iA Financial Corporation Inc.

Good morning, ladies and gentlemen, and welcome to IA Financial Corporation 2023 Third Quarter Results Conference Call. At this time, all lines are in a lesson-only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this call is being recorded on November 8, 2023. I would now like to turn the conference over to Marie-Annick Bonneau. Please go ahead.

Good morning, everyone, and welcome to our 2023 third quarter conference call. All our Q3 documents, including press release, slides for this conference call, MD&A, and supplementary information package are posted in the investor relations section of our website at ia.ca. This conference call is open to the financial community, the media, and the public. I remind you that the question period is reserved for financial analysts. A recording of this call will be available for one week starting this evening. The archived webcast will be available for 90 days, and a transcript will be available on our website in the next week. I draw your attention to the forward-looking statement information on slide two. as well as the non-IFRS and additional financial measures information and the notes regarding 2022 restated results under IFRS 17 and IFRS 9 on slide three. Also, please note that the detailed discussion of the company's risk is provided in our 2022 NDNA available on CDAR and on our website with an update in our Q3 2023 NDNA released yesterday. I will now turn the call over to Denis Ricard, President and CEO.

Good morning, everyone, and thank you for being with us on the call today. As usual, I will start by introducing everyone attending on behalf of IE. First, Eric Jobin, Chief Financial Officer and Chief Actuary. Alain Bergeron, Chief Investment Officer. Stéphane Bourbonnet, responsible for wealth management operations. René Laflamme, in charge of individual insurance and annuities. Pierre Miron, chief growth officer of our Canadian operations and responsible for Dealer Services Canada and IOTO and Home. Sean O'Brien, in charge of our group businesses. And Mike Stickney, chief growth officer of our U.S. operations and co-head of acquisitions. Starting with slide eight for an overview of our third quarter results. Yesterday, we reported a solid core EPS of $2.50, 10% higher than a year earlier, driven by strong profitability in almost all business units. This represents a core ROE quarter annualized of 15.4%, a very strong result which led to a core ROE for the last 12 months of 14.8%, very close to our medium-term target of 15% plus. Our capital position is very solid with a solvency ratio of 145%, and we continue to generate significant organic capital in line with our 2023 target. Sales momentum continued in the third quarter with double-digit growth in many business units. Strong sales along with good retention of in-force business supported the solid 17% year-over-year increase in premiums and deposits, as well as the 7% year-over-year increase in the level of assets under management and administration, a very good result given market conditions. Finally, our book value is $65.25, which represents a 4% increase since the beginning of the year. Turning to slide nine for our year-to-date results relative to mid-term guidance. The core EPS for the first nine months is 7% higher than last year. Core ROE is close to mid-term guidance. The solvency ratio is well above our operating target, and we are well positioned to meet our $600 million organic capital generation objective for 2023. Finally, the due down payout ratio of 32% of core earnings is within the target range. Now to slide 10 to look at Q3 business growth. Starting with individual insurance in Canada, which recorded another solid performance with sales of $96 million during the third quarter. For a third year in a row, we ranked first for overall company rating in the Advisor Perception Survey, confirming our ability to effectively meet our distributors' expectations. In group insurance, net premiums increased by 6% to $407 million as sales and in-force business retention were very good. Sales were also strong. in the dealer services division, reaching $193 million, up 10% over the previous year. Our leading position in Canada, our comprehensive product range and our extensive distribution networks contributed to this very solid result, despite higher financing costs for car buying customers. Finally, at IE Auto and Home, direct written premiums reached $142 million for the quarter, supported by the strong retention of enforced business. This represents a strong increase of 15% compared to the same period last year. Looking now at slide 11 to comment on wealth management sales results, a factor for which the environment continues to be challenging. We performed very well in seg funds, where we remained a leader in both growth and net seg fund sales. with growth sales up 13% year-over-year and net sales of $216 million. While many clients continue to favor cash-equivalent products, mutual fund sales were softer, whereas sales of insurance annuities and other savings products almost doubled year-over-year, reaching $618 million. Finally, in group savings and retirement, sales of $522 million in the third quarter were up 8% year-over-year. This growth performance was mainly supported by sales of accumulation products. Now looking at slide 12 regarding our business growth results in the U.S. In our individual insurance division, strong business growth momentum led to record sales of $44 million U.S., This is a solid 26% increase from a year earlier, a performance driven by our strong distribution channels and our portfolio of products. This division's solid growth story confirms the potential of this market as we continue to strengthen our presence in the U.S., for example, with the recently announced acquisition of Vericity. In the dealer services division, third quarter sales amounted to $248 million U.S. compared to $261 U.S. a year earlier, as higher financing costs for customers continue to have a negative impact on sales. Meanwhile, we are adding dealers and continuing our digital transformation to be ready to seize growth opportunities when the environment will become more favorable. I now want to briefly comment on the acquisition on VeriCity announced at the beginning of October. Please go to slide 13. VeriCity comprises an insurance carrier and a digital agency with synergies in between, both servicing the middle market life insurance space. This medium-sized acquisition with a purchase price of $170 million U.S. presents a strong strategic fit with IE. Among other things, it strengthens our geographic footprint in the US, it complements well our existing activities, and it diversifies our distribution capabilities. We expect this acquisition to be accretive to core EPS starting in year two, to increase core EPS by 10 cents in year three, and to rapidly meet our ROE target. With our strong capital position, while investing in our organic growth, we continue to actively monitor opportunities while making smart choices and staying disciplined. I will now turn it over to Eric, who succeeded Jacques as CFO on August 21st. Eric will comment on Q3 profitability and capital strength, and we will then take questions. Eric.

