Q4 2023 Manulife Financial Corporation Earnings Call
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Operator: Please be advised that this conference call is being recorded. Good morning, ladies and gentlemen, and welcome to the Manulife Financial 4th Quarter and Full Year 2023 Financial Results Conference. I would like to turn the meeting over to Mr. Cole. Please do so.
Please be advised that this conference call is being recorded.
Good morning, ladies and gentlemen, welcome to the Manulife financial fourth quarter and full year 2023 Finance financial results Conference call I would like to turn email, which Mr. Ko. Please go ahead Mr. Goh.
Han: Thank you. This is Manulife's earnings conference call to discuss our fourth quarter and full year 2023 financial and operating results. Our earnings materials, including a webcast slide for today's call, are available on the Investor Relations section of our website at Manulife.com. Turning to slide four, we'll begin today's presentation with a highlight of our four-year results and a strategic update by Roy Gorey, our President and Chief Executive Officer. Following Roy's remarks, Colin Simpson, our Chief Financial Officer, will discuss the company's current financial and operating results in more detail. After the prepared remarks, we'll move to the live Q&A portion of the call. Before we start, please refer to slide 2 for a caution on forward-looking statements and slide 43 for a note on the non-GAAP and other financial measures used in this presentation. Note that certain material factors or assumptions are applied in making forward-looking statements, and actual results may differ materially from what is stated. With that, I'd like to turn the call over to Roy Corey, our President and Chief Executive Officer.
Thank you welcome to many ways earnings conference call to discuss our fourth quarter and full year 2023 financial and operating results.
These materials, including the webcast slides for today's call are available on the Investor Relations section of our website <unk> com.
Turning to slide four we will begin today's presentation with a highlight for your results and strategic update by Roy Gori, Our President and Chief Executive Officer.
Following remarks, Colin Simpson, our Chief Financial Officer will discuss company's financial and operating results in more detail.
Although the prepared remarks, we will move to the Q&A portion of the call before we start please refer to slide truthfully caution on forward looking statements and slides 43 for a note on a non-GAAP and other financial measures used in this presentation.
Note that certain material factors or assumptions are applied in making forward looking statements and actual results may differ materially from what is stated.
I'd like to turn the call over to Roy Gori, Our President and Chief Executive Officer right.
Roy Corey: Thanks Han, and thank you everyone for joining us today. Yesterday, we announced our fourth quarter and full year 2023 financial results. As you can see, our strategy and discipline focus on execution are delivering; even in uncertain market conditions, we generated double-digit top-line growth with record AP sales during the year, while Global WAM delivered another year of positive net inflows despite challenges in the retail fund market. That is the 13th year of positive inflows in the past 14 years.
Thanks, Sean and thank you everyone for joining us today.
Yesterday, we announced our fourth quarter and full year 2023 financial results.
You can see our strategy and disciplined focus on execution are delivering even in uncertain market conditions.
We generated double digit topline growth with a record IP sales during the year.
While global Wan delivered another year of positive net inflows despite challenges in the retail fund market that is the 13th year of positive inflows in the past 14 years.
Roy Corey: Core EPS grew 17%, supported by strong core earnings growth and the impact of share buybacks, our core ROE increased to 15.9 percent, achieving our medium-term target. We delivered robust growth of 9% in adjusted book value per share, and our strong LICAT ratio of 137% and low leverage ratio provide ample financial flexibility. Turning to slide 7.
Core EPS grew 17% supported by strong core earnings growth and the impact of share buybacks.
Our core ROA increased to 15.9% achieving our medium term target.
We delivered robust growth of 9% in adjusted book value per share and a strong why cat ratio of 137% and low leverage ratio provides ample financial flexibility.
Turning to slide seven.
Roy Corey: Today, we're a very different company from when we began our efforts to reshape our portfolio towards lower risk and higher returns, and 2023 was also a milestone year in that transformation journey. As part of that agenda, we further grew our highest potential businesses. In Asia, we saw double-digit growth across key new business metrics. We are a high growth, top three, pan-Asian life insurer. In Global WAM, we acquired CQS, whose multi-sector alternative credit capabilities complement our existing fixed income and multi-asset solutions business and are a powerful addition to our global credit offering.
Today, we're a very different company from when we began our efforts to reshape our portfolio towards lower risk and higher returns in.
In 2023 was also a milestone year in that transformation journey.
As part of that agenda, we further grew our highest potential businesses.
In Asia, we saw double digit growth across key new business metrics.
We are a high growth top three Pan Asian life insurer.
And global Wham, we acquired seek U S.
Whose multi sector alternative credit capabilities complement our existing fixed income and multi asset solutions business.
And are a powerful addition to our global credit offering.
We also generated remittances, a $5.5 billion and returned $4 $3 billion of capital to shareholders through dividends and share buybacks.
Roy Corey: We also generated remittances of $5.5 billion and returned $4.3 billion of capital to shareholders through dividends and share buyback. And I'm pleased to tell you that yesterday our board approved a 9.6% increase in our common share dividend, which will begin in March. But first, it goes without saying that meeting our customers' needs and expectations is at the core of what we do.
And I'm pleased to tell you that yesterday, our board approved a 9.6% increase in our common share dividend beginning in March.
But first it goes without saying the meeting our customers' needs and expectations is at the core of what we do.
We've set up our processing times reduced costs and improved the customer experience.
Roy Corey: We've sped up our processing times, reduced costs, and improved the customer experience. As a result of these and other actions, we've seen a 22 point increase in our Net Promoter Score since 2017, and we are leading or on par with our peers across the majority of our business lines. None of this would be possible without our winning team in Kulcha. And I'm proud that for the fourth consecutive year, we achieved top quartile employee engagement results.
As a result of these and other actions we've seen a 22 point increase in our net promoter score since 2017.
And we are leading or on par with our peers across the majority of our business lines.
And none of this would be possible without a winning team and culture.
And I'm proud that for the fourth consecutive year, we achieved top quartile employee engagement results.
Finally, we ended the year with a significant milestone in our transformation journey the announcement of the largest ever L. T C reinsurance deal.
