Barclays Global Financial Services Conference

Sep 14, 2022

Hello, everyone. I'm Tracy Benguigui, insurance analyst at Barclays, and I'm pleased to host a fireside chat with Unum. To my left is Rick McKenney, CEO, and Steve Zabel, CFO. Rick, maybe you could start off with some opening remarks. Yeah, certainly. Well, thank you for having us here at the Barclays Global Financial Services Conference. It's a good time to talk about what's going on within the company. I know we're sitting in a volatile world, but when we think about our business and serving employers and employees at this time, it's actually a very good time for the company. What we've seen over the course of 2022 has been a real inflection coming into the year. Certainly in the midst still of the pandemic, we saw pressures on the business that had been persisting throughout the pandemic, and we have seen that rapidly change as we've looked over the course of the year. As we sit here in September, we're looking at a much different environment. We saw that inflection starting to happen in the second quarter through some of our financial results, and we continue to see that. When you think about our business, and we're at a broader financial services conference, I talk about our business as being in the employee benefits space. We're at the workplace. It's all we do, taking care of employers and their employees at a time of need. That was never proven more true than through the pandemic, and we're very happy to be on this side of that, and we're looking forward to the growth opportunities that we have working off what we consider to be a very good franchise looking forward. Great. I recognize that Unum recently updated 2022 guidance to the upside, and now we're well into the third quarter. So what are you most encouraged about, and what does the company still have work to do? Yeah, the second quarter was a very good one for the company. We saw a record earnings level. We saw our premiums coming back. I talked about the inflection point that we've seen. We don't expect in the second half of the year, the third and fourth quarter, we'll see those elevated levels. Those are record earning levels. We'll see it come back to a place that we feel very good about in the company, generating both as we continue to grow our top line all the way translating through to the bottom line at a level that looks like it did prior to the pandemic with a good growth rate coming off of that. Very excited about the new guidance we have out there that we've taken through the course of the second half of the year. You couple that with a very strong capital position and flexibility that we have, I think 2022 will turn out to be a good one as we launch, and we're looking forward into 2023. Excellent. Maybe we could get a little bit deeper on where you see the greatest growth opportunities in today's environment. Yeah. When you think about our business and being at the employee at the workplace, it's really just getting that great growth within employers as we take out what we do to more and more customers. We think about it in terms of just increasing that customer base. We have relationships with about 40 million customers today, and so it's how do you grow that on a good organic basis, getting to more people, providing the necessary things that they have, but also combined with new product sets, new services that we bring to an employer. Those growth opportunities will fuel us going forward. We think about the company, we think about good premium levels of growth, we think 4%-6% range. It's been a little bit less than that over the last several years in a difficult environment. We've seen that coming back more rapidly than we anticipated, and we'll get back on that growth trajectory across the board here in the U.S. I don't want to leave out in the U.K. as well. We've seen very strong growth in our U.K. business, almost 10% growth in our U.K. business as well. Growth is what's top of mind as we come out of a challenging time, and we're starting to fire on a lot of cylinders. Excellent. Maybe my next question would be for Steve. Sure. Unum has made investments on the technology side. In fact, your first cut of the 2022 guidance left us thinking that operating expenses would run on the higher side, and that has not really played out. Are there offsetting factors at play? Were you making less operational investments relative to your plan? Yeah. I would just go back to the guidance that we gave coming into 2022, and we did steer towards an increase in our operating expense ratio, which is really just the company's operating expenses over its premium levels. But that would grow in the 125 to 175 basis point range. There were two things that we attributed that to. One was investment in really the customer experience, and so that's our digital footprint. That's our ability to interact with both employers and employees in a different way. I would say that spend continues. We really did not take our foot off the accelerator throughout COVID, investing in those types of capabilities, and we've seen that come through in a lot of the interactions that we've had with customers. The other, though, driver of that increase was just around inflation and what that meant to just our cost of doing business with our own employee base. What we have seen is slightly lower expenses in that area, and part of it is just the search for talent. We've been a little, I would say, probably under-employed, and that's ramping back up. That's where the benefit has been. We have not slowed down the spending and investment in capabilities because as Rick said, that's really job number one. We want to grow our core businesses, and we'll continue to do the things we need to do to grow those. Okay, great. Also, if I revisit the original guidance in February, I guess I heard a greater sense of urgency on repricing efforts on the group life. Given recent favorable mortality