First National Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to the Industrial Alliance Second 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 Friday, August 4, 2023. I would now like to turn the conference over to Ms.

Operator

Marie Anneigbonneau, Head of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to our 2023 Second Quarter Conference Call. All our Q2 documents, including press release, Slides for this conference call, MD and A and supplementary information package are posted in the Investor Relations section of our website atia. Ca. The 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.

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 statements information on Slide 2 as well as the non IFRS and additional financial measures information and the note 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 and A available on SEDAR and on our website with an update in our Q2 2023 MD and A released earlier today sorry, released yesterday. My apologies.

Speaker 1

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 IE. First, Mike Nick, Chief Growth Officer and responsible, among other things, for our U. S. Operations Alain Bergeron, Chief Investment Officer Stephane Bourbonnet, Executive VP, responsible for our mutual fund business and Wealth Management Distribution Affiliates Rene Laflin, in charge of individual insurance and annuities Pierre Miron, responsible for dealer services Canada and IO, Duan Home Sean O'Brien in charge of our group businesses and also attending his last earnings call today is Jacques Padmein, our Chief Actuary and CFO.

Speaker 2

As you know, Jacques will be retiring at the end of this year after 33 years of dedicated service, for which I thank him on behalf of the Board and the management team. Over the years, in addition to leading several Strategic projects, including most recently the transition to IFRS 17 and our flexible work from anywhere working model. Jacques developed strong and genuine connections with his teams and had a positive lasting effect on their professional development. Our incoming Chief Factory and CFO, Eric Jobain, has been with Allie for more than 29 years. Eric has occupied roles of increasing responsibility over the years, including in Corporate Tax Now for the results.

Speaker 2

Yesterday, we reported our results for the Q2. I refer you to Slide 8, While I comment on the main KPIs. Core EPS is $2.39 which is higher 3% higher than a year earlier, In which our results were particularly strong and 15% higher than in the Q1 of 2023. Core ROE of 14.5 percent is close to our medium term target. Our capital position continues to be very robust with a solvency ratio of 154% as at June 30.

Speaker 2

Our strong organic capital generation contributes to this solid result. In Q2, it amounted $250,000,000 keeping us in line to meet our 2023 organic capital generation target of at least $600,000,000 Business growth also remains strong with very good sales in almost all business units. This performance led to a solid 12% year over year growth in premium and deposits and a 10% year over year growth in AUA AUM. Finally, following a smooth transition to the new accounting standard without any impact on our book value, The latter continued to grow during the quarter, reaching 4% growth year to date. Overall, our 2nd quarter results Confirm a very robust capital position along with continued sales momentum from almost all business units and increased profitability year over year.

Speaker 2

Moving to Slide 9 to look at our year to date results. I will comment briefly on the 1st 6 months of the year. Since the beginning of the year, our core profit has grown by 7% compared with last year IFRS 4 core EPS. This is a good result given a slower recovery in our U. S.

Speaker 2

Dealer Services division and the economic context. However, following recent developments in the environment such as higher mortality and P and C claims as well as the worsening of the yield curve inversion. On those positive changes occurred during the second half of the year, It now seems less likely that core EPS will grow by at least 13% over the 2022 IFRS 4 results in 2023. Building on the robust company's fundamentals, business model, growth potential and strategy, we continue to be fully committed to creating value for for shareholders and delivering average core EPS growth of 10% plus per annum in line with our midterm market guidance. Looking at the other metrics, our solvency ratio is well above target, core ROE is near mid term target and our dividend payout ratio is well within target.

Speaker 2

As for organic capital generation, we expect to reach our $600,000,000 target in 2023. In conclusion, our strategy is and has always been based on the long term vision for sustainable growth. On the strength of our solid capital position, we continue to invest organically in our future growth, particularly in our digital transformation, while looking for acquisition opportunities that meet our criteria.

Speaker 3

With this in mind

Speaker 2

and in keeping with our purpose Making our clients feel confident and secure about the future, we'll be able to continue to deliver average annual core EPS growth of 10% plus and to reach our core ROE target of 15% plus. This concludes my remarks. I will now turn it over to Mike, We will comment on business growth. And following Mike, Jacques will provide more information about Q2 results and our capital strength, and we will then take questions.

Speaker 4

Mike? Thank you, Denis, and good morning, everyone. In Q2, our business growth momentum continued in almost All our business units. Sales were particularly good in Canada and individual insurance, dealer services, IA Auto and Home, for insured annuities and for our group businesses as well in U. S.