Thank you, Denis, and good morning, everyone. I'm pleased to be here today to explain our results for the third quarter of 2023. These are good results as almost all business units performed well. Please go to slide 15 for an overview of Q3 profitability and financial strength. Core ETFs at $2.50 is 10% higher than during the same period in 2022. This performance was driven by 10% year-over-year increase in both core insurance and non-insurance results, which reflect well the strong quality of our operating results. At 14.8%, core ROE is also strong and close to our medium-term target of 15% and above. Net income, which is more sensitive to short-term macroeconomic variations under the new accounting standards than it was under IFRS 4, amounts to $55 million. From quarter to quarter, core results allow to better assess the company's earning power by removing short-term market volatility, while the average reported earnings should converge toward core earnings over time. In terms of capital, our financial position continues to be very solid and flexible. As for the book value, it has increased by 4% since the beginning of the year. Now, turning to slide 16 for results by operating business segments. In Insurance Canada, core earnings of $91 million are 8% higher than in the previous year. driven by 9% growth in expected insurance earnings. The core insurance experience for the segment was a loss of $6 million, attributable mainly to higher P&C claims at Haye Home and Auto, due to a storm and increased severity of auto claims. It is worth noting that disability and morbidity experience was favorable and that results were slightly better than expected for mortality claims. In the wealth management segment, Q3 core earnings of 82 million were 26% higher than for the same period of 2022. In addition to lower expenses, this solid performance achieved through 16% year-over-year growth in expected earnings for SEC funds and 29% year-over-year growth in core non-insurance activities as our distribution affiliates once again delivered strong results. As for our U.S. operations, core earnings amounted to $32 million in the third quarter compared to $26 million during the second quarter of 2023 and $37 million a year ago. Results were quite good in the individual insurance division, as evidenced by the 9% increase in the core insurance service result. In the dealer service division, core non-insurance activities improved slightly during the year but remained below the previous year level as higher financing costs and vehicle prices continue to affect consumer affordability. Continuing with slide 17, Q3 core earnings for the investment segment were $93 million, which compares to $97 million a year ago. This score results depend, among other things, on the level of interest rate and the yield curve at the start of the quarter. Accordingly, the interest rate at June 30th had a negative impact of $9 million on core earnings during the third quarter. This more than offset the favorable impact of the portfolio optimization which took place mainly at the end of 2022, and the good performance of IE Auto Finance. Looking forward, the level of interest rate and the slope of the inverted curve improved during the third quarter, which would be a positive factor for the Q4 core net investment results. Finally, our corporate segment recorded after-tax expenses of $42 million, which is the same amount as Q3 2022. Now, looking at non-core adjustments, which are represented on the right side of the slide, most of the Q3 adjustments were due to unfavorable market-related impacts differing from management long-term expectations. These impacts amounted to $169 million during the quarter. More than half of this adjustment relates to investment properties for which the cap rate was increased across the board. The specific fundamentals of our investment properties portfolio are very good, and the valuation now reflects current macroeconomic conditions inferred by external appraisals. Please see slide 26 for more details on market-related impact and slide 30 for information about our investment properties. Now turning to slide 18 regarding our robust capital position. Our solvency ratio of 145% at the end of Q3 is well above our operating target of 120%. Most of the Q3 variation is due to the debenture redemption that occurred in September. The company organically generated $165 million in additional capital during Q3 for a total of $440 million during the first nine months of the year. We are therefore on track to achieve our $600 million 2023 target of organic capital generation. Finally, at the end of September, $1.6 billion in capital deployable was available for organic growth, digital transformation, and future acquisitions. These conclude my remarks. Operator, we are now ready to take questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using the speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Manny Groman from Scotiabank. Please go ahead.

Hi, good morning. On the subject of investment properties, you appraised 100% of your holding. Did I get that correct?

Yes, Manny. Please go ahead, Eric.

No, I said yes, Manny.

Okay, great. Manny, do you want to add color?

Yeah, the one color I would say is that there's a process that looks at the real estate where each property is evaluated once a year. But I would say then when material event arise, then we reflect it in the valuation. And that's what's happened this quarter with the cap rates.