Roy Corey: Finally, we ended the year with a significant milestone in our transformation journey: the announcement of the largest ever LTC reinsurance deal, which I'll touch on in the following slides. You'll remember that in December, we announced the Milestone LTC transaction. We transacted at attractive terms, de-risked our business, and it will be accreted to Core EPS and Core ROE after deploying the capital released to share buybacks. The transaction, which we expect will close by the end of February, also contributes to establishing an active LTC reinsurance market. It's another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher return businesses. And we aren't stopping here; we continue to work on opportunities to create shareholder value through organic and inorganic actions across our legacy and low ROE businesses. Moving to slide 9.
Which I'll touch on in the following slide.
You'll remember that in December we announced the milestone L. P C transaction.
We transacted at attractive terms derisked, our business and it will be accretive to core EPS and core ROA after deploying the capital released to share buybacks.
The transaction, which we expect will close by the end of February also contributes to establishing enacted L. T C reinsurance market.
It's another example of the value we continue to unlock for shareholders as we reshape our portfolio to focus on lower risk and higher return businesses.
And we aren't stopping here.
We continue to work on opportunities to create shareholder value through organic and inorganic actions across our legacy and low our OE businesses.
Moving to slide nine.
Roy Corey: Our transformation journey began in 2018, when we started reshaping our businesses by reducing risk, improving ROE, strengthening capital, and growing high-return businesses. Thanks to disciplined execution, today, our high-return businesses represent a larger share of our earnings. These are impressive results considering that the transition to IFRS 17, which defers the recognition of new business gains into CSM, resulted in a two percentage point reduction in 2022.
Our transformation journey, beginning 2018, when we started reshaping our businesses by reducing risk improving our OE strengthening capital and growing high return businesses.
The disciplined execution today, our high return businesses represent our largest share of our earnings.
These are impressive results considering that the transition to Ivar of 17, which defers the recognition of new business gains into C. S. M resulted in a two percentage point reduction in 2022 in.
Roy Corey: In fact, Asia already represents over 60% of our CSM balance and 70% of our new business CSM, indicating its immense future earnings potential. And as we've changed our business mix over this time, we've significantly expanded our core ROE by almost five percentage points. We've also taken significant actions to reduce risk, including our U.S. variable annuity reinsurance transactions in 2022.
In fact Asia already represents over 60% of our CSM balance and 70% of our new business C. S N, indicating its immense future earnings potential.
And as we've changed our business mix over this time, we've significantly expanded our core ROA by almost five percentage points.
We've also taken significant actions to reduce risk, including our U S variable annuity reinsurance transactions in 2022.
Our portfolio optimization actions along with growth in our highest potential businesses has reduced the core earnings contribution from LTC N V. A significantly from 24% 2017, and together with Decembers L. T. C transaction. This contribution is expected to further decrease to 11%.
Roy Corey: Our portfolio optimization actions, along with growth in our highest potential businesses, have reduced the core earnings contribution from LTC and VA significantly, from 24% in 2017, and together with December's LTC transaction, this contribution is expected to further decrease to 11%. Returning capital to shareholders remains a priority, and since 2018, we've returned $18.9 billion through dividends and share buybacks. Those buybacks have generated a benefit of more than $1.3 billion, as our average repurchase costs were well below our recent share price levels. In closing, I'm excited by the progress that we've made and by our momentum heading into 2024.
Returning capital to shareholders remains a priority and since 2018, we've returned $18.9 billion through dividends and share buybacks.
Those buybacks are generated a benefit of more than $1.3 billion as our average repurchase costs were well below our recent share price levels.
In closing IMAX.
I'm excited by the progress that we've made and by our momentum heading into 'twenty 'twenty four.
Roy Corey: Our unique and diverse geographic footprint, all-weather strategy, and focused execution position us well to continue delivering superior value. Given our strong capital position and cash generation, we will continue to look at opportunities to unlock shareholder value, including inorganic opportunities to deploy capital. I will now hand it over to Colin to review the highlights of our financial results.
Our unique and diverse geographic footprint, all weather strategy and focused execution position us well to continue delivering superior value.
Given our strong capital position and cash generation, we will continue to look at opportunities to unlock shareholder value, including inorganic opportunities to deploy capital.
I'll now hand, it over to Colin to review the highlights of our financial results Colin.
Thanks, right 2023 was indeed, a milestone year for Manulife marked not only by strong business performance and the announcement of a major reinsurance transaction, but also a smooth transition to offer a 17 well.
Colin: Thanks Roy. 2023 was indeed a milestone year for Manulife, marked not only by strong business performance and the announcement of a major reinsurance transaction but also by a smooth transition to IFRS 17. We continue to deliver strong growth in new business metrics, earnings, and adjusted book value, and the fourth quarter contributes to that momentum. I'll go into a little more detail on the quarter's results before the Q&A. I'll start with our top line on slide 11.
We continued to deliver strong growth in new business metrics earnings and adjusted book value in the fourth quarter contributed to that momentum.
I'll go into little more detail on the quarters results before the Q&A.
I'll start with our top line on slide 11.
Colin: Our fourth-quarter APE sales increased 20% from the prior year with double-digit growth across each of our insurance segments. This increase was supported by the ongoing benefit of the return of demand across various markets in Asia, higher large and mid-sized group insurance sales in Canada, and a rebound in demand from affluent customers in the U.S. The momentum in our sales growth contributed to strong increases in new business CSM and new business value of 41% and 20%, respectively. Global Wham saw modest net outflows of $1.3 billion due to a large-case pension plan redemption in our U.S. retirement business.
Fourth quarter, a P cells increased 20% from the prior year with double digit growth across each of our insurance segments.
This increase was supported by the ongoing benefit of the return of demand across various markets in Asia higher large and mid sized group insurance sales in Canada, and a rebound in demand from affluent customers in the U S.
The momentum in our sales growth contributed to strong increases in new business, CSM, and new business value of 41% and 20% respectively.
Global Wham, so modest net outflows of $1 $3 billion due to a large case pension plan redemption in our U S retirement business.
Colin: On a full-year basis, we generated net inflows of $4.5 billion, which is creditable in a year in which investors kept money on the sidelines, benefiting from higher short-term interest rates. I'm proud of the growth we've achieved across our new business metrics compared to 2022, despite the uncertain economic conditions, which is testament to the strength of our global and diverse portfolio of businesses. Turning to slide 12, which shows the growth in our profit metrics, core EPS increased 20% as we grew core earnings and reduced share count.
On a full year basis, we generated net inflows of $4 $5 billion, which is creditable in a year in which investors kept money on the sidelines benefiting from higher short term interest rates.