Speaker 4

Individual insurance. We are also pleased with Wealth Management sales results given the volatility of market conditions. As for U. S. Dealer Services, the environment continued to be challenging.

Speaker 4

Now please refer to Slide 11 as I will comment more specifically for each business unit. Starting with Insurance Canada individual insurance continues to lead the Canadian market in terms of the number of policies issued. During the Q2, individual insurance sales totaled $89,000,000 a solid result that compares to a strong quarter of $98,000,000 a year earlier and which is 22% higher than the $73,000,000 in Sales recorded in the Q2 of 2021. In addition to the strength of our extensive distribution networks and the performance of our digital tools, this good result is attributable to our comprehensive range of products. Incidentally, we are constantly striving to offer new products to better meet our clients' needs.

Speaker 4

With this in mind, the company launched a new universal product for the high end market in the 2nd quarter, which was well received. For Group Insurance results, strong growth in sales drove net was up 6% year over year to reach $404,000,000 Sales in employee plans divisions were up 8% compared to a year earlier amounted to $13,000,000 Sales for special markets totaled $86,000,000 up 25% year over year. In the dealer services division, sales amounted to $190,000,000 up 10% to a year earlier. This performance is a continuation of past quarters with very good growth in the sale of P and C products, which include extended warranties and replacement insurance, up 21% From the same period in 2022. As for our P and C affiliate IA Auto and Home, direct written premiums registered Strong result with a 12% increase when compared to the same period last year.

Speaker 4

Now turning to Slide 12, which focused on the Wealth Management Business segment, IA segregated fund sales continue to do well as the company still ranks 1st in Canada for gross and net segregated fund sales, strengthening our leading position in the industry. More specifically, segregated fund Sales totaled $829,000,000 and net sales resulted in inflows of $188,000,000 Mutual Fund gross sales totaled $370,000,000 results similar to last year with net outflows of $139,000,000 Together, total net fund entries amounted to $49,000,000 for the 2nd quarter. For insured annuities and other savings products, 2nd quarter sales reached when markets become less volatile. Finally, sales in group savings and retirement totaled $747,000,000 in the 2nd quarter. This represents a 7% increase year over year, mainly driven by a large transaction in insured annuity products during the quarter.

Speaker 4

Going to Slide 13 for our U. S. Operations business segment. Sales in individual insurance division amounted to US43 million dollars And are up 13% for the same period in 2022. This good growth was driven by strong performance from the middle and family and final expense markets.

Speaker 4

In the Dealer Services division, 2nd quarter sales amounted to $246,000,000 compared to $266,000,000 a year earlier. This result is mainly attributable to reduced affordability resulting Pleased with the 8 awards received by U. S. Dealer Services at the 2023 Dealers Choice Awards. For the 2nd year in a row, we received the highest number of awards confirming how well we are perceived by dealers.

Speaker 4

Moreover, during the last quarter, we increased our dealer count for our products by 6%. Overall sales results for the quarter, but also for the first half of twenty twenty three are quite strong for most business units. This shows that with long term vision and discipline, we continue to successfully generate solid business growth. Now I'll turn it over to Jacques to comment on Q2 earnings and capital strength.

Speaker 5

Thank you, Mike, and good morning, everyone. I will start with Slide 15, which presents an overview of our profitability and financial strength for Q2 2023. Core EPS increased by 3% year over year and core ROE for the last 12 months is 14.5%. The increase in earnings is mainly due to a 14% year over year rise in the core net investment results and a 11% increase in expected Insurance earnings. In addition, overall core insurance experience was positive mainly as a result of favorable disability In terms of capital, we ended the first half of the year in a very robust capital position highlighted by our solvency ratio of 154%.

Speaker 5

Ongoing good organic capital generation and some capital and risk management Practices contribute to this capital strength. Book value now. Thanks to our prudent and long term management approach, It was not affected by the transition to the new accounting regime. During the 1st 6 months of 2023, IE book value increased by 4% despite the volatility expected from IFRS 9 and 2017. Now turning to Slide 16 to look at results by operating business segment.