experience, do you feel like you need to take as much pricing action? I'm just curious how your 1-1 renewal looks like on a pricing standpoint so far. Yeah. Let's talk about group and pricing across the board. Let me start with the group life. We came into the year, in the midst of COVID, talking about needing to take price to recognize some of the life benefits. I think that still exists in terms of looking in sectors as opposed to across the board on the life side. We've seen things settle down, but I think there's price still that we need to be taking, but it's more sectoral than we've seen. We also expected coming into the year, we may be taking some price on the group disability side. That's probably lessened a little bit, the pressure to take price there on that side, as we've seen rates come up, as we've seen incredibly good experience like we saw in the second quarter. Not that we're not going to take it, but once again, it's probably lessened a little bit. The other place is around our services business that we'll continue to look to take price there as we grow that business, making sure that we actually reach more customers from the services we provide, leave services you could think about. That's an area that we want to be very tactical in how we think about pricing and managing that business, because it is a really important one to us and to our customers. Yeah, the only thing that I'd say on the renewal front, you specifically spelled that out. We've gone through quite a bit of the renewal season already for 1/1 effective dates, and we feel really good about being able to get the prices that we need. Our persistency has been very strong. We showed that in the second quarter, and we continue to see good persistency through the third quarter. When you think about price, you have to talk about what's going on with competition, too. When we step back away from that, we look at our environment overall as the competitive environment is reasonable, so it's a very competitive environment, given the good products that we deliver. However, we don't see outliers in that process. As long as everybody's within a relative band, we'll fight case by case in terms of making sure we're trying to get the right customers. But we can do so in a world that's fairly rational. I think that we're in one of those environments where the competition, although fierce, is rational on a relative basis. Great. I guess in your view, has COVID created a pull forward for mortality, or has the delay of diagnosis from the pandemic led to higher non-COVID mortality experience? I guess as a side point, CDC reduced the life expectancy rates once again. Yeah, I can take that one. Just going back, and we've told this story throughout the pandemic, obviously, we've seen waves of higher mortality come through our book of business. I'd say it was more pronounced when the mortality was hitting more of the working age population, specifically through the Delta variant. Omicron, we did have some mortality in our book. We saw that lessen and abate very quickly as we got into March, and that's continued throughout. Then specifically, though, to the non-COVID mortality, we've seen normal variation and normal volatility in that, but we don't feel like we've seen pull forward or we've seen higher non-COVID because people were not getting maybe the medical treatment that they should have. Again, we've seen some volatility, but we just haven't seen it in our data that would say we've changed our longer term expectations for non-COVID mortality levels. Okay. Well, interest rates are definitely top of mind, and I think most investors are encouraged that higher interest rates can improve PDR pre-funding efforts. I also recognize that your regulator looks at a three-year trailing formula. You had some success with First Unum in entering a hedging program, but you've also discussed the structural elements that challenge hedging interest rates for Unum America under a funds withheld construct. Maybe you could just walk us through that a little. Yeah, let me just step back a little bit on interest rate management and hand it over to Steve to talk about what we're going to do going forward. When you think about, and you mentioned it, our First Unum entity, which is one of our entities that's based in New York. We've actually done hedging in that entity. We think it's a good construct. Pretty straightforward. It's a long-term care hedging. We actually put forwards on in there, locked up about 50% of the cash flows over the next five years. A really good program that we put on. We were happy to get that done over the last several months. Another question we've gotten is, given the rapid rise that we've seen in rates is the idea of a macro hedge. You just lock in some type of macro hedge. We're not leaning towards that idea. It's not off the table, but we're not leaning towards that, just given some of the size of the notional required to do that. It's a very short timeframe towards a liability that actually can vary, as we've seen over the last couple of years. We actually don't think that that's first on the list. But maybe I'll turn it to Steve to talk about what we really are thinking about in the timeframe and structure we're thinking about. Yeah, no, that's great. I know we've talked to many people in the investor community just about how we might approach the Unum America block, and we really like the approach that we took for First Unum. Rick mentioned the type of instrument we use, kind of the time horizon and the amount of cash flows that we would lock up. We've been doing a lot of work internal. I'd call it internal analysis, and it's around a lot of things like structurally where we have the investment portfolio around that Unum America block. We've thought about how that impacts the premium deficiency reserve. First Unum, it's a little bit more straightforward as far as how that impacts our asset adequacy reserve