where Someone's tried to buy a car and quite possible, it's not happy all the time, but it's quite possible that the F and I products or the financing of the F and I product is getting squeezed out of the equation. And that's basically what's going on. So that's A fairly material headwind that's hitting us. And it's not just us, it's hitting the whole industry.

Speaker 3

We've Seeing, I guess, some reports from industry sources that are commenting on this issue. The CEO of Lithia made a comment about F and I revenue being down in Q1 for them. So it's an industry wide issue. And To be honest, I've never seen it before. Usually, when you're going into a slowdown or recession or whatever, you get higher interest rates, you get the consumer being more worried, but usually car prices are quite reasonable during that period and that's not what we have right now.

Speaker 3

So I think what's going to improve the situation, what needs to happen, obviously, inventory getting better will help. But also, something to watch for is factory incentives or OEM incentives. They used to be very prevalent before COVID. They've kind of wound down to small numbers in the last 3 years. And there's rumors that they're going to increase, but it's just early days on that issue.

Speaker 8

That's great color. And then just as go ahead.

Speaker 2

No, I was going to say that it's Denis here. The one thing that I would add is that we are getting prepared for a rebound. I mean, it might happen wherever it happens in 2 quarters, are 3 quarters whatever, at some I mean, there is a pent up demand. And at some time, there's going to be more car being sold. I mean, there is certainly are pressure right now, but we are getting prepared.

Speaker 2

We are investing in the business. We believe in the business. And whenever the market reverse will be in a very good position based on our the platforms that we are investing in and the products we have.

Speaker 8

Got it. And maybe a related question, you were talking about sort of the investments you're making in that business, that 2 year process. I was just trying to get a better sense of what you're trying to accomplish there in terms of those tech investments. Is what's going on under the hood that The tech stack there is just not up to snuff and so you're bringing it up? Or are you investing will begin more cutting edge types of capabilities.

Speaker 8

If you give us a little more sense of what exactly the investments are aimed at, what are they trying to achieve for the

Speaker 3

is? Yes. It's more cutting edge, basically trying to be are a leader in customer experience and service to dealer and all that kind of stuff with improved technology.

Operator

Our next question comes from Scott Chan with Canaccord Genuity. Please proceed.

Speaker 9

Yes. Thanks very much. Going to the new business CSM, at your last update, you kind are targeting high single digit growth. And when I look at this quarter, under IFRS 17, I see that $168,000,000 that was down are just wondering what factors kind of drove that this quarter?

Speaker 6

Hello, Scott. Jacques speaking. There's 2 elements there actually, 1 on the life are in our insurance bucket and one in the Wealth Management. In the insurance bucket, we have to remember that We are comparing a very good sales quarter to a next 1,000,000,000 in the range of sales quarter in 2022. So that's why there's a decrease.

Speaker 6

Normally, we would expect to grow sales every year, but it was extraordinary the level of sales last are here. So that's what explain a part of it. And the other part of the CSM Growth that is lower is really has to do and guys, this is one thing that I hate about CSM. These seg funds, if you sell seg funds, you will create CSM. However, nowadays people move to cash equivalent into GIC, they are not IFRS 17 product.

Speaker 6

They are not deemed insurance product. They are investment product and there's no CSM created for that. However, we made very great business during the quarter there. Profit will flow, but we have not created any CSM. So this, I would say, growth that is not there, it's not really an issue, but unfortunately, we have to leave with those kind of metrics with that

Speaker 9

Okay. Got it. And last question, maybe it's a 2 part question, maybe tying in expenses. If I look here at consolidated core earnings, like the largest variance by far is total other expenses. That was up 26% year over year.

Speaker 9

Maybe kind of tie that in outside of the U. S. And then I also noticed your employees were up 4 I don't know if that's part of the digital transformation or something else in terms of any of the segments that you have.

Speaker 2

Well, I'm not sure I understood your question, to be honest. Could you repeat the question.

