iA Financial Corporation Inc.

Good morning, ladies and gentlemen, and welcome to the Industrial Alliance 2024 second quarter results conference call. At this time, all lines are in lesson only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, August 7, 2024. I would now like to turn the conference over to Marie-Annick Bonneau. Please go ahead.

Good morning, everyone, and welcome to our 2024 second quarter conference call. All our Q2 documents, including press release, slides for this conference call, supplementary information package, and quarterly MD&A are posted in the investor relations section of our website at ia.ca. The conference call is open to the financial community, the media, and the public. I remind you that the question period is reserved for financial analysts. 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 statements information on slide two, as well as the non-IFRS and additional financial measures information on slide three. Also, please note that a detailed discussion of the company's risk is provided in our 2023 MD&A available on CDAR and on our website, with an update in our Q224 MD&A release 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 Savings and Retirement. Pierre Miron, Chief Growth Officer of our Canadian Operations and responsible for Dealer Services Canada and IE Auto and Home. Sean O'Brien, Chief Growth Officer of our U.S. operations. And finally, Louis-Philippe Pouliot, in charge of our group businesses. We are pleased to report solid second quarter results on all fronts. Our Q2 performance is a tangible demonstration of the value we are creating by implementing our growth strategy with discipline and care. By leveraging our distinctive strengths, such as our extensive distribution networks and diversified portfolio activities, and by deploying capital, we achieved strong sales momentum, record core EPS, substantial organic capital generation, and core ROE expansion. Now to the results, starting with slide 8 for an overview of main financial KPIs. Core EPS of $2.75, up by 15% year-over-year, reached a record level. Trailing 12-months core OOE of 15% is already meeting our mid-term target thanks to strong earnings growth and capital deployment initiatives. Business growth continues to be very strong in Canada and in the U.S., with virtually all units recording good sales growth. As a result, we concluded the quarter with premiums and deposits up 15% year-over-year and assets under management and administration up 12% over 12 months. Our capital position remained robust with a solvency ratio of 141%, supported by continued strong organic capital generation and good risk management practices. Our book value per share which stood at $69.92 at June 30th, increased by over 9% when we exclude the impact of share buybacks. Now to slide 9 to look at second quarter business growth for Insurance Canada, which recorded another solid quarter with all business units posting strong sales results. In individual insurance, We continue to lead the Canadian mass-made market in number of policies sold, with strong sales of $98 million during the second quarter, up 10% over last year. This result is attributable to the performance of our distribution networks, our advanced digital tools, and our comprehensive range of products. In group insurance, sales increased by 26% year-over-year, along with good retention, leading to premiums and deposits at $510 million, which is 10% higher than a year ago. In the dealer services division, second quarter sales of $194 million were up 2% year-over-year. This is a good result as growth was tempered by the macroeconomic environment that continued to impact vehicle affordability. and by the temporary outage at CDK Global, a dealership software provider, which occurred from June 19 to July 4. Finally, IOTO and HOME also recorded very strong sales, with direct written premium in the second quarter reaching $188 million, a solid increase of 15% over the same period last year. This result was supported by good retention of in-force business, strong new sales, and the impact of premium increases implemented recently. in 2023. Turning to slide 10 to comment on sales results for wealth management, which posted, again, very solid results, notably with net fund inflows of more than $400 million. Growth sales of SEC funds reached nearly $1.3 billion, up 53% year over year, and net inflows of $608 million were generated during the second quarter. With this solid performance, which demonstrates the strength of our distribution networks, IE continues to rank first in both growth and net SEC fund sales. Mutual fund sales of $468 million were up 26% year-over-year, though inflows were lower than outflows as the mutual fund industry continued to be challenged. In addition, Although investor optimism about financial markets and asset classes offering higher return potential than guaranteed investments favored SEC fund sales, sales of insured annuities and other savings products remain elevated, reaching $541 million. This is good performance that compares to a very strong quarter a year earlier. Finally, group savings and retirement posted solid sales of $858 million in the second quarter, up 6% year-over-year. Now looking at slide 11 regarding our sales results in the U.S. In individual insurance, we achieved record sales of $49 million U.S., an increase of 14% year-over-year, reflecting good performance in all our markets. The continued high activity in this business unit along with the recent acquisitions of Vericity and two existing blocks of insurance business from Prosperity Life Group, illustrate our ability to achieve strong growth in the U.S. life insurance market. In dealer services, second quarter sales amounted to $279 million, up 13% over the same quarter the previous year. Dealers continue to place greater emphasis on F&I product sales, while vehicle inventories are increasing and profit margin on vehicle sales tend to decrease. Meanwhile, as in Canada, sales were tempered by the macroeconomic environment, which continues to impact vehicle affordability, and by the temporary outage at CDK Global. Moving to slide 12, where year-to-date results compare favorably with all our midterm targets. More specifically, core APS has increased by 16% compared with the same period in 2023 and is well above the targeted 10% plus annual average growth. Core ROE met our midterm target of 15% plus. Our solvency ratio of 141% is significantly higher than our operating target. Our good profitability contributed to the generation of $305 million in organic capital, having so far generated more capital than in the same period last year. Lastly, our dividend payout ratio is well within target. Turning to slide 13 to discuss our capital deployment priorities and recent initiatives. At June 30, 2024, we had 1.1 – sorry – We had $1.1 billion in deployable capital following an active second quarter in terms of capital deployment, mainly through share buybacks and acquisitions. To create additional value for our shareholders, our focus continues to be profitable organic growth with new sales having an ROE above 15%, as well as disciplined acquisitions. We recently announced the closing of the Varicity acquisition and the acquisition of two blocks of life insurance business from Prosperity Life Group in the U.S. life market. In Canada, we also completed the acquisition of the Laurentian Bank Securities assets in the wealth management sector. Going forward, in addition to growth initiatives, we will continue to steadily increase our dividends and to buy back shares. In conclusion, we enter the second half of the year confident in the resilience of our diversified business model and in our continued ability to create value and increase profitability. I will now hand it over to Eric, who will comment on the second quarter profitability and capital strength. Following Eric's comment, we will take questions. Eric.