there. We're getting very close to concluding that analysis, and we actually feel pretty good that we do expect to do something similar and upsize that program around the Unum America block and do that this year. That's something that we will talk about once we have executed on additional hedges there, and that's something I think that we'll be able to talk about as we get into our third quarter earnings call. I'd just say more to come on that. Okay, looking forward. So staying on interest rates on the earnings side, how should I be thinking about your portfolio turnover rate? I guess where I'm getting at, what is the pace to recognize earnings expansion? Yeah, I can take that one. We mentioned it on our earnings call. We really did. We talk about inflection points a lot coming out of the pandemic, and this is more less of a pandemic thing and more of the last 10 years, we've been putting money to work at rates that would be below our portfolio yield, and it's been a headwind for us. We've managed that through pricing and other ways. But we did see in the second quarter that we did finally put new money to work, at a place that creates equilibrium with our portfolio rates, and that's across most all of our product lines. So that alone is not going to create upside, I would say, to our earnings performance in the short term. But I think it's a good first step as we look forward to potentially beginning to have our new money rates be accretive, and be a growth driver for the company against what's in our current portfolio and yields there. So we're really optimistic from what we've seen, but I'd say we're just at that equilibrium point right now and more to come probably as we get into 2023. If we could shift gears, I am curious on your thoughts on what type of LTC risk transfer solutions are possible. If you could get into what factors need to be considered for participating parties, and what does the bid-ask spread look like? Yeah. Let's talk about the long-term care block, and I think risk transfer is something that we are looking to. The time is undetermined in terms of getting there, but when you think about that block of business, it is one that we would like to be out of. I would point you back to the individual disability insurance, reinsurance that we did last year to finally sell that block after it being in closed status for a decade and a half. I think that getting the right counterparty, getting the right structure, we were able to accomplish on that front, and we want to do the same thing in long-term care. What we have seen over the last period of time is interest. We have talked about that in terms of the number of players that are interested in looking at that block of business. We need to make sure that buyers can meet sellers and bringing those assumptions together into a reasonable range, and that is the phase that we are in. I think what is different now than it would have been maybe five years ago is we also look, and we learn this through our IDI sale as well, is there are ways to parse the block of business, to think about how can you take certain attributes of a block to meet those sellers' needs, whether that is around the age of the block, the amount of cash flow that you are still facing into in that block, and what their overall view is around structure. All those things are happening. I think I said on our last earnings call we are prepared to work forward, and we are doing the work, but you have got to make sure there is that interest coming from a risk transfer side on the buyer side, and that is really where we are focused today. Time indeterminate, but certainly want to keep on that front because we ultimately think that is something we want to accomplish. Staying on structuring, I have actually heard you talk about the concept of earn-outs when structuring an LTC type of risk transfer, and that really goes to your continued ability to get rate approval by regulators. Under that type of structure, is risk recapture a possible consequence if rate actions are not actualized? If so, would that be good for investors? Yeah, I can take that, maybe piggyback off the bid-ask spread concept because that is clearly one of the items there. We have talked about interest rates. That is one thing that sellers and buyers need to get closer on. Morbidity improvement is another area that we look at, then just the level of experience and data in the book, but then the last is rate increases. I would say two things on rate increases. One, by and large, buyers are going to look at that and probably not value unapproved rate increases, even though that is probably the most determinable of those four as far as how that is going to play forward. Because I would say specifically for us, we have been very successful with our rate action program. There have been transactions out there that there was this earn-out type of concept, and that would be something we would definitely entertain. We have a lot of confidence in our ability to achieve really our expectations and our assumptions within our best estimates around rate increases. We think the environment is really good still at the regulators to get them. We have continued to have success, and so that is something that we would definitely entertain. Yeah. I think, Mira, I just want to be careful that we are not going down that path per se. That is one of the tools in the toolkit. Right. There's very different ways to structure. We're thinking about all those alternatives, and I just want to make sure that that's a possibility, but there's a lot of other possibilities. Pointing back to the IDI block, it's about how we would work with a potential buyer of that block to accommodate their needs, at the same time achieve what we're trying to achieve. I don't want to highlight too much any particular aspect that we would have to do to go through that structuring process. Yeah, fair. Just staying at the conceptual level