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EDITED TRANSCRIPT
IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
Services Inc Earnings Call
EVENT DATE/TIME: MAY 07, 2015 / 03:30PM GMT
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
Services Inc Earnings Call
CORPORATE PARTICIPANTS
Grace Pollock Industrial Alliance Insurance and Financial Services Inc. - IR
Yvon Charest Industrial Alliance Insurance and Financial Services Inc. - President and CEO
Normand Pepin Industrial Alliance Insurance and Financial Services Inc. - EVP
Rene Chabot Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
CONFERENCE CALL PARTICIPANTS
Robert Sedran CIBC World Markets - Analyst
Gabriel Dechaine Canaccord Genuity - Analyst
Tom MacKinnon BMO Capital Markets - Analyst
Doug Young Desjardins Capital Markets - Analyst
Darko Mihelic RBC Capital Markets - Analyst
Meny Grauman Cormark Securities - Analyst
Mario Mendonca TD Securities - Analyst
Sumit Malhotra Scotia Securities - Analyst
PRESENTATION
Operator
Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings results conference call. During the presentation, all participants will be in a
listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday,
May 7, 2015. I'd like to turn the conference over to Grace Pollock. Please go ahead, ma'am.
Grace Pollock - Industrial Alliance Insurance and Financial Services Inc. - IR
Thank you. Good morning and welcome to our first quarter conference call. All documents related to our results including press release, slides, MD&A, and
supplementary information package are posted in the Investor Relations section of our website at ia.ca. This conference call is open to the financial community, the
media, and general public. The question period is reserved for financial analysts.
A recording of this call will be available for one week starting at 4:30 PM this afternoon. The archived webcast will be available for 90 days and a transcript will be
available on our website next week. I draw your attention to the forward-looking statements at the end of the slide package. A more detailed discussion of the
Company's risks is provided in our 2014 MD&A that is available on SEDAR or the IA website. I will now turn the call over Yvon Charest, President and CEO.
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
Good morning everyone. I'm here with Normand Pepin, Executive VP, Rene Chabot, our appointed Actuary, Michel Tremblay, our Chief Investment Officer, and
Mike Stickney, the President of IA American. So I'll start with a few brief comments, Normand will address business growth and Rene will finish with profit and capital
and then we'll take questions. So overall, I would say that 2015 is off to a good start. Diluted EPS was CAD1.03 per share compared to CAD0.83 last year. Equity
markets made a positive contribution to Q1 profit. We also had the benefit of a tax recovery that helped to absorb adverse mortality experience and the impact of harsh
winter conditions on the results of our IA auto and home subsidiary.
Growth was mixed. On one side, we are extremely pleased with the results in our retail insurance operations as well as our seg fund business but disappointed by the
weakness of our mutual fund sales.
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
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We also note that the increase of top line results of our Employee Plan sector this quarter.
Our balance sheet remained strong. We issued CAD250 million in sub debt this quarter and redeemed a series of pref shares that improved our capital for about the
same financing cost.
With our solvency ratio of 211% at quarter-end and other financial flexibility at our disposal, we have significant capital available to expand our operations. At
quarter-end, our book value was CAD34.94, which is an improvement of 11% over the last 12 months and 3% in the quarter. And with that, I will turn it over to
Normand.
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
Thank you, Yvon. Good morning ladies and gentlemen. I will begin with some general comments about the top line and then address the performance of our various
businesses. Premiums and deposits of CAD2 billion reflected good growth from our retail life and general insurance businesses and lower inflows from our wealth
management businesses. Premiums from our group insurance sectors where down slightly mainly due to dealer services.
In the retail sector, insurance sales had a strong quarter. Minimum premiums, which are the bread and butter of this business, were up 14% in Canada. Our adjustable
disability business reported sales growth of 25% and our sales were up by 42% in the US. Another very encouraging sign is the number of policies sold, which is up
significantly, 14% in the last 12 months.
The only negative was excess premiums that are down over last year as we are still rebuilding the pipeline of the 10/8 replacement product. On the general insurance
front, IA auto and home had another good quarter with premium revenue growth of 4% and sales growth of 7%. In retail wealth, seg funds maintained their growth
momentum with net sales of CAD171 million. However, net mutual fund sales were negative, which resulted in total fund outflows of CAD96 million for the quarter.