Speaker 5

In the Insurance Canada segment, core earnings of $91,000,000 compared to a particularly strong result for the same period in 2022. During the Q2 of 2023, a solid 12% year over year growth in expected earnings was recorded, including a 27 Some increase in the CSM recognized for service provider. Insurance experience in this business segment was neutral as favorable long term The EBITDA experience in employee plan and other smaller experience gains were offset by unfavorable mortality in incidental insurance and higher claims at IA Auto Enom, mainly for auto coverages due to inflation, but also as a result of weather events. In the Wealth Management segment, core earnings of $76,000,000 for the 2nd quarter were 15% higher than a year earlier. This performance is a result of the 12% year over year growth in expected earnings for Seq Funds, lower And strong results from the distribution affiliates.

Speaker 5

As far our U. S. Operations, Q2 core earnings were $26,000,000 Result in the Industrial Insurance division were strong, supporting the core insurance service result, which is 15% higher than a year ago. The result of our non insurance activities was lower due to an unfavorable business mix and lower sales in the dealer service division. Also, we continue to invest in digital technology to improve efficiency and client experience and we'll be well positioned to benefit from opportunities when sales pick up again.

Speaker 5

Continuing on Slide 17. Looking at the Investment segment, Q2 core earnings were $106,000,000 compared to $74,000,000 a year earlier. This performance is attributable to the 14% core net investment result growth, following the investment portfolio optimization that occurred mainly throughout 2022. Also, the 2nd quarter result was supported by the impact of the rise in interest rate in 2022 as well as a lower income tax charge due to the tax filing adjustment as it occurs every year in June. Finally, our Corporate segment recorded after tax expenses of $52,000,000 resulting from the accelerated digital transformation, The enhanced employee experience to support talent retention and regulatory compliance projects.

Speaker 5

Looking at non core items on the right side of the slide, the impact of market variations in the second quarter was unfavorable by $72,000,000 mainly due to interest rate variations during the quarter. Please refer to Slide 26 for more details on net investment results included in core earnings. Also this quarter, assumption change led to a post tax Net reserve release of $43,000,000 as model improvements and projection refinements were implemented following It is worth mentioning that while non core macroeconomic deviation has had a neutral impact on the first Out of 2023, the recent worsening of the interest rate yield curve inversion is an unfavorable factor for core earnings in the short term. Now on to Slide 18, which shows about our very robust capital position. Standing at 154% at quarter end, our solvency ratio is well above our operating target of 120%.

Speaker 5

Organic capital generation of $150,000,000 is strong and we are on track to reach our $600,000,000 target. Our segment C ratio continues to have little sensitivity to macroeconomic variation and our financial leverage ratio at June 30 is low at 17.3%. As a result, the amount of capital available for deployment To support our growth strategy stands at $1,800,000,000 This concludes my last remarks as the CFO of IA And I want to take this opportunity to thank the financial community and tell you what a pleasure it has to work with you and to exchange with you over the years. I also want to thank my team, my colleagues, The Board member and Denis for their continued support and trust and wish them success in their continued effort in performing for all our different stakeholders. Operator, we will now take questions.

Operator

Thank You will hear a 3 tone prompt to acknowledge your request. Our first question comes from Gabriel Dechaine with National Bank Financial. Please proceed.

Speaker 6

Hi, good morning. I would like to start off with the growth Drivers and the targets for this year and you touched upon a few of the items that have affected the outlook there. The P&C business, it's not as easy to see in your disclosures now how that one did. Can you quantify like The earnings year over year for P&C and the size of the cat losses perhaps. And then on the yield curve, you mentioned this, I don't know if it's misspoken or something, but it sounded more like a recent phenomenon, but we've got a yield curve inversion for quite a while now, Wondering if I'm just not looking at the right parts of the curve.

Speaker 6

How much of an impact does the inverted yield curve have on the Earnings profile of the business.

Speaker 5

Gabriel, Jacques speaking. About the P and C earnings, for the weather event, it was a €2,500,000 in Q2. And beginning of July it's a post tax. Beginning of July, there were also events in Quebec. And my understanding at this point, it would be the same kind of magnitude, just adds up guys for Q3.

Speaker 5

Yes.

Speaker 2

About the yield curve,

Speaker 5

about the yield curve impact?

Speaker 6

What? Before you proceed, The P and C profit overall, because it's buried in the Canadian insurance. I'm just wondering what the absolute number is for profits there.

Speaker 5

I don't have it on the top of my head. I know that I more have Compared to expected, we have €5,000,000 after tax lower than expected. We were expecting less than last Yes, because of we knew that following the COVID situation, people were driving more. And so That's what I have on top of my head at this point Gabriel.

Speaker 2

Okay. That's good.

