iA Financial Corporation Inc
TSX:IAG
Earnings Call Analysis
Q3-2023 Analysis
iA Financial Corporation Inc
This quarter, the company has shown an impressive core earnings per share (EPS) of $2.50, representing a 10% increase from the previous year and reflecting solid profitability across almost all of its business units. This surge aided the company in achieving a core Return on Equity (ROE) of 15.4% on a quarterly annualized basis, putting it right on the brink of surpassing the medium-term target of 15% or more. Sales have risen significantly, showcasing double-digit growth in various business units, which has contributed to a 17% increase in premiums and deposits and a 7% growth in assets under management and administration year-over-year. With the books closing this quarter at a value of $65.25, investors can take comfort in a 4% rise since the year's beginning, solidifying the company's consistent growth trajectory.
A closer look at Q3 business growth reveals vigorous sales in Canadian Individual Insurance, topping out at $96 million and securing the company's first-ranking in the Advisor Perception Survey for the third consecutive year. Group Insurance net premiums have seen a 6% upturn, with Dealer Services division sales climbing to $193 million, up 10% from the prior year. The U.S. Individual Insurance division also did not lag behind, soaring to record sales of $44 million – a 26% jump from the past year. However, Dealer Services in the U.S. experienced a slight dip in sales due to increased financing costs for customers, underscoring the need to be prepared for future growth when market conditions improve.
The acquisition of Vericity is a step towards intensifying the company's U.S. market footprint and diversifying distribution capabilities. The $170 million investment is expected to spur core EPS growth, with the company projecting a $0.10 increase by the third year post-acquisition. This move aligns with the strategic vision of enhancing geographic coverage and leveraging synergies to meet ROE targets swiftly.
The breakdown of profitability and financial resilience points to a well-performing quarter with a noteworthy 8% rise in core earnings to $91 million in the Canadian Insurance segment and a remarkable 26% surge to $82 million in the Wealth Management segment. On the Investment side, third-quarter core earnings were at $93 million, which, despite a dip from the previous year due to interest rates and an inverted yield curve, show promise for the coming quarter due to improved rates. The company also reported robust organic capital generation, with $165 million generated in Q3, which speaks to its financial stability.
The company's proactive approach in appraising its investment property holdings has led to a reassessment of cap rates to mirror current macroeconomic conditions. This rigorous process ensures that valuations are accurate and reflect the high quality of the portfolio, which, despite a decrease in valuation due to cap rate hikes, suggests potentially higher long-term returns due to the portfolio's strong fundamentals.
Looking ahead, the company anticipates modestly negative actuarial adjustments by year-end, with a focus on mortality and gain-loss ratios. Nonetheless, the robust capital position, with a solvency ratio comfortably above the operating target, indicates a financial buffer against possible fluctuations. Moreover, a keen eye is kept on mortality trends to gauge any adjustments needed for year-end financials, aiming for consistency and accuracy in forecasting and reportage.
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Good morning, ladies and gentlemen, and welcome to iA Financial Corporation 2023 Third Quarter Results Conference Call. [Operator Instructions] 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 of 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 1 week starting this evening. The archived webcast will be available for 90 days, and a transcript will be available on our website in the next week.
I draw your attention to the forward-looking statement information on Slide 2 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 3.
Also, please note that the detailed discussion of the company's risks is provided in our 2022 MD&A available on SEDAR and on our website with an update in our Q3 2023 MD&A 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 iA. First, Eric Jobin, Chief Financial Officer and Chief Actuary; Alain Bergeron, Chief Investment Officer; Stephan Bourbonnais, responsible for our Wealth Management operations; Renee Laflamme, in charge of Individual Insurance and Annuities; Pierre Miron, Chief Growth Officer of our Canadian Operations and responsible for Dealer Services, Canada and iA Auto and Home; Sean O'Brien, in charge of our Group businesses; and Mike Stickney, Chief Growth Officer of our U.S. Operation and Co-Head of Acquisitions.
