iA Financial Corporation Inc

TSX:IAG

Earnings Call Analysis

Strong Financial Performance Fuels Growth

In the third quarter of 2024, the company reported a solid financial performance, achieving a core earnings per share (EPS) of $2.93, a remarkable 17% increase year-over-year. The robust performance has exceeded the long-term guidance of 10% annual growth, affirming the company's strong profitability. The return on equity (ROE) reached an annualized rate of 16.6%, surpassing the target of 15%, showcasing the company's efficient capital deployment and operational effectiveness.

Capital Generation and Deployment Strategies

Year-to-date, the company has generated $485 million in organic capital, setting it on track to exceed its target of $600 million for the entirety of 2024. With $1 billion available for deployment as of September 30, 2024, the company has plans to utilize this capital for various purposes including acquisitions, share buybacks, and dividend increases. Furthermore, a newly proposed regulatory guideline is expected to increase deployable capital by an additional $700 million by January 1, 2025, significantly enhancing the firm's financial flexibility.

Active Acquisition Strategy Enhances Market Position

The company has been proactive in acquiring new business opportunities, integrating Vericity and acquiring blocks from Prosperity Life Group to bolster its U.S. operations. These acquisitions helped augment core earnings contributions, with overall expected insurance earnings from acquisitions performing better than anticipated. The firm remains committed to pursuing accretive acquisitions aligned with its growth strategy, targeting efficient integration and value creation.

Shareholder Value Through Buybacks and Dividends

In line with its commitment to returning value to shareholders, the company has renewed its Normal Course Issuer Bid (NCIB) program, authorizing the buyback of up to 5% of outstanding shares. Additionally, management has announced a 10% increase in dividends to common shareholders, representing a balanced approach between returning excess capital and investing for growth.

Solid Segment Performance Across Business Lines

The Insurance segment reported core earnings of $106 million, a 16% increase year-over-year, fueled by stronger expected insurance earnings and effective pricing strategies. In Wealth Management, core earnings also reached $106 million, representing a 29% increase, driven by favorable market performance. U.S. operations maintained steady core earnings while significantly expanding through recent acquisitions. The company's well-rounded performance across these segments highlights its adaptability and strength in both domestic and international markets.

Prospects for Future Profitability Improvements

Looking ahead, management expects gradual improvements in profitability across key segments, particularly in U.S. Dealer Services, where targeted management actions are in place. The anticipated reforms in capital requirements should also facilitate ongoing growth. While management maintains confidence in current ROE levels, they are cautious not to set higher targets, focusing instead on sustainable performance and capital utilization.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Industrial Alliance Insurance and Financial Services Inc. 2024 Third Quarter Results. [Operator Instructions] This call is being recorded on Wednesday, November 6, 2024.

I would now like to turn the conference over to Marie-Annick, Head of Investor Relations. Please go ahead.

[Marie-Annick Bonneau, executive]

Good morning, and welcome to our 2024 third quarter conference call. All our Q3 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. 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 statements information on Slide 2 as well as the non-IFRS and additional financial measures, information on Slide 3. Also, please note that the 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 Q3 2024 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 Group Benefits and Retirement Solutions.

I'm very pleased with our solid results for the third quarter, both in terms of profitability and business growth. This strong performance, consistent with our year-to-date results reflect the disciplined execution of our growth-oriented strategy and underscores the strength of all our distribution networks.

Starting with Slide 8 for an overview of Q3 2024 key results. Core EPS increased by 17% year-over-year to a record $2.93 per share, while our EPS was higher at $2.99. Trailing 12-month core ROE of 15.3%, supported by a Q3 annualized core ROE of 16.6%, exceeded the threshold of our midterm target. Robust sales growth and capital deployment initiatives were instrumental in achieving this strong result.

In the third quarter, nearly all business units delivered robust sales growth with continued momentum on both sides of the border. This translated into year-over-year increases of 25% in premiums and deposits and 22% in assets under management and administration. Our Solvency ratio of 140% illustrates the robustness of our capital position supported in Q3 by organic capital generation of $180 million. Our book value per share, which stood at $71.63 at September 30, increased by 10% over 12 months or more than 12%, excluding the impact of share buybacks.

Now turning to Slide 9 to look at Q3 business growth for Insurance, Canada. Once again, this segment recorded a solid performance with all business units posting strong sales results. In Individual Insurance, we further strengthened our leading position in the number of policies sold in Canada with strong sales of $103 million during the quarter, up 7% over last year. This growth was driven by the high performance of our distribution networks, our distinctive digital tools and our comprehensive range of products.