Speaker 5

And after the yield curve, in fact, You're totally right. We are exposed at all, I would say, duration on the yield curve. And every quarter, there are some evolution of our Asset portfolio and that is something that varies from quarter to quarter. However, at the end of the quarter, we like we said, our core definition we use, we don't Recognize movement of interest rate, movement of credit rate. So it means that at the end of the quarter, we have the new yield curve that would be used to calculate cost for the following quarter and we're providing those sensitivity.

Speaker 5

We're providing those sensitivity in our slide deck and what you will not What we have noticed with the current situation of our asset liability matching and the yield curve, It would be a drag. I would say between $0.05 and $0.10 over Q3. That's what we're expecting

Speaker 2

right now. Maybe one thing I'd like to yes, it's Denis here. Just want to add on this because the inverted yield curve may create some kind of noise When it happens, I mean, but at the end of the day, when you look on the long term basis, obviously positive yield curve is Most of the time what is happening and keep in mind that for IEA positively occur with let's say the level of long term interest As they are right now, I mean they've increased significantly I guess, is a very positive. So my conclusion is that short term there are some noise in this Inverter which brings some drag in the earnings, but long term it's very positive for value creation.

Speaker 6

Okay. And Jacques, good luck in retirement and enjoy Spending more time on the tractor.

Speaker 5

Thank you very much, Gabriel.

Operator

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

Speaker 3

Hi, good morning. I'll start off with Gabe's best wishes Jacques for your retirement. I think I speak for everyone, all the analysts, You made our jobs easier, so thank you. In terms of the question, Denis, you highlighted factors impacting the growth outlook And in the previous answer, you touched on one aspect of that. I'm curious as you look to 2024, How you're viewing these factors in terms of how temporary they are?

Speaker 3

And is it what sense do you have in terms of those factors Not being so relevant as we look into next year.

Speaker 2

Well, let me start with, let's say, the P and C business, This is short term business and short term business is cyclical. We've seen that through the years. I mean, It's always been like that. And the idea right now is that the industry is repricing. So I can see that we are going through a cycle where the results are lower and I mean we've seen it for the whole industry.

Speaker 2

But the good news is that this can be repriced. And so I see the light at the end of the tunnel here for that. In terms of Mortality, I mean, and Jacques can comment on that. But it's more unknown. I mean, we've had 2 quarters in a row with mortality that's been negative.

Speaker 2

But we'll see going forward and Jacques you might comment after. But and the other point is the U. S. And in the U. S, we're taking actions and it's I mean to some extent it's under our control also because we can take some actions.

Speaker 2

We're as Mike Mazz mentioned, we are emphasizing big time our growth strategy, getting New dealers increasing the pipeline. And so to some extent, we can there's something we can do about it even if the economic context or let's say the auto Industry context is might not be positive. So at the end of the day, when I look at everything, I'm very confident about the fact that we can deliver over Like a midterm target of let's say 10% in average of EPS growth. So our business model is very strong. It's not I mean, It's not because in the short term there's been some bumps that it has changed anything about our business model.

Speaker 2

And Mike, sorry, but Jacques, you might comment on the mortality? Now in fact

Speaker 5

for the mortality, when I saw the Q1 result, I really at the time, it was purely That's just calculation. The fact of having the same kind of result in Q2, we dig more into it. And there may be some part of it, a part That will be recurring probably we associate that to the aftermath of COVID. In fact, during COVID, if you recall well, I Talk about 3 elements that I'm seeing affecting mortality. The first one is people that prematurely die During COVID, we'll not die.

Speaker 5

And so again, so this is something that will have been posted for the For 2022, we hand over. 2nd element positive is the fact that there's been a lot of Research in medicine, so improving mortality, but this may be more long Term, mid term, long term, not short term. And the third, which was a negative, is the fact that during distention, people were not able to attend and go to the physician as Much as they were doing before. So that's probably the ripple effect that have a stronger impact at this time. So that's the way we see it.

Speaker 5

So We believe that 2 third actually of our of that mortality could be affected by that and the remaining is the Scal fluctuation, so it can come back like we saw in previous year.

Speaker 3

Thanks for that. And I just wanted to ask on the corporate segment. We've seen an increase in expenses there and you highlight a number of factors for that. And again, a similar question In terms of how much does that persist going forward? Like when I look at some of the drivers that you highlight Like related to talent retention and regulatory projects, I think the labor market is changing, so maybe some of these factors are likely to moderate relatively soon.

