iA Financial Corporation Inc

TSX:IAG

Earnings Call Analysis

Strong Sales and Profitability Drive Record Q2 Results

In the second quarter, the company achieved record core EPS growth of 15% year-over-year, driven by strong sales and profitability across all segments. Insurance Canada saw earnings rise by 16%, while the Wealth Management segment reported a 29% increase in core earnings. Book value per share increased by over 9%. The company's solvency ratio remained robust at 141%. Recent acquisitions, including Vericity and Prosperity Life Group, are expected to be accretive to future earnings. The management remains confident in continuing to create value and increasing profitability.

Earnings Growth Amid Strong Sales Momentum

The company reported robust second quarter results, showcasing its capability to create value through disciplined execution of growth strategies. Core Earnings Per Share (EPS) grew by 15% year-over-year, reaching a record level. This increase was driven by a 14% rise in core insurance service results and a 19% spike in core non-insurance activities. Such solid performance underscores the effectiveness of the company’s diversified business model and extensive distribution networks【6:6†source】.

Canadian Segment Highlights

The Canadian operations delivered impressive results, particularly in the Insurance Canada and Wealth Management segments. Insurance Canada recorded a 16% year-over-year increase in earnings, reaching $106 million. This surge was fueled by favorable mortality experiences and lower claims in Auto and Home insurance, among other factors. Additionally, the Wealth Management segment saw a remarkable 29% rise in core earnings to $98 million, supported by strong net sales and favorable financial market conditions 【6:1†source】.

Mixed Results in the U.S. Market

U.S. segment earnings were higher than in the first quarter but lower compared to the same period last year. The company expects improved profitability in upcoming quarters due to sales growth and repricing initiatives. Dealer Services in the U.S. performed strongly, with second quarter sales up 13% year-over-year【6:2†source】【6:7†source】.

Investment Performance and Corporate Efficiency

Expected investment earnings surged to $113 million, thanks to rising interest rates earlier in the year. However, credit experience was unfavorable, particularly due to an increase in the provision for credit losses at iA Auto Finance. The Corporate segment's core other expenses remained in line with expectations at $64 million, reflecting operational efficiency and disciplined cost management .

Capital Deployment and Financial Strength

The company's solvency ratio stood at 141%, well above the operating target of 120%. Despite substantial capital deployment through share buybacks and acquisitions, the ratio only declined by 1 percentage point. The acquisition of Vericity and life insurance blocks from Prosperity Life Group are expected to be accretive to core earnings in the following years, albeit dilutive in the first year. The company also generated $175 million in organic capital during the second quarter, contributing to a total of $305 million year-to-date【6:2†source】【6:6†source】【6:1†source】.

Strategic Focus and Future Outlook

Looking ahead, the company remains confident in its ability to drive value through continued growth initiatives and capital deployment. The focus will be on profitable organic growth with new sales achieving a Return on Equity (ROE) above 15%, alongside disciplined acquisitions. Additionally, the company intends to steadily increase dividends and continue share buybacks【6:6†source】.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Industrial Alliance 2024 Second Quarter Results Conference Call. [Operator Instructions] 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.

[Marie-Annick Bonneau, executive]

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 1 week starting this evening. The archived webcast will be available for 90 days, and a transcript will be available on our website in the next week.

I draw your attention to the forward-looking statements information on Slide 2 as well as the non-IFRS and additional financial measures information on Slide 3. Also, please note that a detailed discussion of the company's risks is provided in our 2023 MD&A available on SEDAR and on our website with an update in our Q2 '24 MD&A release yesterday.

I will now turn the call over to Denis Ricard, President and CEO.

[Denis Ricard, executive]

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 Savings and Retirement; Pierre Miron, Chief Growth Officer of our Canadian operations and responsible for Dealer Services, Canada and iA 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 of 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 ROE of 15% is already meeting our midterm target, thanks to strong earnings growth and capital deployment initiatives.

