iA Financial Corporation Inc. (IAG) Earnings Call Transcript & Summary

All right. Welcome back. I hope everybody enjoyed the break. Next speaker is Mr. Denis Ricard, longtime long-time guest at this event. I appreciate you coming again this year. And Denis, of course, is the President and CEO of iA Financial Group. Thanks, Denis, for making the time.

Thank you for the invitation, always a pleasure.

Well, I'd like to start with a big picture question. Last year, calendar fiscal was an exciting year because of the big transition to IFRS 17. At the outset of the year, there was a lot of optimism at iA with regards to your growth objectives, fell short of that. I'm just -- maybe you can talk about some of the challenges that presented themselves over the course of the year that kind of prevented you from hitting what you were hoping to hit? And then we'll flip that around in the next question as far as the outlook stuff.

Obviously, it's this big question about IFRS 17 and its impact on our business. And I must say that at the transition, we expected, I would say, some positive, and it happened. And I'll talk about the challenge for last year. But in terms of the positive that we've seen for our organization, the book value of the company has not been affected by the transition. In fact, our book value, if we compare the end of last year versus the 2 years prior to that, under the previous regime, we were up like 8% whereas the whole industry was negative during that period. So we're very proud that our, I would say, prudent approach in the past has materialized through this transition with the book value. For us, it's -- when you look at our business in the long term, it's one of the main, I would say, KPI. In terms of profitability, beginning of last year, we said that we would -- we thought that the increase of EPS would be around, I would say, between 13% and 18%, so let's say, a 15%-ish. We finished at 5%. Are we happy? No. We're not happy about what happened. There has been more tailwind -- sorry, headwinds than tailwinds when we think about it. Mortality for the first 6 months has not been good. The P&C claims has not been good. Also, the yield curve has not been favorable for the year. The last -- at the end of the year, we incurred some strain on the group business, higher than I would say we used to have. And we might comment about that later on. But -- so I mean, when you think about it, there has been some negative during the year that was not expected. But we took some action. And I mean, if you ask me about 2024, I feel confident that this is...

Well, that's -- yes, let's say, in 2024, the 10% EPS growth target. How do you get back on track for that in this year? Because some of the headwinds that you've talked about are still relevant, like the auto sales in the U.S. affecting that warranty business, the P&C, I mean, there's -- we had good weather, I guess. But there's still some headwinds.

Yes. Well, I see more tailwinds now when I look at it. On the P&C side, you mentioned the weather has been pretty favorable during the first -- at least during the first quarter. Mortality is back on track. When I look at the general expenses, corporate expenses, we set the market. We have a goal of maintaining the same level of last year. Growth has been fantastic in most of our lines of businesses. So organic growth is really the key to grow this organization. In fact, when I look at -- let's say, I move to a higher level, I feel more confident today about our capability to deliver on the 10% EPS growth going forward, which is like it's not only 2024. I'm talking about, let's say, over a midterm period, I feel more comfortable today than ever, because we are generating $600 million of excess capital on a yearly basis. We already have $1.6 billion sitting in the bank to some extent, but capital for deployment that we could deploy, generating a lot on an annual basis. When I look at it, yes, we would like to grow and deploy it through acquisition. But the reality is that, I mean, the likelihood of being able to deploy that amount of capital is not obviously that high. So now we are buying back shares. It's fueling the EPS growth, obviously. So organic growth, our opportunistic strategic acquisition, maybe. We're working on some, but we don't know exactly if we will be able to do it. And the buyback is obviously fueling it. So I feel more confident today than, let's say, 10 years ago, when we were in a much more difficult capital environment, interest rates were declining. It was difficult to generate excess capital at the time. For any acquisition, we needed to go to the market and raise capital. It's not the case anymore.

Bankers won't be happy to hear that. The -- but the internal capital generation question, so $600 million of -- what is your target, $600 million plus for 2024, which is on par with last year, I believe. I guess, given that there's an expectation of the turnaround in 2024, so improved growth, given that your sales mix is still more capital light than it -- and continues to be progressing in that direction. I think there was some expectation that maybe that target would go up. And my question would be, are you simply underpromising to overdeliver? Is that your positioning with regards to that particular target?

The short answer is yes. Actually, that $600 million -- $600 plus, by the way. So but at $600 million, mean we are the highest in terms core earnings of the organization -- I mean, the industry. So I mean, to me, we feel very comfortable with that amount. I mean, the goal is really to improve it, obviously. But the short answer is yes.