Needless to say, the situation is unacceptable and we are working closely with Carl Mustos, the new President of IA Clarington, to bring sales back to their previous
level. On the Group side, sales of our three group insurance businesses grew up a total of 4% in the quarter.
In dealer services, the P&C business continues to gain traction with 19% growth in the quarter while creditor insurance sales were down by 7% year-over-year. Overall,
sales were stable in this sector. Special markets solutions were down by 1% in the quarter due mainly to the Travel block of business. Employees plan had a good
quarter and sales were up by 70% because of larger groups.
Group wealth sales were down in the quarter primarily because of insured annuity that is not a strategic focus. However, AUM was up 4% in the quarter and 11% over
the last 12 months. For all of our wealth management operations including private wealth manager and our broker dealers, assets were up by 5% in the quarter and 12%
in the last year reflecting growth in the equity market. This is a solid start to the year. That concludes my comments and I will now turn the call over to Rene.
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
Thank you Norman. Good morning ladies and gentlemen. Today, we reported first quarter EPS of CAD1.03, which is well above our guidance of CAD0.85 to
CAD0.95 for the quarter. Annualized ROE of 12.1% was at the top of our guidance and compares with 10.7% a year ago. These results reflect two exceptional items
that had a net of CAD0.15 to our EPS. We had a tax gain of CAD0.19 related to our former IAP subsidiary and we redeemed some pref shares at a cost of CAD0.04 per
share.
Overall, expected profit was up by a strong 15% mainly due to our retail insurance and wealth management businesses. In addition, we had a net experience gain of
CAD0.03 per share across all lines of business. When we zoom in on gains and losses in slide 10, markets were good in the quarter and [add] CAD0.05 for UL policy
and CAD0.02 for wealth management fees. Also, long-term disability experience was favorable this quarter and generated a gain of CAD0.01. On the downside, we had
adverse mortality in all sectors. That was much higher than the three year trend you see on slide 11. The loss of CAD0.07 in Q1 is equivalent to the loss that we had
over the previous three years. We consider this quarter to be a deviation. In IA auto and home, which is included in income on capital, we lost CAD0.06 because of
harsh winter conditions. Here again, this is higher than the recent trend for this business and explains the drop in income on capital this quarter.
Our guidance for 2015 is still CAD22 million per quarter, all inclusive, but with some quarterly seasonality related to IA auto and home. Management's view of core
that you can see on slide 12, with the adjustment for exceptional and other items is CAD0.92, which is above the consensus estimate. Strain in our individual insurance
sector was higher than the 35% we expected in Q1. In addition to seasonality that is implicit in the 35% level, our product mix in Q1 was skewed towards permanent
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
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level cost policy and shorter-term contracts that our more costly in terms of capital. In addition, we had lower excess premiums in our upper-end marketplace.
Management estimates that the higher strain ratio reduced EPS by CAD0.02. Our guidance for the next quarter remains at 30%.
I would like to conclude with some comments on capital. Our solvency ratio is strong at 211%. With our financing activity this quarter, we continue to have lot of
flexibility on our balance sheet to grow our business. Our reserves continue to be well protected. We can still absorb a drop of about 30% in the markets before having
to strengthen the reserves. Operator that concludes my formal comments. We'll now take questions.
QUESTION AND ANSWER
Operator
(Operator Instructions). Robert Sedran, CIBC World Markets.
Robert Sedran - CIBC World Markets - Analyst
A couple of questions on sales, I guess it's for Normand. The excess premiums that you spoke of and the product refresh, when would you expect to see some of the
sales start to trickle in for that?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
It's always difficult to predict, you know, when things will happen. Sales wise, when you make some changes to your product, and what we have witnessed, I would
say in the Canadian insurance business, individual insurance business, is that there are less excess premiums. But we have products that, like the 10/8, that should attract
I would say excess premiums. I would say that it takes time. I mean the people who are selling these products, the sales process, it's a very long process.