Okay, so just wondering in terms of that 101 million impact, Is it weighted to certain geographies or certain types of properties that you're holding? If you give us a little more detail in terms of what's driving that impact in terms of the details of your portfolio.

Sure, I'll take this one. In terms of the cap rate increase, it was across the board of our office property. And of course, you know that that's about 85% of our portfolio is in office. Now, most of our offices are in Quebec and in Ontario, not exclusively, but mainly. And the reason I say across the board and rather than specific fundamentals of specific properties, I think the best way I think to make the point is to give you an example. We have a property in the province of Quebec. It's all leased to government, provincial government. We have a lease with them until 2047. And the cap rate that we got from the external appraiser is similar to the rest of the portfolio. So I think that just gives you a sense of what's really happening this quarter in the portfolio. And maybe a sub-bullet of this, of course, is I've said a few times, we've put that in our slides, that the quality of the portfolio is relatively high when it comes to our office. Like it's unlevered. 99.8 is in Canada. The occupancy is higher than the market rate, long-term lease. The reason I bring this up is then when you link it to an increase in cap rate, so when you have a high-quality portfolio, an increase in cap rate, that means, one, a decrease in valuation today, and that's what you're seeing, but it also means an increase in economic expected return in the long term. So hopefully that helps give you a bit of context around this quarter on investment properties.

Yeah, thank you. And then just a question on the Q4 actuarial review. I'm wondering if there's any outlook you can provide at this stage in terms of what to expect and maybe start there and have a follow-up on that.

Yes, Manny. Thanks for the question. In fact, we are still working on it, as you may suspect. We're not done yet completely. Right now, what I'm looking at is mortality. The big question is what has happened since the beginning of the year with respect to mortality in Canada. We're happy to see that we had a turnaround in Q3, so I will look carefully at this one for year-end to see if I need to make any adjustment to that. That's still an unknown. So the next couple of months will provide guidance to what we need to do with this. So the other indicator that I look to make up my mind is the gain and loss. When you look at the insurance experience this year, we have slightly negative gain and loss since the beginning of the year. And when you look at gain and loss on the CSM, it's neutral. So the way I look at this at 30,000 feet is that I'm expecting something slightly negative for urine in terms of there is a change all inclusive.

And then just to follow up, just in terms of conceptually, am I right to think of, and I think we talked about this in the past, the change in IFRS 17 for giving you less ability to offset actuarial charges? Just wanted to understand if I have that correct in terms of this new reality for you.

Yes. In fact, what is happening, Manny, is that all economic change of assumptions goes through P&L every quarter. So this item is now removed from the radar of basis change at year end. So what will happen with basis change, that will be reflected in the CSM. It will not be, or maybe a small part in P&L, but most of the basis change that will be happening at year-end will go through CSM, and it will reflect the contingencies on insurance risks.

Thank you very much.

Your next question comes from Doug Young from Desjardins. Please go ahead.

Hi, good morning. Alain, maybe back to you just on the investment property, and thanks for the response to the first question and the details. But I think last quarter you talked about pursuing value creation opportunities with this portfolio. You've obviously made a mark in terms of the cap rate. You didn't elaborate last quarter. I'm just wondering if there's any updates on what that value creation opportunity would be or your thought process around that portfolio.

Yes, sure. Happy to give also more context on that. So, good call recollection, by the way, for the comment of last quarter. Yes. So, high level, we continue to work on, I would call it significant. We're working on significant opportunities to create value with some of the buildings, essentially changing the entitlement for more density. So, different So various projects or various properties are at various points of the approvals. Some are closer than others. So although there's no certainty, I think we're optimistic and some are progressing well. So between the next two years, we expect that this would favorably, if they go forward, which we expect, favorably affect the valuation of these properties. But I don't think I can tell you, there's not enough progress between now and the last quarter. I don't think I can give you more, but I would say this is very nice that despite the headwinds, that there are this potential tailwind with that portfolio. And frankly, kudos to the team that has found some of these exceptional, I would say, opportunities. So I look forward, Doug, to to give you updates as these materialize.

Okay, but there's nothing, I guess more the point is this is kind of a two-year plus. Nothing imminent. Yeah, nothing imminent. Okay. Nothing imminent. Appreciate the color. And then just maybe, Eric, on core expenses down quarter per quarter, is this a blip? Is this a new run rate? Is there anything unusual in that expense line? Can you maybe elaborate a bit?

Yes, many. On this one, I remind you that, you know, we've been trending well since the beginning of the year on overall expense management. When you look at this corporate expense segment, it's just one part of the equation. When I look at expenses, since the beginning of the year, we've been trending just slightly under plan. And we've done that by making choices along the year So you remember that we had some regulatory and compliance project to complete for September. And when we make those choices along the year to stay within our envelope, you know, those choices sometimes impact more corporate expense segment. Sometimes it's more OPEX than CAPEX. So this is what is bringing a little bit of volatility when you look at this segment. But I prefer to look at the overall picture, which to me encompasses everything.