In Group Insurance, the 21% increase in sales year-over-year, combined with good retention resulted in premiums and deposits of $508 million, which is 10% higher than a year ago. In Dealer Services, third quarter sales of $197 million were up 2% year-over-year. This is a good result given the challenging macroeconomic environment that continued to impact vehicle affordability in Canada.

Finally, iA Auto & Home also recorded very strong sales with direct written premiums in the third quarter reaching $164 million, a robust increase of 15% over the same period last year. This is attributable to our success in generating new sales and to the impact of recent premium increases.

Turning to Slide 10 to comment on sales results from -- for Wealth Management, which were again very solid, notably with net fund flows of more than $600 million. iA continued to rank first in growth in net seg. fund sales. During the third quarter, gross sales of seg. fund amounted to more than $1.3 billion, a significant increase of 51% year-over-year, and net inflows of $781 million were generated during the same period. This robust performance once again demonstrated the strength of our distribution networks.

Mutual fund sales of $385 million were up 33% year-over-year, although inflows were lower than outflows. As for sales of insured annuities and other savings products, they remained high, reaching $483 million during the quarter. This is a very good result, especially considering investors increased optimism toward financial markets and the appeal of riskier asset classes offering potential higher returns. Finally, in Group Savings and Retirement, both insured annuities and accumulation products performed well resulting in solid sales of $900 million, up 62% year-over-year.

Now looking at Slide 11 regarding our sales results in the U.S. And in Individual Insurance, we achieved record sales of USD 68 million. This strong 55% year-over-year increase reflects a solid overall performance as well as the addition of sales from Vericity. We continued a strong business growth of this business unit, along with the recent acquisition of Vericity and of 2 blocks of business from Prosperity Life Group demonstrate our ability to grow in the U.S. life insurance market, both organically and through acquisitions.

In Dealer Services, third quarter sales amounted to USD 286 million, up 15% over the same quarter last year. Dealers continue to place greater emphasis on F&I product sales in effect of improved consumer profitability resulting from lower interest rates and reduced vehicle prices.

Moving to Slide 12, where year-to-date key financial KPIs compare favorably with all our mid...

[Technical Difficulty]

[Operator]

Ladies and gentlemen, we're experiencing some technical difficulties. Please remain on the line and the call will continue in just 1 moment.

[Denis Ricard, executive]

Okay. It seems that the technical difficulties is over, hopefully.

Moving to Slide 12, where year-to-date key financial KPIs compared favorably with all our midterm targets. Among these, in addition to core ROE exceeding 15%. I want to highlight core EPS which is 16.5% higher year-over-year after 9 months, well above the targeted 10% annual average growth. This good profitability contributed to the generation of $485 million in organic capital since the start of the year, which is on track to reach our 2024 target of over $600 million.

Turning to Slide 13 to discuss our capital deployment priorities and recent initiatives. At September 30, 2024, we had $1 billion in capital available for deployment following another active quarter of capital deployment initiatives, which included acquisitions, dividends, share buybacks and IT investments. In September 2024, the AMF published a draft revised capital formula, the CARLI guideline, which would become effective January 1, 2025. If the guideline is adopted as published, we expect our capital available for deployment to increase by around $700 million on January 1, 2025. This positive impact on our financial flexibility will increase our ability to deploy capital, a top priority in delivering our growth strategy.

Indeed, capital deployment is a key catalyst for increasing our ROE and creating long-term value for our shareholders. To this end, we continue to prioritize investing in our growth, both organically through sales with a ROE above our 15% target and through acquisitions. Our acquisition strategy focuses on accretive acquisitions that fit well with our culture and business model and rapidly contribute to ROE expansion. In Q3 alone, we strengthened our footprint in the U.S. life market with the integration of Vericity acquired at the end of June 2024 and the acquisition of 2 blocks of business from Prosperity Life Group. We also completed the acquisition of assets from Laurentian Bank Securities in the Wealth Management sector in Canada.

To conclude, I want to highlight that we renewed our NCIB program to buy back up to 5% of outstanding shares and announced a 10% increase in our dividend to common shareholders. These decisions reflect the high priority we place on returning value to our shareholders through dividends and share buybacks, while actively investing in organic growth and pursuing acquisition opportunities.

I will now hand it over to Eric, who will comment on the third quarter profitability and capital strength. Following Eric's comment, we will take questions.

[Eric Jobin, executive]

Thank you, Denis, and good morning, everyone. Starting with Slide 15, which highlights our solid performance in the third quarter, with favorable results across all key financial indicators of profitability and financial strength. The strong profitability recorded in the first half of 2024 continued into the third quarter. Our strong earnings, combined with our capital deployment initiatives, contributed to the expansion in ROE.