Starting with Slide 8 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 up 14.8%, very close to our medium target -- 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 9 for our year-to-date results relative to midterm guidance. The core EPS for the first 9 months is 7% higher than last year. Core ROE is close to midterm 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 dividend 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 the 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 iA Auto and Home, direct written premiums reached $142 million for the quarter, supported by the strong retention of in-force 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 sector 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 funds sales with gross sales up 13% and 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 insured 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 good 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 USD 44 million. 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 USD 248 million compared to USD 261 million a year earlier as higher financing costs for customers continued 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 of 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 USD 170 million presents a strong strategic fit with iA. Among other things, it strengthens our geographic footprint in the U.S., 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 2, to increase core EPS by $0.10 in year 3, 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 21. 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 EPS at $2.50 is 10% higher than during the same period in 2022. This performance was driven by a 10% year-over-year increase in both core insurance and noninsurance 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 continue 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 our results by operating business segments. In Insurance Canada, core earnings of $91 million, up 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 iA 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 seg funds and 29% year-over-year growth in core noninsurance 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 noninsurance 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. These core results depend, among other things, on the level of interest rates and the yield curve at the start of the quarter. Accordingly, the interest rate at June 30 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 iA Auto Finance. Looking forward, the level of interest rate and the slope of the inverted curve improved during the third quarter, which will 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 noncore 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's 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 condition 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 9 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.
[Operator Instructions] Your first question comes from Meny Grauman from Scotiabank.
On the subject of investment properties, you appraised 100% of your holding. Did I get that correct?
Please go ahead, Eric.
No. I said yes, Meny. Alain, do you want to add color?
Yes. 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 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 could give us a little more detail in terms of what's driving that impact in terms of the details of the portfolio.
Sure, Meny, it's Alain. 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 rates, so when you have a high-quality portfolio that -- 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.
Yes. 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 I have a follow-up on that.
Yes, Meny. 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. So 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, slightly negative for year-end in terms of this change, all inclusive.
And then just a 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 you, giving you less ability to offset actuarial charges. So just wanted to understand if I have that correct in terms of this new reality for you.
Yes. In fact, what is happening, Meny, 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.
Your next question comes from Doug Young from Desjardins.
Alain, maybe back to you just on the investment property. I think -- and thanks for the response to the first question on -- 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 rates. 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?
Yes, sure. Happy to give some more context on that. So good recollection, by the way, for the comment of last quarter. Yes, so high level, we continue to work on, I would call them 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 are very -- or various properties are at various points of the approval. Some are closer than others.
So although there's no certainty, I think we're optimistic and it's some are progressing well. So within -- between the next 2 years, we expect that this would favorably -- this would -- if they go forward, which we expect they would, 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 it's -- 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 give you updates as these materialize.
Okay. But there's nothing, I guess, more? The point is there's...
Nothing imminent. Nothing imminent.
Yes. Nothing imminent, okay. Appreciate the color. And then just maybe Eric, on core expenses down quarter-over-quarter. Is this a blip? Is this a new run rate? Was there anything unusual in that expense line? Can you maybe elaborate a bit?
Yes, Meny. On this one, I remind you that 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, 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, it encompass 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 in expenses, this is -- this quarter's 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, Denis, for you just on Vericity. Thanks for the accretion numbers, it's helpful to think about. But $0.10 core EPS accretion in year 3. Can you talk a bit about what's driving that accretion? Is this all revenue? Is this all expenses? Are you doing 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 3 years out. But maybe I'm missing something. I mean, I know there's a lot there, but just hoping to get some color.
Yes.Thank you for that. So 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. The -- obviously, I mean, distribution is something that we're always looking at. In particular, this company has a specific expertise in terms of digital, I would say, capabilities in terms of distribution. It was quite attractive for us to get into that, and at the same time, inherit 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. And so it's a mix of growth and a mix of expense synergies that is bringing those accretiveness over the years.
Mike, you might want to comment about the overall strategy here.
Sure. Thanks, Denis. As Denis said, and the way I think about it, the most important thing here is we want this to be a growth story. From whatever marketing and strategic standpoint, it gives us exposure to a digital -- a 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'll go on a bit of a segue here for a minute. As many of you know, we acquired American-Amicable 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.