It will last three, six, and nine months and some times a year and then to issue the policy will take very often, let's say three months to issue the policy. So there's a lag
there and I don't know. I mean sometime because that depends also on a few policies. You get the few very large policies with a lot of excess premiums and so I cannot
tell you exactly when it's going to happen, but I mean we don't see why it would not happen.
Robert Sedran - CIBC World Markets - Analyst
But just, not trying to pin you down on the quarter perhaps, but even from a year perspective, is this something that we should expect to see in 2016 or is it something
that could materialize this year?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
It could materialize this year.
Robert Sedran - CIBC World Markets - Analyst
Okay. And then just on the mutual fund side, can you talk a little bit about performance by channel and what the redemption rates are like? Is this all Laurentian Bank
we're talking about basically is my question?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
No, maybe I could try to shed a little bit more light I would say on the mutual fund sales. Obviously, Laurentian Bank is still very important in redemptions. But as you
certainly know, we also terminated our relationship with a very important sub advisor, he had a lot of assets, and he wasn't performing and the underperformance of that
sub advisor combined with I would say the termination, because those sub advisors sometimes have followers, so then he created spike in redemptions. I would also say
that our performance, our performance of some of our funds, some of our key funds, has been I would say weak lately and the investment advisor, let's say, (inaudible)
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are less and less tolerant. They move money very quickly if somebody does not perform over a short-term period. So, what I say, one of the reason also that explains
why the performance for some of our key sub advisors was not up to the mark is that they decided to hedge themselves, hedge the currency. And when you compare
these sub advisors, I would performance with some of our competitors who did not hedge themselves, obviously the currency gain, you know is huge, it has been huge
lately. So we had a few key sub advisors that are under performing right now.
Robert Sedran - CIBC World Markets - Analyst
And this is similarly then not a one quarter response to an issue with something that is likely to linger for more than just Q1?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
I would say it will take, yes, it will take some time to correct it. We have put in place a lot of things. We have things that we -- I think will bring back, let's say the
positive sales for instance. We have broadened up line up and the additions are doing well. Now we understand that we need funds that are currency hedged and also
funds that are not currency hedged, so that you always have some funds that perform well no matter what happens with the currency.
We're also doing some work to manage redemptions better. We're trying to be more proactive there and what we're focusing on also, where we're focusing a lot, is on
the work with our affiliates. We think we can get a much larger share of the business of affiliates. Our affiliated dealers control CAD35 billion of assets. So there's a lot
of room for improvement there. Plus, I think I will say on the positive side, which is something very important. Couple of years ago, our seg fund sales let's say were
negative and now they are very positive and not only the sales are positive, but the performance is overall very positive on the seg fund side. So maybe we're taking now
a closer look at the seg funds line up and seeing how we can take advantage of that on the mutual fund side.
Operator
Gabriel Dechaine, Canaccord Genuity.
Gabriel Dechaine - Canaccord Genuity - Analyst
There's quite a bit of noise on the experience mortality and various other factors. Just want to confirm that we didn't actually see any negative experience from lapse -because it got buried in there, I guess, whether neutral or maybe positive? What are we seeing on the lapse side?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
On the lapse side, it was neutral and that's the reason I didn't say anything on it.
Gabriel Dechaine - Canaccord Genuity - Analyst
Okay. Then the group insurance mortality, is this the first time that we've had such a big loss due to mortality in that business and how many quarters in a row now we
had neutral or slightly positive long-term disability experience?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
I will start with the mortality first okay and we give you some information on slide 11 on that topic. So I mentioned in my opening remarks that it was in all sectors. So
overall mortality cost us CAD0.10 this quarter, CAD0.06 on an individual life side and CAD0.04 on the group side. So the CAD0.04 on the group side was in our three
businesses, CAD0.01 on employer employee and CAD0.01 on SAL and CAD0.02 on SMS.
So usually, mortality on the group side is a kind of a cash cow. That CAD0.10 is offset by two longevity risk gains basically. CAD0.02 on the individual wealth
management side and CAD0.01 on the group pension side. So that's the granularity of that CAD0.07 that we disclosed. So for us the good news is that on the group side
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
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where we were struggling in the past on the disability side we don't see it this quarter, its positive plus CAD0.01 and for us mortality is just something new that
happened in that quarter. With respect to the trend on long-term disability, it's improving for the last three quarters.