In fact, Q3 annual ROE of 16.9% and core quarter annualized ROE of 16.6%, well exceeded our medium-term guidance of 15% plus, resulting in a trailing 12-month core ROE of 15.3%. Core EPS for the quarter was up 17% year-over-year, reaching $2.93, while the reported EPS was even higher at $2.99. This solid growth is mainly due to the strong increase in the insurance service results, driven by a substantial increase in premiums and deposits and in assets achieved both organically and through recent acquisitions.

Our capital position is robust with a solvency ratio well above our operating target and strong ongoing organic capital generation. Thanks to our favorable financial situation and sustained profitability. As announced yesterday, we are raising our dividend by 10% and renewing our share buyback program for the coming year. Finally, we remain a leader in the growth of book value per share with an increase of 10% over the last 12 months, reflecting our ability to create value. Without the impact of the share buybacks, the increase in our book value per share would have exceeded 12%.

Now moving to Slide 16 to take a closer look at our Q3 results by segment. First, Insurance, Canada reported a solid 16% year-over-year increase in core earnings to reach $106 million in the third quarter. Most of this increase was attributable to higher expected insurance earnings, reflecting the strong sales in recent quarters and the favorable impact of pricing adjustments over the last 12 months. Other positive items included the lower impact of new insurance business from employee plans compared to a year ago, the favorable impact of higher distribution results on core noninsurance activities and lower core other expenses.

As for core insurance experience, apart from the August weather event at iA Home and Auto, the net result was positive, mainly due to favorable morbidity and mortality experience. In the Wealth Management sector, core earnings of also $106 million were 29% higher than a year earlier. This solid increase is the result of good financial market performance as well as an increase in the expected insurance earnings for seg. fund from strong net sales over the last 12 months. Mortality experience was also favorable, leading to an insurance experience gain. Finally, the increase in core noninsurance activities reflects a solid performance once again from the distribution affiliates arising mainly from higher net commissions and better margins.

In the U.S., core earnings were $31 million, close to the $32 million recorded for the same period last year. The increase in expected insurance earnings is mainly due to the addition of Vericity and Prosperity blocks of business. It is worth noting that the overall results of these 2 acquisitions were slightly more favorable on core earnings than expected.

Core insurance experience for U.S. Operations was also positive, mainly from favorable mortality experience. In core noninsurance activities, the unfavorable impact of last year's lower sales and a less favorable business mix were only partially offset by strong sales in 2024. Finally, core other expenses increased mainly from the addition of Vericity's expenses.

Now turning to Slide 17, starting with the results for the Investment segment. The Q3 core investment result before tax was 2% higher than during the previous quarter. This result was supported by the good performance of our high-quality investment portfolio, bolstered by the unfavorable impact of interest rate variations. However, taxes were higher and iA Auto Finance results was lower due to credit losses and an increased allowance for credit losses.

In the Corporate segment, Q3 core Other expenses of $60 million pretax were in line with the quarterly expectation of $65 million, plus or minus $5 million, as we continue to focus on operational efficiency, cost conscious execution and disciplined project and workforce management.

Now looking at the right side of the slide for noncore adjustment. The net income to common shareholders exceeded core earnings by $6 million, reaching a quarterly record of $283 million in the third quarter. This was due to favorable market-related impacts, partly offset by adjustments mainly related to acquisitions. Since the transition to IFRS 17, this is the third quarter in seven in which our net income has exceeded our core earnings confirming the credibility of core earnings as a reflection of our recurring operating performance.

Please go to Slide 18 to look at the company's robust capital position. Our excellent organic capital generation in the quarter almost paid off for all capital deployment activities, including share buybacks and acquisition of blocks of business. In this respect, our very good profitability led to strong capital organic generation of $180 million for the quarter. With a total of $485 million generated since the start of the year, we are well positioned to exceed the minimum target of $600 million for 2024.

As for capital available for deployment, it amounted to $1 billion at September 30, 2024. In addition, as Denis mentioned, if the proposed changes to the AMF capital formula are adopted as published in September 2024 in the draft revision of the CARLI guideline, we expect the capital available for deployment to increase by around $700 million on January 1, 2025.

In summary, our third quarter results testify to our ability and commitment to generate growth through quality earnings. With our increased ROE, our strong financial position and the significant amount of capital available for deployment, we are well positioned for future growth.

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

[Operator]

[Operator Instructions] The first question comes from the line of Meny Grauman with Scotiabank.

