Boeing Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Industrial Alliance Insurance and Financial Services Incorporated 20 24 Third Quarter Results. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Wednesday, November 6, 2024. I would now like to turn the conference over to Maria Nick, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to our 2024 Q3 conference call. All our Q3 documents, including press release, slides for this conference call, supplementary information package and quarterly MD and A are posted in the Investor Relations section of our website at ia. Ca. This conference call is open to the financial community, the media and the public. I remind you that the question period is reserved for financial analysts.

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 on slide 3. Also, please note that a detailed discussion of the company's risk is provided in our 2023 MD and A available on SEDAR and on our website with an update in our Q3 2024 MD and A release yesterday. I will now turn the call over to Denis Ricard, President and CEO.

Speaker 2

Good morning, everyone, and thank you for being with us on the call today. As usual, I will start by introducing everyone attending on behalf of IE. First, Eric Jabin, Chief Financial Officer and Chief Actuary Alain Bergeron, Chief Investment Officer Stephane Bourbonnais, responsible for our Wealth Management Operations Rene Laflamme, in charge of individual insurance savings and retirement Pierre Miron, Chief Growth Officer of our Canadian operations and responsible for Dealer Services Canada and IE Auto and Home John O'Brien, Chief Growth Officer of our U. S. Operations and finally, Philippe Poulliot in charge of Group Benefits and Retirement Solutions.

Speaker 2

I'm very pleased with our solid results for the Q3, both in terms of profitability and business growth. This strong performance, consistent with our year to date results, reflects the disciplined execution of our growth oriented strategy and underscores the strength of all our distribution networks. Starting with Slide 8 for an overview of Q3 2024 key results. Core EPS increased by 17% year over year to a record $2.93 per share, while EPS was higher at $2.99 Trailing 12 month core ROE of 15.3 percent supported by a Q3 annualized core ROE of 16.6 percent exceeded the threshold of our mid term target. Robust sales growth and capital deployment initiatives instrumental in achieving this strong result.

Speaker 2

In the Q3, nearly all business units delivered robust sales growth with continued momentum on both sides of the border. This translated into year over year increases of 25% in premiums and deposits and 22% in assets under management and administration. Our solvency ratio of 140 percent illustrates the robustness of our capital position supported in Q3 by organic capital generation of $180,000,000 Our book value per share, which stood at $71.63 at September 30, increased by 10% over 12 months or more than 12% excluding the impact of share buybacks. Now turning to Slide 9 to look at Q3 business growth for Insurance Canada. Once again, this segment recorded a solid performance with all business units posting strong sales results.

Speaker 2

In Individual Insurance, we further strengthened our leading position in the number of policies sold in Canada with strong sales of $103,000,000 during the quarter, up 7% over last year. This growth was driven by the high performance of our distribution networks, our distinctive digital tools and our comprehensive range of products. In Group Insurance, the 21% increase in sales year over year combined with good retention resulted in premiums and deposits of $508,000,000 which is 10% higher than a year ago. In Dealer Services, 3rd quarter sales of $197,000,000 were up 2% year over year. This is a good result given the challenging macroeconomic environment that continued to impact vehicle affordability in Canada.

Speaker 2

Finally, Haiyo Auto and Home also recorded very strong sales with direct written premiums in the Q3 reaching $164,000,000 a robust increase of 15% over the same period last year. This is attributable to our success in generating new sales and to the impact of recent premium increases. Turning to Slide 10 to comment on sales results from for Wealth Management, which were again very solid, notably with net fund flows of more than $600,000,000 IE continued to rank 1st in gross and net sec fund sales. During the Q3, gross sales of sec fund amounted to more than $1,300,000,000 a significant increase of 51% year over year and net inflows of $781,000,000 were generated during the same period. This robust performance once again demonstrates the strength of our distribution networks.

Speaker 2

Mutual fund sales of $385,000,000 were up 33% year over year, although inflows were lower than outflows. As for sales of insured annuities and other savings products, they remain high, reaching $483,000,000 during the quarter. This is a very good result, especially considering investors' increased optimism toward financial markets and the appeal of riskier asset classes offering potential higher returns. Finally, in Group Savings and Retirement, both insured and released and commission products performed well, resulting in solid sales of $900,000,000 up 62% year over year. Now looking at Slide 11 regarding our sales results in the U.