Speaker 9

Yes. Firstly, just your employees were up 4% quarter over quarter. I don't know if that's tied to digital. And then on your core earnings consolidated, your core expenses were up 26% year over year. It was a massive variance In terms of the absolute core earnings in the quarter and just wanted to see if anything out of U.

Speaker 9

S. Drove that.

Speaker 6

Actually, Scott Jacques Speaking here, we mentioned it at the investor event that we are ramping up our formation, not just in the U. S, but in some other divisions. So a large part of that increase come from that. And I will also mention, I mentioned it In my note earlier that there has been some compliance project and investment in employee experience is also were part of that. We've developed tremendous offices in Quebec City.

Speaker 6

We'll continue to deploy that great investment for our employees. However, on the financial result, it just cost a little bit more present compared to last year. So those are the reasons that expenses are there. And I made a comment earlier about a part of some expenses that we revert back, But the other one, they were expected. It was part of our business plan.

Speaker 2

Yes. And maybe one thing I would add is the guidance incorporate that was already included the fact that we work to, let's say, speed up our investments in technology to support our business. So it's not on top of the guidance. It's embedded in the guidance. So we do believe in the 13% to 18% more so on the low end right now,

Operator

Our next question comes from Tom MacKinnon with BMO Capital Markets. Please proceed.

Speaker 10

Yes. Thanks very much and good afternoon. Just a couple of questions. The first is with respect to your tax guidance. I think you talked about core taxes before being in the 21% to 23% range.

Speaker 10

They were just about 24% in the quarter. Was there anything unusual in the quarter that moved that core tax rate up? And should we be still looking at the 21% to 2023% going forward? And I have a follow-up. Thanks.

Speaker 6

Tom Jacques speaking. Yes, we continue to believe in the 2021, 2023. And you know it's like in previous quarters, there's always would tax some situation in which in one quarter it will be higher, sometimes it will be lower. So it's normal. But we believe the 2021, 2023, it's still the good KPIs to keep in mind.

Speaker 10

Right. And then the second question is with respect to the mark to market impacts. I know you did some portfolio memorization and I think the bulk of that was done in the Q4 of 2022 and the Q1 of 2023. And I think the part of the portfolio optimization was to make results are a little bit more balanced under IFRS 17 and less volatile. Now I appreciate that probably wasn't I'm looking at some of the mark to market impacts that happened in 2022 versus the Q1 of 2023.

Speaker 10

Now, I assume this is a more stability are we seeing more stability to some extent in 2020 in are in making that number less volatile. Am I correct in that assessment?

Speaker 6

Tom Jacques speaking. I would say you're correct in saying that nowadays we are very pleased with where we are, where we're standing and we've provided a lot of sensitivity are in our slide deck, so you can look at the sensitivity. And we committed to have a strong asset liability matching. And 2022, we mentioned it at the Investor event. We have to forget about it.

Speaker 6

We were We had to deal with moving out of IFRS 4, while at the same time preparing for IFRS 17. And we completed during Q1. So There's been some effect in Q1 as well. However, they've been put non core. So the best way to look at our position in Israel, that's for instance, we're providing.

Speaker 6

We are working our ALM within some limits, and That's where we will be. Hope I had to answer what you're asking.

Speaker 10

Yes, that's good. And then, Sorry, if I could just squeeze one in here as well. I think you talked about a 28% lift in the LICAT that might have put it at around 1 56,000,000 you had better reported number as well, but the LICAT is 149,000,000. Is there any reason why it might be a little bit lower?

Speaker 6

Yes. Actually, if you look on the slide, you see the math behind that. So the 28%, it's 27.5%, So it's the 28 that is there. The transition was really what we said. We've deployed Capital to NCIB, we deployed capital also with the prefshare that we have not replaced.

Speaker 6

And if you look at The organic capital generation, Q1, like I answered Gabriel earlier, it's always softer. And you see the macroeconomic environment that caused a little bit this quarter and also the transaction. And this Something that we will have to get used to. Like I said earlier, we will manage our asset liability matching within some limit, are on threshold and there will be transaction to rebalance and Alain explained it very well during the Investor Day event that situation is cleared and we will always do that. So we expect that number of portfolio revalencement to be on average 0 And to turn around 0, but there will be some minus and some plus in the current quarter.

