Q4 2019 Earnings Call
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Good morning, and welcome to them and you're like financial Q4, 2019 financial results Conference call. Your host for today will be much news Adrian O'neil. Please go ahead Mr. O'neil.
Thank you and good morning.
<unk> earnings conference call to discuss our fourth quarter and.
29.
Our earnings release.
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Statistical package.
Slides for today's call are available on the Investor Relations section of our website.
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We will begin today's presentation with an overview of our fourth quarter and year end highlight and an update on our strategic priorities.
Gory, our president and Chief Executive Officer.
Following voice remarks filled with <unk>, our chief financial Officer will discuss the Companys financial and operating results.
After the prepared remarks.
Good afternoon answer portion of the call.
We are aiming to conclude the call in one hour today and that each participant to adhere to will limit.
Yes.
If you have additional questions. Please review and we will do you worry about to respond to call question.
Before we start please refer to slide two for a caution on forward looking statement.
Like 35 for a note on the use of non-GAAP financial measures in this presentation.
No that certain material factors for assumptions are tied in making forward looking statements and actual results may differ materially from what is Stephen.
The flight also indicates where to find more information on these topics and the factors that could cause actual results to differ materially from those data.
With that I'd like to turn the call over to ROI, Our President and Chief Executive Officer right.
The way you're in good morning, everyone and thank you for joining us today.
Turning to slide five yesterday, we announced our fourth quarter and full year 2000, I'd seen financial results. We delivered net income of $1.2 billion more than doubled the prior year quarter and core earnings of $1.5 billion, an increase of 10% versus the fourth quarter 2018.
Core are we was solid at 12.5%, including the impacts of portfolio optimization actions.
The core EBITDA margin.
And asset management business increased 90 basis points versus the fourth quarter 2018, as we continued to build Scott.
We returned to positive net flows delivering net inflows of $4.9 billion, an increase of $13.9 billion compared to the prior year quarter.
Finally, we achieved our medium term leverage target of 20.6 after taking into account the 500 million dollar debt redemption in January of this year.
Turning to slide six.
We continue to deliver strong brought on by the full you basis and five year time horizon.
29 team, we delivered net income of $5.6 billion, an increase of $800 million from the prior year.
The year over year increase was driven by growth in core earnings the Nonrecurrence, although 2018 restructuring charge and higher investment related experience gains, partially offset by 500 million dollar charge related to updated ultimate reinvestment rate assumption assumptions issued by the Canadian actuarial standards Board.
Core earnings of $6 billion increased 5% from the prior year driven by double digit growth in Asia and growth in the U.S. as well as global wealth and asset management.
This was partially offset by portfolio optimization actions undertaken over the last 12 months.
Unfavorable policyholder experience and the impact of low and your business volumes in Japan.
And it's also worth noting that Corey P.S. grew 8% from the prior year, which we believe is a good result, and reflects resilience and the strength of our global franchise, given the headwinds that we face throughout 20, not seen including lower interest rates secular challenges in asset management and lower new business volumes in Japan related.
To a change in tax regulation.
You business value generation increased 15% compared to the prior year and reached $2 billion driven by double digit growth in Hong Kong I use your <unk>, the U.S. and Canada, partially offset by a decline in Japan.
Turning to slide seven.
We're delivering on our ambition and generated top cool total shareholder returns in 29 team.
And over the last three years Manualize total shareholder return ranked in the second quarter compared to a proxy piece, which is an improvement from the third coal tar rank over the last five years.
Despite out progress, we still have more to do.
We believe that as we continue to live a strong results execute against that bought priorities and make progress against the targets that we've established.
We'll continue to unlock shareholder value.
On the right hand side of this slide you'll notice that in the last five years, we delivered a compound annual dividend growth rate of 11%.
Which is being supported by steady earnings growth.
On the basis about strong operating results in 2019 and outlook for growth going forward. The board has approved a 12% increase to our quarterly dividend.
Turning to slide eight we're executing on our five priorities and I'm pleased with the progress that we made in 29 thing.
We made significant progress on portfolio optimization in 2019, releasing an additional $2.1 billion of capital.
As a result, I'm very pleased to announce that we've successfully completed out 2022 target releasing $5 million of capital.
Three years ahead of schedule.
Well, we've achieved that target will continue to pursue opportunities to further optimize our legacy portfolio.
This will include both organic and inorganic initiative and we will execute.
They are in the best interests about shareholders.
We remain focused on aggressively managing cost to drive expense efficiency.
Which resulted in modest score expense growth of 3% on a fully basis, which is less than half of our historic average no. No. This was accomplished during a period when we made significant investments in technology and infrastructure to support our future growth.
We delivered total expense savings of $700 million for the year, putting us in a great position to achieve our target of $1 billion of expense efficiencies by 2022.
Bill will provide some additional details on the success of the number of our expense initiatives.
Third priority is to accelerate growth at a high potential businesses and we aspire to have these businesses generate two thirds of total company core earnings by 2000 2022.
In 2019, a hot potential businesses represented 57% of total core earnings versus 55% in the prior year.
And core expense growth outpaced our other businesses by 11 percentage points.
In Asia, we entered into a long term strategic partnership with a leading online medical platform in mainland China.
And agreed to answering <unk> asset management joint venture agreement in India, with Mahindra Finance [noise].
We continue to expand out behavioral insurance product base globally with the launch of many luck moving Vietnam in Cambodia, and the introduction of the group insurance, many like vitality program in Canada.
And then our global wealth and asset management business, the retail and retirement business lines delivered net inflows of approximately $5 billion for the full year.
At both parties about our customers and how we're using technology to attract engage and retain customers by delivering an outstanding experience.
We achieved a net promoter score of eight in 2019, which is a seven point improvement from the 27 seen baseline.
At one point decline from 28 thing.
In Asia, we launched an end to end online insurance platform in collaboration with CBS Bank for the Singapore market and were recognized as the best life insurance companies the digital transformation in Vietnam.
And in our global wealth and asset management business, we launched an industry first voice enabled retirement product using Alexa.
A final priority is high performing team a target is to achieve top quartile employee engagement compared to global financial services and insurance peers by 2022.
29 seen employee engagement, so they had a spacing right greater than 90% and we saw an eight point improvement from the prior year.
I'm encouraged by a progress and believe it when making meaningful headway towards building a high performing team here at manually and consistently achieving top quartile employee engagement.
Moving to slide nine in conclusion, we have an incredible global franchise that is clearly focused on making decisions easier in life better for out nearly 13 million customers.
We achieved solid operating operating results in 2019 delivered top quartile shareholder returns and made important progress towards our ambition or becoming the most digital customer centric company in our industry.