I'm proud of the growth we've achieved across our new business metrics compared to 2022, despite the uncertain economic conditions, which is testament to the strength of our global and diverse portfolio of businesses.
Turning to slide 12, which shows the growth in our profit metrics.
Core EPS increased 20% as we grew core earnings and reduced share count.
Looking at this quarters results, we delivered a core ROE of $16, 4% above our medium term target of 15% plus for the third consecutive quarter.
Colin: Looking at this quarter's results, we delivered a core ROE of 16.4%, above our medium-term target of 15% plus for the third consecutive quarter. Driving up ROE is a key priority, and our recent milestone reinsurance transaction did exactly that. You should expect us to continue evaluating in-force opportunities to improve our return on equity. When we transitioned to IFRS 17, we noted we expect to see more stable growth in our adjusted book value per share as it better aligns with the economics of our business, and slide 13 demonstrates just that. A 9% increase over the year, or 13% after excluding the effect of foreign exchange rate movements on adjusted book value per share to $32.19.
Driving up our OE is a key priority and a recent milestone reinsurance transaction did exactly that you should expect us to continue evaluating and force opportunities to improve our return on equity.
When we transition time for 17, we noted we expect to see more stable growth in our adjusted book value per share as it better aligns with the economics of our business and slide 13 demonstrates just stop now.
A 9% increase over the year or 13% after excluding the effect of foreign exchange rate movements in adjusted book value per share to $32.19.
Colin: A key driver of the CSM growth this quarter was an update to actuarial methods and assumptions. We targeted a risk adjustment for non-financial risk that is calibrated to a 90-95% confidence range, which is conservative relative to peers. We have been trending towards exceeding the top end of this range, and so during the quarter, we recalibrated our risk adjustment towards the midpoint of this range. This had the impact of increasing the CSM and reducing the risk adjustment, which still sits at $18.5 billion. We will continue to monitor risk adjustment target levels across the industry and expect these to converge over time. More information is available in the appendix of this presentation.
A key driver of the CSM growth. This quarter was an update to actuarial methods and assumptions, we target our risk adjustment for nonfinancial risks that is calibrated to a 90% to 95% confidence range, which is conservative relative to peers. We.
We had been trending towards exceeding the top end of this range and so during the quarter, we recalibrated our risk adjustments towards the midpoint of this range. This had the impact of increasing the CSM and reducing the risk adjustment, which still sits at $18 $5 billion.
We will continue to monitor risk adjustment target levels across the industry and expect these to converge over time.
More information is available in the appendix of this presentation.
Bringing you back to our core earnings results on slide 14, I'd like to call out some of the highlights of the drivers of earnings analysis, focusing on the quarter relative to the prior year.
Colin: Bringing you back to our core earnings results on slide 14, I'd like to call out some of the highlights of the Drivers of Earnings Analysis, focusing on the quarter relative to the prior year. There were three main drivers of the increase in core net insurance service revenue. Expected earnings on insurance contracts increased across each insurance segment, led by Asia, which benefited from the impact of basis changes in the third and fourth quarters.
There were three main drivers of the increase in core net insurance service result.
Expected earnings on insurance contracts increased across each insurance segment led by Asia, which benefited from the impact of basis changes in the third and fourth quarters.
Colin: Secondly, business growth in our Group Insurance and Affinity Markets businesses in Canada improved our net insurance results. And lastly, our insurance experience was favorable due to a nearly $60 million release of provisions held in our P&C reinsurance business for catastrophes from prior years, mainly relating to Hurricane Ian. These factors contributed to a 25% increase in core net insurance service results. In terms of our core net investment results, we continue to see the benefits of higher interest rates and business growth year on year. We reported no increase in our expected credit loss provision over the quarter, which has improved investment results somewhat.
Secondly business growth in our group insurance and affinity marketing businesses in Canada improved on net insurance results.
And lastly on insurance experience was favorable due to nearly $60 million release of provisions. How then all P&C reinsurance business for catastrophes from prior years, mainly relating to hurricane in.
These factors contributed to a 25% increase in core net insurance service with salt.
In terms of our core net investment results, we continue to see the benefits of higher interest rates and business growth year on year, We reported no increase in our expected credit loss provision over the quarter, which has improved investment results somewhat too.
Colin: Towards the bottom of the table, you'll see that Global WAM was a notable contributor to the results, supported by higher average AUMA. However, these factors were partially offset by higher performance-related costs included in other core earnings, along with an increase in certain corporate costs. A market experience for the quarter saw offsetting impacts that resulted in a modest net charge and a $114 million gap between core earnings and net income. We reported a $381 million charge from lower-than-expected returns on ALDA, largely reflecting the ongoing pressure on commercial real estate due to increasing cap rates.
Towards the bottom of the table, you'll see that global one was a notable contributed to the results supported by higher average a U M. A.
These factors were partially offset by higher performance related costs included in other core earnings along with an increase in certain corporate costs.
Our market experience for the quarter, so offsetting impacts that resulted in a modest net charge and $114 million gap between core earnings and net income.
Posted a $381 million charge from lower than expected returns on older largely reflecting the ongoing pressure on commercial real estate due to increase in cap rates, but this was partially offset by a $182 million gain due to higher than expected public equity returns during the quarter.
Colin: But this was partially offset by a $182 million gain due to higher-than-expected public equity returns during the quarter. Our multi-year track record in ALDA, as shown in the appendix, is a testament to our strong capabilities in managing these assets and supports our long-term return assumptions. You will also see a positive contribution to net income from the basis change that I mentioned on the previous slide. The next few slides will cover a segment view of our results, starting with Asia on slide 16. Both top and bottom line performance was once again strong. APE sales increased 11% from the prior year quarter as we continue to capitalize on the return on demand from MCV customers.
Our multi year track record in ALDA is shown in the appendix is a testament to our strong capabilities in managing these assets and supports our long term return assumptions.
You will also see a positive contribution to net income from the basis change that I mentioned on the previous slide.
The next few slides will cover the segment view of our results starting with Asia on Slide 16.
Both top and bottom line performance were once again strong.
<unk> sales increased 11% from the prior year quarter as we continued to capitalize on the return of demand from M. C V customers the.