Thank you, Denis, and good morning, everyone. Starting with slide 15 for an overview of Q2 profitability and financial strength. After a solid first quarter result, second quarter was even stronger with core APS growth of 15% compared to last year. Key favorable drivers of this performance include 14% increase in core insurance service result and 19% increase in core non-insurance activity. Insurance experience was positive for a third quarter in a row. As for expenses, they were lower than last year in line with management expectations. The strong profitability coupled with the benefits of capital deployment initiatives is driving ROE expansion with core ROE already meeting our mid-term target of 15% plus. Indeed, at the end of Q2, trailing 12-month core ROE was 15%, and annualized core ROE was 15.9%. Our financial strength remains robust, with a solvency ratio of 141%, well above our operating target. It continues to be supported by strong ongoing organic capital generation. As you know, we consider the book value to be a very important metric that provides an unbiased assessment of company's value. Over the past 12 months, our book value per share increased by more than 9%, excluding the impact of share buyback. This solid performance reflects our sustainability to create value. Now moving to slide 16 to take a closer look at Q2 results by segment. All three of our operating business segments posted good results with particularly strong growth in the two Canadian segments. In Insurance Canada, second quarter earnings reached $106 million, up by 16% compared with the same period in 2023. This performance was supported by insurance experience gains of 11 million, mainly attributable to continued favorable mortality experience in individual and group insurance, and to a solid result again at IE auto and home. Indeed, lower claims in auto and home insurance and the favorable impact of premium increase implemented in 2023 contributed to another good quarter in our P&C operations. Insurance Canada's solid result was also supported by the 33% increase in non-insurance activities, mainly from dealer services. In the wealth management segment, core earnings of $98 million were 29% higher than a year earlier. This robust performance is the solid, is the result of 25% year-over-year increase in the core insurance service results for SIG funds and 29% increase in core non-insurance activities. Also, good financial market performance continue to have a positive impact on this segment's profitability. The higher SIG fund result was driven by strong net sales over the past 12 months and an increase in the CSM recognized for service provided. As for non-insurance activity, Our distribution affiliates recorded, again, a solid performance, mainly due to higher commissions and better margins. In the U.S., second quarter earnings, although higher than the first quarter, were lower than in the same period last year. Lower Q2 core other expenses contributed to profitability, but the impact of new business due to higher sales and more onerous contracts, as well as insurance experience, were unfavorable. In the coming quarters, we expect increased profitability from good sales growth, combined with the repricing initiatives and other management actions. Now turning to slide 17 with the investment segment result first, expected investment earnings of $113 million were higher than in the previous quarter, mainly because of interest rate increase in the first quarter of 2024. Q2 credit experience was unfavorable with an increase in the provision for credit loss at high auto finance and to a lesser extent more downgrades than upgrades in the fixed income portfolio. In the corporate segment, core other expenses before taxes amounted to $64 million during the second quarter, in line with the quarterly expectation of $65 million plus or minus $5 million. This result demonstrates our strong emphasis on operational efficiency, cost-conscious execution, and disciplined approach to project and workforce management. Now looking at the right side of the slide for non-core adjustments, the net income to common shareholders was $206 million in Q2, and the difference with core earnings is mainly due to investment property value adjustments. Other non-core adjustments are mostly acquisition related. Please go to slide 18 to look at the company's capital position. Our solvency ratio of 141% at the end of the second quarter is well above our operating target of 120%. The favorable impact of strong organic capital generation and the 350 million LRCN were more than offset by high level of capital deployment through share buybacks and the acquisition of Vericity. As a result, the ratio declined by one percentage point during the three-month period. The company organically generated a strong 175 million in capital during the second quarter. Year-to-date, 305 million has been generated, and we are on track to exceed the minimum annual target of 600 million for 2024. This strong capital generation supports our solid capital position and the continuity of our capital deployment initiatives. Lastly, at June 30th, the capital available for deployment was $1.1 billion, and our leverage ratio was at a low and flexible level of 16.4%. These very good results conclude the first half of 2024 on a positive note. Our strong profitability combined with our capital deployment initiatives has led to an increase in core ROE, which we expect to continue over the coming quarters. These conclude my remarks. Operator, we will now take questions.