Business growth continued 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 in assets under management and administration of 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 30, 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 mid-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 hampered by the macroeconomic environment that continues 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, iA Auto 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 a good retention of in-force business, strong new sales and the impact of premium increases implemented 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. Gross sales of seg 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, iA continues to rank first in both growth and net seg 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 continues to be challenged. In addition, although investor optimism about financial markets and asset classes offering higher return potential than guaranteed investment favored seg funds sale, sales of insured annuities and other savings products remain elevated, reaching $541 million. This is a 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 USD 49 million, an increase of 14% year-over-year, reflecting good performance in all our markets. This -- 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 USD 279 million, up 13% over the same quarter of 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 continued 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 EPS has increased by 16% compared with the same period in 2023 and is well above our -- 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 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 Vericity acquisition and the acquisition of two blocks of life instruments 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 dividend 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 comments, we will take questions. Eric?

[Eric Jobin, executive]

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 results, second quarter was even stronger with core EPS growth of 15% compared to last year. Key favorable drivers of this performance include 14% increase in core insurance service results and 19% increase in core noninsurance activities. Insurance experience was positive for the third quarter in a row. As for expenses, they were lower than last year, in line with management's 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 sustained ability to create value.

Now moving to Slide 16 to take a closer look at Q2 results by segment. All three of our operating business segment 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 iA 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 noninsurance 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 seg funds and 29% increase in core noninsurance activities. Also, good financial market performance continued to have a positive impact on this segment's profitability. The higher seg funds result was driven by strong net sales over the past 12 months and an increase in the CSM recognized for service providers. As for noninsurance activities, 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 seg funds, 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 iA 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 noncore 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 noncore 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 a high level of capital deployment through share buybacks and the acquisition of Vericity. As a result, the ratio declined by 1 percentage point during the 3-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. The strong capital generation supports our solid capital position and the continuity of our capital deployment initiatives.

Lastly, at June 30, 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.

This concludes my remarks. Operator, we will now take questions.

[Operator]

[Operator Instructions] Your first question comes from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

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?

[Sean O'Brien, executive]

Yes. 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's not -- wasn't a huge impact.

[Meny Grauman, analyst]

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?

[Sean O'Brien, executive]

No. I mean, we took advantage of the opportunity to work close to the dealers and highlight the technology we have to a lot of contract outside of the CMS that is needed, but I don't think there'll be any particular long-term impact to it.

[Meny Grauman, analyst]

And then just as a follow-up in terms of understanding the dynamics there in 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 in the number of dealers on the platform?

[Sean O'Brien, executive]

I think it's a combination of the market 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. It's pretty much just regular growth, I'd say, for -- based on our plan.

[Meny Grauman, analyst]

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. Denis, 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 U.S.?

[Denis Ricard, executive]

Maybe this question is for me. I would say that I've not changed the decision. 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.

[Operator]

Your next question comes from Doug Young from Desjardins Capital Markets.

[Doug Young, analyst]

Just a few questions, several questions, just on the U.S. as well. So maybe 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 lapse supported, but can you just kind of flesh that out what that's related to?

[Eric Jobin, executive]

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

[Doug Young, analyst]

Is this on the term products?

[Eric Jobin, executive]

It's -- in the U.S., it's mostly final expense. So it has to do with mostly final expense.

[Doug Young, analyst]

That's mostly on the final expense side. Okay. And then 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 the loss ratio today in that business versus pre-COVID or the inflation pressures that you're seeing on that business? Is it -- you see inflation of 8% and price increases of 4% or 6%? Are you 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 read this in and you can kind of maybe set me straight. But I think the U.S. Dealer Services, like your 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.

[Eric Jobin, executive]

Yes, Doug, it's Eric again. the percentage that you had 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 part 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 use the analogy of windshield at some point in meetings to say that you want to -- 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.

[Doug Young, analyst]

And this is just on the insurance business or what you're retaining, is that correct?