Colin: The increase in sales contributed to a 27% and 5% growth in new business CSM and NBV, respectively. We delivered strong core earnings growth of 14% year-on-year with a meaningful increase in the contribution from Hong Kong, our largest in-force business. We have made great progress shifting our portfolio towards our higher potential businesses of Asia and Global Lam. But the combination of the pandemic and IFRS 17, which has changed Asia's earnings profile, has led us to extend our target for the Asia region to make up 50% of total core earnings by 2025 by two years. Moving over to Global Warming results on slide 17, we recorded modest net outflows of $1.3 billion for the quarter.
The increase in sales contributed to a 27% and 5% growth in new business CSM and <unk> respectively.
We delivered strong core earnings growth of 14% year on year with a meaningful increase in the contribution from Hong Kong, our largest enforced business.
We have made great progress shifting our portfolio towards our highest potential businesses of Asia and global EM, but.
But the combination of the pandemic and I for 17, which has changed ages earnings profile has led us to extend our target for Asia region to make up 50% of total core earnings by 2025 by two years.
Moving over to the global Am's results on slide 17.
We recorded modest net outflows of $1 3 billion for the quarter. This was due to a large client redemption of U S. Retirement, we also saw elevated retail mutual fund redemption rates in Canada, but this was offset by continued strong inflows in our institutional business.
Colin: This was due to a large client redemption in U.S. retirement. We also saw elevated retail mutual fund redemption rates in Canada, but this was offset by continued strong inflows in our institutional business. Excluding the large case redemption during the quarter, we generated net inflows of $1 billion. The business also delivered strong core earnings supported by higher average AUMA, which increased 5% year-on-year, along with higher fee spreads and a lower effective tax rate. Also of note, severance costs related to restructuring announced during the quarter are excluded from core earnings and will generate expense savings beginning in 2024.
Excluding the large case redemption during the quarter, we generated net inflows of $1 billion.
The business also delivered strong core earnings supported by higher average <unk>, which increased 5% year on year, along with higher fee spreads and a lower effective tax rate.
Also of nodes severance costs related to restructuring announced during the quarter are excluded from core earnings and will generate expense saves beginning in 2024.
Heading over to Canada on Slide 18, we delivered another strong quarter of new business and profit metrics.
Colin: Heading over to Canada on slide 18, we delivered another strong quarter of new business and profit metrics. APE sales increased 44% year-on-year, primarily due to higher large, and also, I might add, the highest on record, mid-case sales in our group insurance business, which were also the main contributors to our growth and new business value of 60%. Gross earnings increased 19%, mostly driven by business growth and a lower ECL provision, as well as more favorable insurance experience in our group benefits business.
<unk> sales increased 44% year on year, primarily due to higher large and also I might add the highest on record mid case sales in our group insurance business, which were also the main contributors to our growth in new business value of 60%.
Core earnings increased 19%, mostly driven by business growth and Aloha ECL provision as well as more favorable insurance experience in our group benefits business.
Colin: Moving to slide 19 on our U.S. segment results. In the U.S., higher APE sales were driven by a rebound in demand from our affluent customers, which contributed to strong MBV and new business CSM results. Our U.S. business delivered strong core earnings, which increased 16% year-on-year, mainly reflecting higher yields and business growth, as well as improved insurance experience.
Moving to slide 19 on our U S segment's results.
In the U S high a P sales were driven by a rebound in demand from our affluent customers, which contributed to strong M. B B, a new business CSM results.
Our U S business delivered strong core earnings, which increased 16% year on year, mainly reflecting higher yields and business growth as well as improved insurance experience.
Colin: On to slide 20 in our balance sheet. We ended the year with a strong LICAT ratio of 137%, which was $22 billion above the supervisory target ratio. Our financial leverage ratio declined by 0.9 percentage points from the prior quarter and is within our TOGA ratio of 25%, adding to our ample financial flexibility.
Onto slide 20 in our balance sheet.
We ended the year with a strong line cat ratio of 137%, which was $22 billion above the supervisory target ratio.
Our financial leverage ratio declined by 0.9 percentage points from prior quarter and is within our target ratio of 25%, adding 12 ample financial flexibility remittance.
Colin: Remittances of $5.5 billion in 2023 were a result of strong operating cash generation and favorable market moves. With remittances in excess of dividend and interest payments, we are able to return capital to shareholders even after organic investment in our business and bolt-on M&As such as a CQS acquisition. Over the last three years, our remittances have averaged over 85% of core earnings. While this percentage is somewhat flattered by the favorable market moves in 2023 and the U.S. variable annuity transactions in 2022, it's a testament to our ability to generate strong cash flow. In aggregate, we have returned approximately $8.7 billion of capital to shareholders through dividends and share buybacks since we resumed our buyback program in 2022. As previously announced, we plan to launch a new program in early 2024 that would allow us to purchase up to 2.8% of our common shares.
Remittances of $5 $5 billion in 2023 were results of strong operating cash generation and favorable market moves with remittances in excess of dividend and interest payments, we were able to return capital to shareholders. Even after organic investments in our business and bolt on M&A, such as a seek U S acquisition.
Over the last three years, all remittances have averaged over 85% of core earnings.
While this percentage is somewhat flattered by the favorable market moves in 2023, and the U S variable annuity transactions in 2022, It's testament to our ability to generate strong cash flow.
In aggregate, we have returned approximately $8 $7 billion of capital to shareholders through dividends and share buybacks since we resumed our buyback program in 2022.
As previously announced we plan to launch a new program in early 2024 that would allow us to purchase up to two 8% of our common shares.
Colin: And as Roy mentioned, yesterday, our board approved a 9.6% increase in our quarterly common share dividend. Moving to slide 21, which summarizes how we are tracking against our medium-term targets. Our new business CSM grew 12% in 2023, modestly below our target; we generated CSM balance growth of 21%. While this was flattered by the basis change, we still generated a solid 5% growth in organic CSM.
And as Roy mentioned yesterday, our board approved a nine 6% increase in our quarterly common share dividend.
Moving to slide 21, which summarizes how we're tracking against our medium term targets on new business CSM grew 12% in 'twenty two 'twenty three modestly below our target.
We generated CSM balanced growth of 21%. While this was flattered by the basis change, we still generated a solid 5% growth in organic CSM.
Colin: Our core EPS growth and core ROE were strong in 2023, exceeding our target ranges. All in, we're pleased with our progress and delivered strong results with focused execution. 2023 was a milestone year, and while we continue to face an uncertain macroeconomic environment, I'm confident that we are uniquely positioned to drive and execute on our transformation agenda in 2024 and beyond. And finally, turning to slide 22, we're hosting an Investor Day in Hong Kong and Jakarta from Tuesday, June 25 to Thursday, June 27, 2024. It has been some time since we hosted an Investor Day in Asia, and we're excited to showcase our quality franchise. Please save the date.