Gabriel Dechaine - Canaccord Genuity - Analyst
Okay, so you're still very confident in the rebates of expected profit from that business that you took or did last Q3?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
We basically execute our plan and as we've mentioned to you last time, this is in Q3 that we will be able to give you more flavor on this because we posted our renewal
for Q1, we recently posted our renewal for Q2, and we have to wait a little bit to see what's going to be the traction on this. The good news is that disability seems to
make improvements.
Gabriel Dechaine - Canaccord Genuity - Analyst
What kind of pricing increases are you getting in Q1 and Q2?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
I don't know the number, Gabriel. This is a case-by-case basis, so I cannot expand on this.
Gabriel Dechaine - Canaccord Genuity - Analyst
Okay and my last question is on the downside risk you have too in equity market correction. This might be a crude way of putting but before you have to increase
reserves for seg fund risk, you can withstand a 30% drop. If you were to reduce that downside sensitivity, so reduce the buffer to 25% or so, what kind of reserve
release would that trigger?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
I don't know why you're asking the question, Gabriel because this is not a situation that would happen.
Gabriel Dechaine - Canaccord Genuity - Analyst
It's mentioned by yourself, how you can actually reduce some of your sensitivities in areas like the equity markets to offset some downside to interest rates and just
maybe I'm looking in the wrong spot, but anyway let's follow up offline. Thanks.
Operator
Tom MacKinnon, BMO Capital Markets.
Tom MacKinnon - BMO Capital Markets - Analyst
Question -- two questions really, one is with respect to the CAD0.05 you made from favorable equity markets associated with the individual insurance. The TSX was
only up marginally in the quarter, I don't know, maybe a little over 1%, I'm wondering how you end up getting a CAD0.05 EPS gain from favorable equity markets
associated with the individual insurance. We don't really see that happening that often and the only times I've ever seen it happening before is when the TSX has been
going up like over 5% or 6%. So if you can elaborate how you got that CAD0.05 and whether or not that would be sustainable? And then, I've got the follow-up
questions. Thanks.
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Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
So, Tom, you're right. This is not totally aligned. We noticed for a certain number of quarters that the proxy that we provide to the marketplace was not as accurate as
we would have expected, but we don't have a better one to provide at the moment. So you have to keep in mind that in our UL policy because this is what we are talking
about here, there are many, many, many different investment options that the client could select, not just the Canadian equity stock market. So they could invest
overseas. They could invest in the US. They could invest in bonds. They could invest in a whole bunch of instruments. So the proxy has done pretty good over a period
of time, but this seems now to diverge a little bit. So that's the reason we gave you something but we question ourselves that maybe we should withdraw it because it's
not totally perfect.
Tom MacKinnon - BMO Capital Markets - Analyst
Alright, and you withdraw this feature from the product, I'm not sure what you mean with the product?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
No, we withdraw the proxy that we provide to you Tom. We know that it's not accurate, but this is the best one we could provide you at the moment. The alternative is
to withdraw it and give you the information on a quarterly basis.
Tom MacKinnon - BMO Capital Markets - Analyst
So, was this a bit of a catch up in terms of what we saw in the quarter? To this reserve or I mean, why was it significantly larger in this quarter?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It was larger because of the interest rate movements and because also of the premiums we collect on the contracts. So there had been more premiums that we collected
in the contracts than our projection, which means that we have more funds and which means that we have more basically, when you do the front-ending of your spread
that you have, you have more to front-end basically.
Tom MacKinnon - BMO Capital Markets - Analyst
Okay, so it's a bit of a mix issue?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It's a mix of a whole bunch of issues because there is premium, there is lapse, there is mortality, there is market, it's a mix of all these elements that build the
CAD0.05 up there and it is all within my core businesses, which is life insurance and it is all normal usual profit for me.
Tom MacKinnon - BMO Capital Markets - Analyst
Yes, but how much is this normal usual profit annually? Is there any way you can -- at least you must be looking at CAD0.20 of this annually?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
No, my proxy. Just look at what we disclosed to you in the past recent years and you will see that most of the time that metric is within plus or minus CAD0.04,
sometimes it will go to CAD0.05 or CAD0.06 very slightly but if you look to a track record of about two, three years you will see that we are within normal target range
and you get it every quarter.