Speaker 6

So this is really the way we look at the solvency ratio.

Speaker 10

Okay,

Operator

thanks. Our next question comes from Doug Young with Desjardins Capital Markets.

Speaker 4

Just looking on The shift on Page 20, this evolution of the CSM, there was a negative $18,000,000 related to experience. And I'm hoping, Jacques, maybe you can unpack that because I think there is negative lapse experience, but I think that was offset by positive longevity gains. And so if I'm correct, can you kind of can you break down the numbers behind that and talk a bit about I understand the longevity side, but if lapse was an issue. Can you kind of talk about that?

Speaker 6

Yes. It's not longevity here. What happened on the CSM, it's there was the mortality in insurance that the reserve release goes through the CSM. So I said earlier that if we will have been under IFRS 4, our mortality experience for the quarter will have been positive, slightly positive. But we have, under this current regime, a loss in the P and L and the benefit in the reverse in the CSM.

Speaker 6

So it has So what we have had during the quarter, negative on the CSM growth for, I would say, the in force, I already answered Scott about the new business. It's really the fact that for SEG funds, we are expecting subsequent deposit. At start of the model, our assumption is based on pre COVID long term assumption. And what is happening today, want to make a comment as well that it's different for us compared to the previous regime. We have to remember that CSM was not front ending profit under the previous regime.

Speaker 6

So if I look at the lapse experience Under the previous regime, we will have had a slight negative impact, slight loss. Are in the same period. But today, under the CSM, as you frontend all the future profit of that business, the number of amplified. However, you have to remember that the amortization of the CSM will be over close to 30 years. So this is what is So you look at CSM, but always remember the amortization period is very long.

Speaker 4

And can you quantify like What the lapse kind of would have been? And I may have to follow-up and follow with you a bit, but I think I got it, but I may have to follow-up with that. But can you quantify what the lapse sit with Ben and CSM.

Speaker 6

For me to understand the result, I did that math To be able to gain an understanding of the result. And it will have been probably a 10 or 2 negative experience loss in the quarter If we were under the IFRS four regime, so nothing to worry about at this point.

Speaker 4

Okay. And then second, if I go to the drivers of earnings, there was an impact of new business, negative $14,000,000 in the quarter, and maybe this is related to your comments about front ending profits and whatnot. Can you talk a bit about what drove that 14,000,000 Negative.

Speaker 6

This is the Onerus product you're referring to. So it's part of the business. Most of that amount come from group insurance, where the business model is that you price A group or you renew a group, say, knowing that they will last they will stay with you for 4, 5 years. However, the accounting regime asks you to recognize 100% of the acquisition costs over 1 year. So it creates, I would say, a kind of a loss in the 1st year.

Speaker 6

And future, when you will renew, they will create positive CSMs. So they will be in the CSM creation. So it's all good. It's normal business. And when you see that, our size actually of employee plan has been much are bigger than last year, so that's why you see a 14 greater than a 10%.

Speaker 6

So it's a good news.

Speaker 4

So this isn't you're writing a bunch of UL policies that are onerous and taking upfront hit. This is kind of more related to the group side.

Speaker 6

Yes. Actually, when you sell policy that are not on Eurus, you will create CSM. You frontend the profit. So it's not on that line. It's really in the CSM.

Speaker 4

Okay. And then just lastly, Jacques, I think you've always given guidance moving forward. I didn't see guidance given this year and then just wanted to kind of verify that. And then usually you do it on a quarterly basis. But and then seasonality on the deal with the county regime Q1 to Q4 is quite wide.

Speaker 4

Is there any reason to believe that seasonality from Q1 to Q4 changes materially under IFRS 17?

Speaker 6

We'll use the mortality as an example, okay? If you look at the Q1, will be netting the P and L, a good growth in the CSM. So it kind of create noise compared to the previous regime. So I would say that it's early to tell what kind of seasonality. I think the basic seasonality of businesses still remain, so the underlying fundamental will be there, but there would be some element triggered by the geography of that accounting regime.