We continue to execute on how far strategic priorities achieved 2022 portfolio optimization capital target three is ahead of schedule.
Executed on initiatives that reduced expenses by $700 million and a trending in the right direction on the remaining targets.
We continue to strengthen our capital position.
And have returned over $900 million with capital to shareholders. Since the start of the program when we consider the net impact of the NCR the andrich.
Once we believe the drip candy and effective capital management tool in order to avoid any confusion at this time, we've decided to no longer issue shares from treasury at a discount in connection with the dividend reinvestment program.
We'll continue to use the answer I'd to return capital to shareholders as the value of our shares fluctuates.
I'm exceptionally proud of the commitment and winning mindset of our employees around the world and their enthusiasm is critical to our success.
Looking ahead to 2020, we will remain focused on executing on our strategy and I'm confident that as we deliver against the plan. We've laid out will unlock significant unlocking value for our customers employees and shareholders.
Phil Wetherington will now review the highlights about financial results Phil.
Thank you ROI and good morning, everyone turning to slide 11, and our financial performance for the fourth quarter on full year.
That's already mentioned in 2019, we delivered solid operating results consistent progress against our five priorities and generated top quartile shareholder returns about fourth quarter metrics would generally positive.
I will highlight the key drivers of our fourth quarter on full year performance with reference to the next few slides.
Turning to slide 12, we generated core earnings in the fourth quarter of $1.5 billion up 10% from the prior year quarter on a constant exchange rate basis.
The increase and core earnings was primarily driven by enforce adds new business growth than the U.S., Hong Kong and Asia other.
Hi, average asset levels, and global wealth and asset management.
The favorable impact of strong equity markets on seed money investments in our surface portfolio compared with losses in the fourth quarter of 2018.
This was partially offset by unfavorable policyholder experience in Canada, and the U.S. low any business volumes in Japan, and the impact of actions taken over the last 12 months to improve the capital efficiency about legacy businesses.
Net income attributed to shareholders was $1.2 billion in the fourth quarter, which more than doubled compared with prior year period, primarily due to strong investment related experience gains versus losses in the fourth quarter of 2018, and a lower charge related to the direct impact.
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Of note, we delivered strong investment related experience gains of $292 million in the quarter driven by fixed income reinvestment gains higher than expected returns on older and favorable credits experience.
Full year investment related experience with a gain of $766 million $400 million of which was reported in core earnings.
The loss from the direct and type impact as interest rates in the fourth quarter was driven by narrowing corporate spreads and the steepening of the U.S. and Canadian dollar yield curves, partially offset by realized gains on the favorable for cell phones.
The impact of equity markets. This quarter was a gain of $125 million inline without disclosed sensitivities.
We took a 34 million dollar charge related to two reinsurance transactions in Canada, which ceded the mortality risk on up close palm block.
Slide 13 shows our source of earnings analysis.
Expected profit on enforce increased 6% on a constant exchange rate basis, driven by Inforce business growth in the U.S., Hong Kong and Asia other.
New business gains were modestly higher and higher than the prior year quarter as the impact of the double digit sales growth in Asia other than the U.S. was partially offset by lower sales volumes in Japan, and variability and large case group insurance sales in Canada.
Overall policyholder experience in the fourth quarter was unfavorable driven by unfavorable claims related experience in our Canadian retail insurance business and adverse lapse related experience in our U.S. life insurance business.
And the U.S., we saw lower than expected levels of debt, which resulted in a gain in the life business and an offsetting losses in the long term care business.
Lower mortality in the U.S. is related to seasonality and we do not believe it to be reflective of a longer term trends.
Core earnings on surplus increase compared with the prior year quarter, primarily due to mark to market gains on seed money investments in the corporate and other segments, partially offset by lower gains on available for sale equities.
Turning to slide 14, we still have a double digit core earnings growth in our global wealth and asset management business driven by higher average asset levels.
In the U.S. core earnings increased by 8% driven by higher sales volumes tax benefits from the closure of prior tax years and gains from a variable annuity transfer program, partially offset by the impact of actions taken over the last 12 months to improve the capital efficiency of our legacy businesses.
And unfavorable policyholder experience compared with net gains in the prior year quarter.
Core earnings in Asia increased by 5% on a constant exchange rate basis, driven by higher new business volumes and enforce growth in Hong Kong and Asia, other partially offset by low any business volumes in Japan.
Core earnings in our Canadian business decreased 6%, primarily due to the impact of unfavorable policyholder experience in our retail insurance business.
On a full year basis core earnings increased 5% driven by enforced enforce growth in Asia, and global wealth and asset management, a higher contribution from new business higher investment income on the non recurrence off 2018 market losses on seed money investments in our surface portfolio.
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These items were partially offset by the impact on earnings and actions on legacy businesses unfavorable policyholder experience on the impact of lower new business volumes in Japan.
Turning to slide 15, we delivered strong core our early of 13.1 cents in 2019, despite the impact of portfolio optimization actions.
Our focus is on achieving sustainable consistent performance for each metric through the cycle and we remain committed to our medium term target.
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Turning to slide 16 in the fourth quarter, we released $1.2 billion of capital, bringing our total capital release from portfolio optimization to $5.1 billion.
We're pleased to have achieved 2022 target three years ahead of schedule.
Initiatives in the fourth quarter included transferring lease renewal risk rebalancing, our investment portfolio related to previously announced transactions and executing to reinsurance agreements in Canada, along with by the items.
We remain committed to continuing to optimize our remaining legacy portfolio through the pursuit of solutions, which are in the best interest of our shareholders.
In the spirit of transparency, we will continue to report our additional progress at regular intervals.
Turning to slide 17, the like cap ratio for our primary operating company was strong at 140% at the end of the fourth quarter, which equates to $22 billion of capital above the supervisory target.
The six points decline in the ratio was driven by two debt redemptions totaling $1.5 billion and the impact of higher risk free rates and narrowing corporate spreads partially offset by the benefit of portfolio optimization actions.
It's worth noting that the impact of the redemption of $500 million of debt. This occurred on January 15, 2020 is included in the fourth quarter Lifepath ratio. This is consistent with AWS fee regulations, whereby the period as inclusion is based on when the decision to redeem is announced which.
In this case was November 2019.
We're pleased to have achieved our medium term financial leverage targets of 25% after taking into account the 500 million dollar debt redemption. This occurred in January 2020.
The 350 basis points decline compared to fourth quarter of 2018 was driven by the positive impact on earnings messes dividends.