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Tom MacKinnon - BMO Capital Markets - Analyst
Okay, so bit of fluctuation in this quarter. And then the other question really is on insurance sales seem to be picking up again in this quarter but the mix was
unfavorable and then you had to take a hit. So the strain was higher than you anticipated. How do you balance this? I mean do you want to have rapid growth in sales
with this growth in strain and what was it with respect to the product offering in the quarter that contributed to higher strain and how should we be looking at that going
forward?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
There was CAD0.02 attributable to that element in our earnings and it was 4% in term of proxy. Two reasons for the 4%. Excess premiums, half of it. You have seen
that these excess premiums were on the weak side. So it's half of the 4% and the other piece is the fact that we sold more whole life permanent level COI policies and
that's the other half. So what could you see for the future? We've maintained our guidance for the next quarters, which is basically 30% in Q2, 30% in Q3 and 25% in
Q4.
Tom MacKinnon - BMO Capital Markets - Analyst
Okay, so is there something attractive more about your level COI that would lead to a higher percentage of sales or I mean if we're trying to get more level COI, you're
going to have more strain, you might have good sales, but you're going to have more strain. Should we look at this quarter as a bit more of an anomaly. You just sold
more level COI or are you picking up more momentum in level COI here?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
Tom, this is not a large fluctuation. This is within normality I would say this type of fluctuation. Normand told you that we didn't get back the pipeline of high-end
products. When we get back that pipeline, usually you get more YRT rates and it's balancing the equation, and also I remind you that we reduced our rates by 4% in the
last quarter of 2014. So that helps on the level COI side. So that's the impact of these two elements that we see right now.
Operator
Doug Young, Desjardins Capital Markets.
Doug Young - Desjardins Capital Markets - Analyst
Hi, just, first question Rene, just to clarify on Tom's last question. You're answer on the individual insurance, you said it was an increase in whole life level COI or was
it UL level COI?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
For me, that's the same. We sold both in our product offerings so I combined both elements.
Doug Young - Desjardins Capital Markets - Analyst
Okay. So it's both. Okay. And when you talk about the 4% rate cut. That's on both the whole life and the UL level COI?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It was mostly on the UL level COI.
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Doug Young - Desjardins Capital Markets - Analyst
Mostly UL, okay and first question just around the group employee benefit side. I mean, you talked about mortality was poor but disability was fine. Can you talk a bit
about the health experience? Others have talked a little bit about adverse experience related to drug costs. Have you had any adverse experience on that side of the
group business?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
You know, we didn't have, it's not bad on employer employee plan on the mortality side, it's only CAD0.01. So it's not a big element and what I mentioned, I
mentioned that the good news was that once again on the LTD side and it's a third quarter in a row I think that we had good news on the LTD side. So we see some kind
of improvement out there. So the reality is that on the mortality side, all our sectors were on the same side of the equation this quarter, which could be normal, but most
of the time there are offsets, that time it didn't happen.
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
Doug is that we discussed mortality, we discussed disability, but we did not discuss the other health benefits, it's just that -- because it was neutral.
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It was neutral.
Doug Young - Desjardins Capital Markets - Analyst
So it wasn't an issue. Okay, it was neutral, okay, and then just on, you talked about your sales on the employee benefit side was up. You talked about having some
large, was it basically one large case or a few large cases on the employee benefit side and can you talk about where that was? Was that in Quebec? Was that outside of
Quebec?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
There are a few large cases. I would say there are some that are national. I kept the list somewhere but there was more than one. I think its four, I would say, large cases
but it's not one big case.
Doug Young - Desjardins Capital Markets - Analyst
And there was nothing -- were they national players or any of them based out of Quebec or was it mostly outside of Quebec?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
Well I wouldn't mention the name, the base or the head office in Montreal but it's a very Canadian company okay. (multiple speakers).
Doug Young - Desjardins Capital Markets - Analyst
Okay and then just lastly I don't know if this for Rene or Yvon but I don't usually pay much attention to value in your business, but what caught my eye, because value
in the business did decline 20% year-over-year and I know part of that is attributable to sales declines or a shift in sales mix and obviously the mutual fund business
coming off a little bit, but it looks like margins have come up. Just, I guess my question basically is should this level of decline be a concern and if it's not, why not?