[Eric Jobin, executive]

Yes.

[Doug Young, analyst]

Yes. And then -- and how long does it take for the repricing to offset that claims cost pressure that you're seeing?

[Eric Jobin, executive]

Yes. You know that those guarantees run for 4 to 7 years. So 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 quarters and years to stabilize the pricing in line with the current development. So that would be my answer to your question.

[Doug Young, analyst]

Okay. And then just lastly, and I apologize, Denis, if you've answered this already, but like 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 Denis, do you want to cover this? I mean is this the inflection point? Like is this -- you're comfortable with what you're seeing from a trend perspective, not just topline, but also from the repricing. And the -- like is this quarter the inflection point for the profitability of that business?

[Denis Ricard, executive]

Yes, I'll start and Sean can add to it. But I'll repeat what I said. I think it's too early to say that we have an inflection point. I see some positive like increase in sales, we're focusing on organic growth. I mean you can solve a 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?

[Sean O'Brien, executive]

Yes. I just in 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 sequenced manner. I've also been looking at the team itself and have made a few changes. So 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'll wait another couple of quarters to maybe see where it goes from there.

[Operator]

Your next question comes from Gabriel Dechaine from National Bank.

[Gabriel Dechaine, analyst]

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 million to $140 million. What conditions do we need to get back to last year's levels for that particular line item?

[Eric Jobin, executive]

Yes, Gabriel, 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, lots of things happen on the macroeconomic side.

Last year, we had lots of things with curve up, curve down, curves 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 add 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 element that also impact core investment results are our deployment -- 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, that are -- 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 -- expected return on those, it necessarily means that core investment result is going down. And also our -- 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 liabilities. So all of those together are positioning us where we are right now, and we're really happy. You will notice also that we have further reduced the sensitivity with respect to interest rates in the quarter. So when you will look at the core net investment result of Q3, if you use that sensitivity, it's the best approach to predict what will be the core investment results.

[Gabriel Dechaine, analyst]

Okay. Revisiting that lapse 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 card 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.

[Eric Jobin, executive]

Yes. That's one assumption, Gabriel. We'll see in the coming quarters, but right now, what we see is it's not a big deviation from our assumption. We'll see. And 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.

[Gabriel Dechaine, analyst]

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

[Eric Jobin, executive]

Exactly, exactly.

[Gabriel Dechaine, analyst]

And then last one, again, I think that it's -- just to put it in 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? Will it get larger than what we saw this quarter?

[Eric Jobin, executive]

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 cue 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.

[Gabriel Dechaine, analyst]

Do you -- sorry, I'm just looking at this. I guess in -- like at the end of 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...

[Eric Jobin, executive]

Yes, 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 other one 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 and other ones for the quarter.

[Gabriel Dechaine, analyst]

Okay. So you kind of already pre-provisioned a little bit for trouble times ahead.

[Eric Jobin, executive]

Yes.

[Operator]

Your next question comes from Tom MacKinnon from BMO Capital.

[Tom MacKinnon, analyst]

A question about the U.S. and really just looking at the non-PAA business. So I guess that excludes the U.S. Dealer Services for the most part. How are these numbers going to be moving as a result of diversity in the Prosperity Life acquisition? Particularly looking at bump up in risk adjustment release, bump up in CSM recognized. 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 -- with the U.S., which were at 22, when those things increase to some extent as you're bringing on both the earnings from those 2 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.

[Eric Jobin, executive]

Yes. 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 earnings. There is, like you said, on the PAA line and also on the noninsurance 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 Vericity 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 -- 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 would be the according risk adjustment that will follow as well. So the insurance company will impact those two lines. The core net investment was outlined in the Investment segment because the investment earnings 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 noninsurance activities in the U.S. segment. So those are the impacts for Vericity.

Now we announced as well the acquisition of Prosperity, which is a life insurance block -- 2 blocks indeed. And those 2 blocks will impact the -- our result the same way as I described for the life insurance company of the Vericity acquisition, which means risk adjustment, CSM recognized for service provider and core net investment result as well.