Thank you, ladies and gentlemen. If you would like to ask a question, please press star 1. To withdraw a question, press star 2. One moment, please, for your first question. Your first question comes from Manny Groman from Scotiabank. Please go ahead.

Hi, good morning. Thanks for taking my question. I just wanted to ask about U.S. dealer services. Sales there improved sequentially again, but I'm wondering what the impact of the CDK outage was. Was it material to that sales number?

Yeah, this is... This is Sean. It was a good quarter driven by our non-affiliate channel primarily. The dealer channel is also doing well. But in the end of June, it did definitely have an impact. But 30% of our dealers are on that platform. But it quickly bounced back and the sales are rolling into the next month. So it wasn't a huge impact.

And then in terms of the... Like the impact going forward, is there anything that you expect sort of knock-on impacts, anything either positive or negative in terms of impacting that sales number going forward?

No, I mean, we took advantage of the opportunity to, you know, to work closely with the dealers and, you know, highlight the technology we have to allow the contract, you know, outside of the DMS as needed, but I don't think there'll be any particular long-term impact to it.

And then just as a follow-up in terms of understanding the dynamics during that number, there was discussion about definitely growing the number of dealers on the platform. So when we see this improvement here, are we seeing just success in terms of getting dealers on the platform, or are we seeing something more fundamental in terms of dealer-level growth, something changing in the market that's actually allowing that to improve beyond just the overall growth and the number of dealers on the platform?

I think it's a combination of the market's coming back on the F&I side. So the dealers are pushing it. So we're seeing our win rate is higher on products with existing stores. We're also adding some stores. So the combination of the two, I think, that are impacting it. But it's pretty much just regular growth, I'd say, based on our plan.

And then just finally for me, just on the same subject, just in terms of the expectations going forward. We saw improvement in Q1 already. Danny, you were I would say conservative in terms of your outlook, but did what you see in Q2, was that better than what you expected? And have you changed your outlook here in terms of what to expect for the dealer services business in the US?

Maybe this question is for me. I would say that I've not changed the position. I still want to be prudent at this point. We turned the corner. I still need a couple of additional quarters before I can say that.

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

Hi, good morning. Just a few questions, several questions just on the U.S. as well. Maybe I'll just kind of hit them in order, you had negative lapse experience. I assume this is just for the insurance business. I'm just trying to understand, because I kind of understand the products that you're in. I don't think they're lap supported, but can you just kind of flesh that out, what that's related to?

Yes. Hi, Doug. It's Eric. Those lapses are related to early duration lapses for our products. So we have slightly more people lapsing the policies in, let's say, the first year of the contract than expected.

Is this on the term products?

It's, you know, in the U.S., it's mostly final expense. So it has to do with mostly final expense. That's mostly on the final expense side.