Speaker 3

So I'm just curious on negative $52,000,000 in corporate this quarter. How should we think about this number going forward? Can it kind of go back to what we saw sort of in early 2022?

Speaker 5

Okay. Jacques speaking, Mene. It won't come back to 2022, Lavell, for sure. For the remaining of the year, we expect to be in the same Balpacas what you've seen so far in 2023. In 2024, we will see there's a big, I would say compliance project we're working on right now.

Speaker 5

And this project, the level of capitalization It's low compared to most of the not most, but all other digital transformation project we are doing. So overall, the way we manage expenses overall. The fact with IFRS 17 is that some And even without IFRS 17, there are some expenses when you transform yourself that you can capitalize, some other that you cannot capitalize. And this part, It's when we work on the project, sometimes that we are able to have the real value. So when we do forecast, we don't have exactly all the IT Solutions, so sometime we may be up a little bit and this is costing a little bit this year on the P and L, but that's not a big amount.

Speaker 5

And the other element also is the geography of expenses of what affect the P and L versus what affect the CSM. So there will be some refinement in our model for next year. But for this year, overall expenses were okay. It's just that the P and L is Slightly negatively affected so far this year.

Speaker 4

Thanks, Sven.

Operator

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

Speaker 7

Hi, good morning. Maybe we can start with just the assumption change, Jacques. Can you talk about what that was? Now you talked loosely about model refinements and stuff like that, but I mean it's not an insignificant number, so I'm curious what it was. And can you talk about the mechanics of how this works?

Speaker 7

Like why does it positively impact earnings, negatively impact LICAT and CSM?

Speaker 3

Can you talk about the moving parts?

Speaker 5

Hello, Doug. In fact, you know IFRS 17, It's a brand new big center and we have to change valuation of all insurance product of the organization. So it's not now that we have unmaged your processes and there are some places where we find refinement. So we were still finding refinement in IFRS four and it has been there for quite a long time. So this is normal.

Speaker 5

What is happening this quarter, we've made few, I would say, improvement. I will go with the mechanic first. When you do business change related to actuarial decrement like mortality, lapse, morbidity, Expenses, this will flow through the CSM. But it is calculated with the locked in rate And you have to do a second calculation with the current rate and the difference between both calculation will go Through the P and L. So there are even for those actual decrement, the big part would be in CSM, but there are a ripple effect in the P and L.

Speaker 5

And if you move your economic assumption, your valuation assumption for LiveUpdate goes directly to the P and L. So to answer specifically for the refinement we brought this year, there's been some refinement on the CSM was more about our power product, the way we modelize power product. And on the P and L, it has to do with refinement about the strength instrument we are using to support Long term liability, we speak here more about the strength options. So we improved our monetization and there were 2nd element that is ready to reflect market expectation for the expected credit loss ratio than our own So that were the big element that we refined this quarter.

Speaker 7

Okay. You and I may have to sit down and talk more about this, but I'll leave it at that For the call. Thinking of the second question, CSM, like the impact of new insurance business declined 13% quarter over quarter. Denny, you talked Boathouse sales were strong. And if I look at Canadian individual insurance, quarter over quarter was flat.

Speaker 7

And I assume that's one of the bigger drivers of that Was there a mix impact? What else drove the decline in that line item in the CSM?

Speaker 5

Okay. Jacques again. And Doug, on my previous question, I should mention that we're working with A total liability of more than €30,000,000,000 So when you said earlier that it was big number, it's not big number when you work with a €1,000,000,000 liability? Yes. Okay.

Speaker 5

About the CSM for new sites, so if we look at quarter over quarter, There are a few elements there. The sales were lower like you said. Also there has been business change that we made at End of Q4. So in the CSM, we reflect those new assumptions and it has an effect. Also the business mix, Like you said, it's different.

Speaker 5

And keep in mind, guys, it's very important. CSM doesn't the reduction of CSM doesn't mean that profit of that business will be worse, because it depends on the product you sell. A long term guaranteed product will have a higher CSM even if it's less Profitable data term product. So keep that in mind, it's very important. So that's why we prefer Organic generation of capital that capture the cost of capital or the capital required to support the business is very, very important.

Speaker 5

Other elements also, there has been some reallocation in our supplementary information Package, in fact, there were elements that last year were considered as new So it's and we had the impact in the gain and loss. So we reclassified that and it has a negative impact on the value of new freight as well. So This is what I explained those number.