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
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Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
Doug the metric is very sensitive to the movement in rates. So you see that the rates have been decreasing in 2014 compared to 2013. So, there was about a 100 basis
point decline in the discount rate that we use to calculate that value. So that's the major piece of the equation here. 50% of the decrease is explained by this. So that's the
first piece, the decrease in rates and it's like assuming that it's a permanent decrease and it's going to stay there.
So you know these rates move every time, first element. The second element, yes there was also some decrease in profit. We reduced our prices in individual life
insurance and also, with lower rates, you know that the costs of hedging our seg funds is increasing. So that's the two components and it explains another 30% of the
decrease. The last 20% is the level of our sales, and it's mostly the fact that the mutual funds are a bit on the weak side right now.
Doug Young - Desjardins Capital Markets - Analyst
And so really, the last part is the most important and it's really going to be predicated on you, turning around your mutual fund sales, is that a fair way to think of it?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
That's fair to say that.
Operator
(Operator Instructions) Darko Mihelic, RBC Capital Markets.
Darko Mihelic - RBC Capital Markets - Analyst
Just a couple of questions. Maybe you've answered the first question though, I want to revert back to your sort of guided range, if I were to understand when we sort of
look at the guidance on a quarterly basis and as we sort of take ourselves out to the end of this year, if we continue with the kind of mutual fund outflows that we had in
this quarter, how much will that move the needle in terms of your guidance on a quarterly basis? In other words by Q4, if we have this kind of outflow, how much
would it affect the guided number?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
To be honest with you Darko, I haven't done the math. So I don't know exactly what would be the impact, it's sure that the earning driving engine here is the overall
assets under management on the wealth management businesses. So for us, the good news is that the market has been strong and even if we had outflows on the mutual
fund side, we have very good inflows on the seg fund side and overall it was not too damaging.
Darko Mihelic - RBC Capital Markets - Analyst
Okay, and I guess maybe another way to ask the question is you pretty much have a CAD0.05 or CAD0.10 improvement in Q2 in your guided range, I'm just curious as
to what it is that propels the guided range so much in Q2? Is it just the seasonality or is there some sort of an assumption built in on the asset side?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It's both, Darko. There is significant seasonality in the numbers because you know that our first quarter is always weaker than all the rest of the year. So the seasonality
is a big piece of it for many different reasons for -- because of the seasonality of claims in our car dealers, because of seasonality of expenses. That's part of the equation
too. So there are many different components that create some seasonality as well as some assets and inflows built up on the wealth management side.
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MAY 07, 2015 / 03:30PM GMT, IAG.TO - Q1 2015 Industrial Alliance Insurance and Financial
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Darko Mihelic - RBC Capital Markets - Analyst
Okay. And then maybe just Rene, just the last question is I just want to confirm, I mean, every time I look at the expected profit, sometimes a large change has just
caused me to sort of rethink my model and when I look at the individual insurance, there's a big step up from the past eight quarter run rate, which is fine but just to
confirm, I mean now that we sort of set this, this is kind of a level that we should expect more or less for the next four quarters. Would that be fair statement?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
Yes, that's a fair statement.
Operator
Meny Grauman, Cormark Securities.
Meny Grauman - Cormark Securities - Analyst
Questions about acquisitions. At your last Investor Day you gave sort of the menu of acquisition preferences. At the top of list was retail wealth management
manufacturing and just wondering whether the challenges you're having on the mutual fund side, does that increase the urgency here or does that make it less of a
priority. Wanting your thoughts about that?
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
It's Yvon Charest. It does not change our strategy. You know Normand has mentioned the many, many action plans that we have implemented during the last nine
months. So that and we think and we believe we have good solutions on which we are working. The acquisition strategy, I saw it as a kind of just separate file
altogether. We don't have a view that says "oh my gosh", the only way to improve the net sales is to go for an acquisition. So we see that as two separate files.
Operator
(Operator Instructions) Mario Mendonca, TD Securities.