Okay, so it sounds like this is more of a normal kind of, as we think of kind of trying to put something in for this line item for in our models, like this is kind of, you've kind of gone through some of the bigger bumps and expenses. This core is more normalized. Is that a way to kind of think about it?

Yes, that's okay. That's a good way to look at it.

Okay. And then maybe lastly, Denny, for you, just on VeriCity, thanks for the accretion numbers. It's helpful to think about. But 10 cents core EPS accretion in year three, can you talk a bit about what's driving that accretion? Is this all revenue? Is this all expenses? Are you redoing reinsurance treaties? Can you talk a little bit more about this? And then I guess my overarching question is, how do I think about this? Because if I look at the economics, it looks like it's a 4% return on capital deployed three years out, but maybe I'm missing something. I know there's a lot there, but just hoping to get some color.

Yeah, thank you for that. I might ask Mike to provide more insight, but let me just first say that this is very consistent with our strategy right now in terms of developing the U.S. life business in the U.S., And obviously, distribution is something that we're always looking at. In particular, this company has a specific expertise in terms of digital capabilities, in terms of distribution. It was quite attractive for us to get into that. And at the same time, it inherits some manufacturing capabilities as well. But at the end of the day, it is a mix of both... increase in revenue. It's a growth story, basically, and Mike might want to comment on that. So it's a mix of growth and a mix of expense synergies that is bringing those equitiveness over the years. Mike, you might want to comment about the overall strategy here.

Sure. Thanks, Denis. As Denny said, and the way I think about it, the most important thing here, we want this to be a growth story. From whatever marketing and strategic standpoint, it gives us exposure to a digital, state-of-the-art digital platform, distribution platform. And secondly, we believe we can grow the business. That's why we want to do this. In many ways, it actually reminds me of American Amicable, and I was go on a bit of a segue here for a minute. As many of you know, we acquired American Amapool 13 years ago now for $145 million. It was a small company back then, did about $25 million of sales, had private equity ownership, and the owners did not want to put more money in it, so the sales were flat. And so when we showed up, we said, we want to grow this business, and management went to work on that and have done a great job. The reality was that business was breakeven for the first few years. But today, when I look at it, we've grown sales by more than a multiple of six times, and the earnings, as you know, are pretty good. We've got pretty good margins. So turning to veracity, it's quite a similar situation. Their sales are about $40 million and are flat, primarily because of capital constraints. The majority owner is a private equity firm and did not want to put in more capital. And as many of you pointed out, the business is breakeven. So in terms of moving forward, our number one priority is this. And, you know, the math is simple. If you grow revenue faster, you grow expenses, you're going to create margins. And that's what happened to American Amicable, and that's the plan here. Beyond that, second issue, we expect to generate some expense synergies sort of in the neighborhood of five to six million by the third year. We also expect to generate some gains by improving their capital management activity. They've been using primarily reinsurance and that all needs to be reviewed. And one other thing to keep in mind when you look at their results is they paid $20 million in COVID claims 2020 to 2022. So having said all of that, the biggest contributor, I expect, will be growth. But yeah, we're optimistic. So I hope that helps.

Appreciate the call. Thank you.

Your next question comes from Gabriel Deschain from National Bank. Please go ahead.

I'd like to follow on that line of questioning, actually. You mentioned that American Amicable is nicely profitable, but can you put a number on that just so we can kind of give a bit more weight to this previous acquisition of the case study? And then the things that you mentioned there, the expense synergies, the reinsurance recapture, which seems like a likely strategy, are those things included in your current accretion figures?

Sorry, it's Denis here. I mean, we don't disclose specifically the results in the U.S. between, let's say, the dealer business and the live business. But, you know what I mean, certainly when I look at the individual live business in the U.S., in terms of target ROE and actual ROE from that business, it's higher than our targeted ROE. So we're very pleased with that business. And could you repeat the second part of your question, Denis?

The second part of the question, I mean, it would be helpful if we can get those numbers at some point, but on American Amicable and the dealer services profit split, the expense energy number that you put out there and the reinsurance recapture strategy, these are in year three. Are those in the $0.10 accretion figure?

I can take that, Denny, if you want. Yeah, go ahead. Yeah, I mean, expense synergy, yes. Reinsurance, no. Reinsurance needs more work. We didn't have the time to work through it. And, you know, we've got to talk to a number of people to sort all that out. It's, you know, relatively complex, but my gut take is there's room for improvement.

Like how long are those contracts typically?

I can't tell you right now, and it's probably confidential anyways.

Okay. You know, just switching over to the mortality discussion, we saw a couple quarters, the first half where there were losses and then this quarter yet gains. Sounds like you're still keeping an eye on it. It makes sense to me. I'm just wondering, you know, what are some of the observations that you've been making? Because it sounds like, you know, maybe this quarter was good, but it might not be sustainable.