[Meny Grauman, analyst]

I wanted to ask about the sustainability of ROE -- annualized core ROE, 16.6%, so a very strong step up here. I'm curious, is there anything that you see when you look at the numbers that you would view as unusual that is basically making this result from an ROE perspective, unsustainable?

[Denis Ricard, executive]

Yes, I'm going to start, Meny. Thanks for the question. We're very proud of the results of this quarter. we have not -- I have not used the word exceptional because exceptional would mean that it's not repeatable. We believe they are very strong. And we've made so much -- so many initiatives over the last 10 years in our organization, for example, diversifying our product mix, business mix, investing in a disciplined acquisition, returning some of the capital to our shareholders through NCIB. I think we've got a very balanced approach, targeted towards improving the value to shareholders that at the end of the day, leads to a better ROE going forward. So I'm very pleased with the trend. It's going right now. Probably a bit too early to call for higher target for ROE, it may come. But for the time being, I mean we are very pleased and proud of the results that we've got so far. And I don't see a cloud in the sky that would prevent us to be able to generate that kind of ROE going forward.

[Meny Grauman, analyst]

Okay. That's very clear. And maybe if I can ask just on the capital available for deployment. So you're signaling quite a meaningful increase. I guess the question is, does that change the capital deployment priorities or the way you look at capital deployment is going from $1 billion to $1.7 billion, change that at all?

[Denis Ricard, executive]

Thanks, Meny. It's Denis again. Last year, at about the same time, we had capital for deployment that was around $1.8 billion. And obviously, I got that question all the time. And the answer last year is the same as this year, basically. We're looking at all the way that we can to increase value to shareholders. And in terms of the priorities, organic growth is really the one that is the primary one, investing in our current businesses with an ROE over the 10% to 15% target. That's really our main focus and investments in technologies included into that.

Second is about acquisition -- disciplined acquisition. We have a track record of having a disciplined acquisition and we'll continue doing that. We're very proud of the latest ones that positively impacted our results, Prosperity and Vericity. And then the dividend, I mean, we've increased dividend by 10%. It's really a confidence call that we made on our results. And lastly, NCIB is -- we try to be opportunistic on the NCIB side and returning some of the excess capital to the shareholders. So it's really a balanced approach that we had like last year, and it's continuing going forward.

[Operator]

And the next question comes the line of Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, analyst]

Yes. So just to understand the regulatory change. So essentially, your holding company, there's a lower capital requirement, I guess, the core ratio probably that threshold for regulatory intervention has been lowered or is proposed to be lowered and that's what frees up some capital that you're holding back to meet that requirement? Is that the gist of it?

[Eric Jobin, executive]

Gabriel, it's Eric. You're exactly right. That's the intention of our regulator. In Quebec right now, what we had in terms of game rule was to use the same target for operating companies as for holdco companies. And we understand from our regulator that they wanted to create some harmonization with the federal level which has different constraints for holdco compared to operating companies. We need to understand that the regulator focus is more to get the consumer protection at the OpCo level. So the quality or the structure of capital for holdco can be less stringent than it is for OpCo. So what is happening right now is just the harmonization with some companies at the federal level in terms of level playing field, and this is resulting in additional capital available for deployment for us at this point.

[Gabriel Dechaine, analyst]

So you're also stating that it harmonizes with OSFI, then the AMF moved out or is that...

[Eric Jobin, executive]

It harmonized with some companies at OSFI level, not all.

[Gabriel Dechaine, analyst]

Okay. And Denis, I wasn't quite clear on your answer to the last question. I mean the M&A -- I'll go with the M&A route at this company, and I think you stated in your there or your press release, you've made 30-plus acquisitions over the years. The last two have not been by your own admission, and I appreciate the candor. They weren't well timed, like the IAS or whatever. And does that factor into your outlook for M&A, I guess, is my question. How do you -- are you taking a different approach now? Because I do expect you're going to be an acquisitive company in the future, you have been in the past, but is your approach changing at all?

[Denis Ricard, executive]

Well, it's interesting as a question because I had a conversation with my board recently. And I said that, obviously, the IAS results are disappointing and timing was not really good and we had some challenges, and we are working on them. I think it's -- what is important is to make issues visible and work on them. Now with that said, one of the risks that an organization has when one acquisition, and again, it's one amongst many of them, if one acquisition doesn't go the right way as expected, the risk is that then from that point on is the risk-averse to a point where it makes the company not growing as much as it should.

So as far as I'm concerned, I think in this organization, we have a culture of being conservative and prudent enough in our acquisition that we have to be careful. We have to be conscious that we need to take some risk, calculated risk going forward. But it's also a risk not to pursue acquisitions when you think about it because growing is important. The risk of not growing, sometimes it may be more important than the risk of growing. So my view on this is really to have a balanced view. And the track record for our position, general risking is very positive. And it's not because one of them doesn't go as expected, that we should refrain from growing by acquisition in the future.