Speaker 2

S. And in individual insurance, we achieved record sales of US68 $1,000,000 This strong 55% year over year increase reflects a solid overall performance as well as the addition of sales from Vericiti. The continued strong business growth of this business unit along with the recent acquisition of Vericiti and of 2 blocks of business from Prosperity Life Group demonstrate our ability to grow in the U. S. Life insurance market, both organically and through acquisitions.

Speaker 2

In Dealer Services, 3rd quarter sales amounted to US286 $1,000,000 up 15% over the same quarter last year. Dealers continue to place greater emphasis on F and I product sales in the context of improved consumer profitability resulting from lower interest rates and reduced vehicle prices. Moving to Slide 12, where year to date key financial KPIs compare favorably with all our mid

Operator

gentlemen, we seem to

Speaker 2

Okay. It seems that the technical difficulties is over, hopefully. Moving to Slide 12, where year to date key financial KPIs compare favorably with all our midterm targets. Among these, in addition to core ROE exceeding 15%, I want to highlight core EPS, which is 16.5% higher year over year after 9 months, well above the targeted 10% annual average growth. This good profitability contributed to the generation of $485,000,000 in organic capital since the start of the year, which is on track to reach our 2024 target of over $600,000,000 Turning to Slide 13 to discuss our capital deployment priorities and recent initiatives.

Speaker 2

At September 30, 2024, we had $1,000,000,000 in capital available for deployment following another active quarter of capital deployment initiatives, which included acquisitions, dividends, share buybacks and IT investments. In September 2024, the AMF published a draft revised capital formula, the CARLI guideline, which would become effective January 1, 2025. If the guideline is adopted as published, we expect our capital available for deployment to increase by around $700,000,000 on January 1, 2025. This positive impact on our financial flexibility will increase our ability to deploy capital, a top priority in delivering our growth strategy. Indeed, capital deployment is a key catalyst for increasing our ROE and creating long term value for our shareholders.

Speaker 2

To this end, we continue to prioritize investing in our growth, both organically through sales with ROE above our 15% target and through acquisitions. Our acquisition strategy focuses on accretive acquisitions that fit well with our culture and business model and rapidly contribute to ROE expansion. In Q3 alone, we strengthened our footprint in the U. S. Life market with the integration of Vericity acquired at the end of June 2024 and the acquisition of 2 blocks of business from Prosperity Life Group.

Speaker 2

We also completed the acquisition of assets from Laurentian Bank Securities in the Wealth Management Sector in Canada. To conclude, I want to highlight that we renewed our NCIB program to buy back up to 5% of outstanding shares and announced a 10% increase in our dividend to common shareholders. These decisions reflect the high priority we place on returning value to our shareholders dividends and share buyback, while actively investing in organic growth and pursuing acquisition opportunities. I will now hand it over to Eric, who will comment on the Q3 profitability and capital strength. Following Eric's comment, we will take questions.

Speaker 3

Thank you, Denis, and good morning, everyone. Starting with Slide 15, which highlight our solid performance in the 3rd quarter with favorable results across all key financial indicators of profitability and financial strength. The strong profitability recorded in the first half of twenty twenty four continued into the third quarter. Our strong earnings combined with our capital deployment initiatives contributed to the expansion in ROE. In fact, Q3 annualized ROE of 16.9% and core quarter annualized ROE of 16.6 percent well exceeded our midterm guidance of 15% plus, resulting in a trailing 12 month core ROE of 15.3%.

Speaker 3

Core EPS for the quarter was up 17% year over year reaching $2.93 with while the reported EPS was even higher at 2.99 dollars This solid growth is mainly due to the strong increase in the insurance service results driven by a substantial increase in premiums and deposits and in assets achieved both organically and through recent acquisitions. Our capital position is robust with a solvency ratio well above our operating target and strong ongoing organic capital generation. Thanks to our favorable financial situation and sustained profitability, as announced yesterday, we are raising our dividend by 10% and renewing our share buyback program for the coming year. Finally, we remain a leader in the growth of book value per share with an increase of 10% over the last 12 months, reflecting our ability to create value. Without the impact of the share buybacks, the increase in our book value per share would have exceeded 12%.

Speaker 3

Now moving to Slide 16 to take a closer look at our Q3 results by segment. First, Insurance Canada reported a solid 16% year over year increase in core earnings to reach $106,000,000 in the 3rd quarter. Most of this increase was attributable to higher expected insurance earnings, reflecting the strong sales in recent quarters and the favorable impact of pricing adjustment over the last 12 months. Other positive items included the lower impact of new insurance business from employee plans compared to a year ago, the favorable impact of higher distribution results on core non insurance activities and lower core other expenses. As for core insurance experience, apart from the August weather event at Aieo Umenoto, the net result was positive mainly due to favorable morbidity and mortality experience.