Yeah, I'll take it, Gabriel, on this one. You know, mortality can fluctuate quarter to quarter. We've seen it in Canada. So for the U.S., it's the same thing. We're happy and I'm confident right now with our expected assumption. And when you see fluctuation around, it's just statistical in the U.S. to me.

Okay. And could you, final question, could you quantify the amount of negative experience in the P&C business this quarter?

Yes, Gabriel, it's Eric again. It's about 9 million overall. Okay. 6 million out of the 9 coming from the bad weather that we had in July. Got it. Thank you.

Thank you.

Your next question comes from Tom McKinnon from BMO. Please go ahead.

Yeah, thanks very much. Two questions here. One really on the CSM. If we look at the impact of new business, it was $134 million. That's the lowest we've seen in the quarter so far in 2023 and was certainly lower than the $152 million we had in the third quarter of last year. And this comes despite the fact that you appear to have better sales, better insurance sales. So what's driving that?

Yeah, thanks, Tom, for the question. I will say two things. First, remember the business change that we made at the end of last year. So those changes were negative. So it's a bit of a return to normal situation. for the CSM reflective this year of those basis change. And to another extent, the CSM, when you think about it, is the present value of future profit. And that present value is done using the locked-in curve from IFRS 17. And when the rates are going up, the locked-in curve goes up and the present value goes down. So it's just a question of geography in presentation. So we do not worry that this number is going down because keep in mind that long-term rate is good in our business. So it will just show up elsewhere and at some other point in time. When you look at the CSM reconciliation, you have a line that talks about organic financial growth. So that decrease over time with the increase in terrestrials should result into an increased number over the coming quarters and years.

Tom, sorry, it's Denny here. Just one thing to add on this. Whenever internally we talk about CSM, I always like to remind people that CSM is not inclusive necessarily. of every businesses we're in. Like, for example, the fact that we have more customers moving into GICs from, let's say, SEC funds. I mean, obviously, it does not help in terms of the CSM, but at some point, people will come back. And so we always have to keep that in mind. Thank you.

Yeah. And the negative three that was there, there was some negative experience in the CSM. What was that related to?

Yeah, when you look at the gain that we had on mortality in Canada, you know, we mentioned in the previous quarters that sometimes the geography of gains and loss is different than under IFRS 4. So we had a little gain on mortality in Canada on the PNL, and that resulted in a little loss on the CSM side.

And that was mortality?

Yeah, that was mortality, sorry.

Okay. Okay, so if we net them together, you would say your mortality experience was neutral?

Yes, that's a good way to look at it.

And then the last is on slide 18, the macroeconomic variations that hurt your capital available for deployment by $200 million. If I look at the mark-to-market impacts that you outlined, the 169, the bulk of that was the decline in investment properties. Am I to then infer that the bulk of the $200 million decline in capital available for deployment was as a result of that investment property mark as well?

Yeah, I would say it's all inclusive of macroeconomic things that happened in the third quarter. You know, stock market did stumble a little bit. Real estate impacted and interest rate change. So it's reflective of everything altogether.

And if I could squeeze one more, your interest rate sensitivity would imply that you would have had a much bigger hit as a result. of the big spike in interest rates than you actually had in terms of their marks with respect to interest rates. I think it was only like $14 million, yet your sensitivities would imply that number to be probably at least north of $75 million or something like that, just given the jump in rates. Why was that different?

Yes, that's another good question. When you look at the sensitivity page, it says that it's for parallel interest rate shift. And, you know, we've seen lots of yield curve change since the beginning of the year. So that's really what's making up the difference.

Okay, thanks for that.

Your next question comes from Lamar Persaud from Carmark. Please go ahead.

Yeah, I just want to kind of continue along the discussions on the CSN here from Tom. So just thinking about the impact of new insurance business in your CSN, so the $134 million there, you did make some refinements to what goes through this line last quarter and again this quarter. Do these changes impact the outlook for new business CSN growth, or is high single-digit growth still appropriate? I understand what you guys are suggesting that this might be a bit lower in the near term, but what I'm really trying to get at is, is the longer-term expectation for high single digits still appropriate?

Yes. I would say that if everything else stays the same in terms of macroeconomic, you're right. We should still expect to see that increase. that high single digit increase.

Okay. Okay. And then I just want to come back to the potential for M&A and U.S. dealer services. We haven't really seen much consolidation in the space post the IAS deal. So I'm wondering if maybe we could spend some time talking about, you know, maybe the long-term attractiveness of this business. Like wouldn't you want to consolidate it when, wouldn't you want to consolidate the space when it's a little bit out of favor or is a long-term view on this business somewhat impaired?