then, I just want to be sure I heard this correctly. If the earn-out trigger would not be the contingency on getting rate approval, what would be the trigger then? When you say the contingency? On the regulators continuing to approve rate approval. Oh, no. I would think about that independently. We feel very good about getting rate approvals, and whether that's as part of a transaction or those are economics that we would keep outside of a transaction, I don't think that would change the way we approach regulators. Okay. Can you clarify some of your earlier statements about prepaying your premium deficiency reserve? I guess would that be utilized in a risk transfer transaction that Unum explores? I guess what you're saying, does that make a deal more possible? Yeah. When you go back to the establishment of the PDR, it's one of the things we said at that point in time. We were adding reserves to our book of business higher than what we think were warranted at the time, but we're doing that in the process. As a result, we'll just have more reserves behind that book of business. When you think about a buyer willing to spend a certain amount, that narrows that GAAP. That's one thing as we go through the PDR funding process, our premium deficiency reserve, as we actually increase the amount we have there, it does narrow that GAAP. It doesn't make a deal happen, but it certainly, once you can find buyers meeting sellers, it will narrow the GAAP of what that delta might look like. That's one of the things as going through this, and the premium deficiency reserve that is beneficial. I think that we're looking forward to continuing to work through that process. We've talked about it's accelerated on a timeframe faster than we thought on the premium deficiency reserve. At the same time, we've been returning capital to shareholders as well, and so I think that equilibrium of all those different pieces is actually working reasonably well right now, and we'll have to look to see how we handle that over the course of 2023. I also recognize that your LTC block has high persistency, so that could imply you could take some illiquid asset posture. I am just wondering, your current market opportunities, where are you seeing that opportunity for reinvestment purposes? I am just wondering why you would view munis as an attractive asset class to fit this bill versus, let's say, something like private credit or real estate. Yeah, I can tell you throughout COVID, it was a very interesting investment strategy period of time, because a couple things that you saw. One, a lot of issuers that had very high yielding bonds out there, and we had a lot of high yielding bonds in our portfolio. They called them during that period of time. We actually had a lot of cash flow coming in during that period of time from the calls on those bonds. We took the opportunity to do a couple things. One is we viewed the alternative asset class as matching up with our illiquid liabilities around LTC, and we really increased, I'd say, our allocation to that during the period of time. That's played very well for us. That asset allocation has performed very well over the last couple years, and we also think it matches up very well. The other thing, though, is we looked across all asset classes and really looked at where we were going to get paid for the risk. Munis really rose to the top a little bit during that period of time. So we were able to add quite a bit of duration with those types of investments at what we thought was pretty good yields for the risk that we were taking, and that played out well for us over that period of time. Now what we see is some of the higher yielding types of investment opportunities. The yields that you're able to get there start to become a little bit more attractive. The good news for us is just the size of our portfolio and the size of our investment strategy. We're able to really pick and choose. We don't really have to buy across all asset classes and across all opportunities. We can really move in and out of different allocations for new money and take advantage of where the markets are. I feel like we did that. Our allocation to high yields dropped quite a bit throughout the pandemic. We built our alt portfolio up over $1 billion, which again, matches off well with our long-term care portfolio. Now we're a little bit back in the market for high yields. Okay. Yeah, I recognize munis have higher credit ratings, and you said less high yields, but still recognize your BBB bias. I'm just wondering how you're stressing your portfolio for credit risk, migration risk. Yeah. I think when you look at our portfolio, as Steve talked about, we actually like the construct of our portfolio today. We'll come in and out of asset classes based on whether we're getting paid to take on that risk. But when we think about our portfolio, it's a credit-by-credit portfolio. We're not looking at broad indices. We're actually stressing individual names and taking them through. The current thought is around what happens in a recession. Recessions can come in many different forms. We'll take every one of those credits, and actually, even as we push the portfolio through an inflationary scenario, we'll look at it from a recessionary perspective as well and stress those credits and make sure they hold up. As we do that, we look at our portfolio, and we feel very good about the construct. Regardless of what the external rating is, we're looking at the underlying credit, and we feel very good about where they are. Yeah, I would just add, that's worked very well for us historically, whether it's second quarter of 2020 when the markets were so disrupted, the level of defaults we had there, very minimal, or you go back to other recessionary periods. We've been able to weather those much better than overall indices, and it's because, as Rick said, we analyze this credit by credit by credit. Yeah. It's the same team, and