Speaker 3

In the Wealth Management sector, core earnings of also 106,000,000 dollars were 29% higher than a year earlier. This solid increase is the result of good financial market performance as well as an increase in the expected insurance earnings for SEGFAN from strong net sales over the last 12 months. Mortality experience was also favorable leading to an insurance experience gain. Finally, the increase in core non insurance activities reflect a solid performance once again from the distribution affiliates arising mainly from higher net commissions and better margins. In the U.

Speaker 3

S, core earnings were $31,000,000 close to the $32,000,000 recorded for the same period last year. The increase in expected insurance earning is mainly due to the addition of Vericity and Prosperity blocks of business. It is worth noting that the overall results of these two acquisition were slightly more favorable on core earnings than expected. Core insurance experience for U. S.

Speaker 3

Operations was also positive mainly from favorable mortality experience. In core non insurance activities, the unfavorable impact of last year lower sales and the less favorable business mix were only partially offset by strong sales in 2024. Finally, core order expenses increased mainly from the addition of Vericities expenses. Now turning to Slide 17, starting with the results for the investment segment. The Q3 Corning Investment result before tax was 3% higher than during the previous quarter.

Speaker 3

This result was supported by the good performance of our high quality investment portfolio bolstered by the unfavorable impact of interest rate variations. However, taxes were higher and higher auto finance results was lower due to credit losses and an increased allowance for credit losses. In the corporate segment, Q3 core other expenses of $60,000,000 pretax were in line with the quarterly expectation of $65,000,000 plus or minus $5,000,000 as we continue to focus on operational efficiency, cost conscious execution and disciplined project and workforce management. Now looking at the right side of the slide for non core adjustment, the net income to common shareholders exceeded core earnings by $6,000,000 reaching a quarterly record of $283,000,000 in the 3rd quarter. This was due to favorable market related impacts, partly offset by adjustments mainly related to acquisitions.

Speaker 3

Since the transition to IFRS 17, this is the 3rd quarter in 2017 in which our net income has exceeded our core earnings, confirming the credibility of core earnings as a reflection of our recurring operating performance. Please go to Slide 18 to look at the company robust capital position. Our excellent organic capital generation in the quarter almost paid off for all capital deployment activities, including share buybacks and acquisition of blocks of business. In this respect, our very good profitability led to strong capital organic generation of €180,000,000 before the quarter. With a total of €485,000,000 generated since the start of the year, we are well positioned to exceed the minimum target of $600,000,000 for 2024.

Speaker 3

As for capital available for deployment, it amounted to $1,000,000,000 at September 30, 2024. In addition, as Denis mentioned, if the proposed changes to the AMF capital formula are adopted as published in September 2024 in the draft revision of the CARLI guideline, we expect the capital available for deployment to increase by around $700,000,000 on January 1, 2025. In summary, our Q3 results testify our ability and commitment to generate growth through quality earnings. With our increased ROE, our strong financial position and the significant amount of capital available for deployment, we are well positioned for future growth. This concludes my remarks.

Speaker 3

Operator, we will now take questions.

Operator

The The first question comes from the line of Meny Grauman with Scotiabank. Please go ahead.

Speaker 4

Hi, good morning. I want to ask about the sustainability of ROE, annualized core ROE 16.6 percent, so a very strong step up here. I'm curious, is there anything that you see when you look at the numbers that you would view as unusual that is basically making this result from an ROE perspective unsustainable?

Speaker 2

Yes, I'm going to start, Mehdi. Thanks for the question. We're very proud of the results of this quarter. We have not I have not used the word exceptional, because exceptional would mean that it's not repeatable. We believe they are very strong.

Speaker 2

And we've made so much so many initiatives over the last 10 years in our organization. For example, diversifying our product mix, business mix, investing in a disciplined acquisition, returning some of the capital to our shareholders through NCIB. I think we've got a very balanced approach targeted towards improving the value to shareholders that at the end of the day leads to a better ROE going forward. So I'm very pleased with the trend it's going right now, probably a bit too early to call for a higher target for ROE. It may come, but for the time being, I mean, we are very pleased and proud of the results we've got so far.

Speaker 2

And I don't see a cloud in the sky that would prevent us to be able to generate that kind of ROE going forward.