Speaker 7

Okay. Yes. And then if I can sneak the one last one in. And Landy, there's been a $28,000,000 mark on your investment property this quarter, dollars 48,000,000 year to date, a little higher than we would have expected. Can you talk about details on this?

Speaker 7

Was this all office, Canada? Is there other regions? I don't think you really have big exposure And then just a bit on the outlook for that investment property portfolio.

Speaker 8

Sure, sure. First of all, you're right, it's 100 And look, and as you see, we have an overweight in office space and the office, It's a factor in the real estate right now that there is some uncertainty. I don't expect that the headwinds will stop tomorrow. On the other hand, if you look at the quality of our portfolio, even if there is a lot of uncertainty in the short term, This should help mitigate the impact. Think about our lease term.

Speaker 8

The weighted average lease term is 9 year. We have a lot of government leases. The portfolio is unlevered. Another thing I would mention is that the recent activity, The vacancy that if you look through the numbers, you'll notice that the vacancy went down very slightly. You'll also notice that actually you won't notice, but what I like is in Q1 and in Q2, our Net new leases has been greater than the termination.

Speaker 8

So that means that this is a leading indicator of things getting better. And finally, one thing I would say is that we have some potential upside in the portfolio. We have a few value creation opportunities that we're pursuing. Of course, this is not something for the next quarter, but this is something that mid term, There is some upside in the portfolio.

Speaker 7

Great. Thank you. And Jacques, all the best in retirement. Thank you.

Speaker 5

Thank you very much, Derek.

Operator

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

Speaker 9

Thank you. Good morning. I guess where I want to start is try and get a little bit more or I guess narrow the range of 2023 guidance. So when you say no longer To be above 13%, but you seem to be reiterating the 10% growth objective over the medium term. I kind of think of a range of something like 10% to 13%.

Speaker 9

Is there is that a correct interpretation of what you're trying to tell Or because of the headwinds, it could be something less than your normal medium term target?

Speaker 2

It's Denis here. I think it would be fair to say that and we've seen that over time that there are some years when there's There's more bumps and we've hit something lower than 10% in the past. After 6 months, we're at 7%. So to get to the what you're talking about here 10% to 13%, there will be there will have to be a significant turnover about the various factors that we mentioned. So under that condition, it could happen, but so far after 6 months 7%.

Speaker 2

So it's your guess here. But we've seen the years where it has been lower than 10%. But I mean our 10% is an average. So some years it's higher, some years it's lower.

Speaker 9

Got it. Okay. Just want to drill down a little bit on the Investment income, it was down quarter over quarter. Is that related to the yield curve inversion or is there something How's going on there? And maybe as part of that question as well, it gives us a sense of sort of what we should expect in future quarters?

Speaker 5

Jacques speaking. Yes, it has to do with the yield curve movement that happens during Q1. So this is the main element. There are 2 other elements here. We bought back the pref share.

Speaker 5

And if you look at the Jorges graphite of where it has an impact, it reduced the investment income because we no longer manage the asset and the cost of the Ref were under the line, so there's an amount there. And also we have less slightly less invested in NFI during the quarter, But mainly it's interest.

Speaker 9

Okay, understood. And then last question for me, I guess, is on the U. S. Dealer Services business and the warranty in particular. So when I look at the data points coming from the industry, it suggests Higher like vehicle sales, it's just some improvement in used car pricing, it's just some improvement in dealer incentives, Inventories are certainly building.

Speaker 9

So there's a number of factors that I

Speaker 2

would look to

Speaker 9

that would point to Proving industry fundamentals, maybe not big step function, I get it, but at least Q2 looked better than Q1. So I'm wondering if there is Something I'm missing here that remains a challenge and maybe simply just financing costs are high and therefore sales are Low, but is it not correct to think that things are at least sequentially getting better for that business?

Speaker 4

Hi, Paul. It's Mike Stichney. Yes, I'm agreeing with what you're saying. Those are the positive things going on and things are improving. There continue to be some headwinds at the same time though and it's just how it all plays out and I guess You see it in the overall sales, whether it's cars or insurance.

Speaker 4

Some of the headwinds, as much as vehicle pricing It's improving and there are some incentives. The data we've seen is that 45% of new car sales were still above MSRP In the Q2, so obviously, that kind of means prices are still high. We're not definitely not back to pre COVID levels. You mentioned used car prices are coming down and that is true. That's what we're seeing as well.