the history has been good. You go all the way back to the financial crisis, their ability to do that, recessionary environments, energy. There's been a number of things along the way, and I think our portfolio has withstand each of those very well through that period of time. Okay. It's definitely noted. I'm just wondering, if we do see fallen angels, would you be a forced seller of BB, or would you maybe want to jump in if you see opportunities with spreads? It's all about opportunity. We're not a forced seller. As we talked about the illiquid nature of our liabilities, we're not going to be a forced seller on any front. It's how do we actually look at the construct of the portfolio and where do we want to invest? Then we also will manage the portfolio. We will continue to be active managers of it, but it's on a credit-by-credit basis as we think about that. Got it. Then maybe shifting to capital management, it feels like you are pursuing buybacks and PDR pre-funding on a dual track. I am just wondering what it will take to bump up either option higher up on your priority list. Yeah. So when you think about our capital deployment, we are in a good spot coming out of the pandemic. Our capital ratios are at recent highs, multi-year highs that we have seen. Last year when we came back in, we started buying back shares in the market. About $200 million a year is that we established that pace. At the same time, we increased the funding of our PDR at about the same pace. So like you say, a dual track view of how we are funding both of those things, and we will continue to evaluate them as it moves forward. The PDR, the construct of that, as we talked about back at our Investor Day in February, has changed as interest rates have come up. So we think about that. And then how we redeploy capital to shareholders through share buybacks is something we are always under evaluation of what is the right level. I would tell you, we feel pretty good about the $200 million in buyback and the $200 million accelerated PDR as we sit here today, but that obviously changes on a daily basis. Okay. You are also holding healthy holdco cash at $1.2 billion as of the second quarter. Can you walk us through what type of buffer you like to maintain for holdco purposes? Yep. And then I guess outside holdco purposes, debt servicing, shareholder dividends, do you feel like cash that's sitting there today is truly unencumbered for shareholder purposes? Yeah. So just kind of clicking through all the capital metrics that we have. You mentioned holdco cash. We set a target, a minimum there of one times our fixed cost on an annual basis. That would be our expected dividends and our debt service. That's just over $400 million right now, so have quite a bit of excess capital there. RBC is up around 415. We target above 350% RBC there. Then from a leverage perspective, we target less than 30%, and we're between 24% and 25%. So we do feel like we have a lot of financial flexibility right now. When you say unencumbered, yeah, we would view that as unencumbered, but we'd step back and look at our entire capital profile, and there are still some uncertainties there. We've talked about how our premium deficiency reserve is calculated, and it looks very favorable right now as far as how we project that forward if current prevailing interest rates continue into the future. But we still have to leg into that over one or two years as our discount rate calculation really evolves. It's a trailing three-year weighted average, as we've talked about, that has to work its way into the actual calculation. So we would like to keep a little bit of buffer. I think we clearly think right now the excess capital we have provides flexibility above and beyond that. So the question just becomes how much of that do you want to put against the balance sheet of long-term care and potentially accelerate that more? Or what do you want to do around other types of capital deployment? We've been very consistent in the first priority is growing our core business, and that is really where we like to put that capital. But then we'll also look at opportunities for inorganic growth over time, and then we'll look at deploying additional capital back to shareholders. So, I think we have a little bit more runway here as we get into next year, but it's something that we'll look at as we get into 2023. I think I'd add into that holding company cash discussion, too, is it truly unencumbered? You have to think about things that can go bump and making sure you have flexibility there. We also maintain $500 million of credit lines. We also went back, and we have some pre-capitalized trust securities out there. So we have access to short-term cash needs on top of all those things. We think about that delta truly as capital. It's not just about holding company cash. That's capital, as Steve talked about, can be put to work. Great. Any early thoughts on RBC perspective from the NAIC C2 proposal? Yeah, we like it. I know it impacts different companies in different ways. I think the line's kind of drawn along whether you have group business as we do, that you can reprice, and the benefit that that factor gives you and your ability to reprice for adverse experience around mortality. I'd say, the individual writers probably feel a little bit different. We've disclosed that it is going to be a capital benefit to us, about 20% improvement or 20-point improvement in our RBC. That's going in at the end of the year, as we understand it. We do think that that'll give us even more capital flexibility. That'll be down in the operating companies. We'll take some time to be able to get the capital up through just the normal dividend capacity calculation up to the holdco. But we view that as capital that we'll also have on the balance sheets going forward. I recognize that you look at a number of capital ratios. It's not just RBC. Maybe on the rating agency side, I know S&P