The acquisition of MGA PPI Management Inc. by iA Financial Group took another bite out of the holding company’s consolidated results in the first quarter of 2020.

In its quarterly management report, iA said it “recognized a goodwill impairment of $24.0 million on a non-taxable basis,” which amounts to a decrease in earnings per share of $0.22. 

iA stated in its report to shareholders that it recognized this impairment of goodwill in General Expenses in the Income Statement of PPI Management Inc. “Following effects of the COVID-19 pandemic, the Company reviewed the financial projections of PPI Management Inc.”

COVID-19 the culprit

In the first quarter of 2020, iA reported net income of $39.1 million, equal to earnings per share of $0.36. In the same quarter of 2019, its net earnings were $151.1 million, for earnings per share of $1.40. This represents a drop of $112 million, or $1.04 per share, mainly due to COVID-19.

iA evaluates the total negative impact of the pandemic on its income per share at $1.12 in Q1 2020, including the negative impact of $0.22 linked to the impairment of PPI goodwill. This represents a net loss of about $120 million, Pierre Picard, public relations manager at iA, told Insurance Portal.

In general, firms adjust goodwill according to the gap between the financial value identified during an acquisition and market value after a given period.

In this case, the adjustment of PPI goodwill “mainly stems from the COVID-19 pandemic and is explained by an increase in the risk premium used in the projection discount rate and a temporary decrease in projected future revenues,” iA’s Q1 2020 management report reads.

Commission income “lower than expected” 

On top of the impairment of its goodwill on iA general expenses, PPI also dragged down iA’s results in the individual insurance sector.

The downturn in iA net earnings in Q1 2020 is notably explained by a net loss in individual insurance experience of $31.2 million after taxes, corresponding to a $0.29 decline in earnings per share.

Among other factors, iA attributes this net loss in individual insurance experience to commission income from the PPI subsidiary being “lower than expected.” This led to a $0.01 decrease in earnings per share in this segment, iA adds. The corresponding net loss is about $1.1 million, Picard told Insurance Portal

At a conference call that follows each announcement of quarterly results, financial analysts grilled the iA executives on this topic.

Sales in the social distancing era

In addition, iA mentioned that the decline in commission income following a sales slowdown is due to social distancing during the COVID-19 crisis, and the technological challenges it raises.

What is happening with PPI right now and with all MGAs in Canada and even the US is that sales distributors have to move from face-to-face meetings to non-face-to-face meetings,” Jacques Potvin, Executive VP, CFO & Chief Actuary of iA Financial Group explained. “Also, keep in mind that PPI does business in the very high-end market where it’s impossible to do medical tests. So the impairment is really temporary regarding revenue,” he continued. iA expects to see that revenue “decreasing in 2020, and probably 2021,” Potvin added.

Potvin prefaced his talk by highlighting the fact that all the results were caused by COVID-19. He said that “up to mid-March, PPI recent results were in line with our projections.”

Accounting rule to blame?

Although he admits that the PPI results have been hit by COVID-19, Potvin insists that the setback is temporary and should not have required iA to impair PPI goodwill. The company was simply obliged to follow an accounting rule.

What we have here is an accounting rule…that normally should be for permanent impairment. Business-wise, we see that as a temporary impairment but unfortunately, we have to follow the accounting rule. We had to recognize that in the accounting formula for the test of impairment. So that's really what explained PPI,” Potvin said.

This view was backed by iA Financial Group President and CEO Denis Ricard. “The accounting rules are the accounting rules. And the fact is they are one-sided…we believe that long-term, the value of PPI is not diminished. But because the accounting rules force us to look at the short-term impact on the cash flows or revenues and at the same time assume a higher discount rate, —we had to take a hit,” he said.

Now when things go back to normal, guess what, the accounting rules will not allow the organization to put back the value in the balance sheet,” Ricard adds.

Revising objectives for 2020

To better face the challenges raised by COVID-19, iA “has changed some of [its] priorities” for 2020, Denis Ricard told the analysts. For one, the firm plans to boost its investment in digital technology. “Everything that has to do with improving the distribution experience like non-face-to-face, end-to-end processes, we've put our money there because we want to make sure that the revenues are going to be there,” he explained.

Even though we had already started a lot of digital initiatives over the last several years, we have accelerated the investments that we're making there. So at this point, we are tightening up our expenditure, but we are reallocating it towards where it's going to make the biggest difference in the COVID environment,” he says.

As iA is investing in digital capabilities “like never, never before”, Denis Ricard confirms that his team and himself “are ready to seize the opportunities” that arise.