[Gabriel Dechaine, analyst]

No, no, I wasn't suggesting you would refrain in the future. I'm just wondering if there was a lesson learned there that, that one didn't go as well as planned, and we'll -- we learned from that experience and what that lesson might have been. So...

[Denis Ricard, executive]

I mean we have several lessons from that acquisition. We shared with the Board. And when I look at the recent acquisitions, Vericity and the Prosperity, I'm telling you, we've learned and we've acted on what we have learned.

[Gabriel Dechaine, analyst]

And looking ahead in terms of industry verticals, is it -- I mean, if I had asked you this a few years ago, it would have been not a warranty top of the list, is it possible when we see more deals like Prosperity blocks of business that seem to be a little bit, I don't know, scalable in your U.S. business given the work you've done over the past decade in Individual Insurance?

[Denis Ricard, executive]

We're looking at both the U.S. life and the warranty business in the U.S. at this point. We don't look at the third leg, let's say. And yes, we would be open to other deals like that, that are very accretive for the organization that they are much higher than target ROE. So we are open to look at several opportunities. And in fact, when I look at, say, Vericity is a great example of competency that we acquired in a business that we already know in the U.S. Prosperity is really a tuck-in acquisition and the integration is going very, very well right now. So there's -- I mean, it's really to count on our strength in the businesses that we're in right now. And if there are more deals and we're looking at some deals, we'll do it.

[Gabriel Dechaine, analyst]

Okay. And just last one on the U.S. Did you have any lapse experience pop up again in that final benefits or benefits expense -- funeral expense business. I know that arose last quarter? And then what was it about the sales mix? The U.S. warranty sales were up whatever, 15%, so a good number, but you cited that the mix wasn't as profitable or something like that. Can you give a bit more detail on that?

[Eric Jobin, executive]

Yes, I'll take this one for the sales mix profitability, Gabriel. In fact, for the U.S. dealer, in fact, what happened is that if you look at the U.S. dealer sales, there's insured business and there's fee business. And we had slightly more -- of course, the fee business is slightly less, I would say, brings less dollar of profit than insured products. And we're feeling a little bit of pressure on margin on the latter, so that all in, it resulted in less profitable business mix in the quarter.

[Gabriel Dechaine, analyst]

Okay. And the lapse, anything there or was that just the one...

[Eric Jobin, executive]

Yes, on the lapse. Sorry, I forgot about that. On the lapse, the situation is improving on life insurance. It's still something that we're working on, but we're taking management action with distributors to improve the situation, but it's going in the right direction.

[Gabriel Dechaine, analyst]

Congrats on the quarter.

[Operator]

The next question comes from the line of Doug Young with Desjardins.

[Doug Young, analyst]

Eric, just back to the $700 million, and I don't want to dig into the weeds, but it's -- is this something where the core ratio, which I think is 70% goes down to 60%? Or is this more -- I think it was back in the 2020, when AMF came out and published -- changed the capital treatment, whether your property and casualty subsidiary that's held by a life insurance company and that negatively impacted your deployable capital? And is it more of a reversal of something that's negatively impacting your available capital? Or is it actually the core? So I'm just trying to understand how the moving pieces are going to get to that $700 million?

[Eric Jobin, executive]

Yes. Thanks, Doug, for the question. In fact, I will say that there are 3 important figures. First, you are right that it has to do with the core ratio, okay? Because our capital available for deployment now is a function of the core ratio. This is our most stringent constraint. So that's the first piece. Secondly, in terms of target ratios, there are minimum ratios in the industry. And just to adjust your comment, it's not 60%, it's 55%, in terms of minimum ratio. Then there is what we call an intervention target ratio, which is the level where the regulator will step in to see what's going on and maybe ask for an action plan from the company. And then there's -- on top of that, we don't want obviously to operate as companies at this level, that would be clearly uncomfortable. So we set up according to our risk profile, risk governance and so on, we set up what we call an operating target on top of that.

So what just happened here is that the regulator -- our regulator with the harmonization removed that intervention target constraint. And this opens up the floor to us to operate like holdcos -- other holdcos in Canada on the basis of minimum ratio, but we would not go as low as the minimum ratio because on top of that, we need to put some margin for our operations, for the risk profile of the company. So clearly, what we will do and what we have done in providing the estimate of $700 million is to calculate what would be the available capital, on a basis comparable to other companies in Canada that are subject to the same constraints as we are. Does that answer your question?