Is there any thought towards -- we're always asking for more transparency. And I think that's part of the -- it's the nature of the beast covering insurance companies that are still opaque to outside observers. Is there any thought towards illustrating the creation of the excess capital, if you will, like being able to reconcile it somehow? Because it's a number that we get not just from iA, but other companies. They say, "This is our internal capital generation." And being able to "Oh, I can calculate that." I can't simply. Is there any...

No, that's a great question. I mean, personally I'm interested in understanding, and we look internally at that KPI. And we might, at some point, be a bit more -- I mean we are in a process right now with the IFRS 17 transition to improve some of the disclosure that we're having. It might be part of that. I mean, general expense is another one where I think we need to improve a bit the. Let's say, the fact that we are classifying the group business differently from some of our other companies, also it's a place where we will improve our disclosure. So we will adjust. And I mean, the idea for us, and we've done that in the past, is to be a leader in disclosure and be able to, I would say, explain in each case, to some extent, the market about our business.

Well, you mentioned the group business and how it's classified differently at iA versus what you -- the approach your peers have opted for. Given how you've classified it, is this Q1 kind of phenomenon of a big strain number that weighs on profits a permanent feature? And maybe it's going to vary in terms of size? There was unusually large renewals this year. Just how should we be thinking about that seasonality, probably?

So let me first say that it's not because the competitive environment is more difficult that the strain was that high in the first quarter. In fact, I'm encouraging my team to grow that business. And if the number was higher because we gained more market share, I'm fine. And I mean -- and we could demonstrate that to the market. But let me just explain one thing. When we decided to use the general method in the IFRS 17, we could have used the PAA, I think, is the other one. Yes, anyway, so general method. For us, okay, the whole group insurance business, the required capital is $180 million if we had used the other methodology. Under the GM, the general method, it's $140 million. So it's $40 million less required capital because we chose that methodology for the whole group insurance business. That means that our group insurance business is bringing a higher ROE than otherwise we would -- it would have done under the other formula. That's why we chose that. Now on a P&L basis, it changes nothing. It just showed the strain separately from, let's say I mean, if we had used the other methodology, the strain would have been buried in another line. So on the P&L side, changes nothing. On the capital side, it optimized the capital, generate a higher ROE. That's why we did it. And I still -- I mean, it's pretty clear that we did the -- we made the right decision.

Well, I think the issue is the -- it's a learning process. IFRS 17, I think, is going to be -- continue to be in a learning process sadly for another 5, 10 years. Because...

I agree.

And it's more -- it becomes an issue of, let's try to frame expectations. Is this -- like I said earlier, this -- we'll have Q1 a big hit every year, and we get just accustomed to that, and that's the way it is. So familiarity will kind of deflate the issue, so to speak. Is that -- so the seasonality is a bigger factor in the...

Yes. I mean, the renewal or more like Q4, we've seen it and maybe Q1. Let's say, there might be seasonality in terms of renewal, like groups tend to renew more at the end of the year. But at the end of the day, I mean, you should expect that it will come back over time. And it's a great thing, because the dense profit is increasing. I mean, the value of the organization is higher when we sell those, even if there is a strain.

So the expenses, we did -- you touched upon the corporate expenses a couple a moment ago -- a few moments ago. And you're committed to keeping it flat. And I'm just wondering, are there -- and this is in the vein of iAG is in the past had periods where growth wasn't where you wanted it to be, but then you take management actions and then things are back on track and maybe even better than before. And I think about expenses, well, that's an area where you can pull a lever and improve your growth profile. And it doesn't sound like that, though. You're just keeping it flat. But there's no active cost-cutting initiative in any other segments?

Well, we are managing our expenses on a continuous basis. So we -- from time to time, yes, we look at our businesses. There might be some changes here and there. We've done that last year with the capital market. You might recall that we've improved significantly our bottom line on the Wealth Management side. That was one of the reasons. So from time to time, we look at our businesses and would you make some decisions. We have invested significantly over the last 5 years in technology, I mean. And now we are reaping the benefits, starting to reap the benefit out of it. So I think we -- I'm sure we made the right decision in terms of general expenses. Now when you look at general expenses with under IFRS 17 again, it's a problem. We need to improve our disclosure here. Because what you have seen as investors, a significant increase in corporate expense. You don't see the whole picture. You don't see -- I mean corporate expenses might be like 12% of the total expenses of the company only. You don't see the rest. Now for 2023, I am pleased of where we finished. In fact, when you get the circular, you'll see that when you look at the bonus component of general expenses for executives, it's on track. I mean, we've done just a bit better than expected. And it's because there are other expenses in other areas where it's been favorable. So to me, I mean, we have a work to do to explain a bit more our general expenses and we'll improve.