Speaker 4

Okay. That's very clear. And maybe if I can ask just on the capital available for deployment. So you're signaling quite a meaningful increase. I guess the question is, does that change the capital deployment priorities or the way you look at capital deployment is going from $1,000,000,000 to $1,700,000,000 change that at all?

Speaker 2

Thanks, Denis. It's Denis again. Last year at about the same time, we had capital for deployment that was around $1,800,000,000 And obviously, I got that question all the time. And the answer last year is the same as this year basically. We're looking at the all the way that we can to increase value to shareholders.

Speaker 2

And in terms of the priorities, organic growth is really the one that is the primary one, investing in our current businesses, are we over 10% to 15% target. That's really our main focus and the investments in technology is included into that. 2nd is about acquisition, disciplined acquisition. We have a track record of having disciplined acquisition and we'll continue doing that. We're very proud of the latest ones that are positively impacted our results, prosperity and Veracity.

Speaker 2

And then the dividend, I mean, we've increased dividend by 10%. It's really a confidence call that we made on our results. And lastly, NCIB is we try to be opportunistic on the NCIB side and returning some of the excess capital to the shareholders. So it's really a balanced approach that we had like last year and it's continuing going forward.

Speaker 4

Got it. Thanks so much.

Operator

The next question comes from the line of Givir Desai with National Bank Financial. Please go ahead. Hello?

Speaker 5

Yes. Sorry, just to understand the good morning, by the way. The regulatory change, So essentially, you're holding company. There's a lower capital requirement. I guess, the core ratio probably.

Speaker 5

That threshold for regulatory intervention has been lowered or is proposed to be lowered and that's what frees up some capital that you're holding back to meet that requirement. Is that the gist of it?

Speaker 3

Gabriel, it's Eric. You're exactly right. That's the intention of our regulator. In Quebec right now, what we had in terms of game rules was to use the same target for operating companies as for old co companies. And we understand from our regulator that they wanted to create some harmonization with the federal level, which has different constraints for old co compared to operating companies.

Speaker 3

We need to understand that the regulator focus is more to get the consumer protection at the op co level. So the quality or the structure of capital for OpCo can be less stringent than it is for OpCo. So what is happening right now is just this harmonization with some companies at the federal level in terms of level playing field. And this is resulting in additional capital for available for deployment for us at this point.

Speaker 5

Right. So you're also stating that it harmonizes with OSFI then the AMF move does or that's

Speaker 3

your understanding? It harmonized with some companies that OSFI level, not all.

Speaker 5

Okay. And sorry, Denis, I wasn't quite clear on your answer to the last question. I mean, the M and A, I'll go with the M and A route. So this company and I think you stated in your MD and A there or your press release, you've made 30 plus acquisitions over the years. The last few have not been and by your own admission and I appreciate the candor, they weren't well timed like the IAS or whatever.

Speaker 5

And does that factor into your outlook for M and A, I guess is my question. How are you taking a different approach now? Because I do expect you're going to be an acquisitive company in the future. You have been in the past, but is your approach changing at all?

Speaker 2

Well, it's interesting guys a question because I had a conversation with my board recently and I said that obviously the IAS results are disappointing and timing was not really good and we got some challenges and we are working on them. I think it's what is important is to make issues visible and work on them. Now with that said, one of the risks that an organization has when one acquisition, and again, it's one of amongst many of them, if one acquisition doesn't go the right way as expected, the risk is that then from that point on, it's the risk adverse to a point where it makes the company not growing as much as it should. As far as I'm concerned, I think in this organization, we have a culture of being conservative and prudent enough in our acquisition that we have to be careful, we have to be conscious that we need to take some risk, calculated risk going forward. But it's also a risk not to pursue acquisition when you think about it, because growing is important.

Speaker 2

The risk of not growing sometimes it may be more important than the risk of growing. So my view on this is really to have a balanced view. And the track record for our acquisition, generally speaking, is very positive.

Speaker 5

And it's

Speaker 2

not because one of them doesn't go as expected that we should refrain from growing by acquisition in the future.

Speaker 5

No, no, I wasn't suggesting you would refrain in the future. I'm just wondering if there was a lesson learned there that that one didn't go as well as planned and we'll we learned from that experience and what that lesson might have been. So anyway

Speaker 2

I mean, we have several lessons from that acquisition that we shared with the Board. And when I look at the recent acquisitions, the Veracity and the Prosperity, I'm telling you, we've learned and we've acted on what we have learned.

