It’s not on the incident side. We’re not seeing the number of claims, but the severity has been running a little bit hotter than we’ve seen historically, but that really does attribute the whole difference. That is the severity.
Wes Carmichael: Thank you.
Dan Houston: Thank you, Wes.
Operator: Thank you. Our next questions come from the line of Tom Gallagher with Evercore ISI. Please proceed with your questions.
Tom Gallagher: A few questions on RIS for me. Dan, you would highlighted you expected net outflows in RIS in Q4. And I think part of that is just seasonal, the way the business works. Now, last year you guys had outsized, I think it was $7 billion of outflows in Q4. I just want to make sure we’re all level set here. Would you expect another outsized quarter directionally similar to $7 billion or just more down, something a lot better than that, still outflows, but not some of the unusual large jumbo outflows.
Dan Houston: Yeah. Tom, I appreciate the question. I’ll have Chris take that one on.
ChrisLittlefield: Yes. Thanks, Tom. So again, as we see in the third quarter, we’re seeing really good quality pipeline and well positioned for a strong double-digit growth in sales and transfer deposit growth across SMBs and large throughout the full year. But as Dan mentioned, we do expect to see some elevated loss activity. I think the hard part about the fourth quarter is, it’s really difficult to predict, Tom, it’s an active quarter for plan transitions and plan lineup changes. And you’re going to plans transition move from December to January. So it’s really hard for us to give a lot of clear guidance on that. But we expect it to be negative, but we do expect it to be less negative than the year ago. Both in terms of dollars and in terms of the withdrawal percentages.
So again, that would give you some directional view. As we continue to look forward into the fourth quarter and first quarter, we continue to see strong transfer deposits, solid recurring deposit growth and a meaningful moderation in our contract lapse rate, all consistent with how we’re really managing the business, which is for profitable growth. And despite all of this activity, we expect to be within our guidance range for revenue for the full year and in the upper half of margin for the full year. So we had some pressure, but certainly don’t see as much as we did a year ago.
Dan Houston: Did that help, Tom?
Tom Gallagher: That’s helpful, Chris and Dan. Thanks. My follow-up is, just on a fee question on RIS. If I – the calculation I’m doing is probably overly simplified, but if I look at the average increase in monthly assets, it’s 3% to 4%, and you should have gotten an extra fee day in Q3. And then I look at essentially flat fees for the quarter and Q3 versus 2Q that would suggest, I would say, somewhat higher-than-normal fee compression or fee pressure. Is there – are you seeing more fee pressure than normal? Or is there maybe something with the calculation that we need to adjust? Thanks.
Chris Littlefield: No. Thanks, Tom. No, again, I think throughout the year, we’ve definitely benefited from equity markets that’s pushed our fee rate around 40 bps the last few quarters. But as we’re seeing the compression – metering in line with our guidance. We’ve historically guided that we expect fee compression annually to be at sort of the 2 to 3 bps reduction a year, which is driven by competitive market dynamics, both acquiring new business, retaining existing customers, having higher price plans, lapse versus and newer ones coming in at lower fee rates. So that’s the compression that we sort of put in that 2 bps to 3 bps a year reduction. This year – this quarter, it was about 2 bps versus a year ago. So that’s what you’re seeing.
And while the fee revenue rate is down a bit, keep in mind that how we manage this business, we also have lower expenses, and we’re delivering higher margins, consistent with how we’re really managing this business for the future.
Dan Houston: Yeah. Chris, the only thing I might add to that list is also the investment management shift. So to the extent there’s more money that goes to a passive option as opposed to active, you’re going to see a negative impact on the revenues as well.
Tom Gallagher: That makes sense. Thanks, guys.
Dan Houston: Appreciate it, Tom.
Operator: Thank you. Our next questions come from the line of Tracy Benguigui with Barclays. Please proceed with your questions.
Tracy Benguigui: Thank you. Your office CML LTV albeit 63%, but it’s worse than 57% last quarter. I feel like office pressures will take time to materialize. How do you see your office CML LTV trending going forward? Is it too simplistic to think about low-to-mid single-digit deterioration every quarter? I’m just wondering if there’s a certain level where you feel less comfortable?
Dan Houston: Pat, any insights here?
Pat Halter: Yeah. Thanks for the question, Tracy. So as Deanna mentioned, we actually do rewriting on our office portfolio on a quarterly basis. And just a reminder, again, we have about $3.1 billion worth of office in our general account. That’s a 57% loan-to-value, 2.6 times debt service coverage. It’s 89% occupied. 75% of buildings we consider to be Class A, really strong, high-quality buildings, sort of A quality in terms of our sort of expectation on the rating performance. But we do every quarter, an analysis of the cash flow streams of each office property, the terminal cap rates, the discount rates that we want to apply to come up with a valuation. I think one of the things that I really think is important that we’ve been very aggressive on adjusting our cap rates on a quarter-to-quarter basis to make sure we’re staying abreast of what we’re hearing, what we’re seeing in terms of investor expectations in terms of where trades are being consummated in the marketplace.