Redemption of $1.5 billion of debt and the increase in the value office I available for sale securities, which more than offset the next impact of our share buyback fans dividend reinvestment programs as well as the impact of a stronger Canadian dollar.
While the like cap ratio was impacted by the previously mentioned that redemptions the benefit will not be reflected in the leverage ratio until the first quarter of Twentytwenty all else being equal the redemption will reduce our leverage ratio by an additional 60 basis points to 24.5.
Sent.
I'm confident that we will continue to maintain the strong capital position with financial flexibility.
And as Roy mentioned, we've decided to no longer issue shares from Treasury as a discount in connection with the dividend reinvestment program. Instead, we will purchase shares in the open market.
Turning to slide 18, we continued to make meaningful progress towards our target of $1 billion, a pre tax expense efficiencies by 2022 and delivered $400 million of incremental sales in 2019 on $700 million program to date.
The previously announced expense initiatives have already delivered significant benefits.
Our voluntary exit and early retirement programs as well as other restructuring initiatives have delivered 1900 departures, including 300 departures in the second half of 29 team.
We streamlined our real estate footprint in the USA and Canada, and we'll continue to look for opportunities globally.
We have implemented automation and robotic solutions to drive efficiencies and improved customer experience and we're now using artificial intelligence to adjudicates transactions.
Finally, we renegotiated various contracts with third party vendors.
In total our expense efficiency initiatives delivered bottomline savings of $300 million in 2018 growing to $700 million in 2019.
We are well positioned to achieve our targets of $1 billion of expense efficiencies on or ahead of schedule.
Turning to slide 19 and core expenses.
Our continued cost discipline is delivering meaningful benefits, which are evident throughout modest core expense growth.
On a constant exchange rate basis core expenses grew at 5% in the fourth quarter and a modest 3% for the full year, including severance costs and increased investment in our infrastructure and digital initiatives in aggregate. These additional costs exceeded $100 million.
Modest core expense growth combined with pre tax core earnings growth of 3% resulted in a 29 team core expense efficiency ratio of 52% inline with the prior year.
Slide 20 shows our new business value generation and a PE sales.
The fourth quarter of 2019, we deliver you business value of $526 million up 4% from the prior year quarter.
In Asia, new business value decreased by 4% compared with the fourth quarter of 2018, reflecting a decline in Japan sales, partially offset by higher sales in Japan, and a more favorable business mix in Asia other.
In Canada, new business value increased by 16% from the prior quarter driven by high individual insurance sales I think more favorable business mix and group insurance and in the U.S. new business value increased by 61% primary primarily as a result of higher.
Sales.
For the full year, new business funny was $2 billion up 15 cents compared with 2018.
In the fourth quarter of 2019, we delivered eight the sales of $1.5 billion, which were largely inline with the prior year period, despite headwinds in Japan.
This reflects double digit sales growth in Hong Kong Asia, other us offset by the impact of tax changes on Coty sales in Japan, and lower sales in Canada due to the variability of large case group insurance sales.
For the full year IP sales of $6 billion increased 7% compared to 2018, reflecting growth in all segments.
Turning to slide 21.
Our global wealth and asset management business generated net inflows of $4.9 billion in the fourth quarter compared with net outflows of $9 billion in the prior year quarter with positive contributions from all business lines and geographies.
In the U.S. net inflows improved for the fourth consecutive quarter due to higher gross flows from all business lines and lower retail redemptions amid improved market conditions.
Canada net flows reflects the continued sales momentum in retail and the funding is several large fixed income institutional mandates.
Despite the strong performance in the fourth quarter, we experienced net outflows of point $9 billion for the full year driven by higher redemptions.
Institutional asset management business, most specifically the decision by one institutional clients in the third quarter of 2019 to internalize the management to several large primarily fixed income mandates.
Our core EBITDA margin was solid at 20, 27.3% up 90 basis points from the prior year quarter as we continue to build scale in our global wealth and asset management business.
Slide 22 outlines our medium term financial operating targets and our full year performance.
Core or are we exceeded our target for the second year in a row expense efficiency is trending in the rights direction and we have achieved a medium term portfolio optimization and leverage targets.
While core EPS growth for 2019 fell short of our medium term target. We remained confident in delivering 10% to 12% core EPS growth over the medium term given the focus on a five strategic priorities and strong track record of execution.
Before we open the call to questions I will turn it over to Adrian for some brief remarks on Investor day, Adrian Thanks, Phil turning to slide 23.
We're hosting an investor day on June 23, 2020, our offices in Toronto, Canada.
Save the date and registration details will follow later this month.
We look forward to seeing you there.
Operator, we will now open the call. This question.
Thank you Ms. O'neil.
We will now take questions from the telephone lines. If you have a question and you're using the speakerphone. Please lift your handset before making your selection. If you have a question. Please press star one on your telephone keypad to cancel the question. Please press the pound sign. Please press star one at this time, if you have a question.
Please parcel participants register thank you for your patience.
First question is from Sumit Malhotra from Scotia Bank. Please go ahead.
Thank you good morning.
First question is probably for a for Steve.
On the Canadian policyholder experience in the quarter you mentioned.
You mentioned there was some issues there and we've seen that from a couple of the other companies that reported last night as well any specifics you can provide.
As to as to what the issues were and and maybe we can.
Like about sustainability after that.
Sure Sumit.
Ill make a comment and pass it over to Mike for more color. What we saw in Canada in Q4, the driver of the negative experience was a large claims on our Canadian retail insurance business. It was a handful of large claims and it's not something that we've seen.
Seen very often we we looked at it in attributed to normal variability.
The other thing that's worth commenting on as we had been seeing very favorable group.
Claims experience and that moderated somewhat in.
In.
In Q4 was more neutral Mike I don't know if you have more to add on the group.
I think thats right, we're going to see some seasonality there is nothing.
Farming at this point in the individual claims.
We do think that that's just.
Normal volatility on the block that size.
So you know coming after the quarter and wish you normally do your actuarial assumptions just to see the experience line turn more negative than we've seen in oil it doesn't sound like you're saying, it's something that.
It is already on the on the watch list. If you will have to be reviewed in terms of reserve strengthening going forward is that accurate.
Correct as I said this act this large claims it's in.
Aberration in terms of what we've seen historically, so no trend there.
And second and last question is for Phil.
Does the removal of the discount on the drip have any impact another company considers share repurchases the to the Unsi IB and the discounting the drip were obviously announced at the same time.
You removed one of them does it does this have not having that that capital inflow. If you will via the heavier share issuance that comes with the discount does that change how you think about buybacks.
Hey, Sumant. Thanks to the question this is Phil.