Speaker 5

And looking ahead in terms of industry verticals, is it I mean, if I'd asked you this a few years ago or it would have been not a warranty top of the list, is it possible we see more deals like Prosperity Blocks of Business that seem to be a little bit, I don't know, scalable in your U. S. Business given the work you've done over the past decade in individual insurance?

Speaker 2

We're looking at both the U. S. Life and the warranty business in the U. S. At this point.

Speaker 2

We don't look at the 3rd leg, let's say. And yes, we will be open to other deals like that, that are very accretive for the organization that they have ROE much higher than our target ROE. So we are open to look at several opportunities. And in fact, when I look at say, Versity is a great example of competency that we acquired in a business that we already know in the U. S.

Speaker 2

Prosperity is really a tuck in acquisition and the integration is going very, very well right now. So there's I mean, it's really to count on our strength in the businesses that we're in right now. And if there are more deals and we're looking at some deal, we'll do it.

Speaker 5

Okay. And just last one on the U. S, Did you have any lapse experience pop up again in that final benefits or benefits expense, funeral expense business? I know that arose last quarter. And then what was it about the sales mix?

Speaker 5

So the U. S. Warranty sales were up, whatever 15%, so good number, but you cited that the mix wasn't as profitable or something like that. Can you give a bit more detail on that?

Speaker 3

Yes. I'll take this one for the sales mix profitability, Gabriel. In fact, for the U. S. Dealer, in fact, what happened is that if you look at the U.

Speaker 3

S. Dealer sales, there's insured business and there's fee business. And we have slightly more, of course, the fee business is slightly less. I would say, it brings less dollar of profit than insured products. And we're feeling a little bit of pressure on margin on the later, so that all in, it resulted in less profitable business mix in the quarter.

Speaker 5

Okay. And the lapse, anything there or was that just a one off?

Speaker 3

Yes, on the lapse, sorry, I forgot about that. On the lapse, the situation is improving on life insurance. It's still something that we're working on, but we're taking management action with the distributors to improve the situation, but it's going in the right direction.

Speaker 5

Okay, cool. And congrats on the quarter.

Operator

The next question comes from the line of Doug Young with Desjardins.

Speaker 6

Hi, good morning. Eric, just back to the $700,000,000 and I don't want to dig into the weeds, but is this something where the core ratio, which I think is 70% goes down to 60% or is this more I think it was back in 2020 when the AMF came out and published change the capital treatment for your property and casualty subsidiary that's held by a life insurance company and that negatively impacted your deployable capital. And is it more of a reversal of something that's negatively impacting your available capital or is it actually the core? So I'm just trying to understand how the moving pieces are going to get to that 700,000,000

Speaker 3

dollars Yes. Thanks, Doug, for the question. In fact, I will say that there are 3 important triggers. First, you are right that it has to do with the core ratio, okay? Because our capital available for deployment now is function of the core ratio.

Speaker 3

This is our most stringent constraint. So that's the first piece. Secondly, in terms of target ratios, there are minimum ratios in the industry. And just to adjust your comment, it's not 60, it's 55 in terms of minimum ratio. Then there is what we call an intervention target ratio, which is the level where the regulator would step in to see what's going on and maybe ask for an action plan from the company.

Speaker 3

And then there is on top of that, we don't want obviously to operate as companies at this level. That would be clearly uncomfortable. So we set up according to our risk profile, risk governance and so on, we set up what we call an operating target on top of that. So what just happened here is that the regulator, our regulator with the harmonization remove that intervention target constraint and this opens up the floor to us to operate like all calls, other all calls in Canada on the basis of minimum ratio, but we would not go as low as a minimum ratio because on top of that we need to put some margin for our operations, for the risk profile of the company. So clearly, what we will do and what we have done in providing the estimate of €700,000,000 is to calculate what would be the available capital on a basis comparable to other companies in Canada that are subject to the same constraint as we are.

Speaker 3

Does that answer your question?

Speaker 6

It does. And I think your core rate now, correct me, is it 85, like I'm just trying to mathematically think does that go down to 70? Like

Speaker 3

or

Speaker 6

trying to think of like mathematically how this kind of like what's your core rate? Like what is that minimum that you would go to that you use to get to that 700?

Speaker 3

Yes, of course, we still need to do the exercise and finalize exactly where our target would be over the minimum. But you're in the right path to think that the AD would go down if we deploy all that additional excess capital and when.