Operator

Our next question comes from Paul Holden with CIBC World Markets. Please proceed.

Speaker 11

Yes. Thank you. I want to go back to the discussion on the U. S. Operations and I guess quickly drill down on the core non insurance come line, big year over year decline is highlighted.

Speaker 11

And I think you mentioned mix playing one factor. And I'd like to understand that mix change a little bit better. And then second factor you mentioned was lower dealer volumes, which we can see in your reported numbers. But what I want to understand there better is like how quickly do those lower volumes flow through the earnings, because my understanding is earnings is more of an amortization function based on historical sales and so it flows through slowly over time as sales grows, but it looks like the impact this quarter is more than I would have expected under that convention.

Speaker 6

Paul, thank you for the question. Actually, in the U. S, we have to remember that it's more service fee And anything else. So the impact is directly affected actually. As soon As your sales are lower, you don't make because most of the administration you provide to the dealer on which you're making your profit, your margin happen in the when the sales happen.

Speaker 6

So that's why the impact is almost immediate. If you look at on the insurance part, you're right, that is amortized, but we reinsure 90% of the business is reinsure. So this is really the mathematics behind.

Speaker 11

Okay. And then just the change in mix?

Speaker 6

The change in mix is really I will let Mike answer that one.

Speaker 3

Sorry, I was on hold or on mute rather. The change in mix relates to just a shift in our sales, basically, writing more non affiliate business and less Affiliate is where we basically are administering the policies and ensuring them, I guess. And non affiliate, we're just the insurer only. So the margin in dollar terms on non affiliate is not as good as affiliate business, although it's very profitable business on its own.

Speaker 2

And I would add that we saw a fluctuation, a statistical fluctuation for the quarter. We don't see at this point that this is a trend that is going to last forever.

Speaker 11

That was going to be my follow-up question is what is the outlook for affiliated versus unaffiliated? At At least maybe, I mean, I understand that maybe there might have been some deviation in the quarter and long term it should return to normal. But what about Short term, right, are the factors that impacted Q1 maybe also relevant for at least the remainder of 2023?

Speaker 3

Yes. I mean, we made a comment somewhere along the way there that the outlook is We're sort of taking the position of the outlook is kind of soft and probably what we're seeing will continue for a quarter or 2. I'm hopeful it will return. I think just talking to industry people that Inventory levels are improving and if the OEMs provide some, let's say, improved I think sales could pick up. There's a lot of pent up to bed out there in my mind.

Speaker 11

Great. And then I see you updated and changed your disclosures, I think, around the car loan portfolio. But just to get clarity, if you were to look at sort of the loss rate on the way you used to report it, I I think if I understand your disclosures correctly, it would have been down quarter over quarter. Is that correct?

Speaker 6

No, I would say slightly down.

Speaker 11

Okay. That's helpful. And then final question for me, because I think I understand your messaging on expenses. And again, going back to If we were still under IFRS 4 accounting, I think your message is expense experience would have been close to neutral. Is that correct?

Speaker 11

You're saying expense growth is high, but it was expected to be high. So it's not impacting the guidance or the expected earnings. Is that correct?

Speaker 6

We said there will have been negative expecting to reverse back because of the question of timing. So we can say for the year pretty close to expectation, but for the quarter slightly negative.

Speaker 11

Understood. That's all the questions I had. Thank you.

Operator

Our next question comes from Lamar Persaud with Cormark Securities. Please proceed.

Speaker 12

Thanks. Let me come back to expenses. Jacques, would it seem reasonable that expenses, and I'm talking about a consolidated level, could be up 20% versus 2022 full year 2023 versus 2023. Does that seem reasonable to you?

Speaker 6

According to our business plan and the investment we're making in our digital transformation, yes.

Speaker 12

Okay. Thank you. And then I'm wondering if you could quantify the negative impact of the higher mortality claims in the Canadian Insurance Business and Offsetting Gain in the CSM. I'm really trying to understand both what the core earnings growth would have been in the Canadian insurance business and what the experience losses would have been in the CSM otherwise. So that's I think negative in between there.