So we've always looked at the at the anti be negative drip and Thats consistently how weve reported our progress and.
I think it is worth highlighting that when we look at out.
Capital deployment priorities and see IB does remain positive that and I think thats relevant in the context as the strong capital position hundred 40% like cut but in particular this course of given that we have achieved our medium term leverage targets I think it's worth saying that we do have substantial financial.
Next ability so when we when we look at the capital deployment priorities at the top of the list RIDEA is organic growth and continuing to invest in organic growth, particularly when we look at our ability to expand our distribution channels in Asia.
And also building the sky, the about global wealth and asset management business.
We also believe and sustainable dividend growth and that really is the context for the 12% increase in the dividends this quarter.
When appropriate we will buy back shares we continue but continue to believe that buying back shares is an efficient use of capital.
Thanks for time.
Thank you.
Next question is from Tom Mackinnon from BMO capital markets. Please go ahead.
Yes, thanks very much.
With respect to hitting the 5 billion target. The three years ahead of time in terms of capital free up.
I think is easy mentioned you you're going to you know sort of keep your put on the gas here and.
Look to further optimize the legacy portfolio.
Is there any a low hanging fruit still that didn't the legacy portfolio to optimize here. What are your next what are your plans with respect to this if you want to continue to.
You know move forward and go beyond this 5 billion dollar target.
Yeah. Thanks, Tom let me start and I'll hand over to into the.
As you highlight we're really pleased with the progress we've been making on portfolio optimization into achieved that goal threes ahead of schedule is obviously something that.
Where we're extremely proud off but perhaps more so was the tradeoff that we were able to Mike in terms of freeing up that capital and the net core earnings give on the five bill effectively on a full year vices of is actually less than $200 million and as we said earlier where not going.
While the victory flag at this point, we're going to continue to focus on.
Portfolio optimization, and making sure that were.
Looking for the most efficient use about capital. So further work both organic and inorganic is certainly.
On our own out horizon in what we're going to be absolutely laser focused on.
And we clearly feel that there's much more opportunity for us to progress on that front, but I'll, let the sort of share a little bit more on that and perhaps more will detail.
Yes. Thank you talk for the question is no no Peter said here I'd say, we're still working on some inorganic reinsurance transactions. So I think theres still some runway there so scenario will continue to focus on.
Though that in terms of where the team is spending its time, there's been a bit of a shift towards more on the organic side.
So this includes Inforce management.
Rate.
Buyouts and transfer programs claims management.
So I'm really actually quite excited about those opportunities I think there's even more runway to go in there.
Okay, Thanks, and as a follow up but assuming that the businesses that you freed up we're probably consuming more capital.
Is it to its a safe say that you're you're you have increased ability to sorted organically generate excess capital in your business now and it can you put any metric around or have you thought about trying to put any metric around which you just organically to free up in terms of capital outside of these.
Extra initiatives.
Especially given the fact that you got a 140 light cat.
Yes, Tom it's Steve.
Overall, we're happy with that the capital generation, whether it's with respect to portfolio optimization organic I don't think we harvested in terms of.
Looking at the generation of capital from that the businesses, where we've been lightening up but just overall.
In general very focused on continuing to generate capital.
Honestly.
Okay. Thanks.
Thank you for the next question is an area I'm on Duncan from TD Securities. Please go ahead.
Good morning.
Two questions for Phil So so when I look at the year.
It looks like a pretty strong year markets are great.
No issues on changes in assumptions solid experience very solid investment gains, but yet the company didnt meet that 10% to 12% target I.
I think.
I'm Democrat, there's about 5%, so where I'm getting at is does the 10% to 12%.
What kind of year does it take to generate 10% to 12% or maybe you could answer by saying what was it about 2019 that prevented you from making the target this year.
Hey, Mario Thanks to the question. This is Phil so the 10% to 12% target relates to core EPS growth fund in 2019, our core EPS growth was 8% so slightly short of that target range. That's correctly called out the historic experience is that we have achieved the.
In fact over achieved the 10 to 12 cents. When we look at 29 team. There was some specific factors that was suddenly headwinds for us.
The low interest rates environments of course is one.
That may be something that persist, but we are I think well prepared to be able to deal with a low interest rate environment. It was also a challenging time for the global wealth and asset management business, particularly off the back of the market declines we had seen in the fourth quarter of 2018, which presented a headwind throughout 2019 and then when we look at our.
Asia business the tax tax changes that we've seen around coli products in Japan that was a headwind and also the protests in Hong Kong were also a headwind for us to deal with and for us to get to 8% escort EPS growth in the year life that we're actually very pleased.
But with the outcome when I look forward from here.
There are factors that are quite different to the year ago. So if we look at where for example in wealth and asset management.
The are you I may landed at the end of 29 team was 16% above the level of 2018.
So I think that's.
You can see that through the numbers when you look at the earnings growth and whilst not wealth and asset management in Q4 of 15 cents I think thats potentially a tailwind.
The positive story for four Twentytwenty. So all in all we feel we feel good about a year ahead in the medium term targets that we have yeah. Marty let me just that I think thats, a great summary, but still I would also say that the eight the same core earnings per share.
Outcome in quite a challenged environment. A was also delivered despite the portfolio optimization actions and the earnings impact of all those actions off the back off a very solid 2018, starting point as well and as Phil said I feel that we really have strong women.
There are a lot of opportunities on the horizon, but this clearly not going to be a shortage of challenges either I think to think that 2020 will be without its challenges would be.
Incorrect.
Okay, and maybe just a quick follow up is there anything you would point as to a you'd have let's think about regarding the corona virus that could impact.
Next quarter or 2020 generally.
Yes, Thanks, Mario look it's really too early to say anything meaningful about the ground of ours at this point and certainly as it relates to a full cost the 2020, where obviously watching the situation very closely as is everyone else's. So has the business in that part of the world.
And obviously the safety about stop agents and customers is our highest priority, but from a full cost perspective. The message I'd leave you with is that it's way too early to make any predictions on how that will pan out at this point, we're watching it closely as we get more information will obviously be willing to share that.
Thank you.
Thank you.
Your next question is from Scott Chen from Canaccord Genuity. Please go ahead.
Good morning.
Just focus on on Japan noticed kind of the insurance sales were kind of where the key sales were kind of flattish quarter over quarter I thought that we kind of maybe see gradual improvement with the new regulations and maybe you could just provide an update on that.
Sure. Thanks for the question this is.
I mean, the Donnie has so so despite.
The headwinds.
In Japan as out of the new Datsun's governing golly, we weren't able to deliver the land of 5% quoting school.
In quarter, four and 11%.