Okay. there's a negative dealer or negative claims experience at the dealer side. And you talked a bit about this in previous quarters. I wonder if you can provide some context as to what you're seeing in terms of, I don't know if it's a loss ratio today in that business versus pre-COVID or, you know, the inflation pressures that you're seeing on that business. Is it, you know, you see inflation of 8% and price increases or 4% or 6% or you're seeing some erosion there? I don't know if that's something you can kind of give a little bit of context to. And maybe I can weave this in and you can kind of maybe set me straight. But I think the U.S. Dealer Service is like you're split between what you reinsure and what you keep, the 75-25. That's evolved. I thought it was 90-10 before. Maybe that, I don't know if those numbers are right, but are you retaining more risk? And as a result, you're seeing more claims pressures, just kind of trying to get a sense of all of that.

Yes, Doug, it's Eric again. The percentage that you add is still valid in terms of split between risk-taking and administration. So the 25%, 75% is still valid. That being said, what we see is a bit of pressure from inflation. As you may suspect, inflation is trending higher on the parts and on the fixed and repair costs. And also, something that is happening is that with the technology in vehicles, it's becoming more and more complex. I used the analogy of windshield at some point in meetings to say that, you know, we used to pay $1,000 to replace a windshield, and now it's costing $2,000 to $3,000. So it's an easy example of what's happening there. So we just need to adjust. And the good thing with our product is that we are just processing the experience rating and we will reprice the product as we adjust with experience.

And this is just on the insured business or what you're retaining. That's correct?

Yes.

Yeah, and then, you know, how long does it take for the repricing to offset that claims cost pressure that you're seeing?

Yeah, you know that those guarantees run for four to seven years. So, you know, when we determine the price initially, we cannot review it. So, we can only reprice for the new business. So, it will take... a couple of quarter and years to stabilize the pricing in line with the current development. So that would be my answer to your question.

Okay. And then just lastly, and I apologize, Danny, if you've answered this already, but you put in something new in the slide deck that you now expect gradual profit improvement at the U.S. dealer services. And I don't know if Sean or Danny want to cover this. I mean, is this the inflection point? you're comfortable with what you're seeing from a trend perspective, not just top line, but also from the repricing and is this quarter the inflection point for the profitability of that business?

Yeah, I'll start and Sean can add to it, but I'll repeat what I said. I think it's too early to see that we are at an inflection point. I see some positive, like increasing sales, we're focusing on organic growth. I mean, you can solve a lot of lot of issues with growth and this is what we're doing right now. We are focusing on profitable growth, organic growth. That's been the focus of the team and maybe Sean, you want to add on this?

Yeah, I've just, you know, my 60 days in, I'm really taking a lot of time with that business and I do see some opportunity. There is further pricing changes that we'll be making in a sequence manner. I've also been looking at the team itself and have made a few changes. So there is There is some, I think, a lot of opportunity in that business. But is it at the inflection point yet? I tend to agree with Denis. I'd wait another couple quarters to maybe see where it goes from there.

Appreciate it. Thank you.

Your next question comes from Gabrielle Deshaunes from National Bank. Please go ahead.

Hey, good morning. Just a question on the expected investment income line item. It's running around $115 million. Just basic, stupid question. I thought there'd be a fairly bigger sequential increase because of higher rates at the end of last quarter, but didn't get that. Last year, if I look, it was $130 to $140 million. What conditions do we need to get back to last year's levels for that particular line item?

Yeah, Gabrielle, it's Eric. On this, I think it's better to look at this number on a quarter-to-quarter basis than comparing to last year, because when you look at the story year over year, you know, lots of things happen on the macroeconomic side. Last year, we had lots of things with curve up, curve down, curve change. Stock market tumbling. So it's a little difficult to compare. And the story becomes very complex when you want to compare year over year. So that's why I prefer to look at it quarter to quarter. And when you look at it from quarter to quarter, we see, remember that our previous approach of setting the rate for core investment earnings was to use the end of quarter rate. And the rate went down in Q1, so that's one part of the explanation. The other elements that also impact core investment results are our deployment, the capital deployment activities. You know that a lot of activity happened in Q1 with acquisition, with NCIB. and all those things. So all in all, those are the items that impacted from quarter to quarter impacts. And maybe two other quick ones that I'm just thinking of. When you think about Q4 to where we are today in Q2, remember that our NFI had some markdowns. So, since we don't have the expected return on those, it necessarily means that core investment result is going down. And also, what we announced in Q1 in terms of interest rate risk, volatility management, we've changed the accounting methodology for some liabilities. so to properly line up the change in the market value of asset with change of value of liability so all of those together are positioning us where we are right now and we're really happy you will you will notice also that we have further reduced the sensitivity with uh with respect to interest rate in the quarter so when you you will look at the coordinate investment result for q3 If you use that sensitivity, it's the best approach to predict what will be the core investment results.