I think I'm going to take that one. It's Denis here. That business right now is going through obviously some big initiatives in terms of conversion, for example, or integration when we bought IAS. So we have invested significantly in technology to improve the operations, and I would say the motto is really to do the organic growth. In this difficult environment right now, we are seeing an increase in financing costs for the customers, and obviously it puts pressure on sales. So the focus right now is truly on organic growth, and once the profitability is back to the standard or the target that we have, We might go further and maybe look at some acquisition at the time because still that market is fragmented. There are opportunities, but we're not going for the big fish right now. We might do some token acquisition, but for the time being, I would say over the next maybe 12 to 24 months, we want to make sure that we are going back to the level of profitability in line with our target.

Thanks. And then last one for me. Can you guys just touch on the elasticity of expenses? Like if the operating environment is tough, do you guys have the flexibility to slow expense growth? And did that play into the lower expense growth this quarter? Thanks.

Well, you talk about elasticity of expense. It's been a while since I heard that word. Thank you for that. I mean, to what extent we are able to absorb expenses, I think that's the question you're asking here. I mean, inflation right now is obviously a challenge for any organization. I mean, it forces all organizations to make smart choices in terms of where they invest and all those things. At the same time, you know, we can adjust some of the pricing of our products going forward. So at the end of the day, for us, we believe that we can still maintain our 10% EPS growth. When I look at it, I mean, at a very high level, with the level of inflation that we're going through right now, and the fact that interest rates have increased accordingly, which is very positive for us. When I look at all the impact of everything here, we are confident that we can increase our EPS mid-term by 10% plus.

Appreciate the time.

Your next question comes from Paul Holden from CIBC. Please go ahead.

Thank you. Good morning. So I'm going to continue with the expense line of questioning and maybe try to get a little bit more specific here. And I guess looking at the U.S. segment to start, those core other expenses were down quarter for quarter for the second consecutive quarter. Yet, as you've highlighted, you're making investments in the warranty business. So just wondering if this is due to some seasonality if there's been some cost reduction actions, or maybe, again, costs were just simply elevated in the first half of the year and should be more similar to Q3 going forward?

Yes, it's Eric Paul. Thank you. Two things really happening here. First, Mike mentioned it. The team is really working hard in terms of expense improvement and operations. improving our operating expense. So that's one item. And the other one that is, you know, it's not a seasonality, but it's a yearly review. There is a variable compensation item related to the performance of a U.S. dealer. And this re-evaluation is happening in July. So you see the positive effect, if I can say, of this revaluation on core and other expense of the U.S. divisions on this item. So this time it's a positive in terms of core expenses. So, yeah, that's what I wanted to say about those two items.

Okay. Understood. And then going back to the core other expenses on the corporate segment, pretty big decline from Q2, but maybe Q2 is just simply elevated. Again, I guess a similar question there, like is there any kind of cost reduction actions that have taken place since Q2, or is there just simply a lower run rate for some of these projects you've highlighted?

Yeah, in reality, like I mentioned earlier, Paul, we're tracking expenses since the beginning of the year, and it's been trending about the same, you know, percentage under our plan since the beginning of the year. It's just a question of geography here and decision taken along the year that sometimes impact numbers like in the core expense segment. So you see a bit more volatility. But when I look at the overall expense situation of the company, it's been very stable and according to our plan since the beginning of the year.

Paul, if you don't mind, it's Denis here. I just want to add some flavor on what Eric has mentioned, which is very good. The way I look at it is that when I look at the last two years, like 2022, 2021, For various reasons, like more regulations, additional digital investments, the general expenses that we incurred was higher than our budget each year. But I must say that this year, I'm very pleased because I guess we put an additional level of, I would say, constraint in our operations in the sense that We stick to our budget. There's no way we're going to go over this year. I don't like to say more discipline. It's not the right word, but certainly there are more attention put into our expense management.

Got it. Understood. Okay. And then last question for me is related to a comment Erica made earlier about regarding interest rate impacts on the business. Again, going back to the CSM discussion of the new business impact on CSM going lower to the PV, but then we should expect interest rate benefits elsewhere. So, really the question is where should we be expecting those interest rate benefits because I would have expected one of those areas to be the core net investment result. when should we expect that to get better for higher bond yields and where else on the DOE statement should we be expecting to see the positives?

Yes, Paul, if you look at the CSM reconciliation of our supplemental information package, I will guide you to the line just under the impact of new insurance business. It's called organic financial growth. Page 27. So this line should increase at a faster pace going forward because of that increase in interest rate. But you're correct that core net investment results should benefit a little bit of it as well. Because overall, it's good news for us that interest rate increase in our in the end, with the product that we sell and we have in our in-force.

Paul, it's Denis here. It's Denis Ricard here. Thank you for that question. Actually, that was the question. I did ask that question myself to my management team. I wanted to make sure that, okay, we're seeing that interest rates is, I mean, long-term interest rates increase is positive. Where do we see it? My conclusion is that we should see it in the net investment results from one quarter to the other. That's basically it. And Eric had just also added some color on the CSM.

Okay. And sorry, just to clarify that. Really, that's going to be a matter of when there's, I don't know if you call it normalization, but a shift in the yield curve that's more favorable, then it'll really come through, correct?