Hope this answers your question, Tom?

[Tom MacKinnon, analyst]

Yes, 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?

[Eric Jobin, executive]

Yes, 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 Vericity 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 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 4 items for Vericity.

[Tom MacKinnon, analyst]

Okay. And just as a follow-up, 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, the $31 million in the second quarter and it was $23 million mark in the first quarter. So it seems to go up quarter-over-quarter. Anything to read into this? 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?

[Alain Bergeron, executive]

Tom it's Alain Bergeron.

[Eric Jobin, executive]

Alain, just a second. I realize that I forgot to mention, Tom, that we've said that for Prosperity that the transaction would be accretive in the first year. So I just wanted to add on top of my comments regarding Vericity.

Alain, you can go.

[Alain Bergeron, executive]

Yes. So, Tom, yes -- first, I would say I would not much meaning or I would not read too much into plus or minus $8 million on the portfolio of that size within like a quarter-over-quarter. I'd say it's more noise than trend. I mean if you just go back, then if you add 2023, just actually Q2 -- Q2 2023, I think it was $33 million.

So I think with -- just to give a bit more details on the quarter, it's several idiosyncratic situations, all linked to a specific tenant decisions or negotiations or expectations of negotiations. And look, we had positive revaluation in the quarter. We also had negative revaluation, but we had more negative than positive. So that's really the -- what happened. And 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 in the context of a market that continues to be under pressure in Q2. And by that, I mean the office leasing markets remain very competitive 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 -- there's the environment. Things that I watch for in the environment is for how this environment could turn for the better, things as the 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 its presence in the office trends, price discovery, are there software sellers and the economic growth.

[Operator]

Your next question comes from Lemar Persaud from Cormark.

[Lemar Persaud, analyst]

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?

[Denis Ricard, executive]

Denis here. You're talking about the 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 for -- to match all our liabilities into only one block. And so the way to look at it right now, it's like it represents 3% of our assets. And it is a -- glad that we're okay, and we're glad to have it in our portfolio because it brings diversification. So it brings some positive into the -- our asset liability strategy overall.

[Lemar Persaud, analyst]

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? Or...

[Denis Ricard, executive]

No, you're right. I mean that's what it is exactly. Yes, you're right. I think there is no specific, let's say, a competitive advantage it adds to the dealer services business. It's more an asset class at this point.

[Lemar Persaud, analyst]

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.

[Denis Ricard, executive]

So Sean, do you want to comment on that?

[Sean O'Brien, executive]

Yes. I mean I think the structural improvements you're talking about, there are some nice opportunities to improve that over time. I also believe in the dealer as a distributor. I find that 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 performed through that CDK outage was impressive to me, and they just retooled and continued to find ways to sell cars to the clients.

So I think -- no matter which way the economy goes, there's probably some opportunities, but we will -- the business will rise and flow a little bit with those dynamics. But beyond that, I don't know what to say about it.

[Operator]

Your next question comes from Paul Holden from CIBC.

[Paul Holden, analyst]

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 of quarters?

[Eric Jobin, executive]

Yes. It's Eric. I will comment on this one. When you look at the Insurance Canada gain this quarter, I would say that close to 2/3 of the insurance gain came from iA Home and Auto. And on that gain -- on that gain, it came, I would say, for two reasons. First, the weather was good, as you may suspect. And the second one is the auto test 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.

[Paul Holden, analyst]

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 Auto and Home, sort of for '25 with the Q4 results?

[Eric Jobin, executive]

Yes. The actuary are updating their loss ratio on a yearly basis. You're right.

[Paul Holden, analyst]

Okay. 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 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?

[Renée Laflamme, executive]

This is Renee speaking. I'd refer you back to what we've said in the past that we're aiming at a growing around 8% year-over-year on the long term, so growing faster than our competitors, in fact, or than the market. There will be differences. It would not be a smooth ride. But 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.