Okay. Revisiting that labs question in the U.S., I don't know if you can quantify that and if I should even care if it's a small number, but just conceptually, The final expense business is a lower-end consumer product, I guess. And that's where there's a lot of – and older, I suppose. That's where a lot of the financial stress is being felt in the U.S. We're seeing that in the credit cards business, for instance. I'm wondering if there's a parallel there that these lapse rate issues might not be a one-quarter thing. They might actually stick around for a while because that consumer is feeling the pain of higher rates and making choices like cutting out a product that they feel like they don't need.

Yes, that's one assumption, Gabriel. We'll see in the coming quarters, but right now what we see is not a big deviation from our assumption. We'll see. And, you know, that business is short-term as well, and we're talking with the distributors and we are repricing the products accordingly. So I don't expect this to be a recurring – negative impact in the years to come.

And it's short term, but that's only like the warranty stuff. It's for new business that any repricing would have an impact, correct?

Exactly.

Okay.

Exactly.

And then last one, again, I think that it's, you know, just put it into context, the credit losses and the PCLs in the non-prime auto business line, not a big number, but just wondering what the outlook is there, is for those provisions over the next year or so. Is it going to get larger than what we saw this quarter?

Yes, you are right that it's not a big number. In the overall picture, 4 million loss on the portfolio is quite small. And the way we look at it is to look at the impaired loans. When you look at that number, this represents what we call the stage 3 loans. And this number is improving from Q1 to Q2. So it gives you a clue toward the quality of our portfolio. So that's how I would qualify what's coming. I'm very comfortable with the quality of our portfolio and on the overall allowance for credit loss with respect to our business.

Did you... Sorry, I'm just looking at this. I guess in Q4 of last year, you would have taken a bigger Stage 2 provision. It looks like the allowance popped up quite a bit there. Just to...

Yeah, I don't have the numbers in front of me. But if you're referring to Q4, I know that in Q4, we updated. Remember that the provisions and the allowance is determined using macroeconomic parameters. And at the end of last year, we aligned those macroeconomic factors with the update. So that generated this increase in allowance for the quarter.

Okay, so you're kind of already pre-provisioned a little bit for troubled times ahead. Okay, great. Thanks.

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

Yeah, thanks very much. Question about the U.S. and really just looking at the non-PAA business. So I guess that... the US dealer services for the most part how are these numbers going to be moving as a result of diversity and that prosperity life acquisitions particularly looking at you know bump up and risk adjustment release bump up in CSM recognize is there any other is there an increase in other expenses I guess the bottom line is does the are the core earnings associated with this business with the U.S., which we're at 22, wouldn't those things increase to some extent as you're bringing on both the earnings from those two blocks at Prosperity as well as Vericity here? I guess Vericity would then increase the PAA, or no, that would increase basically the life business as well. So I hope you were able to make some sense of my question there, but any color would be great. Thanks.

Yeah, I think I know where you want to go, Tom. And I will just clarify one point when you refer to the dealer business. Dealer business is showing up on two lines in the drivers of earning. There is, like you said, on the PAA line and also on the non-insurance revenue line as well. while the life business is showing up just at the top with the risk adjustment release and the CSM recognized for service provided. So keep those in mind when we talk about our businesses. So when you talk about what's going to be the impact of various city acquisition, it's multiple line impact, okay? And you have to bear with me for a second. First, because you know that Vericity has an insurance company, life insurance company, and a distributor. So for the life insurance company, you will see in the CSM reconciliation that we included in the quarter the impact of the CSM of that business. So that's one part. So that CSM will be amortized under the CSM recognized for service provided starting next quarter. So that's one item. The other item will be the according risk adjustment that will follow as well. So the insurance company will impact those two lines plus the core net investment result line in the investment segment because the investment earnings will show up out there. So that's another item of that acquisition. And I would say finally, and I said about that there is a distribution arm, the distribution arm will impact the core non-insurance activities in the U.S. segment. So those are the impacts for various cities. Now, we announced as well the acquisition of Prosperity, which is a life insurance block, two blocks indeed, And those two blocks will impact our results the same way as I described for the life insurance company of the veracity acquisition, which means risk adjustment, CSM recognized for service provided, and core net investment result as well. Hope this answers your question, Tom.

Yeah, that was great in terms of where, but maybe the better question is how much. What's the total impact on core earnings of all those things?