delayed its capital model proposal. It still has to come together. Do you think that would present any additional capital stream for Unum? I guess I'm thinking about the rating agency's proposed ALM mismatch charges specifically. Yeah. We've looked at that. We've spent a lot of time talking to S&P about the interpretation of that. We actually feel pretty good that within our current capital construct, we're going to look fine under any proposal that's out there right now. Our capital metrics are well in excess of where we are rated right now, specifically for S&P, and over time, they have taken into consideration LTC as a business and the ALM mismatch. I'll say qualitatively, into their evaluation, we view this as more of just a quantification of that and then memorializing that risk and building that into their capital formula. So we feel pretty good about where we're going to end up. Now, it's not finalized, and that it continues to get pushed out, so we'll have to see where that recommendation ends up, and it sounds like it might even be pushed out into next year now. Yeah. But we have constant dialogue with all of our rating agencies. I do not know how much you could say about your assumption review, but I guess just philosophically, CPI numbers came out. When you build your interest rate forecast, I am just wondering how you interpret the Fed plans in thinking about that. Yeah. Right now, and it is still in process, but we expect our reserve adequacy study work to go very smoothly. We go through a pretty rigorous process every year. Interest rates are part of that. I would say it is most impactful around long-term care, and we feel like that is pretty much in a box how we think about that for this year. It is pretty prescriptive from a First Unum perspective as far as how that works. Then obviously we have the premium deficiency reserve that we have talked about a lot. So we do not really view those types of things to really impact it for this year. So feel good about where we are going into year-end. Great. Then just maybe staying with you on the digital front, what investments are you making that you think is really paying off? Yeah. I talk about renewal, and just us putting renewal rates through the group business. One of the technologies we started to develop multiple years ago was something that we branded HR Connect. That's our ability to tap directly into some of these HCM systems. Think Workday. I was just actually yesterday, I did something similar to this down in Orlando, Florida for Workday Rising, which is their big annual kickoff meeting down there. One of the things that we've had a great partnership with them and other providers of those types of HCM systems, we're able to digitally connect with those systems. When you think about the employee or the employer experience in the group space, the information they have on their employee base feeds directly into our information. At any point in time, we know exactly who's insured, exactly the premiums that are owed, and it really saves a lot of the reconciliation process in that space. The same with being able to integrate into things like leave management and being able to communicate directly with the employee and their manager for a leave occurrence or experience directly through their system, so they don't have to come to our system. It's been a home run. We have seen pretty significant differences in our renewal success with those customers that are on that sort of platform versus those that are not. It's not just being able to sell it with a new case, it's being able to keep existing cases and have them really see the value of that sort of technology. That's one example that we've- Yeah, no, I'd broaden that out, too, which is actually our digital investment. That's connecting with employers. We're also focused on the customer's experience, and so actually at the consumer level, and so the digital investments we're making are really to impact the entire buying and administration process, when you think about all the way from somebody goes on a claim all the way back to when they originally came into the system, as Steve was talking about. Great. Maybe it's a good time to pause and see if there's any questions from the audience. We have mic runners, so if anyone could raise their hand with a question. Hey, Alec Rosebrook from Millennium. When you laid out your capital return plan, I think you were building in an assumption for funding about $3 billion on the PDR. What were you assuming for capital generation each year from a statutory earnings perspective, and how does that compare to what it is now, given the recovery in the business and also the improvement in interest rates? Yeah. So take a step back, and I think you're going back to our February meeting where we talked about our plans, and so a lot has changed since then. I think that what we saw early in the year is we recovered faster than expected around both our GAAP and statutory expectations. The pandemic came down faster. But as you look out to multiple years, I think this is kind of where we expected to be, at least from an overall mortality and all the things that we see on the liability side. Interest rates being up has been a new piece that has come in over the last six months, and then you factor that into some of our disclosure we put out there at that time about how that impacts the PDR movements and Treasury rates. They're up a lot higher than we had anticipated at that point in time. I think our middle-of-the-road assumption was right around a 225 10-year Treasury. As that has moved, that will limit or actually reduce the amount of PDR funding that we have. Now, does that happen all in this year? No. Because of the construct of it, we'll be funding a slightly lower level than we anticipated. We had said 550 to 650, I believe was the number. We'll be at the lower end of that piece for this year. But ultimately, that will reduce as we