Speaker 7

Okay. And then second, just

Speaker 6

on the 2 acquisitions, the Veracity and the 2 Prosperity books, can you quantify what that contributed to core earnings? And then I think you talked a bit about more favorable to core than expected. Is that something that is expected to continue? Or is that just more favorable this quarter and you anticipate it to go back to more level? Just hoping to get some context there.

Speaker 3

Yes. I will draw your attention to the driver of earnings for the U. S. Segment for a second, Doug, on this. If you look at the first two lines of the driver of earnings, you will notice that the trend in the risk adjustment recognition and on the CSM amortization has gone up.

Speaker 3

If you look at the trend, it's quite obvious that it went up by more than €10,000,000 So that's one clue for you. The other one is to look at the core other expense on the same page that did go up. We said in the opening comments that we now factor in the core other expense of Vericiti. So that's the other part to consider. And when you net those 2 outs, it's positive.

Speaker 3

Whether this will continue, there is a part of it that will continue, but we're just 1 quarter in. So we need to remain humble and see how this develops. But for now, we're quite happy with the results of this acquisition and its contribution.

Speaker 6

And was there any impact on the experience from those two businesses? Like when I look at that experience line, does that factor in some of the better than expected results of those deals? Or is it just simply in those three lines?

Speaker 3

Not yet. I referred you to the expected insurance earnings, Doug. It's too early in terms of experience. We're just 1 quarter in, so nothing to mention out there. That differs from our expectation.

Speaker 6

Okay. And then just lastly, the U. S. Extended vehicle warranty business and sales were good obviously and have shown some improvement. You talked about the mix, but it looks like the profitability is still down year over year.

Speaker 6

You didn't mention any negative claims experience. I'm just wondering how things are going from a claims perspective, if there's anything to kind of flush out there?

Speaker 3

Yes, we're still on the claim side, we are still facing challenges on the from inflation of the auto parts. So that's one challenge. But we're doing the re pricing on the products and you know that those challenge. So it takes a while to develop. So that's one piece.

Speaker 3

You see the claims and the price has been fixed. So for the repricing to go through, it will take a while, but we're dealing with it. So that's the important on this. And the other thing that you have to remember also is that there is some seasonality. When you look at profitability from 1 quarter to the other, Q4 is generally the lowest quarter in terms of profitability because it just follows the consumer behavior that tends to buy more cars.

Speaker 3

The biggest quarter normally is Q2, the 2nd quarter, sorry. And because people buy cars in May and when spring happens. So that's the best quarter. Then the next best one is probably the 3rd, the lowest being the 4th and the 1st quarter. So the profit is recognized mostly at point of sale.

Speaker 3

So the profit on a quarter to quarter basis follows this pattern of seasonality.

Speaker 6

Perfect. Appreciate the color. Thank you.

Operator

Your next question comes from the line of Paul Holden with CIBC. Please go ahead.

Speaker 8

Thank you. Good morning. Maybe to continue that conversation, you continue to reiterate that you expect gradual profit improvement in U. S. Dealer services.

Speaker 8

So I don't expect it will take 3 to 7 years to realize that gradual profit improvement, but what would be sort of the key drivers or factors we should look to drive that improved profitability?

Speaker 3

I would say maybe 12 to 24 months. If I said this year that it would gradually improve in 2024. So it's following the right path. So you're right, it will not take 3 to 7 years. We expect the situation to improve gradually in the coming quarters.

Speaker 3

Sean is really working hard with his team to take management action and strengthen the situation and through repricing and management action. So it's a question of quarters.

Speaker 2

And it's Denis here. I would add that you will get much more color at the Investor event because we want to spend a large portion of that meeting to explaining the driver of earnings for that business. And you're going to get a bit more color and about our strategy, where is our focus, what actions, initiatives we've made to improve the situation. So it's something that you guys would be quite interested to hear.

Speaker 8

For sure. And I'm assuming Denis based on your earlier comments that you are once again interested in doing U. S. Dealer services acquisitions that you're generally happy with the way the business is trending?

Speaker 2

Yes, there's no reason for me to say that we will not pursue growth in that business, whether it's organic or by acquisition.

Speaker 8

Okay, okay. That's great. And then speaking of timing of prior acquisitions, I mean, Vercity and Prosperity actually look like they're very well timed given what's happening today. My question on them is how much interest rate sensitivity is in those businesses, I. E.

Speaker 8

The nice tick up in bond yields a material benefit or not?

Speaker 3

I will comment on this, Paul, that very little because the business profile of Vericiti and Fibidity Life is term business. And as you know, those are short term businesses. So the interest rate sensitivity coming with those is very limited.