For the for the full year, Oh, we continue to see very strong momentum in geographies like Hong Kong and other Asia. So despite some of the challenge challenges that the mentioned earlier in the call as Vas I think overall.
Got a pretty pleased with the zillion performance that we showed in Asia.
As far as Japan is concerned the sales, but at this at challenge on account of the Thats rules that pretty much came into force ane, partly offset E 19.
Delivered $45 million on golly as opposed to $51 million of Golden sales.
In.
Auditory, but the yield on year. The bad is then would obviously be challenged because we had an exceedingly strong aquatic Ford off but the 18 on backed off some strong momentum and at that point in time on on on coli now we're putting a number of initiate is in slide so first.
Lastly, we are launching a new coli brought out we are also launching a new FX life, a brought up with the more we.
We had expanding our distribution. So we had onboarding new EMG days to offer other wells and we can't brought out we've launched a more recently.
MSP channel in Japan on the back of the success that we had witnessed in Singapore as well as of yet looking at and taking actions on lead shaping up cost base in Japan, So as to drive ongoing efficiency in the Japanese markets. So number of.
Initiatives as you get down in the pipeline and we continue to watch the quality situation very closely.
Thanks, and my second question just on a global when nice total net inflow quarter 4.9 billion.
Compared to last year last quarter, you called out.
Some large fixed income mandates that were one and I was wondering if you can kind of quantify that like you did last quarter just to kind of see.
Maybe add to help us kind of think about the visibility going forward over the next few years.
Okay. Thanks, Scott its tolerance here, yes in terms of the fixed income mandates they weren't as material and so many other ones. We typically disclose I think it fits into millions. This was a number of smaller mandates lots on a go in that contributed to the corners. It was more wide based it wasn't one particular mandate. It was actually two different teams that was split so we feel quite good just about momentum.
I think if you look at particularly the net flows in the corner and just looking at how we're starting this year versus last year were just a completely different.
Net flows were positive as you as you would have seen across all geographies all business lines. We've got our we've had our fourth consecutive quarter of improvement in at phones in our U.S. business as well as our retail global product line and then gross flows were up from last quarter as well as from last year again across all geographies and all business lines, we feel we're starting from a position from UBS.
Strength and that was supported by some wins as you mentioned the acute in the fourth quarter strong marketshare, but our investment performance also improved across the franchise.
And we launched a new product in our front end markets business and private equity fund on fund and the corner that was successful in contributed so we feel quite good just about the broad based momentum, we haven't and our ability to continue to generate net flows over the medium and long term.
Great. Thank you.
Thank you next question is Chalmette Gabriel machines from National Bank Financial. Please go ahead.
Hi, Good morning quick numbers, one can you remind me of the earnings impact of the portfolio optimization.
And the.
Transaction, but you are executed on this year and what the I guess the full run rate would be a in 2020.
Sure. Thanks, Gabriel this is Phil so in the fourth quarter. The cumulative impact was in the order of $45 million and we look at the ongoing run rate impacts, including the actions we've taken in the fourth quarter.
Good rule of thumb, he would be about $50 million of course is solely looking $200 million on an annualized basis. If we compare the fourth quarter of 29 team to the fourth quarter 2018, the incremental impact on run rate that was in the order of $20 million. So in terms of the extent to.
Which as being a headwind thats in the order of two percentage points of growth.
Thank you.
And then my real question I guess.
In Japan, as well or was there anything else going on other than sales that led to the earnings dropped to the bid that take a step down in the quarter versus.
Through in Q3, and coldly in particular removed from older issue, but.
Oh, I guess, how does that compare in terms of bus stream or games or impact versus a product we felt across the region. There is one of the juiciest because if there's a fill slow down in other areas.
By other factors I'm, just wondering if that sort.
Sort of a linear.
Page measure.
So.
Thanks for the question. This is I mean again, so on Japan the difference.
You as you pointed out is on account of two reasons. One is obviously the lower volumes and account of on on a god of quality as well as of the had a certain product makes that kind of caused the.
While the.
The mediation on on on on new business quarter on quarter. We also.
As I alluded earlier.
Yes.
<unk> expense.
We took soda in expense caused one onetime expense calls to reshape our expense base in Japan.
So that kind of drive ongoing efficiency. So the combination of the product mix as well as the onetime expenses led to the decline.
You are you guys. That's thing too in respect to your second question on on quarterly margins.
Continued to be very satisfied with the 40 margin so they're not that different from what they bar.
For the dots rules.
Interviews and again.
We keep a very shopify on volumes losses value and as we've mentioned earlier, we do not have dies value or volume. So we do keep our ongoing at a base shop online in driving the right balance yet.
Just just to add a quick comment too and nails I'd say that were really quite frankly pleased with agents performance in 2019, LC had some significant headwinds not just call LIBOR interest rate movements, which is something that weve, obviously dealt with across the entire franchise, but despite that head.
When core earnings grew 11% for the full year and new business value grew 8% and if you take out Japan. You know, we grew core earnings and new business value in excess of 20%. So really it does I think underscore the diversity of the franchise that we have both at the global level, but then in particular in Asia, where over the.
Past few years, we've really worked hard to build scale in markets outside of Japan in Hong Kong, which has historically been the real drivers of growth and momentum for US now, we've got Singapore, Vietnam, Philippines, Indonesia, China that are now contributing much will significantly to our business. They are willing the future.
Thank you.
Thanks.
Your next question is from Darko, Let me check from RBC capital markets. Please go ahead.
Hi, Thanks, just a quick follow up on the Corona virus I'm, just wondering if I mean I'm trying to interpret tell you when you say it's too early.
Two.
Sort of think about the impact of it is that's is that to say that so far in January and February sales and everything else is fine and you haven't seen an impact or or is it that there has been an impact on your just hoping that its a.
It's going to subside.
Let me start Doc and I'll hand over to Aneel he might want to provide some extra commentary I think it the bottom line for US is that when I say, it's too early we just don't have enough data points to really drive a trend line.
From a year on year comparison perspective, we've got obviously Chinese new year, that's that's in the mix and certain markets a more impacted than others. Obviously, you know we kick into high gear with business continuity plans, we have folks working from home to root to really minimize disruption.
Got you know, it's really hard to declare whether this is something that's going to impact our momentum in our results or not so we really want to be cautious and not coal something out.
Prematurely or inaccurately I know you any anything you'd like that.
No specifically just.
The outbreak got into focus towards the end of January and since then I just said be evident focus has been the safety off our people.
As that as our agents and we've got a big game and and steps to ensure that we are able to service customers doing during during these times, that's really been our prime money finally focus.
We have taken action. So obviously in the city of won.