look at the next couple of years. The statutory earnings generation, that being a lower number, looks fairly good as we look out to 2023 and beyond. Yeah, and specific to capital generation, you're right. We have a lag of a year of statutory earnings translating into dividends. This year is going to be a little bit lower. But historically, we were at about that billion-dollar mark of statutory earnings, and the following year, we could get that through dividends. We do feel like by next year, we'll be back to that sort of capacity. Hi, Travis Maskovis from The Hartford. Just wanted to ask you about the potential for a softer macro environment and any potential changes that you're making either on the investment portfolio. I know you've increased high yield recently, but that said, other areas, is there something you're doing from a hedging or asset allocation perspective? On the business side, are there any areas that you think might be negatively impacted if it does come to fruition? Yeah. Steve, you want to talk about the portfolio, and I'll talk about the business? Yeah. Yeah. Just starting with the portfolio, we don't view a major change in how we approach the market. As I mentioned before, we're pretty selective, underwrite each credit, stress each credit. I would say we're not going to be making any major changes on that front other than just really tracking it. The comment was made earlier about potential downgrades. In our portfolio right now, we actually see more credits that probably are on slate for upgrade, that the upgrades have been a little bit slower than expected coming out of COVID than we thought, than potential expected downgrades. We actually see somewhat of upward pressure right now. We'll have to see what any kind of recessionary pressures actually look like, though, which industries they're going to impact and how that's going to play through individual companies. But right now, we're not anticipating any major changes in the number of business. Yeah. In a recessionary potential or as you say, a softening in the economy, that's kind of how we think about it. Right now, we're starting to see our premiums growing at a good level. They're aided by actually the wage inflation that you see out there, the full employment levels. Historically what's happened is we've gone into recessionary environments. That growth just slows a little bit. It doesn't go away, doesn't go negative. It just slows some of the growth that we have become accustomed to, and we could see that happen. I'm not predicting it. We could see that happen. The second piece is does it impact the underlying products that we have, the product set that we have, pricing, things like that, and we just haven't seen that through the last several recessions. It's a pretty stable base. When you think about products such as group disability, we might see an increase in submitted claims, but those don't usually turn into paid claims. A softening economy, we still feel pretty good about our margin levels. You take that together with a little bit slower top line, maybe we'll feel a little bit of impact, but once again, it's speculative. It also depends very much on how a softening economy comes at us. The employment picture looks very strong at the moment, and that's the one that really matters to us when you think about the impacts within our business. Maybe I'll jump in with another question. For LDTI, you shared quantitative disclosures on the balance sheet side from implementation. Any thoughts on the earnings side you could leave us? Yeah. I'll go back to the disclosures that we made and then give you a little bit of preview, maybe where we're going to be going with our disclosures. Back when we first disclosed the adoption impact to OCI, which seems a long time ago, rates were at a very different place. We disclosed it in the range of $6.5 billion. If you carry that forward to the end of the second quarter, that was down more around $1.5 billion-$2 billion. So that's decreased. I would say the attention to that upfront adoption impact has decreased quite a bit too. I think most of the stakeholders are probably going to look through that impact unless there's something that comes out of the discussion that makes you look at a block of business differently. So we feel pretty good about that. Then I'd tell you, we'll have a little bit more disclosure as we get into our third quarter Q. There's not going to be a surprise there. For those of you that have been tracking LDTI, it's going to be things that you'd expect around amortization periods and around just how the net premium impacts the calculation and potentially smooths volatility in earnings. There won't be any big surprises there, but it will be qualitative. I think it's going to be more getting into the first quarter as we finish our recasts that we will have in our 10-K. We'll have that be part of an investor discussion to really talk about the earnings impacts. On disclosures, I'm just curious about any supplemental new type of non-GAAP metrics that you may share that may better align with the way you view your business, economically speaking, like cash flows. Yeah, no. I do think that's something we need to evaluate, and part of the whole capital discussion and what really makes sense from building the PDR recognition faster is we do want to give investors a view of really what our deployment capacity is going to look like post-funding of the PDR. I do think that's going to need to come with potentially a little bit more disclosure on cash flows themselves. That's something that we'll evaluate and we'll think about as we probably get into Investor Day, of how much information we want to give there to give that post-PDR view of how much capital we really do have to deploy on an annual basis. Excellent. I think we're just about out of time. Let's give a round of applause to our speakers. Thank you, Tracy. Yeah, thank you. Thanks, everybody.