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 6x. And the earnings, as you know, are pretty good. We've got pretty good margins. So turning to Vericity, 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 have pointed out, the business is breakeven.
So in terms of moving forward, our #1 priority is [ grow with ] this. And the math is simple, if you can grow revenue faster than you grow expenses, you're going to create margins. And that's what happened with 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 $5 million to $6 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 the results is they paid $20 million of COVID claims from 2020 to 2022. So having said all of that, the biggest contributor, I expect, will be growth. But yes, we're optimistic. So I hope that helps.
Your next question comes from Gabriel Dechaine from National Bank.
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, is that -- 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 Life business. But I mean, certainly, when I look at the Individual Life 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, Gabriel?
The second part of the question. I mean, it'd be helpful if we could get those numbers at some point but -- on American-Amicable and the Dealer Services profit split.
The expense synergy number that you put out there and the reinsurance recapture strategy, these are in year 3, are those in the $0.10 accretion figure?
I could take that, Denis, if you want.
Yes, go ahead.
Yes. I mean, the expense synergy, yes; reinsurance, no. Reinsurance needs more work. We didn't have the time to work through it. And we've got to talk to a number of people to sort all that out, it's 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. Now when you -- just switching over to the mortality discussion. We saw a couple of quarters in the first half where there were losses, and then this quarter, you had gains. Sounds like you're still keeping an eye on it. It makes sense to me. I'm just wondering, what are some of the observations that you've been making? Because it sounds like there's some -- maybe this quarter was good but it might not be sustainable.
Yes. I'll take it, Gabriel, on this one. Mortality can fluctuate quarter to quarter. We've seen 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 a statistical in the U.S. to me.
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. $6 million out of the $9 million coming from the bad weather that we had in July.
Your next question comes from Tom MacKinnon from BMO.
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?
Yes. Thanks, Tom, for the question. I will say 2 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 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 and 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 increased interest rate should result into an increased number over the coming quarters and years.
Tom, just -- sorry, it's Denis here. Just one thing to add on this. Whenever internally we talk about CSM, I always would like to remind people that CSM is not inclusive of every businesses we're in. Like for example, the fact that we have more customers moving into GICs from, let's say, our seg funds. And 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.
Yes. And if I -- is the negative 3% that was there, there was some negative experience in the CSM. What was that related to?
Yes. It's -- when you look at the gain that we had on mortality in Canada, 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 P&L and that resulted in a little loss on the CSM side.
And that was mortality? Or...
Yes, yes. 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 of the $169 million, 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?
Yes. I would say it's all inclusive of macroeconomic things that happened in the third quarter. 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 or $15 million -- $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 we've seen lots of yield curve change since the beginning of the year, so that's really what's making up the difference.
Your next question comes from Lemar Persaud from Cormark.
I just want to kind of continue along the discussions on the CSM here from Tom. So just thinking about the impact of new insurance business in your CSM, 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 CSM 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-digit still appropriate?
Yes, I would say that, if everything else stays the same in terms of macroeconomic, you're right. It should -- we should still expect to see that high single-digit increase.
Okay. And then I just want to come back to the potential for M&A in U.S. Dealer Services. We haven't really seen much consolidation in the space post the IAS deal. So wondering if maybe we could spend some time talking about maybe the long-term attractiveness of this business. Like wouldn't you want to consolidate in the space when it's a little bit out of favor? Or is the 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, our integration that we -- when we bought IAS. So we are -- 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, let's say, profitability is back to the, I would say, the standard or the, I would say, 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 fit right now. We might do some, let's say, tuck-in 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.
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 would that -- does that play into the lower expense growth this quarter?
Well, the -- you talk about elasticity of expense. That's -- 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 organization to make smart choices in terms of where they invest and all those things. And at the same time, 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 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 midterm by 10%-plus.
And your next question comes from Paul Holden from CIBC.
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-over-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 improving our operating expense. So that's one item.