Yeah, Tom, keep in mind that first for prosperity, we did not announce any impact. We just talked about the impact on solvency ratio. That's one piece. The other piece for veracity acquisition is that we said that it would be dilutive to core earnings in the first year, which is 12 months, right? It's not calendar year. It's 12 months. And we would be accretive to core earnings in the following years. So I would stick with those guidance. And the geography of this will be in the lines that I mentioned to you. So it will be spread on those four items for various cities. Okay, thanks.

And just as a follow-up, the – The marks you took on investment properties, I mean, this is really what ended up happening versus what you would have anticipated the increase should be in the quarter. There was $31 million in the second quarter and it was $23 million a mark in the first quarter. So it seems to go up quarter over quarter. Anything to read into this? You know, I would have anticipated that the trend should start to certainly decline and not be as high as it was in 2023. But any thoughts there? Thanks.

Hi, Tom. It's Alain Bergeron.

Alain, just a second. I realized that I forgot to mention, Tom, that we've said that for prosperity, that the transaction would be accretive in the first year. So just wanted to add on top of my comments regarding veracity. Alan, you can go.

Yeah. So yeah. Hi Tom. Um, yeah, the first I would say I would not put much meaning or no, I would not read too much into plus or minus 8 million on a portfolio of that size within like a quarter over quarter. Uh, I say it's more noise than, than trend. I mean, if you just go back and then if you add 2023, just actually cute to when they add a Q2, 2023, I think it was 33. So I think just to give a bit more details on this quarter, it's several idiosyncratic situations, all linked to specific tenant decisions or negotiations or expectations of negotiations. And look, we had positive reevaluation in the quarter. We also had negative reevaluation, but we had more negative than positive. So that's really the uh what happened and uh this is i think it's important it's in the context of a market that continues because our property when i say market it's canadian office property so it's in the context of a market that continues to be under pressure uh in q2 and by that i mean the office leasing markets remain very competitive for for tenants But on the other hand, if you kind of look at marker for, because this portfolio doesn't operate in a vacuum. It's the environment. Things that I watch for in the environment is for how this environment could turn for the better. Things would be interest rate moves. So what's happened in the last few days, in the last few weeks or months have been constructive. The things I watch for is presence in the office trend. Price discovery. Are there software sellers and economic growth?

Okay, thanks.

You're welcome. Pardon me. Your next question comes from Lamar Persaud from Carmark. Please go ahead.

Yeah, thanks. I want to start off on the auto loan portfolio. Is this something you could potentially sell off, or do you view this as a core capability for the domestic dealer services business?

Go ahead, Cindy, you're talking about a strategy behind that. When we bought the portfolio in 2015, there were several reasons. I would say that a very important one was about adding an asset class that would help us specifically at the time was to match the GICs. Since IFRS 17, that portfolio has been incorporated into the total portfolio methodology to match all our liabilities into only one block. And so the way to look at it right now, it represents 3% of our assets, and it is a class that we're okay and we're glad to have it in our portfolio because it brings diversification. So it brings some positive into our asset liability strategy overall.

Okay, okay. So what I'm reading between the lines there is that – it's something that you still value and you would not necessarily sell. But it sounds like it's not critical to the Canadian dealer services business. Is that the right way to characterize it?

No, you're right. I mean, strategically, yeah, you're right. I think there is no specific, let's say, competitive advantage. It adds to the dealer services business. It's more an asset plus at this point.

Okay, great. And then just moving on to U.S. dealer services, could you give us an update on your thoughts on the outlook for this business in the context of broader market forces? So on the one hand, potentially lower rates should be positive for affordability. But then the narrative over the past week shifting to increased chances for a recession, that would be more of a headwind. Or does it feel like regardless of the broader market forces, initiatives undertaken by IAG should drive structural improvements in this business regardless of what goes on in the broader markets? Hopefully, you kind of get where I'm going at on that one.

So, Sean, you want to comment on that?

Yeah, I mean, I think the structural improvements you're talking about, there are some nice opportunities to prove that over time. I also believe in the dealer as a distributor. I find that, you know, when auto sales are down, they tend to push harder on their products that they're moving through the F&I department. Watching how they perform through that CD key outage was impressive to me. And then they just retool and continue to find ways to sell cars to the clients. So, you know, I think no matter which way the economy goes, there's probably some opportunities. But we will, the business will, you know, come rise and fall a little bit with those dynamics. But beyond that, I don't know what to say about it.