Our core EPS growth and core ROE was strong in 2023 exceeding our target ranges.
All in we're pleased with our progress and delivered strong results with focused execution.
<unk> 23 was a milestone year and while we continue to face an uncertain macroeconomic environment I'm confident that we are uniquely positioned to drive and execute on our transformation agenda in 2024 and beyond.
And finally, turning to slide 22, we're hosting an investor day in Hong Kong and Jakarta from Tuesday June 25th to Thursday June 27th 'twenty 'twenty four it has been sometime since we hosted an investor day in Asia, and we're excited to showcase our quality franchise. Please save the date registration details will follow.
Operator: Registration details will follow shortly. This concludes our prepared remarks. Before we move to the Q&A session, I'd like to remind each participant to adhere to a limit of two questions, including follow-ups, and to re-queue if they have additional questions. Operator, we will now open the call to questions. Thank you. We will now take questions from the telephone lines. If you have a question and you're using a speakerphone, please pick up your handset before making your selection. If you have a question, please press star one on your device's keypad. To cancel the question, please press star 2. Please press star 1 at this time.
Shortly.
This concludes our prepared remarks before we move to the Q&A session I'd like to remind each participant to adhere to a limit of two questions, including follow ups and to re queue. If they have additional questions. Operator, we will now open the call to questions.
Thank you, we'll now take questions from the telephone line. If you have a question and you are using a speakerphone. Please go handset before making your selection.
Your question. Please press star one on your devices.
Canceled a question. Please press Star Kimberley. Please press star one at this time, if you have a question there'll be a brief pause all participants register thank you for your patience.
Operator: If you have a question, there will be a brief pause while participants register. Thank you for your patience. And the first question is from Manny Grauman from Scotiabank. Please go ahead. Hi, good morning.
And your first question is from many grauman from Scotiabank. Please go ahead.
Hi, Good morning, I wanted to ask about the global minimum tax and whether it will have a material impact on you if you could provide us.
Colin: I wanted to ask about the global minimum tax and whether it will have a material impact on you. If you could provide us with any sort of guidance in terms of how big that impact would be, thanks. Manny. It's Colin here.
Any sort of guidance in terms of how big that impact would be.
Yeah. Thanks, Manny it's Colin has so we've looked at the draft legislation in Canada and.
Colin: So we've looked at the draft legislation in Canada, and we're participating in the consultation process. There's really a lot to be done before the draft rules are fully integrated into existing Canadian tax law. But saying that, should the legislation become substantially enacted, we would expect to incur higher taxes, just from the nature of some of the jurisdictions we operate in. We think it's going to add about two to three percentage points to our effective tax rates. And we'll start incurring that cost once the legislation becomes substantially enacted, potentially Q2, maybe Q3 this year. Thanks so much.
And we are participating in the consultation progress process, there's really a lot to be done before the drop throughs are fully integrated within our existing Canadian tax law, but saying that should the legislation becomes substantially and that says we would expect to incur higher taxes just from the nature of some of the jurisdictions. We operate in are we think it's going to add.
Two to three percentage points to our effective tax rates.
And we will start incurring nuts once the once the legislation becomes substantially enacted a potentially Q2, maybe Q3 this year.
Thanks, So much and then just on the risk adjustment.
Steve: And then just on the risk adjustment, the change that you made, just wanted to better understand why the risk adjustment is trending to the upper end of the target range. What's the process that drives that? Are you being overly conservative in terms of your assumptions? Transcribed by https://otter.ai. Thanks, Manny. It's Steve here.
Change that you made just wanted to better understand what's driving that to the risk adjustment is trending.
Typically the upper end of the target range.
Just wanted to understand how what's the process that drives that is that.
That you're being overly conservative in terms of your.
In terms of your assumptions or is there something.
What's going on here.
Making a track higher than you expect.
Ah. Thanks, many it's it's Steve here, so yes, our our disclosed confidence level range for the risk adjustment is 90 to 95, and we are trending to go higher and in fact without the change we would've reported over that confidence level range in Q4, which is really driving the decision and we're comfortable with.
Steve: So, yes, our disclosed confidence level range for the risk adjustment is 90 to 95, and we were trending to go higher. And in fact, without the change, we would have reported over that confidence level range in Q4, which is really driving the decision. You know, we're comfortable with the range that we selected at transition, and the move was simply to move back closer to within that range.
The range that we selected at at transition and the mood was simply to move back closer to within that range and what we saw was I you know relative.
Steve: What we saw was, you know, Relative to peers, we included in the appendix, you can see some of the benchmarking versus peers, and we are more conservative than global peers here. And particularly in Asia, that's what was driving the growth above that target end of the range. So we made the adjustment primarily in Asia, which had the largest impact. And that leaves Asia actually at the high end of that disclosed 90 to 95 range.
Relative to peers. We included in the appendix you can see some of the benchmarking versus peers and we are more conservative than that and global peers here and particularly in Asia that side, that's where that's what was driving the growth above that target end of the range. So we made the adjustment primarily.
In in Asia was the largest impact and that leaves Asia actually at.
The high end of that disclosed 90 to 95 range. So fairly simple in terms of just moving back to towards the midpoint of the range.
Steve: So fairly simple in terms of just moving back to towards the mid. And then, does that have any implications for core earnings going forward, just thinking through the change and how it will impact results on a look-ahead basis in terms of the core results? Yes, a modest impact on core earnings.
And then does that have any implications for core earnings going going forward just thinking through.
The change how it will impact results.
Oh look ahead basis in terms of the corporate bonds.
Yes modest impact in course, so while we reduced the risk adjustment by just over $2 8 billion Canadian that I.
Steve: So while we reduced the risk adjustment by just over $2.8 billion Canadian, that largely went to an increase in the CSM. And because the CSM amortizes slightly faster than the risk adjustment releases, we see a modest, just a hair under $20 million benefit to run-rate core earnings, and that was in our Q4 results. Thanks so much.
Mostly largely went to the an increase in the C. S M and because the C. S. M. I amortize is slightly faster than the risk adjustment releases, we see a modest just a hair under $20 million.
Benefit to run rate core earnings and that was in our Q4 results as well.