[Paul Holden, analyst]

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

[Renée Laflamme, executive]

Well, when you look at the past and you look at the past market difficulties, 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.

[Paul Holden, analyst]

Okay. Perfect. Last one for me is on the wealth business, obviously, very strong seg funds, net sales. Just curious on the mutual fund trajectory. 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 the higher gross redemptions. And if there's any reasons to believe that could improve or really what I'm getting at here, is there a path do you think to getting at least back to breakeven and maybe even to positive net sales of mutual funds, just given the strong gross sales results?

[Denis Ricard, executive]

Stephan, you might want to comment on that?

[Stephan Bourbonnais, executive]

Yes. It's Stephan Bourbonnais. Well, 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 initiatives 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 overall numbers.

[Operator]

Your next question comes from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Eric, can we go 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 to find a point on it, but are you referring to improving from the trailing 12 months 15% or the quarter is 15.9%? Because it's a pretty big difference in those two things.

[Eric Jobin, executive]

Yes. I would say, Mario, that I'm referring to the trailing 12 months because this one, you know the quarter, 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.

[Mario Mendonca, analyst]

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 tier 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 reenter 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 player has declared they want back in?

[Renée Laflamme, executive]

This is Renee speaking. I don't think we will lose our leading position. Relationship with distribution is critical in this key. We have the right platform with a 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 fund or the money go from one carrier to another just based on the fact that the new -- someone wants to come back. Competition is there, but the advisers will not swing for -- just for the sake of doing this. So we'll continue to be competitive.

[Denis Ricard, executive]

Yes. Well, let me 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 knew the recipe. So good luck for the competitor.

[Mario Mendonca, analyst]

Okay. 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 towards 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 regular tax change? What drove that?

[Eric Jobin, executive]

It's a couple of items, Mario. We mentioned in the report that, you're right, about the non-taxable investment income. So that was -- 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 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.

[Mario Mendonca, analyst]

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

[Eric Jobin, executive]

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

[Operator]

Your next question comes from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, analyst]

Just a couple of questions. First, I 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 OSFI is doing some work on that, but I'm not sure if the AMF will differ. Denis, is there anything that I should be thinking about with respect to capital changes on the seg funds file?

[Denis Ricard, executive]

Yes, 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.

[Darko Mihelic, analyst]

Okay. And my second question, just going back to the discussion on Vericity and its impact on results. And thank you for the road map. And I understand actually, that 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 any -- 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?

[Eric Jobin, executive]

Yes. It will -- it's Eric again. It will improve over the coming years. And we have a number of management actions that we contemplate. Of course, if we agreed 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 in-force. 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 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 2.

[Denis Ricard, executive]

Yes, to be clear, in the first year, it's dilutive to earnings. And like Eric said, there are several initiatives, both on the increase in revenue side and decreased expenses that will 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, it should be -- I mean, my view is that it should be quite neutral.

[Operator]

Your next question comes from Tom MacKinnon from BMO Capital.

[Tom MacKinnon, analyst]

Just a follow up on the tax. Can you just remind us what is your guide for your core tax rate going forward?

[Eric Jobin, executive]

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

[Tom MacKinnon, analyst]

Between 22% and 23%?

[Eric Jobin, executive]

21%, 22% -- 21%. Yes, it's in that range.

[Operator]

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

[Denis Ricard, executive]

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 of the questions.

Maybe my comment would be around the fact that you can see that the allocation of capital, I mean, that we do it efficiently is improving. Our -- there is an expansion of ROE. We are delivering on our 10% plus EPS growth. That's pretty -- pretty significant. We've got some very significant growth of our business in the quarter. And the sensitivity of our results have also decreased. So we are in a very, very good position. And I would say, I think at the end that our stock deserve a, 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 are still -- we will still be active in the NCIB.

So that would be my closing remarks. Thank you all.

[Operator]

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