One -- I want to shift over to the U.S. and there's a couple of subjects under the U.S. that we can talk about. But where I'd like to start is, notwithstanding the fact that you've been there for a number of years, is it still a challenge explaining to The Street and investors what exactly your U.S. strategy is? I mean, that's a simple stupid question, but I think it's one that's pretty relevant. And if so, what are you doing to address that?

I don't think the issue is explaining the strategy. I think the -- is to explain the -- how, let's say, how great we did on the life side. But obviously now it's challenging on the U.S. dealer side. Now the strategy has always been to leverage our strength in Canada in sectors, I would say, comparable in the U.S. Life is a good example and the U.S. dealer business is another one. And in the U.S., when you look at it, I mean, sometimes we need to be patient here. When we bought American-Amicable in 2010, I mean, sales were like $25 million a year. Last year was $170 million. So we've had great success, 15% CAGR in over that period. Our ROE is amazing, is way above the target ROE of the organization. We are in a niche market, okay? We're not competing against the big guys there. So we select our market and we are a leader in the business in the U.S. Now on the U.S. dealer side, timing was not good, okay? We closed the deal, the biggest one in May 2020, okay? Car sales were not that good at that time, you might recall that. So -- and now interest rates is high, affordability is an issue. So -- and we -- there's things we can control and things we can't control. So we cannot control the interest rates in the environment, but we can control the expense. We can control the -- our sales strategy -- so we are focusing on 2 things in the U.S. dealer: managing expense and gaining more accounts than we lose. And so you should see some gradual improvement over the next quarters.

So when you -- that was a message that was clearly delivered last quarter. What's the timing of impact? So when you sign up new dealers, how long does it take for them to become...

It takes few months. It takes a few months because there's some administrative process. So it's not immediate. So that's why we're seeing you should see some improvement over the next quarters.

And as one of the challenges today, the opposite of -- well, there was a bit of a tailwind in the pandemic. When supply was low, dealers were, "Well, we want to get some revenue here so let's sell some FI products." And now the sales are just weak because demand is low. They just want to get a car off the lot without hindering the sales process by introducing an FI pitch. Is that a challenge now?

Well, the issue is more that the prices of cars have gone up significantly. The financing of the cars for the client have gone up significantly. So there is less room of affordability for the clients to pick for the F&I product. And we see it across the whole spectrum of dealerships we do business with. The attachment rate of F&I products has decreased last year. So we'll see over time. As I said, it's not something that we can control 100%. Obviously, we can do some training and things like that. But at the end of the day, the affordability has been an issue. So if rates go down, it should help in that business.

The other U.S. -- you mentioned American-Amicable a few moments ago. That one, people, I think, forgot about and then last year had a really good year, it looks like.

20% increase in sales.

And earnings, hard to decipher just given the -- but it looks like it's a needle-moving type of operation now. So what's been the recipe for that, the success of that one?

Okay, you'll find my answer boring. Okay. So it's really the combination -- I mean, we've got super operators in the U.S. It's really the combination of good products, good service, good digital tools and relationship -- long-term relationships with distributors. If you do those 4 in a superb way, you have a competitive advantage.

And it's -- like what changes have -- I don't know if it's on the distribution side, the product side over the -- I'm talking about a longer period, 10 years or so. Is it still very much focused on final expenses and a client base that's less affluent, if you will?

Yes. The market is really like -- it's finding expense type of products and we're trying to focus on that part of the market, which is less competitive, as I mentioned. And now we've got like Vericity, you might be interested in hearing about it. And the reason why we bought Vericity is that, I mean, right now, we are present in the independent distribution in the U.S., IMOs, independent marketing organization. And with Vericity, we are broadening the scope of distribution, adding the digital distribution. So they are expert at generating leads through digital means using AI, using other technology, they get the leads. And they also have around 200 people that on the phone, online, sell the products to the client that has been generated.