Speaker 6

I just hope that I remember the number well, Lemar. I think it's EUR 13,000,000 pretax on the P and L and EUR 15,000,000 on the CSM. So that's what happened. What I don't recall if it's free or after tax. Sorry for that.

Speaker 12

Okay. Okay. If you could circle back to me after the call maybe higher, that would be perfect. And then what was the so now that we have that negative insurance experience excluding the mortality benefit, what was that driven by?

Speaker 6

We thought mortality will have been positive said because the net of insurance sector was €6,000,000 negative and I just mentioned we have the €13,000,000 I don't know if it's tax So the other element on the sector was positive for Ayurveda and Home and some small other small items.

Operator

Our next question comes from Darko Mihelic with RBC Capital Markets. Please proceed.

Speaker 13

Hi, thank you. Maybe my first question, just going back to the tax rate, Jacques, You don't have to answer now, but maybe it would be helpful for like an idea of the tax rate per segment because there's a lot of volatility in So if you can come back to me that would be very helpful for my modeling. And my other question though really is For Jacques and Alain, and it has to do with Page 10 of your supplemental is the OR11 in the PDF file. This would be the investment core net investment result. And before I ask this question, I will say honestly that I have an idea of the answer, but I would like to just ask this for you on the record.

Speaker 13

If Denny Ricard came to you Jacques and you, Alain, and said, give me a forecast for this segment, how would you go about doing it? What would the number be

Speaker 12

in 2023?

Speaker 2

Can answer. It's a

Speaker 6

good question that goes especially with the fact that under that regime and we provided and I believe you have the information in that slide deck, But at the Investor event, when where we demonstrated that more businesses are affected by the economic environment. So it means that Next quarter core EPS are affected by the macroeconomic environment. So that will be the first Fensa will have to tell Denis that, yes, we do our best with the ALM, etcetera, etcetera. But There are things that are not under our control that we have to live with. However, I would say that We are the margin, okay, the margin that you will see there is really the Earnings expectation on our asset portfolio over the rates, the yield curves use to value the different liabilities, plus investment on surplus.

Speaker 6

So it sees what is there. So It's not to market for asset, not to market for liabilities. So our expected, I would say, you saw the growth that we are here. You see what is happening and I think you can expect that it will grow at probably, I would say 8 to 10, maybe a little bit more than that. It will grow with the business actually because it's a spread over the asset and liability, but asset affected by economic environment.

Speaker 6

Okay.

Speaker 13

Thank you very much for confirming that. Thank you.

Operator

Mr. Ricard, there are no further questions at this time. Please continue with your presentation or closing remarks.

Speaker 2

Yes, thank you. And I guess, Jacques, since we announced your retirement, people are asking all the questions to you. They want to take advantage of you, right? Anyway, I'd like to thank you, all of you for attending this meeting. I'd like to thank also our employees who worked so hard on IFRS 17.

Speaker 2

Have been, I think, the highlight of this quarter and the highlight of the questions as well, because we all need to find have some benchmark, and I guess, it's going to take a couple of quarters for sure. So I guess I'd like to highlight a couple of things that are very important for us. The fact that we truly believe in our earning power and we've increased our dividend by 13% in the quarter is a testimony of that. The fact that we've increased the EPS by 16% versus last year IFRS 4, and we are still believing that we are confident that we can deliver on our, let's say, the low end of the 13% to 18% that we provided is also, I having a good testimony. And also always keep in mind that the transition to IFRS 17 for us has been positive in terms of book value and also expectation of EPS going forward.

Speaker 2

And finally, the fact that our Capital for deployment, we've said it so many times and now it's reality. We've got $1,800,000,000 of capital to deploy and we're very pleased with that. So with that said, thanks a lot and see you next time. Bye.

Operator

That does conclude the conference call

Remove Ads
Powered by Quartr
Earnings Conference Call
iA Financial Q1 2023
00:00 / 00:00
Remove Ads