Yes.

Okay, thank you.

I see that as a future tailwind. I mean, at some point, the yield curve is going to go back to some more normal, and that's going to be a tailwind for us. Understood. Thank you.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. Your next question comes from Mario Mandoka from TD Securities. Please go ahead.

Good morning. My question is a little similar to what you just discussed with Paul. When I try to look at your net investment income, it's one line. The disclosure is not quite as detailed as others. And the company's done a good job of explaining why that's the case. But when I try to model up this number, when I think about this number, I'm not seeing the returns on this line consistent with the changes in interest rates. So I paid attention, obviously, when you talked about how it's last quarter's interest rates or the quarter ending that affects this quarter. Let me ask it this way. When we see interest rates move higher, when we see the long end of the curve move higher in, let's say, during Q3, Is the message then that a shift up at the long end of the curve necessarily benefits the next quarter and a shift down at the long end of the curve necessarily hurts the next quarter? Is it really just that straightforward?

Yes, you're right, Mario. The long-term rate direction that you mentioned is correct. What I would add on your previous comment about what happened since the beginning of the year You know, it's been a bumpy road on the macroeconomic side since the beginning of the year. I've seen more things happening in nine months on the macroeconomic side and yield curve than I've seen over the last 20 years. You know, when I look at and you try to understand what is happening on core net investment results, you know, Q1 was a decrease of interest rate. The curve went down. Then it became inverted in Q2. And then the long end of the curve raise without, you know, with removing a little bit of the inversion in Q3. So lots of things happen that kind of create noise on the core net investment result. That's really what's happening there.

I understand. Now, going back to the investment properties for a moment, I can't help but think that this was a bit of a cleanup quarter because the size of the charge was so great relative to any experience I have with industrial lines. Was there something about this quarter that really, was it just the moving rates or did the company really go above and beyond and try to really clean up your valuation so that you could put this issue behind you? Am I characterizing that appropriately?

Hi, Mario. It's Alain speaking. I could see why you may think that it was the case, but that would not meet the accounting standards and the auditors to try to do a cleanup. I know this is a common practice in many institutional portfolios, but when it comes to public company and we have to reflect independent valuation or inputs. So it's either externally appraised or infer from the externally appraised. So we can't be biased one way or the other. So we're really reflecting the information that we are hearing from or the actual evaluation from our third party. The one thing that you may, maybe you're coming, maybe one thing you're thinking of is, I'm not sure the extent to which everyone is subject to. So if you look at institutional portfolio or even the MSCI Real Pack Index, you're not seeing too much of that movement. That suggests to me that perhaps it's because of many institutional portfolios, they're really being fragmented. properly fully appraised in Q4. So there may be others that may have an OKQ3 and then have to take a Q4, but just let me be as clear as I can. Our goal was to take the information from the external appraiser and apply it to the overall portfolio so that we're not sitting on information today that we know would affect the mark-to-market in Q4. But that being said, from that point on, You know, the Q4 results and the Q1, Q2 in the future, they will be driven by how the market condition change. So we haven't put an extra buffer in that.

Okay. That's clear. And then, Eric, maybe one question for you. Since this conversion to IFRS 17, the spread between your reported and your core earnings, has been particularly wide. Now, I get it. It relates to the conversion to IFRS 17 and the unfortunate coincidence that that conversion happened at the same time that market, that macro volatility reached some historic levels. The question I have for you is, will there be similar changes, differences to the positive when we eventually see a more constructive market. What I'm getting at is I want to make clear that there's no bias to the negative, that the core will always be greater than the reported. Or is it sort of symmetrical going forward?

Yes, good question, Mario. You're absolutely right. We will see. It's just a question of time. I can't say when. But we will see quarters where we might have 400 million profit. It's very volatile, and what we expect is that the reported will fluctuate around on both sides, and it should converge toward our core earnings over time. Please, go ahead.

Yes, Denis here. I was going to make a prediction that we're going to come up with a quarter with the EPS, core EPS, of over $4 or $4.50 in the near future when the market, let's say, comes back. And it's related to your point. To me, the way I look at it is that we, as management, we are creating value for our shareholders for the long term. Now, unfortunately, and we said that many times, the accounting regime, the new accounting regime, they link the asset and liability. Under the previous regime, all the changes that you've seen today would have flowed through the liability and it would be a very, very minor impact. The core earnings that you would have got under the previous regime would be very similar to what we are getting under the current regime. If we did believe in the core earnings over the last, I don't know, 15 years, we should believe that the core earnings today is good. Now, the problem is the reported earnings because, as you said, we're going to see fluctuation. And I don't think, and Eric has confirmed here, I don't think there is a bias that, you know, the core earnings will always be, you know… Sorry, that the reported earnings would be like lower than the core earnings all the time and that we have some bias that we've built in our process to make it attractive or always positive.