[Doug Young, analyst]

It does. And I think your core rate now, you correct me, is it 85%? Like I'm just trying to mathematically think does that go down to 70% -- like or like -- or trying to think of like mathematically how this kind of like what your core -- like what is that minimum that you would go to that you used to get to that $700 million?

[Eric Jobin, executive]

Yes. Of course, we still need to do the exercise and finalize exactly where our target would be over the minimum. But you're in the right path to think that the AD would go down if we deploy all that additional excess capital and when.

[Doug Young, analyst]

Okay. And then second, just on the two acquisitions, the Vericity and the Prosperity books. Can you quantify what that contributed to core earnings? And then I think you talked a bit about more favorable to core than expected. Is that something that is expected to continue? Or is that just more favorable this quarter and you anticipated to go back to more level? Just hoping to get some context there.

[Eric Jobin, executive]

Yes. I will draw your attention to the driver operating for the U.S. segment for a second, Doug, on this. If you look at the first 2 lines of the driver of earnings, you will notice that a trend in risk adjustment, recognition and on the CSM amortization has gone up. If you look at the trend, it's quite obvious that it went up by more than $10 million. So that's one clue for you. The other one is to look at the core other expense on the same page that did go up. We said in the opening comments that we now factor in the core Other expense of Vericity. So that's the other -- the other part to consider. And when you net those two out, it's positive. Whether this will continue, there is a part of it that will continue, but we're just one quarter in. So we need to remain humble and see how this develops. But for now, we're quite happy with the results of this acquisition and its contribution.

[Doug Young, analyst]

And was there any impact on the experience from those two businesses? Like when I look at that experience line, does that factor in some of the better-than-expected results of those deals? Or is it just simply in those 3 lines?

[Eric Jobin, executive]

Not yet. I referred you to the expected insurance earnings, Doug. It's too early in terms of experience. It's -- we're just one quarter in. So nothing to mention out there that differs from our expectation.

[Doug Young, analyst]

Okay. And then just lastly, the U.S. extended vehicle warranty business and sales were good, obviously, and have shown some improvement. You talked about the mix, but it looks like the profitability is still down year-over-year. You didn't mention any negative claims experience. I'm just wondering how things are going from a claims perspective, if there's anything to flesh out there?

[Eric Jobin, executive]

Yes, we're still -- on the claims side, we are still facing challenges on the -- from inflation of the auto parts, so that's one challenge. But we're doing the repricing on the products. And those products are when we sell them, they are in the books for its single premium and they are in the books for, let's say, between 3 to 7 years. So it takes a while to develop. So that's one piece. You see the claims and the price has been fixed. So for the repricing to go through, it will take a while, but we're dealing with it. So that's the important on this.

And the other thing that you have to remember also is that there is some seasonality. When you look at profitability from one quarter to the other, Q4 is generally the lowest quarter in terms of profitability because it just follows the consumer year that tends to buy more cars. The biggest quarter normally is the second quarter, sorry, and -- because people buy cars in May and when spring happens. So that's the best quarter, then the next best one is probably the third, the lowest being the fourth and the first quarter. So the profit is recognized mostly at the point of sale. So the profit on a quarter-to-quarter basis follows this pattern of seasonality.

[Operator]

The next question comes from the line of Paul Holden with CIBC.

[Paul Holden, analyst]

Maybe to continue that conversation, you continue to reiterate that you expect gradual profit improvement in U.S. Dealer Services. So I don't expect it will take 3 to 7 years to realize that gradual profit improvement. But what would be sort of the key drivers or factors we should look to, to drive that improved profitability?

[Eric Jobin, executive]

I would say, maybe 12 to 24 months, if -- we said this year that it would gradually improve in 2024. So it's following the right path. So you're right, it will not take 3 to 7 years. We expect the situation to improve gradually in the coming quarters. Sean is really working hard with his team to take management action and strengthen the situation through repricing and management actions. So it's a question of quarters.

[Denis Ricard, executive]

And -- it's Denis here. I would add that you get much more color at the Investor Event because we want to spend a large portion of that meeting to explain the driver of earnings for that business, and you're going to get a bit more color about our strategy, where is our focus, what actions, initiatives we've made to improve the situation. So it's something that you guys will be quite interested to hear.

[Paul Holden, analyst]

For sure. And I'm assuming Denis, based on your earlier comments that you are once again interested in doing U.S. Dealer Services acquisitions that you're generally happy with the way the business is trending.

[Denis Ricard, executive]

Yes, there's no reason for me to say that we will not pursue growth in that business, whether it's organic or by acquisition.