Speaker 4

But Strangely enough, used car sales are not showing any increase. New car sales had a pretty good increase, but used car and maybe just the average consumer For a used car is somewhat constrained, higher interest rates, whatever concerns about the economy. And I guess The other factor in this I mentioned last quarter, higher interest rates, I see it as a headwind rather just in terms of We're seeing lower penetrations on in terms of insurance products with car penetration of insurance Products per car kind of thing. And we're also seeing the dealers or the F and I people selling more value products as well as a way to squeeze in Some insurance into the contract, which is better than no sale, but obviously it's a bit of a headwind overall. So at this point, I'm feeling we're getting a gradual improvement.

Speaker 4

I'm feeling kind of Optimistic in that we grew our sales quarter over quarter. We're increasing our dealer count. But yes, we're nowhere near pre COVID levels. That's sort of where I see it.

Speaker 9

Okay. And sorry, just to follow-up on that in terms of You expanded your dealer relationship 6%. And I think sales are down roughly 7% year over year. So if I think Going forward as those new dealer relationships roll on and maybe something like a net neutral impact on overall sales is a reasonable expectation. Is that the right way to think about it?

Speaker 4

I see it as a positive. If you can add dealers, you should build out sales.

Speaker 2

Okay. That's it

Speaker 9

for me. And again, Jacques, thanks for all the help over the years and congratulations and enjoy the retirement.

Speaker 5

Thank you very much, Paul.

Operator

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

Speaker 10

Yes. Thanks and good morning. And just to start, say, Jacques, all the best. And it's been I've enjoyed our discussions And all the best to you and thanks for all your support. So the first question just on the core tax rate Kind of running in around 18%.

Speaker 10

I think you guys have been talking sort of like 2021, 2022, just some color as to what happened there and What the guide is? And I have a follow-up. Thanks.

Speaker 5

First, hi Tom. Thank you very much for your good work. And about the core tax Great. Yes, we said 21% to 23%. So profit is I would say you can use 22% as the run rate.

Speaker 5

Our profit It is a little bit lower than expected. So reality, it's a little bit lower than that. What happened is, in fact, the true And few other elements, we have the CIF stuff. So usual tax stuff that happened for Insurance Company.

Speaker 10

Okay, thanks. And if we look at the Organic capital that you generated, that went up quarter over quarter and you talk about all this noise associated with the yield curve movements and things like that. It doesn't seem to have impacted capital generation. Can you talk about the outlook for capital generation still sitting And the $600,000,000 guide this year, how much is that increase going forward? And what are the things that You would point to that would change the €600,000,000 guide that you've got for 2023 for organic capital generation?

Speaker 5

We're still on for the €600,000,000 In fact, even if profit is slightly lower, I would say capital requirements for business is Slightly lower as well because of the business mix we are selling. So we are still fine with that. And you can see the trend impact on the Slide macroeconomic environment impact, there's been a negative impact this year. Portfolio adjustment has been positive. So We're still very optimistic about our $600,000,000

Speaker 10

And the launch With the new UL for high end market, that has no impact on that as well. That's not going to is that going to add to this or be neutral to it?

Speaker 5

In fact, that product is priced according to our profitability standard, our other product as well. So we just I hope it will increase sales and that's exactly why we developed such products. So it will help by bringing more profit.

Speaker 10

Okay. That's good. Now then as a final question, I guess, given the key performance indicator for the company and the $1,800,000,000 in excess you're currently sitting on. You're very comfortable from a capital generation standpoint and an excess capital standpoint. So You have been buying back a little stock.

Speaker 10

Why not pick up on that more, especially if there's any potential Weakness in the stock price, I'm assuming you would believe it would be attractively priced. Or what are your other plans for it? I mean, you talk about investments Digital spends in the company, but if you can take that question for us. Thanks.

Speaker 2

Okay. Tom, I'd like to comment on that. It's Denis here. Great question. I get that question Several obviously several times.

Speaker 2

We are in a very good position. And in terms of allocation of capital, Certainly, the investment in technology is very important. And organic growth It's key for us in all our products. We are generating more than 15% ROE. And second, obviously, we look at acquisition.

Speaker 2

And in terms of acquisition, We always have some files that we're looking at right now. I would say that at this point, probably more on the life insurance side when we look at the U. S. Versus U. S.

Speaker 2

Dealer where it's more like tuck in acquisition at this point. So we are on the lookout And we are actively buying back shares because we are generating so much excess capital as we go. So we are In a very great position to grow the organization. And just keep in mind also that we will stay quite obviously prudent and disciplined in the way that we Acquire our organization if we do. That's something that is very important.