Can I just add one thing, Mario? Because it's the third quarter today where we're under IFRS 17, so it's a very small sample. But nonetheless, Q1 was actually reported was higher than core earnings. So I know it's a small sample, but it's just one example.

So the advice you'd give for me outside looking in is I have to measure this over an extended period of time. So whether that's several years, several years from now, I can look back and say, yeah, it was the accounting essentially and nothing more. That would be your advice to me then. Look at it over the long term.

Yes, exactly, Mario. That's what I mean when I say that the average should converge toward the core.

Okay. Well, I'm sure I'll be around long enough to see that. Thank you. So do we.

Pardon me. We have one more question from Draco Mielek from RBC Capital. Please go ahead.

Hi. Thank you. Can I... Can I please ask a couple of questions with respect to capital and looking specifically at slide 18? The first question is a very simple one. If you can just help me understand why capital required for organic growth is much lower than the last couple of quarters.

Yes, two things that go on that front. I would say that that happened. You know, the business mix or the product portfolio mix was slightly favorable in Q3. That has mostly to do with respect to the lower sales that we had on the SPIA side of group savings. Those sales comes usually with investment that consume a bit of capital. So if you connect with the sales side, that we made in the quarter. It kind of gave a break to required capital this quarter. And I would say the second item is related to group insurance, and it's the fact that most of the business renewals are go in force in the first half of the year. So, again, it's a question of seasonality on this one. Because most of the business required capital goes into our books, if I can say, in the first half of the year.

Okay, I think I'll have a follow-up for you afterwards on that, as well as the organic CSM growth. It was a little bit light, but I guess the net of my real question, where I really want to take this, is once we consider the acquisition of electricity, let's call that and we take into account the NCIB, which, depending on where your stock price is, we can sort of come up with a number. Let's say that's another $500 million of capital. We get to the point where we're under $1 billion left for deployment. So the question for Denny is really somewhere around, given your earlier commentary that you might be looking for tuck-in acquisitions, but certainly nothing significant in the U.S., is it fair to say that we really should be looking at a company that's essentially going to be buying back stock aggressively in the current environment and that you can actually 165 of organic capital generation this quarter, you can essentially pay for that with the organic capital generation quarter in, quarter out. Am I thinking about that correctly or is there a possibility that you would consider even larger buybacks given that we aren't looking for larger acquisitions and perhaps bring down the capital even more aggressively. Am I thinking about that correctly, Danny? Or maybe you can give me some idea conceptually about how you're thinking about the NCIB.

Yes, thank you for the question. Actually, this is one scenario. I mean, one scenario would be that if we are not able to find at the right price, right targets that are sizable, obviously we will be more aggressive on the NCIB because at the end of the day, we want to give back the value to our shareholders. Now, our preferred route is really to grow the company and grow more so on the individual insurance side right now in the U.S., or there might be other opportunities in other sectors. Like I said, on the U.S. dealer for the time being, I mean, we're on the hold, but there might be some other in other sectors that comes up. And the size might be high. I mean, it could go, let's say... close to what we did for IAS. We could go as high as that if we truly believe that there is a strategic fit and it's good for us. I mean, we have the means to do that right now, and we are generating a lot of excess capital. So I don't want you to think that we will only do token acquisition, but we will stay very disciplined. I must tell you that. We want to make sure that we return value and we build value to the shareholders.

Okay, I think that touches on everything that I wanted to get from that conversation, which is good. Thank you for that, Denny. But just to be clear, your strong capital generation, a function of that is actually that your required capital is low and your organic CSM growth is low. Is that something that I should think about as changing going forward? In other words, we should see more required capital for organic growth. I mean, the $39 million is low, and I should think more in the lines of something around $140 to $150 per quarter of actual capital generation. Am I correct in thinking it that way?

Well, no. I think that we put a lot of attention to be as capital-efficient as possible. And as far as I'm concerned, we're generating around $600 million right now. This is a reasonable level right now. We do not intend to, let's say, unless the market changes, obviously. I mean, you never know. I mean, there may be some competitive reasons for that. But everything else being the same, you should not expect the $600 to go down. Okay.

All right. Fair enough. Great. Thank you very much.

And there are no further questions at this time. I will turn the call back over to Denis Ricard for closing remarks.

Well, thanks a lot. It was quite a quarter with all the macroeconomic environment, and I think we made it very clear to all of you that this management team is really keen to build long-term value for the shareholders, and the short-term situation does not distract this management team. We are focusing on our core management whether it's the ROE, whether it's the generation of capital, which are the, I would say, the two most important KPIs for us. So good quarters, when I look at all those KPIs, ROE quarter, let's say, annualized over 15%, generation of capital in line with the target, And at the end of the day, growth is important. And so the last thing is that we've seen significant growth in almost all of our businesses. We're very proud of that. So the company is doing well, and we continue to do so going forward. So thanks a lot for attending this call. See you next time.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.