[Paul Holden, analyst]

Okay. Okay. That's great. And then speaking of timing of prior acquisitions, I mean, Vericity and Prosperity actually look like they're very well timed given what's happening today. My question on them is how much interest rate sensitivity is in those businesses, i.e., the nice tick up in bond yields, a material benefit or not?

[Eric Jobin, executive]

I will comment on this, Paul, that very little because the business profile of Vericity and Prosperity Life is term business. And as you know, those are short-term businesses. So the interest rate sensitivity coming with those is very limited.

[Paul Holden, analyst]

Okay. Got it. And then last one for me is kind of continuing on the topic of capital deployment. Share buybacks, right? You're clearly generating a lot of organic capital every quarter, have a lot of excess deployable capital, but the share price is up significantly over the last 4, 5 months. So how do you balance those factors in terms of the thinking towards ongoing share repurchases?

[Denis Ricard, executive]

I think you should expect that we will continue doing some buybacks on this, we have, let's say, a sizable acquisition in the pipeline. But it's really, for us, one way to return some of the value to the shareholders. So my expectation is that this is going to continue.

[Operator]

The next question comes from the line of Mario Mendonca with TD Securities.

[Mario Mendonca, analyst]

Eric, I want to go back to the $700 million. I think I understand the math behind it. I think I understand the concept, especially when you refer to another holdco in the country. I think many of us know you're referring to there. From a practical perspective, though, if you wanted to replicate what that other company does with their holdco, it would involve raising debt at the holdco and then using that to buy back stock, which would, of course, take the leverage ratio higher, but would have the effect of -- yes, increase the leverage ratio and you could absorb a reduction in your core because the threshold is lower. So what I'm asking from a practical perspective, is that how you exploit this change by raising debt at the holdco and using it to buy back stock?

[Eric Jobin, executive]

Yes, it's early to call, Mario, on this. Well, your strategy is right, though. This is something we could do. And if we want to keep improving our ROE expansion, we need to have, I would say, a more comparable cost structure in terms of capital. So we will need to get there at some point, but we don't want to do this suddenly at this point. So -- but we'll just be opportunistic with the share buyback. We talked about it, and that's how we see it.

[Denis Ricard, executive]

Yes. Mario, it's Denis here. I think the ultimate destination is what you described, but it can take some time to get there.

[Mario Mendonca, analyst]

Okay. So we should expect over -- let's say, over a longer period of time, a couple of years that industrial lines will not be operating at a 15% or 16% leverage ratio. It will look a little bit like again, like this other company that you've referred to, like, a higher leverage ratio clearly?

[Eric Jobin, executive]

One word, absolutely.

[Mario Mendonca, analyst]

Okay. Yes. I mean, it makes sense. Might as well take advantage of it. And that's your point then, that's where -- that's how this company can have an ROE like everybody else's, once you exploit that room and your leverage ratio, that's the sort of long-term goal here, might as well have the same ROE as anybody else. Is that the point?

[Eric Jobin, executive]

I would say one word, absolutely.

[Mario Mendonca, analyst]

Let's move on to something else. There's strain in Q4 '23, very elevated. Eric, you talked about seasonality in U.S. Dealer Services. Is there -- should we see a similar type of seasonality in Q4 '24 associated with strain in the group?

[Eric Jobin, executive]

Yes, you are right, Mario. And remember that you and I talked about this earlier this year. As of the result of Q4, there is seasonality in the group and patterns that result in a normally higher strain at some point of the year. That being said, we don't expect the strain to be as high as last year for Q4 of this year.

[Mario Mendonca, analyst]

Not as high as Q4?

[Eric Jobin, executive]

No.

[Operator]

The next question comes from the line of Lemar Persaud with Cormark.

[Lemar Persaud, analyst]

I want to come back to this capital for deployment and the $700 million you guys are getting. But I want to look at it in terms of the payout ratio. So under what circumstances would Industrial Alliance consider increasing the target payout ratio? Or does it feel like 25% to 35% is the right number over the longer term because you could say that IAG is becoming a more mature company, it's generating all this organic capital generation, it can fund organic growth and pursue M&A. So maybe we're at the point where it makes sense to bump up the payout ratio, like how do you guys think through that?

[Denis Ricard, executive]

Yes, it's Denis here. I don't consider our company to be mature. We see a lot of opportunities. We believe that we are more on the growth side as opposed to mature side. So for us, it will be premature to aim for a higher payout ratio at this point. We prefer to deploy capital in other means through a growth, organic and acquisition, all the favored ones.