Mario Mendonca - TD Securities - Analyst
Rene, can we revisit the inter-relationship or the relationship that is between expected profit and experience gains specifically in the individual insurance segment. The
big increase in expected profit, what I would like to understand better is the extent to which that increase reflects much a greater in force business or a change in margin
or expected margins?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
What it reflects mostly Mario, is what we disclosed at the Investor Day last year. So we disclosed a better margin basically last year at the Investor Day and that's the
major piece of it. The second element that we have out there is the fact that if you look at the number of last year, you see that we were probably on the conservative
side on the expected profit because there was almost no growth from 2013 to 2014 and we have generated some experience gains last year in individual life insurance.
So we just get back to a normal growth rate on our in force plus the element that we have disclosed at the Investor Day.
Mario Mendonca - TD Securities - Analyst
Now the higher margin, what assumptions in particular would have driven the higher margin and ultimately the higher expected profit?
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Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
It was all related to the additional protection, the additional conservatism that we built in our stock market assumptions.
Mario Mendonca - TD Securities - Analyst
I'm sorry, I'm not sure if I follow. We are talking about the --Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
If you get back Mario to the Investor Day you will see that we widened our corridor, we put more margins out there and this is that additional margin that flows in.
Mario Mendonca - TD Securities - Analyst
Okay. So I'll go to the heart of the question. The heart of the question is when I see expected profit move this way, what I become sensitive to is that we'll see more
experience losses going forward because some of those reserves have been moved up from let's call it -- yes, you've moved the reserves into PfADs so that's really what
I'm getting at, is there some potential here that estimated to (inaudible). Is there any potential we'll see the higher experience losses?
Rene Chabot - Industrial Alliance Insurance and Financial Services Inc. - SVP, Chief Actuary
This is not -- I don't think it's going to be case Mario. The way it works, I don't think it's going to be the case. It's more the other piece of the equation. If you look
at 2014 compared to 2013, there was a zero growth. This year, it means that I have probably about 8% growth as a normal level of profit, if I forget the other pieces.
So does it mean is that would I be able to deliver that 8% growth? Because last year I feel I was a bit too much conservative and you see it in my experience gains, that's
going to be a key element in my point of view and the good news is that the first quarter seems to be correct with respect to that aspect.
Doug Young - Desjardins Capital Markets - Analyst
Okay, I think I follow that. Then a question more broadly Yvon for you. Do you see any difference in Industrial Alliance's ability to compete with the larger insurers
today versus say five years ago or even 10 years ago. You've been around from the beginning and do you find it more difficult for the Company to compete with the
larger players either from a scale perspective, pricing, is there anything that would make it more challenging now?
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
I will first tell you my answer and then explain it. I don't see more difficulty now and you know you have to look at the two main lines of business where we are active
retail insurance and seg funds. Yes, in retail insurance, we made the decision to better balance sales, profit, and capital. If you just take a small rule of thumb and you
look at our profit in that kind of business in percentage of premium, you would see, and I guess I'd be number one in Canada. So we made the decision to ensure that
we'll have enough profit in that line of business and I like the idea that now we are back in sales. So profit is relatively strong and we are back in sales. This is just great
the way I see it. When you look at our market share in terms of number of policies that are being sold, we are number three in Canada.
So we still have a pretty good cost structure versus peers. You look at seg funds and we are just -- we came back quite nicely during the last two years. We are highly
positive in terms of sales. We have been in the top three in term of sales for quite a few quarters. My people told me that I guess it was in February or March that we
were even Number 1. We have been positive in net sales of seg funds while the industry was negative last year.
So, I feel good about the core of our operations and these two lines of business together with mutual fund account for slightly more than 85% of net income and then
I've got the dealer services, where we think that our strategic positioning is pretty good. So where we have to be prudent in our operations, it is in our two smaller lines
of business. So employee plans, where we suffered more rapidly than the other guys. Everyone now is suffering on disability and it seems that we have suffered before
the competition, but we have solved, I hope and I guess, the issue before them.
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So it says more on the group side that we have to make sure that we focus on the right spot, the right niches that we avoid trying competing directly with them, but on
the retail side and I will end up with this. If you compare net income apple-to-apple in Canada with peers, for two of the big three, our net income in Canada is 50% of
them and for the third one, our net income is 78% of the third Big 3. So it means that we have a pretty strong operation in our core business in Canada.