Got it thanks, so much.
Steve: Thank you. Well actually, that was the question I was going to ask, that $20 million, is that a quarter, annual, or what? It's a quarter. $20 million a quarter. Okay, great. And just to really dumb it down, I mean, just throwing out that we're exceeding our 99, 90, to 95% range. What does that mean? What's going on?
Thank you.
The next question is from Gabriel <unk> from National Bank Financial. Please go ahead.
Well actually that was the question I was going to have that 20 million is that a quarter or what.
It's a quarter 20 million per quarter Gabe.
Okay, great and just a really dumb it down I mean, just throwing out we're exceeding our 90, 990% to 95%.
There are a range what does that mean, what's going on what was going on in the business in the Asia business in particular that created this variation and caused the reshuffling of one liability category to another because you know.
Steve: What was going on in the business, in the Asia business in particular, that created this variation and then caused the reshuffling of one liability category to another because, you know, it could happen again, right? Yeah, and if we back up, the risk adjustment, you can think of it as the non-economics or the non-investment PFADs under the old IFRS 4, that's what it is. Under IFRS 17, we calibrate, and we're required to disclose the confidence level range of that, and we base it on LICAT shocks and then calibrate from there.
It could happen again right.
Yeah, and if we if we back up the risk adjustment you can think of it as the nine economics of the non investment piece adds under the old IRS for that's what it is under IRS routine, we calibrate and we're required to disclose the confidence level range path and we based it off.
Light cat shocks and then calibrate from there so it's fairly fairly straightforward process. What was driving it was you know for Asia, we were actually above that top end of the range and as you know we write a lot of a profitable business in Asia that was driving because Asia was higher than the high end of the range that was the total.
Steve: So it's a fairly straightforward process. What was driving it was, you know, for Asia, we were actually above that top end of the range. And as you know, we write a lot of profitable business in Asia, which was driving because Asia was higher than the high end of the range, which was up for the total company. So we've calibrated down, as I said, primarily in Asia, and we would expect more stability going forward in terms of where we sit within the range. Gabriel Roy here.
So we've calibrated down as I said, primarily in Asia, and we would expect more stability going going forward in terms of where we sit within the range Gabriel Roy here I might just add that obviously with the transition I for 17, we had to make a whole lot of assumptions as did everyone else in the industry and it's only through 'twenty.
Gabriel Roy: I might just add that, obviously, with the transition to IFRS 17, we had to make a whole lot of assumptions, as did everyone else in the industry. And it's only through 2023 that we started to see where the industry started to land with its risk adjustment, confidence levels, and so on. We're quite pleased that we were very conservative relative to our peers. And the calibration that Steve talks about was just to bring it back into the range, which was, as he highlights and is articulated in the document we've published, very conservative relative to others. We're happy that that's where we typically land on the conservative end. No, I get that.
23 that we started to see where the industry started to land with their risk adjustment confidence levels and so on we were quite pleased that we were very conservative relative to our peers and the calibration that Steve talked to was just to bring it back into the range, which was as he highlights and as articulated in the document that we published you know very conservative realm.
<unk> two toddlers, we're happy that that's where we typically land at the conservative end.
I get that.
Steve: I'm just, you know, trying to conceptualize this thing. So non-economic risk, like mortality exceeding your worst-case assumptions or something like that in Asia, it might be something else; it probably is something else. So you moved it from risk adjustment to CSM; you're able to release those reserves sooner because it's. I guess I'm more confident in that assumption. I know this sounds hugely convoluted, but I'm trying to explain this for the layman. You know what I mean?
Trying to conceptualize this thing so non economic risks.
Like mortality.
Was exceeding your.
Worst case assumptions or something like that in Asia that might be something else I'll, probably has something else. So you moved it from risk adjustment the CSM youre able to release those.
Reserves sooner because.
I guess a more confidence.
Assumption I know, there's a hugely convoluted, but I'm trying to get this for the layman like Oh you.
You know what I mean.
Yeah.
Steve: Yeah, what I explained to you is we hold the risk adjustment, which is like the old PFAS, and we've calibrated it based on the standard to say, hey, this is at the 90 to 95th percentile in terms of contract. I think that should give you high confidence in the quality of the CSM because you set up CSM after you set up all the risk adjustment. And this is a fairly modest shift. Risk adjustment releases into income as well, which is why you see a modest impact on core earnings. So this is just a fairly simple recalibration. Alright, well, thanks.
You know what I, what I explained is we we hold the risk adjustment, which is like the old P. Fads and bill we've calibrated it based on the standard to say Hey. This is at the 90 to 95 percentile in terms of confidence I think that should the takeaways are I think that should give you a high confidence in the quality of the C. F N b.
Because he setups, yes, you setup C. S. M. After you set up.
All the you know the risk adjustment and this is a fairly modest shift at risk.
Risk adjustment releases into income as well, which is why you see a modest impact on core earnings. So this is just a fairly simple recalibration alright.
Alright, well thanks.
Thank you.
Doug Young: Thank you. The next question is from Doug Young from DeJarvin Capital Markets. Please go ahead.
The next question is from Doug Young from de Sal Bank capital markets. Please go ahead.
I apologize, but I do have to kind of just dig into the risk adjustment and maybe Steve.
Steve: I apologize, but I do have to kind of just dig into the risk adjustment. And maybe, Steve, what I'm more wondering is, you know, why was it set originally at 90 to 95? Because it does seem high as a confidence interval. And there must have been a reason that it was set in that range.
More wondering is why was it sat originally at 90% to 95.
Because it does seem high and as a confidence interval in.
There hasn't been a reason that it was set in that range and why would it differ versus peers is this just an interplay between capital and risk adjustment is this mix of business related like I know, it's easy enough just to compare manulife relative to the peers as you did on the slide but I'm just trying to dig a little deeper like why was that sat there why would there be differences.
Steve: And why would it differ versus peers? Is this just an interplay between capital and risk adjustment? Is this a mix of business? Like, I know it's easy enough just to compare Manulife relative to the peers as you did on the slide, but I'm just trying to dig a little deeper. Like, why was it set there?