So we have definitely obviously shut down the office Juan contributes to a very small proportion of the China sales.
Got a.
Temporarily in the short term it will cause a little bit of disruption in terms of people flow.
But it's kind of hard for us to kind of gauge the impact as Roy mentioned.
It's too early for us to be specific about it.
Okay. Thank you and my other question is for fulfill.
So can you just remind us what happened to remittances why they fell so precipitously this year and what the expectation I mean, if they're one offs in there and what the expectation would be.
Or twentytwenty given that you've increased your dividends significantly.
Thanks, Daqo, Yeah, you may recall that remittances in 2018 were $4 billion that was an historic high.
Something that is a great outcome in 2018 for 2019, our Mrs with $2.8 billion.
And you may recall on the I think is the third quarter call. We had a question about the potential impact of interest rates on remittances. We said at that time that interest rates all one factor that can impact remittances from year to year.
And we had decided to.
Just a summer misses that had been scheduled from Hong Kong in response to the low rate environment and that's an example of one of the items that.
It has caused this year's numbers below than last year.
But overall I feel good about remittances and that's part of the context for the increase in dividend that has being proposed.
Phil just one at announce not proposes it's that 12%. It's Steve just one AD that side, we don't expect sort of a linear growth in remains as there will be variability what we really look to is long term sustainability and we feel confident with our our medium term long term remains capabilities.
Yeah.
Great. Thank you.
Thank you.
Question is some Humphrey Lee from Downlink Dowling and partners. Please go ahead.
Good morning, Thank for taking my questions. My first question is when the V. So about the reinsurance for program in the U.S.
I was wondering if you can kind of share some color in terms of the benefits that you got in terms of de risking your exposure.
It's kind of hard to tell based on the change in the net amount of risk since there was the that the tailwind of the strong equity markets. So I was wondering if you can share anything in terms of maybe the too.
Risk reduction on where there's a narrow minded residual account value all the guarantee amount related to the to the block that you you have the buyout.
Okay.
Thank you for the question on free so.
By the buyback program was sort of phase one and we have further phases plant. The block that we targeted in this phase has about 4 billion U.S. dollars of guaranteed value and 35000 policies.
Representing about 15% of our overall U.S.G. MWB block.
So we started in early November and run through early February.
So essentially the program offers customers with principal plus for life product.
An account value enhancement in exchange for forfeiting withdrawal and death benefit guarantees.
At year end, we were at.
An 8% acceptance rate.
Actually as of the end of the program, which has early February we ended up at 17%.
In terms of the actual risk reduction.
It was up it was approximately $40 million and minimize risk that was reduced that's part of the at times of year end as part of 8% acceptance rates. So that number will be higher as of the end of the phase.
Got to appreciate the color.
That's helpful and obviously, you'll continue to do that throughout 2020.
Shifting gear and just want to follow up on Japan with a new.
Hi, so in terms of the management actions that you've talked about being in flight.
How should we think about the impact in the in the current quarter and then also should we expect anytime mall.
Expenses related to these management actions in the coming quarters as you continue to right size your expense base and also adding new distribution and kind of <unk>. All these turnarounds.
Thanks for the question I'm free Unfortunately, I can't make any forward looking statements icon be specific about.
The impacts in the cut in part or I guess Watt Oh, we are very focused on ensuring that we are taking initiated around launching new products as I mentioned.
The new large enough coli also given the fact that on account of the diminished stats advantage going he is going to be a smaller proportion of the Japanese market. We are focused on introducing a newer products on the retail as well as on the other outside of the have also.
We've been focusing on expanding our distribution, so motivating and training EMG partners. This offer the best and retail products as well as I said, we've taken set an expense actions.
To reshape our expense base in Japan.
So we I just said I had a number of initiatives that that that audience flight, but unfortunately icon kind of talk about a.
Walter and the specific impact of that on a on a go forward basis.
Saga Humphrey sorry, ROI here I was just going to say, it's probably important to note that the tax regulation that that and there has been talking about specifically as it relates to coli was enacted in Q2 of 29 team. So.
Yes, basically it rolled through accordingly.
No I was just so there's a fair to assume because it just seems to have some actions that is going be ongoing 2020 I.
I know you don't want to provide any guidance, but they did their you'll be there'll be some.
Additional efforts over the Oh expenses, you could incur because of these kind of initiatives.
So I think.
Hi, This is Phil maybe maybe it will help to buy quantify the impact to on the fourth quarter on the restructuring charge and then the what payback that may have so in the fourth quarter.
The additional expense that we had seen from the restructuring actions within the order of eight to 10 million Canadian dollars and when we take these actions we really do look for.
A one on one pay back and we expect that to flow through in Twentytwenty.
Got it does is helpful. Thank you.
Thank you.
Your next question is from many Grumman from Cormark Securities. Please go ahead.
Hi, Good morning, just a question on the portfolio optimization.
Will you be releasing a new targets.
In the coming on at the Investor day, or anytime in futures that up for consideration.
Hey, many ROI here look at this stage were not planning to reissue a target and that's not to imply that we're not going to continue to focus on portfolio optimization, we feel that that guidance that we provided at the previous Investor day was critical to illustrate I made the commitment that we were going to Mike and the accountability that we wanted to.
Dr., having achieved that goal as I mentioned earlier, we're going to continue to focus on.
The efficiency about capital than the allocation about capital across our franchise through the various inorganic and organic measures. So at this stage note playing to reissue target.
Thanks for that and then just on the PNC reinsurance business, we don't talk a lot about it but given.
Talk on climate change Im just wondering if you've changed your view of the the risk profile of that business. It you could comment on how you view that business and why you feel that its a.
An important part of your overall business.
Thanks money. This is this is Phil.
It's still a very positive about PNC re business it provides diversification.
Very much contained risk given that its a.
Short business that.
We know very quickly whether or not as being the catastrophe.
If we look at our experience over a number of years.
It.
Has actually been very favorable that tends to be.
Five six years, where we get.
No very minimal claims and then then they'll be a seventh year when there is.
Significant claim I think the other point to make as well with respect to the CNC re business is that it's something that is because the short short term business. It's something we can reprice annually and our experience over the past 12 months and going through.
The current new business cycle as the market is heartening, partly because of concerns potentially about.
Increased risk to that's natural catastrophes, but certainly a hot thing markets is something thats favorable so no change in view from us on with PNC Reed business.
Thank you.
Thank you.
The next question is from Steve Carell from H. capital. Please go ahead.
Hi, Thanks, very much we talked about leverage and now that you're on a pro forma basis below that 25% level didn't want to ask how proactive you think you'll be in managing that and some time ago, but I remember a time when the leverage drifted down to the 20% range.