Okay, thank you. That's it for me.

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

Thank you. Good morning. First question is related to IA, home and auto, second consecutive quarter of very strong results. First off, can you give us an approximation of how much it contributed to the positive experience in Canada? And then two, based on rates that you've already taken, claim trends, any reason to think that the positive experience does not continue for at least the next couple quarters?

Yes, it's Eric. I will comment on this one. You know, when you look at the Insurance Canada gain this quarter, I would say that close to two-thirds of the insurance gain came from Ayo Minato. And on that gain, you know, it came, I would say, for two reasons. First, the weather was good, as you may suspect. And the second one is the auto theft that went down. We see that government and police efforts to fix the issue are yielding the results. So it's improving our results as well on this item. Okay.

And then in terms of when you reset sort of your base case expectations for this business, that would be at the end of the year, correct? So is that correct? And so we might see a different sort of baseline from you on an auto and a home sort of for 25 with the Q4 results?

Yes, the actuary are updating their luxury issue on a yearly basis. You're right. Okay, that's good.

Second question is related to Insurance Canada results, I guess specifically on the individual insurance sales. up 10% in the quarter, but up 4% year-to-date. And I remember with Q1, you had sort of mentioned some sort of timing impacts. So I guess my question is sort of what number should we be thinking about in terms of what may be a more sustainable growth rate? Is it more the low single digits? Is it more something high single digits, low double digits like Q2?

Good morning. This is Renée speaking. You know, I'd refer you back to what we said in the past, that we're aiming at growing around 8% year-over-year, you know, on the long term, so growing faster than our competitors, in fact, faster than the market. There will be differences. It would not be a smooth ride. But, you know, we're pleased with our distribution network, the diversity of our distribution network. The technology, our wide range of products, so we think that over the long run, we can sustain that growth.

Okay. And nothing in the current economic situation or anything company-specific that would steer you away from sort of an 8% number is looking achievable in the near term?

Well, you know, when you look at the past and you look at the past market trends, when you look at the COVID period, the individual insurance business has been very resilient. So at this point, there's nothing for me to comment on.

Okay, perfect. Last one for me is on the wealth business. Obviously, very strong seg fund net sales. Just curious on the mutual fund trajectories. Also see very good gross sales, but the net sales a little bit worse. quarter over quarter and year over year. So maybe you can talk a little bit about the dynamics that's driving higher gross redemptions and if there's any reasons to believe that could improve or really what I'm getting at is, is there a path, do you think, to getting at least back to break-even and maybe even to positive net sales and mutual funds just given the strong gross sales results? Thank you.

Stefan, you might want to comment on that.

Yeah, it's just unbelievable. When we look at it, I mean, the performance seems to be consistent with what we've seen in the sector. We've been focusing on generating gross sales and obviously looking at adding new supporters of the Clarington. In terms of the overall net, obviously what we're seeing is we're doing much better with the affiliate than non-affiliate. So part of the initiative that we are looking at is really much doubling down on our own distribution over the next quarter and coming up with a focus also on key accounts to help us generate new sales and improve our wall numbers.

Okay, that's good. That's it for me. Thank you.

Your next question comes from Mario Mendonca from TD Securities. Please go ahead.

Good morning, Eric. Can we go to first to you? Your closing comments or your opening comments, rather, at the very end, you suggested that you'd expect ROE to improve from current levels. And this may be too fine a point on it, but are you referring to improving from the trailing 12 months 15% or the quarters 15.9%? Because there's a pretty big difference in those two things.

Yes, I would say, Mario, that I'm referring to the trailing 12-month because this one, you know, the quarter annualized is giving you a clue of our current ROE capacity. If ever we deploy more capital, this could go north of that. But as with the current level of deployed capital that we have, it's going to trend upward from the trailing 12-month point of view.

That makes a lot of sense. A different type of question. Industrial Alliance has really dominated the segregated fund market for some time now. And from my perspective, it almost appears that industrial had the market to itself. Now we hear a large peer, very capable in product manufacturing, capable in distribution, has decided they want their fair share back. So what I'm getting at here is, is the segregated fund market one of those markets where Flows can swing around pretty aggressively as players re-enter the market with a new product, new pricing structure, a more aggressive distribution strategy. But what I'm getting at is, are the good times over for industrial? Are you going to lose share in this business now that another large pair has declared they want back in?

