iA Financial's Q1 2024 earnings call was a performance of carefully orchestrated messaging, balancing strong core EPS growth with cautious pronouncements about their US Dealer Services division. While analysts focused on near-term profitability concerns, a deeper dive into the transcripts reveals a subtle shift in iA's narrative around this troubled acquisition. The guarded optimism of past calls has given way to a more hesitant tone, raising a critical question: Is iA quietly preparing to wind down its US Dealer Services experiment?

The saga of iA's US Dealer Services venture began with the acquisition of IAS in 2020, a move intended to leverage iA's Canadian leadership in the F&I market into a major US expansion. The timing, however, couldn't have been worse. The pandemic wreaked havoc on the auto industry, disrupting supply chains, inflating vehicle prices, and pushing financing costs to painful highs for consumers. The result: a significant decline in F&I product sales, leaving iA's ambitious US foray struggling to gain traction.

Throughout 2023, iA maintained a confident stance, attributing the division's woes to external market factors and emphasizing their commitment to organic growth. "Patience" was the mantra, as executives assured investors that a recovery was inevitable, albeit gradual. However, the Q1 2024 earnings call reveals a notable change in this messaging.

Denis Ricard, iA's President and CEO, now describes the US Dealer Services performance as "gradually improving" but admits to needing "a couple of more quarters to show it." This hesitancy is a stark contrast to his previous pronouncements of a "well-thought strategy" and confidence in the market's eventual rebound. Ricard's cautious tone suggests a growing recognition that external factors alone might not be the culprit for the division's continued struggles.

Further fueling this hypothesis is the notable absence of any mention of "organic growth" for the US Dealer Services in iA's 2024 outlook. This omission is particularly striking considering the emphasis placed on organic growth in previous calls. The shift suggests a potential move away from prioritizing aggressive expansion in favor of a more conservative approach, possibly focused on maximizing the profitability of existing accounts rather than adding new ones.

Adding more weight to this argument is iA's increased focus on cost control within the US Dealer Services division. While past calls emphasized investments in systems integration, the Q1 2024 transcript reveals a shift towards "tightening up on expenses" and "improving margins." Eric Jobin, iA's CFO, even acknowledges plans to eliminate some positions in the division, signaling a clear intent to curtail spending and prioritize profitability.

While these measures could simply reflect a prudent response to the challenging market conditions, the combined shift in iA's narrative, from aggressive growth to cautious profitability, suggests a more significant strategic shift might be underway. The lack of concrete numbers regarding cost savings further fuels this hypothesis. By withholding specific details, iA might be buying time to assess the division's viability and explore potential exit strategies without alarming investors.

This hypothesis is further supported by iA's decision to increase its NCIB from 5% to 8%, effectively broadening its options for capital deployment. This move signals a recognition that acquisitions might not be the immediate priority for capital allocation, especially considering Ricard's admission that "there are greater opportunities for certain business units such as our U.S. Operations." This statement implicitly suggests that US Dealer Services might not be the focal point for M&A activities in the near future, reinforcing the possibility of a strategic retreat.

Key Numbers

The modest year-over-year sales growth in Q1 2024, despite the improved inventory situation and lower vehicle prices, suggests a deeper underlying challenge within the division. This, coupled with iA's strong capital position and unchanged organic capital generation target, raises the question of why they aren't more aggressively pursuing acquisitions, especially in US life insurance where Ricard sees "greater opportunities."

The answer might lie in a changing internal assessment of US Dealer Services. The division's continued struggles, despite iA's efforts, might be pushing the company towards a more conservative approach, focused on stabilizing the business and evaluating long-term viability. This shift could eventually lead to a decision to divest the division, effectively acknowledging the challenges of replicating their Canadian success in the complex and competitive US F&I market.

US Dealer Services Sales Performance

While iA hasn't explicitly confirmed this hypothesis, the subtle but significant shifts in their messaging suggest a strategic reassessment of US Dealer Services might be underway. Investors should closely monitor future earnings calls for more concrete evidence of this potential strategic retreat. The coming quarters will reveal whether iA's "guarded optimism" truly reflects a belief in the division's eventual recovery or a calculated attempt to mask a strategic shift towards a less ambitious US F&I strategy.

"Fun Fact: iA Financial is one of the oldest insurance companies in Canada, founded in 1892 as "Industrial Alliance." This deep history might contribute to their conservative approach to capital allocation and their focus on long-term value creation."