And the other one, that is -- it's not a seasonality but it's a yearly review. There is a variable compensation item related to the performance of U.S. Dealer. And this reevaluation is happening in July. So you see the positive effect, if I can say, of this reevaluation on core other expense of the U.S. divisions on this item. So this time, it's a positive in terms of core expenses. So yes, that's what I wanted to say about those 2 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, similar question there. Like is there any kind of cost reduction actions that have taken place since Q2? Or is this just simply a lower run rate for some of these projects you've highlighted?
Yes. 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 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 2 years, like 2022, 2021, for various reasons like more regulations, digital investment -- additional digital investments, the general expenses that we incurred was, I would say, 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 a sense that we stick to our budget. There's no way we're going to go over this year. And so there's -- 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 Eric made earlier regarding interest rate impacts on the business, again going back to the CSM discussion of the new business impact on CSM going lower because of 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. So 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, yes. 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 in the overall, it's a good news for us that interest rate increase in our -- in the -- with the product that we sell and we have in our in-force.
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 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 will really come through, correct?
Yes.
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.
[Operator Instructions] Your next question comes from Mario Mendonca from TD Securities.
My question is a little -- it's similar to what you just discussed with Paul. When I try to look at your net investment income, it's 1 line, and the disclosure is not quite as detailed as others. And the company has 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 change in interest rates. So I paid attention, obviously, when you talked about how its 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, it's been a bumpy road on the macroeconomic side since the beginning of the year. I've seen more things happening in 9 months on the macroeconomic side and yield curve than I've seen over the last 20 years. When I look at -- and you try to understand what is happening on core net investment results, 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 raised with removing a little bit of the inversion in Q3. So lots of things happened that kind of create noise on the core net investment result. That's really what's happening there.
Now going back to the investment properties for a moment. I mean, I can't help but think that there was -- 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 line. Was there something about this quarter that really -- was it just the move in rates? Or did the company really go above and beyond and try to really clean up your valuations so that you could put this issue behind you? Am I characterizing that appropriately?
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 other institutional portfolios. But when it comes to public company, we have to reflect independent valuation or inputs, so it's either externally appraised or inferred 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/REALPAC index, you're not seeing too much of that movement, that suggests to me, and that perhaps it's because of many institutional portfolios, they're really being properly fully appraised in Q4. So there may be others that may have an okay Q3 and then have to take a Q4. But for -- 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, the Q4 results and the Q1, Q2 in the future, they will be driven by how the market conditions 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 of IFRS 17 and the unfortunate coincidence that, that conversion happened at the same time that the 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. You -- we will see -- 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 towards the -- our core earnings over time.
It's Denis here. I was going to make a prediction that we're going to come up with a quarter with a EPS -- core EPS of over $4 or $4.50 in the near future when the market, let's say, come 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 liabilities. Under the previous regime, all the changes that you've seen today will have flow through the liability, and it would be, I mean, 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.
So 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 the core earnings will always be -- sorry, that the reported earnings would be, like, lower than the core earnings all the time, and that we have some bias that we build in our process to make it attractive or always positive.
Can I just add one thing, Mario. Just 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. 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 from now, I can look back and say, yes, 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 towards the core.
Okay. Well, I'm sure I'll be around long enough to see that.
So do we.
We have one more question from Darko Mihelic from RBC Capital.
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, Darko, on that front, I would say that happened. 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 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 renews or 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 Vericity, let's call that [ $200 million ], and we take into account the NCIB, depending on where your stock price is, we can sort of put 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 Denis 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 million of organic capital generation this quarter. You can essentially pay that -- 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, Denis? 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 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 tuck-in acquisition, but we are still 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, Denis. 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 think -- I should think more in the lines of something around $140 million to $150 million per quarter of actual capital generation. Am I correct in thinking it that way?
Well, no. I think that -- I mean, we put a lot of attention to be as capital-efficient as possible. And as far as I'm concerned, we are generating around $600 million right now. This is a reasonable level right now where 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 million to go down.
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 KPIs, 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 quarter. And when I look at all those KPIs, ROE a 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.