This is Renee speaking. I don't think we will lose our leading position here. Relationship with distribution is critical and is key. We have the right platform with the diversified product that is needed as well as technology. I can appreciate that competitors want to come back and look at this very interesting product for our clients. But in terms of will the the fun or the money go from one carrier to another just based on the fact that they knew someone wants to come back. Competition is there, but the advisors will not swing just for the sake of doing this. So, you know, we'll continue to be competitive.

Yeah, I would only add, Mario, I would only add that building relationship takes time. and so we've done it through the years, and we will continue doing it, and we know the recipe, so good luck for the competitor.

One final question relates to the tax gain, or let's say contribution from taxes in the investment segment of the business. That's a pretty big swing from taxes to gains in one quarter, and I appreciate that it relates to the quantum of tax-free income, investment income. Help me understand how that swings so much from one quarter to another. Was there a change in the asset mix toward tax-advantaged products, or was this a reaction to the idea that insurance companies will not be captured under that rule about dividends, Canadian dividends? What happened in one quarter? I'm trying to piece it together. Is it Is it an asset mix change? Is it a tax change? What drove that?

It's a couple of items, Mario. We mentioned in the reports that you're right about the non-taxable investment income. So that's one piece and probably the bigger. There is some also capital gains that did flow in there. that are less taxable. And to some other extent, in Q2, we also have what we often refer as the true-up. You know, when we file the final report on our income taxes with the government authorities, we always have a little difference between the provisions forecasted and the reality. So that did flow in there as well.

So the tax rate should just return to normal next quarter then? Is that fair?

Exactly. Yeah, exactly. The guidance is still the same on the tax rate.

Thank you.

Your next question comes from Darko Mielek from RBC Capital Markets. Please go ahead.

Hi. Thank you for speaking me in here. Just a couple of questions. First, want to touch on also on the seg funds business a little bit and what I wanted to touch on was potentially any changes from a regulatory perspective on seg funds and I understand OSPI is doing some work on that but I'm not sure if the AMF will differ Denny is there anything that I should be thinking about with respect to capital changes on the seg fund file

Yeah, there are some work being done in the Canadian landscape right now. I know that OSFI is supposed to bring some new changes. AMF is looking at it as well. But I have no indication right now that it might have an impact on our businesses at all. So that would be my guideline.

Okay. Thank you for that. And my second question, just going back to the discussion on Veracity, and its impact on results and thank you for the roadmap and I understand actually that it will be accretive but it was losing money not too long ago so is this something that could sort of just come in in the first quarter and actually have a negative impact and then progressively get positive throughout the year to the point where it gets accretive can you just is there Is that how I should think about it, or should I think about it as really very neutral at the beginning and turning accretive later?

Yes, it will. It's Eric again. It will improve over the coming years. And, you know, we have a number of management actions that we contemplate. Of course, if we agree to pay that price, it's because we had a plan behind the acquisition. And we've mentioned that we would look at the reinsurance for the new business, reinsurance for the enforced. They were heavily using that. And so that's the first thing that we will be looking at in the coming quarter. Also, we are looking at repatriating the investment fund. activity with us, so that will create other positive management action as well. So lots of things going on to make this profitable, and we'll just be executing our plan to get accretive in year two.

Yeah, to be clear, in the first year, it's dilutive to earnings. And like Eric said, there are several initiatives, both on the increasing revenue side and decreased expenses that will, you know, change the situation to a positive. And keep also in mind that prosperity is going to be positive in the first year, so accretive to EPS. So all in all, you know, it should be, I mean, my view is that it should be quite neutral.

Great. That's very helpful. Thank you very much.

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

Just to follow up on the tax, can you just remind us what is your guide for your core tax rate going forward?

Between 22% and 22% is in the appropriate range.

Between 22% and 23%?

21, 22, 21, yeah, it's in that range.

21 to 22. Okay, thanks so much.

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

Okay, thank you. Thank you for all your questions. And I'd like to remind everyone that we have had very good results for the quarter, notwithstanding all the questions. Maybe my comment would be around the fact that You can see that the allocation of capital, I mean, the way that we do it efficiently is improving. There is an expansion of ROE. We are delivering on our 10% plus EPS growth. That's pretty significant. We've got some very significant growth of our business in the quarter. And the sensitivity of our results have also decreased significantly. So we are in a very, very good position. And I would say, I think at the end, that our stock deserves, you know, I would say a favorable price to book ratio compared to where it is right now. And you might see that with the current price, we will still be active in the NCIB. So that would be my closing remark. Thank you all.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.