Mario Mendonca - TD Securities - Analyst
So if there's any disadvantage, it would only be in the diversification offered by the international businesses of the larger companies. That might be the only way to?
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
Yes, you are right in saying Mario that the more lines of business you are active in, the more you could choose every year where you'd like to invest your capital. And
on this, I'm glad that we started our operation in the US in 2010, in a kind of niche operation within retail insurance, an operation that is not capital intensive because of
short duration and I'm pleased to see that the proportion of sales in the US versus the total has been increasing nicely so that we have a base on which we could build.
Operator
Sumit Malhotra, Scotia Capital.
Sumit Malhotra - Scotia Securities - Analyst
First for Normand or Rene, just to come back to the mutual fund business. I'm hoping you can confirm or update some numbers for me. In the past and in some of your
other disclosures, you've told us that there was roughly CAD1 billion of mutual fund AUM that was left in the Laurentian Bank channel and I think in 2014, you had
outflows of in and around of CAD400 million. First off, I just want to confirm those are correct and/or what the update on those numbers is now in terms of AUM left
and if it's around that billion dollar mark, are you operating with the view that, that drag, if it's on the same range is going to be with the Company for at least the next
two years?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
Normand Pepin, your numbers are right. If I look into the future. What I could say, you can see that the redemptions are starting to taper down. You know, that means
we still had lot of redemptions in the first quarter, but if I compare the first quarter 2015 to the first quarter 2014, it was less. So obviously there are less assets, but the
redemptions are going down. Now they will start impacting us less and less.
Sumit Malhotra - Scotia Securities - Analyst
So just to make sure I have this right so then of the -- what is the balance that's left in the channel now?
Normand Pepin - Industrial Alliance Insurance and Financial Services Inc. - EVP
I didn't check for the end of this quarter but like you said, the last quarter was around CAD1 billion. So maybe that were redemptions of about CAD100 million this
quarter and you have to look at the marketing impact. So I would say there are probably, it's a bit under CAD1 billion.
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Sumit Malhotra - Scotia Securities - Analyst
And then if I bring this maybe back to Yvon and I think this was touched on earlier, in terms of your outlook on acquisitions, at the Investor Day in June, you did give
us what I'll call a pecking order in terms of where your interests lay as you looked at the marketplace. Distribution was somewhere middle of the pack on that list. I'm
not directly tying these together, but obviously this Laurentian Bank experience has re-emphasized the importance of distribution. Why was that one lower on your list
of priorities and is there maybe some alternative distribution that you're considering as you look to how you want to position individual wealth for the future?
Yvon Charest - Industrial Alliance Insurance and Financial Services Inc. - President and CEO
If I may, its Yvon Charest, what we say there, and obviously we all know that distribution is the core of the operations, and mind you, if you look at our mutual fund
operations, right now we have about 40% of gross sales coming either from affiliated channel or strategic accounts. So it is a significant percentage and we are trying to
increase that percentage. What happens though is that we have already a lot of AUA on which we could tap and try to turn them into AUM, because if you just forget
the banks, we might have the second largest mutual fund broker dealer operation in Canada right now.
And our priority has been more to ensure that we have a good solution to transfer a good proportion of AUA to AUM and once we'll be more comfortable with that,
certainly it'll be easier for us to buy some more and to buy them at a different price. So I think that explains why we said that it was the mutual fund manufacturing
business that we wanted the most at the Investor Day last fall. And we also said there that we had two or three good niches and what we like with niches is that they
have a superior return and this is why we had some interest on this. So it was not because we were not that interested by distribution, but it's simply that we had more
interest somewhere else.
Operator
And there are no further questions from the phone lines and I'll turn the call back to Ms. Pollock.
Grace Pollock - Industrial Alliance Insurance and Financial Services Inc. - IR
Thank you. So, this concludes our conference call today. If you have any further questions, please call us at 418-780-5945. Thanks for joining us today.
Operator
And ladies and gentlemen, that does conclude the conference call for today. We thank you once again for your participation and ask that you please disconnect your
lines.
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