Speaker 8

Okay, got it. And then last one for me is kind of on the continue on the topic of capital deployment. Share buybacks, right, you're clearly generating a lot of organic capital every quarter, have a lot of excess deployable capital, but the share price is up significantly over the last 4 or 5 months. So how do you balance those factors in terms of the thinking towards ongoing share repurchases?

Speaker 2

I think you should expect that we will continue doing some buybacks on this. We have a, let's say, a sizable acquisition in the pipeline. But it's really for us one way to return some of the value to the shareholders. So my expectation is that this is going to continue.

Speaker 8

Got it. Okay. Thank you. That's it for me.

Operator

Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.

Speaker 9

Good morning. Eric, I want to go back to the $700,000,000 I think I understand the math behind it. I think I understand the concept, especially when you refer to another holdco in the country. I think many of us know who you're referring to there. From a practical perspective though, if you wanted to replicate what that other company does with their holdco, it would involve raising debt at the holdco and then using that to

Speaker 2

buy back stock, which would of course take

Speaker 9

the leverage ratio higher, but would have the effect of yes, increase the leverage ratio and you could absorb a reduction in your core LICAT because the threshold is lower. So what I'm asking from a practical perspective, is that how you exploit this change by raising debt at the Holdco and using it to buy back stock?

Speaker 3

Yes, it's early to call Mario on this. Well, your strategy is right though. This is something we could do. And if we want to keep improving our ROE expansion, we need to have, I would say, a more comparable cost structure in terms of capital. So we will need to get there at some point, but we don't want to do this suddenly at this point.

Speaker 3

So but we'll just be opportunistic with the share buyback. We talked about it and that's how we see it.

Speaker 2

Yes, Mario, it's Denis here. I think the ultimate destination is what you described, but it can take some time to get there.

Speaker 9

Okay. So we should expect over let's say over a longer period of time, a couple of years that industrial lines will not be operating at 15% or 16% leverage ratio. It will look a little bit like again like this other company that you've referred to, like a higher leverage ratio clearly.

Speaker 3

One word, absolutely.

Speaker 9

Okay. Yes, I mean, makes sense. Might as well take advantage of it. And that's your point then. That's where that's how this company can have an ROE like everybody else's.

Speaker 9

Once you exploit that room in your leverage ratio, that's the sort of long term goal here. Might as well have the same ROE as anybody else. Is that the point?

Speaker 2

I would say one word, absolutely.

Speaker 9

All right. Let's move on to something else. There's strain in Q4, 2023, very elevated. Eric, you talked about seasonality in U. S.

Speaker 9

Dealer services. Is there should we see a similar type of seasonality in Q4, 20 24 associated with strain and group?

Speaker 3

Yes, you are right, Mario. And remember that you and I talked about this earlier this year as of the result of Q4. There is seasonality in group and patterns that result in normally higher strain at some point of the year. That being said, we don't expect the strain to be as high as last year for Q4 of this year.

Speaker 9

Not as high as Q4? No. Thank you.

Operator

Your next question comes from the line of Lamar Persaud with Cormark. Please go ahead.

Speaker 7

Yes, thanks. I want to come back to this capital for deployment and the $700,000,000 you guys are getting. But I want to look at it in terms of the payout ratio. So under what circumstance would Industrial Alliance consider increasing the target payout ratio? Or does it feel like 25% to 35% is the right number over the longer term?

Speaker 7

Because you could say that IAG is becoming a more mature company, it's generating all this organic capital generation, it can fund organic growth and pursue M and A. So maybe we're at the point where it makes sense to bump up the payout ratio, like how do you guys think through that?

Speaker 2

Yes, it's Denis here. I don't consider our company to be mature. We see a lot of opportunities. We believe that we're more on the growth side as opposed to mature side. So for us, it will be premature to aim for a higher payout ratio at this point.

Speaker 2

We prefer to deploy capital in other means through a growth, organic and acquisition are the favorite one.

Speaker 7

Okay. At what point like what should we be watching to suggest that maybe it's time to revisit this? Or is it something that it's just so far away, it's not even worth discussing at this point with the Board?

Speaker 2

One way to look at it is that our market cap is now maybe at 12,000,000,000 but 10,000,000,000 plus right now. Our competitors, which are a bit more mature, I would say, are in the $40,000,000,000 plus So I would say that, I don't know, until we reach $20,000,000,000 that's probably not in the option at this point. I mean, so it tells you that it's several years down the road.