Roy: Why would there be? Yeah, I think under the standard, it's principles-based, so you've got a range of judgments, and Manulife has typically been conservative in terms of setting our risk margins. I should be really clear. If you look at Asia Peers, because we hold a higher risk adjustment does not mean we take more risk. We write very, very similar profiles of business, so you should actually look at it as we're holding higher risk adjustment for similar risk. The other thing is, it's such a significant change in accounting, right, and there are a lot of policy decisions, there's a lot of disclosure under IFRS 17, so I would expect over time, you know, you might see a convergence of practice on this subject and perhaps other policy decisions as, you know Yeah, I guess this is more of a statement. I'm just surprised that there is such a variance or that such a variance is allowed between players, but I'll move on.
Yeah, I think under the standard its principles base. So you've got a range of judgments and Manulife has typically been conservative in terms of setting our risk margins I should be really clear. If you look at Asia peers, because we hold a higher risk adjustment does not mean, we take more risk we write very very similar profile of business.
So you should actually look at it is we're holding higher risk adjustment for similar risks. The the other thing is such a significant change in accounting right and there's a lot of policy decisions. There's a lot of disclosure on dry for 17, I. So I would expect over time.
You might see a convergence of practice on this subject and perhaps other policy decisions as you know the results are digested it and analyzed.
Yeah I guess this is more of a statement I'm just surprised that there is such a variance or it's such a variances allowed between between players.
I'll move on right, maybe and maybe I'm just sensitive this morning, but any your comments you're seeing too.
Roy: Roy, maybe I'm just uber sensitive this morning, but in any of your comments, you seem to have emphasized looking at all options for capital deployment, including inorganic. I mean, has M&A moved up your priority list when you think of the capital position? You've got IFRS 17 mostly done.
Emphasize looking at all options for capital deployment, including inorganic has has M&A M&A.
Moved up your priority list when you think of your capital position you've got after a 17, mostly done you've got the excess capital you Youre doing reinsurance transactions.
Roy: You've got the excess capital. You're doing reinsurance transactions. You know, is M&A now moving up their priority list, and not just smaller deals like you did, but bigger types of transactions? Yeah, Doug, thanks for the question.
Hmm.
Is M&A and now moving up the priority list and not just smaller deals like you did but more bigger type of transactions.
Yeah, Doug Thanks for the question and Youre right. You know we have been you know.
Roy: And you're right, we have been, you know, very focused on our capital. Our capital position is very strong. Our LICAT ratio is 137.
Very focused on our capital our capital position is very strong I like cat ratios of 137, and obviously as we transition to high for 17, you know we will still trying to figure out as was the industry, how like Atwood move and how the transition would work. So it was obviously very sensible for us to be prudent in that environment, but with a lockout ratio of 137%.
Roy: And obviously, as we transitioned to IFRS 17, you know, we were still trying to figure out, as was the industry, how LICAT would move and how the transition would work. So it was obviously very sensible for us to be prudent in that environment. But with a LICAT ratio of 137%, you know, we have $22 billion above our supervisory minimum, $10 billion above our internal operating range, and we have been very actively buying back shares, in fact, since 2018, actually $5.5 billion, which has generated $1.5 billion of shareholder value. When we talk about our priorities for capital, obviously, number one for us has always been dividends and organic growth. We announced the dividend increase yesterday, which again further consolidates our position that, you know, dividends should be a way that we create value for shareholders.
You know, we had 22 billion above our supervisory minimum 10, bill above our internal operating range and we have been very actively buying back shares in fact since 2018 in fact $5.5 billion, which has generated 1.5 billion of shareholder value. When we talk about our priorities for capital obviously number one.
For us as always being dividends and organic growth, we announced the dividend increase.
Yesterday, which again are further consolidates our position that no dividend should be a way that we create value for shareholders, but you know given our unique footprint the organic growth for us is a huge priority and it's it's an area for significant growth the second tier priorities for us from a capital deployment perspective as always.
Roy: But, you know, given our unique footprint, organic growth for us is a huge priority, and it's an area for significant growth. The second tier of priorities for us from a capital deployment perspective has always been buybacks and M&A, and we have been judicious about M&A and will continue to be. So for us, you know, the focus areas that we would look at when it comes to M&A are, A, is it strategic? And, B, is it financially valuable for the franchise? We don't want to do anything that obviously doesn't create value.
Zane buybacks and M&A.
And we have think judicious about M&A and we'll continue to be so for US you know the the.
The focus areas that we would look at when it comes to M&A is I is it strategic and B is it financially valuable for the franchise, we don't want to do anything that obviously doesn't create value.
Roy: And, you know, as we see the uncertainty start to decrease, then obviously, our appetite for M&A will increase as well. So we're pretty optimistic about the outlook organically to grow our franchise, and having the financial flexibility through our strong capital ratio and low leverage, I think really makes the M&A option one that's available to us, but we're going to be disciplined. So I just want to again reassure you that we would not be reckless. Yes, maybe a follow-up.
And you know as we see the uncertainty start to decrease then obviously our appetite for M&A will increase as well so we're pretty optimistic about the outlook organically to grow our franchise and having the financial flexibility through a strong capital ratio and low leverage I think.
Really makes the M&A option, one that's available to us, but we're gonna be disciplined so I just want to again reassure you that we would not be reckless.
Yes, maybe a follow up are you seeing more opportunities these days.
Roy: Are you seeing more opportunities these days? Look, again, we've got a good scan of what is available, and, you know, I think in the higher rate environment, it has put some pressure on certain businesses. I think we obviously stand to benefit in a higher rate environment. Again, we don't think that we're necessarily going to see a massive increase on the longer end of the curve, but it does create opportunities for us, and we'll continue to look at them. So, yeah, I think that the opportunities have perhaps increased in recent years, which means it's perhaps more interesting for us to focus on this space. Appreciate the color.
Okay again, we've got a good scan of what is available and you know I think in the higher rate environment.
It has put some pressure on certain businesses I think we obviously stand to benefit in a higher higher rate environment again, we don't think that necessarily we're going to see a massive increase in the longer end of the curve, but it does place opportunities for us and we'll continue to look at them. So yeah, I think that the opportunities had put.
Perhaps increased in recent years, which means it's a it's perhaps more interesting for us to focus in this space.
I appreciate the color. Thank you.
Doug Young: Thank you. Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Thank you. The next question is from Paul Holden from CIBC.
Steve: Thank you, good morning. Going back to the risk adjustment discussion, I just want to understand if there are any potential implications for insurance experience going forward. Is there now the potential for more negative experience because of the lower risk adjustment? Paul, it's Steve.
Go ahead.
Thank you and good morning, I'm going back to the risk adjustment discussion.