Would that be an acceptable outcome here that could happen naturally or would you expect to use buybacks debt issuance other tools and kind of want to be close to that 25% level to optimize our we and all that stuff.
Steve This is Phil Thanks to the question. The first thing I should say of course, we're very pleased that weve achieved on medium term leverage target with the pro forma 24.5%.
It's important to highlight the 25% is not a cap for us so what that.
25, or below 25 means is that we do have quite substantial financial flexibility in the leverage ratio, but equally I don't think it's necessary necessary for us to try and manage exactly to 25% either so I think what we have here is some flexibility either side of 25 cents and looking at how we did.
Capital and we talked about capital deployment earlier, but the highest priority is that the opportunity to organically invest and we are in a fortunate position that we do generate organic capital.
But we'll also be looking for opportunities to accelerate the organic deployments opportunities and that of course to some extent may mean and see IP.
But also it means that if there are inorganic opportunities out that we may consider them, but one thing you can be short of is that we'll be very very disciplined for me looking at inorganic transactions.
Okay and last thing for me Thanks, Phil.
On the value business side, I noted that the U.S. was up.
Almost around 60% from run rate looks like it's from strong sales from John Hancock life, but can you provide a little detail on what's going on there and driving that.
Yes, Marianne hair, and you're absolutely right. It was from the strong sales we had a very strong fourth quarter. Our vitality product has been very effective for us and we've seen a lot of sales as it relates to that we also saw there were some changes that were in regulatory changes being made in the fourth quarter. So that was also a reason why the sales went up we sat around the industry, where they ran.
A lot more sales in the fourth quarter, and that's helping to drive the new business value. We also have taken a lot of actions over the last couple of years as well in terms of getting on profitable products out there and lowering our acquisition costs as well. So it has been a lot of focus on that's driving value higher.
Have you been happy with the take up on the vitality side in terms of.
Utilization rates or however, you adoption or whatever you think about that.
Yeah, we are very happy actually in 2019 vitality sales represented about 45% of our overall sales and the fourth quarter is a lot higher than that so we are seeing a lot of KCAP, we get launched a new product as well at the end of the year call John Hancock Aspire, which is the first ever integrated diabetes specific product and we're seeing a lot.
Got it excitement around that so we have been very pleased with the vitality.
Yes, Steve all I'd just add that.
The whole push around behavioral insurance is something that we're really very passionate about thats true in the U.S., but it's also true for us in Canada, where we have vitality as well, but then in Asia with many like move and in addition to the interest and the sales growth that were able to generate across all geographies, we're seeing a real step up in customer satisfaction.
The MPS schools that we use to measure how satisfied or loyal customers up our of many multiple of the traditional products and we really think that is a key driver for future engagement with customers and ultimately that will translate also to sales.
Thanks for that color.
Thank you.
Your next question is from David I would imagine from Evercore. Please go ahead.
Hi, good morning.
Just a question for Phil.
Following up on on the remittances.
Just wondering where you think the remittances will be.
As a percentage of core earnings over the medium term just assuming rates are at these levels.
And and also.
If you could give some sense for the expenses at the holding company.
In terms of interest expenses and other other costs outside of the dividend and share repo that would be helpful as well.
Hi, David Thanks to the question this is filled out dividends.
The target dividend guidance is 30% to 40% of core earnings.
And what we target is for emissions is to at least cover that and any debt servicing costs.
I can confidently say that our experience in recent years has been absolutely that that.
We've been able to cover three remittances, the the dividend servicing costs and when I look at the 2.8 billion for 29 team that is the case there as well so I don't have particular concerns about.
Future Maintenances, but as Steve said earlier. It is it's a number that will bounce around from from year to year.
Okay.
Okay, and I guess, no no sort of outlook in terms of like I know it bounces around but no sort of outlook in terms of where you think that.
Version ratio in terms of core earnings.
Yes, a level of remittances as a percentage of core earnings that you think you should be able to.
To to generate over the over the medium term.
No it's not something we've issued guidance on David.
Okay fair enough and if I could just squeeze in a quick one on a on long term care.
It was a bit surprised to see the adverse experience. There I was wondering if you could quantify the dollar amount that it was adverse.
Hi, David shirts, Steve here, so that dynamic of what we saw and it was it was covered in fill his remarks, but I'll I'll repeat for the group here that we saw lower rates.
Mortality across the us businesses and that manifested itself in a gain in claims and U.S. light and a loss in LTC that was the driver what we saw in LTC. This quarter I won't quantify the exact number but I would categorize it as modest and we have seen this type of C.
Personality in the past its not every year, but we have definitely seen this seasonality in the past and we don't adjust our.
Our reserve assumptions to reflect the seasonality, it's not that granular.
Yeah.
Got it okay.
If I could just ask a high level one for to ROI just on.
Just on overall earnings growth for the company.
The 8% EPS growth.
I guess I'm, just wondering I calculated the drag from low rates to really be like about two points off all the earnings growth for the entire company. I guess is that is that about right and where do you see that going if rates remain at these levels.
Yes, well we aren't.
We don't disclose the impact on right, specifically and over longer period. Obviously, we think that there are mitigates that we can put in place you know the 8% earnings core earnings per share growth is something that were really quite pleased we fell 29 thing was a year with significant headwinds and as Phil highlighted we have.
We started the year.
On the wealth side with.
Quite a dramatic equity markets, which meant that starting positions where we're under some pressure.
And then obviously sprites in Japan also pose significant headwinds for us as well so delivering eight in that environment and then adjusting for portfolio optimization.
Impacts you'd be closer to nine is actually a pretty good outcome, we feel good about the 10 or 12% target.
Specifically to your question on interest rates.
We feel that low where rights for longer is part of the cool. So we're not working on an assumption of route right bouncing back anytime soon and we feel that the assets that we put in to really rightsized, our cost base and other actions, we're taking to really drive the performance of our franchise.
We will put us in good stead really deal with some of those headwinds the any other thing I'd site and we talked about this at Investor day in a previous forums.
There are three big Mega trends that we see that are really shaping.
The economies of the World and we'll continue to do so over the next decade, and we think that were really well position to capitalize on those three mega trend. The first is that have an aging population you know, there's 900 million people I 65 and above in the world today and that is forecast to grow to 2 billion by 2050 the retirement.
That is currently 70 trillion dollars, that's going to grow to 400 trillion and given the focus that we havent or timing and the the presidents and capability that we have across our geographies. We think thats. That's certainly a growth driver for us the middle class in Asia. In particular is also growing at a rapid pace about two years ago.