Speaker 7

Okay, that's helpful. Just another question here. I noticed you guys talked about the regulatory capital requirements for seg funds in that blurb. Can you help us understand what that's going to mean for the outlook for the seg fund business?

Speaker 3

Yes. In fact, it won't change much. We don't expect, in fact, any impactful change to our seg funds because as you may know, we already have the internal model used and we're using dynamic hedging to protect the downside risk of those products. So our capital will not change with those rule adjustment. Thanks.

Speaker 3

That's it for me.

Operator

Your next question comes from the line of Tom MacKinnon with BMO Capital Markets. Please go ahead.

Speaker 10

Yes, thanks. Good morning. Just a couple of things. First on the dividend increase, you guys typically increase your dividend every 3 quarters as opposed to annually and this 10% dividend increase would if you analyzed it would be more like a 13% percent above your 10% core earnings growth target. If you could just walk me through some of the thinking there and I assume none of this $700,000,000 that you additionally got works its way into that thinking, but that's the first question and I've got a follow-up.

Speaker 10

Thanks.

Speaker 2

I will comment on that if you want to add. No, I don't think it's related to the $700,000,000 Basically, as I mentioned before, we target around 30% payout ratio. And because our profitability is very strong with 10% increase in dividend, we are about in the middle of that range right now. So that's really the rationale behind it, nothing more.

Speaker 10

Okay. Thanks. And then into the U. S, I mean, you had Vericiti, you had 3 months in the quarter of Vericiti, but you only had 2 months from Prosperity from the blocks from Prosperity. So, is there any additional uptick that you would anticipate in either I'm sure there's lots of CSM and you only got 2 thirds of that CSM from Prosperity.

Speaker 10

So just help us think through that and risk adjustment release too from Prosperity because you only got 2 months of that. And then what is the impact on expenses of only having the prosperity block in for 2 months? Just help me think some of that. Would we anticipate that net net you said it did better than you thought, but you only had 2 months of prosperity in the quarter as opposed to 3?

Speaker 3

You are right, Tom, on this. What will happen is that obviously next quarter we'll have a full quarter in terms of risk adjustment release as well as CSM amortization. So that will contribute to slightly more of those two items. And in terms of cost, we are fully integrating this business with the American Amicable business. So cost will stay the same.

Speaker 3

The cost increase that we see in core corporate expense is solely due to Vericiti acquisition because it comes with people and operations. So those costs are just a reflection of Vericiti.

Speaker 10

Perfect. And then the final one is really with respect to the other core expenses in Canada. Look, just they've been trending. They were 16 in the Q1, 17 in the Q2 and now just 11 in the Q3. Is there anything unusual there?

Speaker 10

What should we be thinking about for that? Because it seems to be down at least significantly year over year and then down significantly quarter over quarter.

Speaker 3

You're absolutely right, Tom, on this. We had kind of one time items that were favorable for core other expense in Insurance Canada. So what I expect at this point is this to come back to normal in the next quarter.

Speaker 10

Okay. Thanks so much. And normal meaning the kind of run rate we had in the first half of the year?

Speaker 3

Exactly.

Speaker 10

Okay. Appreciate that. Thanks so much.

Operator

I'll now turn the call back over to Dennis Racal for closing remarks. Please go ahead.

Speaker 2

Thank you. I think it would be under statement that we are pleased with the results this quarter, very solid profitability with an ROE much above our target. And what makes me confident about the future is really not only the current profitability and the discipline of our organization, but it's the growth that our businesses have brought. We haven't talked that much during the question period about the business, the growth of our businesses. But I can tell you that our leaders are putting all their attention and focus on growing their businesses.

Speaker 2

And it's the best testimony for us for future growth of the company. We've seen assets under management. We've seen premiums and deposit increase high double digit in the 20% over the quarter and that's the results of their hard work and all their teams. So thanks to all of us. Thanks to all of them.

Speaker 2

And one last comment is about the creation of value. We've been a leader and we are a leader in creating value to our shareholders. We've made so many actions over the last decades and it's you can see that our journey is not over and we will continue performing going forward. Thanks a lot for everyone and see you next time.

Operator

Ladies and gentlemen, this concludes

Speaker 1

today's call.

Operator

Thank you all for joining and you may now disconnect.

Speaker 1

Thank you, Paul. Yes.

Speaker 3

Hold on.

Remove Ads
Powered by Quartr
Earnings Conference Call
Boeing Q3 2024
00:00 / 00:00
Remove Ads