I wanted to understand if there are any potential implications for insurance experience.
Going forward is there now.
Potential for more negative.
Negative experience because of the lower risk adjustment.
I'll, let Steve no. This does not impact the insurance experience going forward.
Steve: No, this does not impact the insurance experience at all; you shouldn't expect it. Okay, I got it. Thanks for that. And then the second question is related to Asia, you know, obviously doing extremely well in Hong Kong, but if I look at sales and earnings ex-Hong Kong, they're down slightly year over year. Two-part question to that. One is, what do you think is required to turn that around and get back to targeted growth in Asia outside of Hong Kong? And two, did that trend over the last year influence at all the change in earnings contribution target from 25 to 27? Paul, this is Phil.
At all you shouldn't expect any any impact there okay got it thanks for that and then second question is related to.
Asia.
You know, obviously doing extremely well and in Hong Kong, but if I look at sales and earnings ex Hong Kong, they're down slightly year over year.
Two part question to that one is what do you think is required to turn that around and get back to targeted growth in Asia.
Sorry to Hong Kong, and two did that trend over the last year influence at all the change in earnings contribution target from 25 to 27.
Paul This is Phil Thanks for the question and.
Phil: Thanks for the question. And, you know, it has been a good year for our results in Asia. And we, you know, in the fourth quarter, that continued double-digit growth in sales. And as you highlight, Hong Kong has been particularly important in that. But for us, it's not just about the volume of sales; it's about the quality of those sales as well. And that's something that we've made substantial progress on as we've moved through 2023. And you can see that in the improvements in value metrics that we've reported. So the 14% growth in earnings, and the 27% growth in new business CSM. And you rightly point out that Hong Kong was a very important driver.
And you know it has been a strong year for our results in Asia and we you know in the fourth quarter that continued double digit growth in sales and as you highlight Hong Kong has been particularly important in that but for us. It's not just about the volume of sales. It's about the quality of those sales as well and that's something that we've made.
Tangible progress on as we've moved through 2023, and you can see that in the improvements and value metrics that we've reported so the 14% growth in earnings the 27% growth in new business CSM.
And you rightly points out that Hong Kong is a very important driver that was in 2023, we saw the reemergence of the M. C V customer segment it's.
Phil: That was, you know, in 2023, we saw the re-emergence of the MCV customer segment. But it's not just the MCV customer segment that's driving the Hong Kong results. We saw a notable growth in the core business, in the domestic business in Hong Kong in the fourth quarter, as well as a four-year improvement in the domestic business. But what I have said throughout 2023 is that the recovery from the pandemic has been uneven across Asia.
It's not just the Mcd customer segment, that's driving the Hong Kong results. We saw notable growth in the core business and the domestic business in Hong Kong in the fourth quarter as well as we sort of full year improvement in the domestic business, but what I have said throughout 2023 is that the recovery for.
The pandemic has been uneven across Asia that had been some markets that have grown and we've seen improved momentum.
Phil: There have been some markets that have grown, and we've seen improved momentum in some key markets, especially in the fourth quarter. We've seen improvements in new business momentum in Indonesia, Vietnam, Malaysia, for example, and Singapore. It's been a record year for AP sales as well as for mainland China. Now, as we look forward into 2024, I am encouraged by a number of tailwinds that exist. And we do expect the continuation of the MCV customer segment. I think we'll see a normalized rate of growth as we go into 2024, one year after the reopening of the borders.
In some key markets, especially in the fourth quarter, we've seen improvements in new business momentum in Indonesia, and Vietnam and Malaysia. For example in Singapore, It's been a record year for AP sales as well as mainland China now as we look forward into 2000.
24, I'm encouraged by a number of tail winds that exists.
We do expect the continuation of the M. C V customer segments, I think we will see.
Normalized rates of growth as we go into 2020 for one year. After the reopening of the borders that I'm I'm also optimistic that the domestic segments and Hong Kong will continue to grow we saw economic GDP growth in the second half of 2023 in Hong Kong at above 4% in the first half it was about <unk>.
Phil: But I'm also optimistic that the domestic segment in Hong Kong will continue to grow. We saw economic GDP growth of above 4% in the second half of 2023 in Hong Kong. In the first half, it was about 2%.
2%, so I think that bodes well for 2024.
Phil: I think that bodes well for 2024. However, outside of Asia, that uneven recovery means that there's further to go as we go into 2024. Our focus is very much on driving quality new business. I'm really keen to look at the value metrics of new business CSM, new business value, and earnings, and less so on APE sales. But we do expect APE sales to grow in 2024 as well. And I might take the second part of your question, Paul.
And then outside of Asia that uneven recovery means that you know that there's further to go as we go into 2024 and our focus is very much on driving quality, new business and so I'm really keen to look at the value metrics, new business CSM, new business value and earnings.
And less so at a P E sales, but we do we do expect a P cells to grow in 2024 as well.
Got it and I'm going to take the second part of your question I'm going to take the second part of your question Paul I'll, just add to Bill's comments that despite that uneven recovery that Phil mentioned in other Asia. We did grow core earnings for the full year by 18% in other Asia, which again just talks to the strength of our diverse franchise. So really proud of our Asia performance.
Roy: I'll just add to Phil's comments that despite that uneven recovery that Phil mentioned in Other Asia, we did grow core earnings for the full year by 18% in Other Asia, which again just talks to the strength of our diverse franchise. So really proud of our Asian performance despite the short-term challenges that we've seen there. And to your second question, obviously, we are really proud of our Asia franchise. We've been in Asia for 127 years, and we are a top three Pan-Asian player, actually up from number six in 2014. And what differentiates us is that we do have a very diverse business across the various markets. And we've also got an enviable GWAM business that really spans retail, retirement, and institutional and has actually great synergies with our insurance business. We'll talk a bit more about that when we get you out to Asia for our Investor Day, but the delay in our goal of getting to the 50...
<unk> the short term challenges that we've seen there and to your second question. Obviously, we are really proud of our Asia franchise, we've been in Asia for 127 years, and we are that we are a top three Pan Asian play are actually up from number six in 2014, and what differentiates US is that we do have a very diverse.
Business across the various markets and we've also got an enviable G. Wang business that really spans.
Spans retail retirement, and institutional and has actually great synergies with our insurance business will talk a bit more about that when we get you out to Asia for our Investor day, but.
But the delay in our goal of getting to the 50.