Speaker 2

I mean, we've seen a lot of files where we just exited because it didn't meet either our Strategic intent or financially didn't make sense. So we are we continue to be very disciplined in the way we allocate capital.

Speaker 10

Okay. Thanks.

Operator

Our next question comes from Mario Mendonca with TD Securities. Please proceed.

Speaker 11

Good morning. And Jacques, first for you, thank you very much for the sort of free education you offered me and You offered me and everyone else as we especially as we got through IFRS 17 and all the best to you in your retirement. Yes. Let me get started by first asking a question on insured annuities. I understand the dynamics and what's driving the growth What's less clear for me under IFRS 17 is how it gets reflected in your results.

Speaker 11

Is this something that would that growth in that asset base, would it be reflected in CSM amortization in that segment, the Wealth Management segment or would the spread income be captured in the net investment result?

Speaker 5

Thank you very much for your kind work, Mario. It will be in the CSM. So you create CSM profitable, Annuity, when you sell them, you treat CSM. So it will amortize into the division, to the wealth division. And of course, there will be some investment revenue as well as you manage the spread there, which is Which would be the trend between the expected and the actual will influence, I would say, the net core investment income.

Speaker 11

Okay. So most of it goes through CSM, but a portion of the spread or

Speaker 5

some of the spread end will go

Speaker 11

through investment.

Speaker 2

Okay.

Speaker 11

The references you made to inverted yield curve and the effect that that could have on your results, where is that seen? Is that seen in The investment result, it seemed logical that it would go through the investment result or is there something else?

Speaker 5

You're totally right. It's there.

Speaker 11

And I think were you implying in your response when you said $0.05 to $0.10 I think is what you said. Were you suggesting that it would be 0 point 0 $0.05 Worse than what we saw in Q2 2023. Is that the point you're making?

Speaker 5

Yes. It's comparable to Q2, what I said. And Mario, there are some ripple effect as well. Interest rate yield curve have some effect On the risk adjustment and CSM because you have to recalculate them, but it's minor compared to what will go to the net investment. So most of the impact would be net investment.

Speaker 11

Okay. Next question real quickly. The U. S. Dealer services, your folks have on 2 quarters, you referred to the mix Being unfavorable to the sort of margins you generate there, could you remind me what you mean by mix in U.

Speaker 11

S. Dealer Services and talk about the dynamics that are impacting that mix?

Speaker 5

There's mix about product, but also mix with the distribution affiliate, non affiliate That it's less profitable with the non affiliate. So this is what we're referring to when we speak about the Distribution mix.

Speaker 11

But why would the non affiliate be growing and the affiliate not be growing?

Speaker 2

Yes. Maybe Mike you would like to get some details out of this?

Speaker 4

Yes. No, Amira, it's just it's marketing stuff. Sometimes the market moves one way or the other. The non affiliate clients we have are doing better and selling more. It's kind of a short term fluctuation is why I see it.

Speaker 4

And it's very profitable business, but profits as a percentage The sales of revenue are lower, but it's still quite profitable. We're happy to do that business.

Speaker 11

But for some reason, the affiliate Channel just isn't keeping pace with the non affiliates.

Speaker 4

Right now that's the case, yes.

Speaker 6

Okay.

Speaker 11

And then finally, mortality. If the company were to adjust the mortality At some point down the road, would it more likely go through CSM or through P and L?

Speaker 5

No, I think we'll go through CSM.

Speaker 7

Thanks very

Speaker 3

much. There are

Operator

no further questions at this time.

Speaker 2

Okay. Thank you. Steny here. I'll take the mic. Well, thanks all.

Speaker 2

And just before I go with my conclusion, I'd like to again thank Jacques. And also just to assure you the market that Joc is working very closely with Eric and the transition is going very well. So As you will realize over the next quarters, we have a lot of bench strength at this organization. Well, just to conclude, the business model, as we've said today, has not changed at all. We are We have a lot of strength in this organization.

Speaker 2

Capital is very, very strong. At the end of the day, capital is king. So we have All the tools that is necessary for us to grow is now for us to execute. So with that said, I wish you if you have not taken your vacation, if you wish you great vacation, certainly, we will take some vacation over the next couple of weeks And come back with a lot of energy. Thanks a lot.

Operator

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day.

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Earnings Conference Call
First National Financial Q2 2023
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