So yes, that's -- the Vericity acquisition, it was a bit surprising to some and maybe underappreciated in terms of what it adds to the mix. Because I know I expected something maybe more like American-Amicable and a scale-enhancing type acquisition. This one is more of a capacity-enhancing acquisition. And how do these 2 -- you explain one facet of it, They're going to sell the same product but in a different channel. Is that essentially it?

Well, not exactly -- they could sell the same product in the final [ expansion ] -- they -- right now, they have more than that. So they will continue to sell other type of products like -- simple products like term products and things like that. But one thing also to keep in mind in that deal is that we are going to gain expertise not only for the U.S. business or across the board. So our expectation -- but we have not priced for it, but our expectation is that, that expertise could be brought in Canada also at some point. So that's something that we're going to work on. So for us, it's really a strategic move on that matter.

And what's the path to profitability of Vericity? That you acquired it and it wasn't -- but I assume because they were spending a lot of building new systems...

And a public company.

Yes. So what's the plan?

2025 should be accretive to our earnings. So very quickly...

On a core basis?

Yes, on a core basis it will be accretive. So for us, I mean, there's a lot of expense because it's a public company. But the reality is that, I mean, we're going to generate additional revenue as well. So it's in our plans. -- it's both on the revenue side and the expense side. And keep in mind, sorry to interrupt you here, but it is a story that it's a bit similar to what we did with American-Amicable at the time. They were not making money in 2010 when we bought the company. And we were able to generate with additional leverage that both on the revenue side and on the expense side, we're able to be more efficient. So it's a kind of -- we see this as the same kind of story.

And Vericity has a tech platform, distribution platform and then more of a legacy traditional type business as well? How does that one fit?

Well, actually, we bought a manufacturer, Fidelity Life, and we bought also the e-commerce or e-distributor. So it's a combination of the 2. So they have the platform. They have some expertise. We have a CTO there, like a Chief Technology Officer, that we believe is going to be able to bring some additional expertise within the group.

Okay. One -- I've got a couple of minutes here. I do want to spend some time talking about CRE. Pretty big experience loss in Q3, a smaller one in Q4. What's the expectation going forward? I know that's a difficult question to answer. And there is a heavy skew towards office in that portfolio. Are you anticipating making some changes opportunistically over the next few years to kind of readjust that?

We are -- I'd say we're happy with our portfolio, let's say. When we look at it in a percentage of our total, I mean, it's really there to back the long-term liabilities of the organization. So it's really a long-term view. Our biggest -- I mean, the quality of our real estate is very good. A lot of government -- occupied by government, long-term lease, The average -- weighted average is about 9 years. We have one -- the biggest one is like -- the lease will end in 2047 and it's full of civil servant. And actually, because of the hybrid work, I mean it's not fully occupied so they're bringing other ministry in that building, because it's so long. We are very well positioned when you think about it. So the quality is great. And we took some write-downs because of the cap rate in Q3. Even for that one, even if we know that the lease is going to be there to 2047, And so we're pleased with the -- I mean, obviously, there are some, how do you call that, cylicality. But because we look at it on the long term, were not that I mean -- and we have other type of assets. I mean, the nonfixed assets, it's not only made of. So in average, we're pleased with the results we have.

And the whole portfolio has been reviewed, so to speak, right?

Yes, absolutely. Yes. In Q3, I mean, we applied the increase in cap rate for the whole portfolio. Even -- like I said, even that one, which is the lease ends in 2046.

And just to wrap up on capital management. You mentioned buybacks earlier in his presentation. And it's last year, very active under the program. This year, a similarly sized program, a, do you expect to be similarly active in this year? And I guess, b, would be what conditions would need to change for you to maybe dial it back, whether it's an acquisition or market conditions? What's the strategy there?

Right now, it's -- we are very active. In fact, we have a program that's supposed to end in November. And at the pace we are right now, it's -- we're going to hit the 5% before that. So we'll see what we do there. But the reality is that the current price, we see this as a great opportunity to buy back our stock. For us to stop buying back -- because we have -- we generate $600 million a year. We have $1.6 billion. So I mean, there will need to be a sizable acquisition to do that. So that would be the only condition I would see.

Okay. Well, thanks again for spending the time with us, and I hope the rest of your day goes well.

Okay. Thank you.