[Lemar Persaud, analyst]

Okay. Okay. At what point -- like what should we be watching to suggest that maybe it's time to revisit this? Or is this something that it's just so far away. It's not even worth discussing at this point with the Board?

[Denis Ricard, executive]

One way to look at it is that our market cap is now today maybe at $12 billion -- but $10 billion plus right now. Our competitors, which are a bit more mature, I would say, are in the $40-plus billion. So I would say that, I don't know, until we reached $20 billion, that's probably not in the option at this point. I mean, so it tells you that it's several years down the road.

[Lemar Persaud, analyst]

Okay. That's helpful. Just another question here. I noticed you guys talked about the regulatory capital requirements for seg. funds in that blurb. Can you help us understand what that's going to mean for the outlook for the seg. funds business?

[Eric Jobin, executive]

Yes. In fact, it won't change much -- we don't expect, in fact, any impactful change to our seg. funds because as you may know, we already have the internal model use, and we're using dynamic hedging to protect the downside risk of those products. So our capital will not change with those rule adjustments.

[Operator]

The next question comes from the line of Tom MacKinnon with BMO Capital Markets.

[Tom MacKinnon, analyst]

Just a couple of things. First, on the dividend increase. You guys typically increase your dividend every 3 quarters as opposed to annually and it's 10% dividend increase would -- if you annualized it would be more like a 13%, above your 10% core earnings growth target. If you could just walk me through some of the thinking there. And I assume none of the $700 million that you additionally got works this way into that thinking. But that's the first question, and I've got a follow-up.

[Denis Ricard, executive]

I will comment on that, then if you want to add. No, I don't think it's related to the $700 million. Basically, as I mentioned before, we target around 30% payout ratio. And because our profitability is very strong with a 10% increase in dividend, we're about in the middle of that range right now. So that's really the rationale behind it. Nothing more.

[Tom MacKinnon, analyst]

Okay. And then into the U.S., I mean you had Vericity, you had 3 months in the quarter of Vericity, but you only had 2 months from Prosperity -- from the blocks from Prosperity. So is there any additional uptick that you would anticipate in either -- I'm sure there's lots of CSM and you only got 2/3 of that CSM from Prosperity. So just help us think through that and risk adjustment released too from Prosperity because you only got 2 months of that? And then what is the impact on expenses of only having the Prosperity block in for 2 months? Just help me think some of that. Would we anticipate that net-net, you said it's better than you thought, but you only had 2 months of prosperity in the quarter as opposed to three?

[Eric Jobin, executive]

You are right, Tom, on this. What will happen is that obviously, next quarter, we'll have a full quarter in terms of risk adjustment, release as well as CSM amortization. So that will contribute to slightly more of those 2 items. And in terms of cost, we are fully integrating this business with the American-Amicable business. So cost will stay the same. The cost increase that we see in core corporate expense is totally due to Vericity acquisition because it comes with people and operations. So those costs are just a reflection of Vericity.

[Tom MacKinnon, analyst]

Perfect. And then the final one is really with respect to the other core expenses in Canada. Look, just they've been trending. They were 16 in the first quarter, 17 in the second quarter and now just 11 in the third quarter. Is there anything unusual there? What should we be thinking about for that? Because it seems to be down at least significantly year-over-year and then down significantly quarter-over-quarter.

[Eric Jobin, executive]

You're absolutely right, Tom, on this. We had kind of onetime items that were favorable for core order expense in Insurance, Canada. So what I expect at this point is this to come back to normal in the next quarter.

[Tom MacKinnon, analyst]

Okay. And normal meaning the kind of run rate we had in the first half of the year?

[Eric Jobin, executive]

Exactly.

[Operator]

I will now turn the call back over to Denis Ricard for closing remarks. Please go ahead.

[Denis Ricard, executive]

Thank you. I think it would be an understatement that we are pleased with the results this quarter, very solid profitability with an ROE much above our target. And what makes me confident about the future is really not only the current profitability and the discipline of our organization, but it's the growth that our businesses have brought. We haven't talked that much during the question period about the business, the growth of our businesses. But I can tell you that our leaders are putting all their attention and focus on growing their businesses, and it's the best testimony for us for future growth of the company.

We've seen assets under management, we've seen premiums and deposits increased high double digit in the 20% over the quarter, and that's the results of their hard work and all their teams. So thanks to all of us, thanks to all of them. And one last comment is about the creation of value. We've been a leader and we are a leader in creating value for our shareholders. We made so many actions over the last decade, and it's -- you can see that our journey is not over, and we will continue performing going forward. Thanks a lot for everyone, and see you next time.

[Operator]

Ladies and gentlemen, this conclude today's call. Thank you all for joining. You may now disconnect.