The Middle class in Asia was about 1.4 billion people that forecast to grow to 2.8 billion by 2025, representing 60% of the world's middle class that growth comes with demand.
Suddenly for four for our products as you see that middle class seek to grow well, but also protect themselves and again. The fact that we've been in Asia for 120 years puts us in good stead to capture that opportunity and then finally, the digitization of the consumer we talked a little bit about vitality earlier, but this is a significant trend and we think.
Idle simplify the way, we actually engage with customers and obviously help reduce costs, but at the same time allow us to access customers that historically, we perhaps would able to so I thought I know, it's a long answers your question.
But you know the 10% to 12% target is something that we feel a reasonably optimistic about we do say that that is a medium term through the cycle target.
And yet there are certainly headwinds like interest rates, but we feel that there are equal opportunities.
No. That's that's great I really appreciate the color right. Thanks.
Thank you.
The next question is from Doug Young from Janney Capital markets. Please go ahead.
Hi, Good morning, I'll try to keep this relatively quick the core expense last Steve. It was 143 million in the press release, you called that 38 billion related to policyholder experience I think that with Canada and the U.S. just trying to get a sense.
What was the other items because that was on a core basis and then if you can kind of maybe push that into the 62 million of negative core policyholder negative experience in the U.S.
And it sounds like the mortality.
I was an offset between life and long term care insurance. So that was so was the 62 million mostly lapse, maybe you can give a bit of color on that thank you.
Sure Doug So in terms of core experience a reminder of what's in there. It's policyholder experience expense impacts, which would include expenses, where we don't reserve for them and Asia Regional office expenses and then there are other experience items, which are prime.
Dominated by reinsurance related items so the.
The the 143, which you mentioned in terms of core experience and you noted correctly 39 million.
That was policyholder experience in the fourth quarter. The remainder is primarily a expense results.
And then when we go to that you asked you were asking about the core experience there again.
Similar drivers in terms of policyholder experience and expense on the policyholder experience Freind AG correct in terms of the light claims and the LTC, which we covered the remainder was that we we saw some adverse lapse experience it was spread across a number of.
Product lines about half of that is on certain products, where were we saw some I'd say early duration or shorter term issues, which we.
We don't expect to persist we did see some lower lapse rates on guaranteed UL business.
Which we have not really seen in 2018 too early to say, whether that's a trend or not but.
Reminder, that we've strengthened lapse assumptions materially over time, and these long term products lapse rates, our current lapse assumptions are for lapses.
Well under 1% often under 0.5% so just some context for what we're seeing.
And Doug This is Phil just to elaborate on the expense components. The year on year impacts of expenses. There is about $40 million of adverse experience positive that is the restructuring costs that we referred to earlier in the context of Japan, but also.
The impact of the investments, we're making in some of our platforms and digital initiatives and one example of that is something we've talked about before in the U.S. The fact that we are.
Consolidating various legacy systems onto a single platform and that really has the benefit of changing a fixed costs into a variable cost, which is really important given the portfolio optimization strategy.
So this is something that the extends like the expense item could persist it's not something you built into your reserve assumptions, but it is.
Something that could persist through 2020, essentially and Steve and 62 million how much of that was expense because I get a sense from the 143, but for the 62, how much was expense versus labs.
Yes, I'll take the first part Phil can comment on that on the ongoing where Marianne.
We havent we haven't.
Disclosed split.
Within that core experienced line, but they're both material items.
The total there.
And so from my perspective on the this is filled the impact of expenses I said earlier, it's about $40 million. So it's a fairly equivalent in terms of impact to the policyholder experience.
Most of that work that's being done on the outsourcing happened last year and this year and we'll probably see a little less next year. So I don't expect it to continue.
Thank you.
Thank you.
The next question is from Paul Holden from CNBC. Please go ahead.
Hi, Thank you I'll just ask a one question that's related to the U.S. business.
I saw a nice uptick and expected profit.
I think this quarter, which in the first quarter, we've seen positive and almost a year and a half. So maybe you can comment on that sort of or the headwinds of.
Portfolio optimization behind this business segment.
Sense of expense initiatives, having a positive impact.
Hi, Jim you can talk about some of the dynamics driving that.
And I guess from by US perspective, we're seeing the regular release on the merchants on in force. Yes, we have had a negative impacts as it relates to the portfolio optimization as we said in the quarter is about $10 million for the quarter, but we.
Started nothing unusual.
Happening outside of that.
Okay. So I.
I mean change in trend right. So from negative to positive and we should expect positive expected profit growth going forward as kind of the message here.
Yeah, I think it's Steve So clearly we've seen the headwind from the portfolio optimization initiatives in the U.S. and.
I'd say all else being equal we would see that returned to growth overall company wide. If you normalize for that portfolio optimization our growth in earnings on enforce our 6% for the year, which is around what.
But we would expect with higher growth in Asia, and relatively lower growth, but growth in both Canada and the U.S.
Obviously if.
Feeds team continues to have the success there could be headwinds, but they would be based on very favorable tradeoffs for shareholders. Overall, yeah. Just to clarify one thing that we did have a significant portfolio optimization transaction that was excuse in Q3 last year and that that is impacting the the run rate.
This is Steve said.
The.
The expected profit growth that is actually reported in 2019, 6%.
And if we adjust that in the fourth quarter, 6% growth, if we adjust that for the impact of the portfolio optimization initiatives would actually be 8%.
Correct, 6% was for full year.
Yes.
Okay.
That's helpful. Thank you.
Thank you.
Next question, some Darko Mihelic from RBC capital markets. Please go ahead.
Hi, Thank you for taking my follow up question I'm going to ask this only because I just saw Industriali on says report.
In their report, they're taking a litigation provision of about $15 million after tax.
You see Alaska AG, what it is related to but I thought maybe I'll just ask you guys. What we have well have the floor is there any sort of update in that case. It's Scott is one that's been appealed.
No I talk I think so that really here so.
You know we had the case last year and as expected we had a favorable ruling we continue to believe that that cases is one or the foundation of its legally unfounded and that we're in a very strong position.
The appeal was hood in January of this year.
I expect that there'll be some time before judgment is made but opposition on that case has not changed we feel very confident about our position then the foundation that were on.
Okay, great. Thanks very much.
Thank you.
There are no further questions registered at this time I'd like to turn the meeting that goal looking is o'neil.
Thank you operator will be available after the call is there any follow up question have a nice morning.
Thank you. The conference has now ended please disconnect your lines at this time and thank you for your participation.
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Being recorded Nols as you put modest single family homes. It does doubled.
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