Unum Group (NYSE:UNM) Q3 2023 Earnings Call Transcript

Unum Group (NYSE:UNM) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning. My name is Brianna and I will be your conference operator today. I’d like to welcome you to the Unum Group Third Quarter 2023 Earnings Results and Conference Call. Please note that this call is being recorded. All participants are in listen-only mode at this time. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Matt Royal, Senior Vice President of Investor Relations. Please go ahead.

Matt Royal: Thank you, Brianna. Good morning and welcome to the Third Quarter 2023 Earnings Call for Unum Group. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results may differ materially from the results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31st, 2022. Our SEC filings can be found in the Investors section of our website at unum.com.

I remind you that the statements in today’s call speak only as of the date they are made and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today’s presentation, including recast financials for the long duration targeted improvement accounting pronouncement can be found in our third quarter statistical supplement on our website in the Investors section. Further, all references to or which include Unum International sales and premium results are presented on a constant currency basis. Yesterday afternoon, Unum reported third quarter 2023 net income of $202 million or $1.02 per diluted common share, a decrease from $510.3 million or $2.53 per diluted common share in the third quarter of 2022.

Net income for the third quarter of 2023 included the after-tax amortization of the cost of reinsurance of $8.7 million or $0.04 per diluted common share. The after-tax impact of non-contemporaneous reinsurance of $7.3 million or $0.04 per diluted common share, a net after-tax investment loss on the company’s investment portfolio of approximately $24.4 million or $0.13 per diluted common share and a net after-tax reserve increase related to assumption updates of $139.3 million or $0.71 per diluted common share. Net income for the third quarter of 2022 included the after-tax amortization of the cost of reinsurance of $9.3 million or $0.04 per diluted common share. The after-tax impact of non-contemporaneous reinsurance of $1.4 million or $0.01 per diluted common share.

A net after-tax investment loss on the company’s investment portfolio of $3.4 million or $0.02 per diluted common share and an after-tax net reserve decrease related to the assumption updates of $192.1 million or $0.95 per diluted common share. Excluding these items, after-tax adjusted operating income in the third quarter of 2023 was $381.7 million or $1.94 per diluted common share, an increase from $332.3 million or $1.65 per diluted common share in the year ago quarter. Participating in this morning’s conference call are Unum’s President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; Chief Operating Officer, Mike Simonds; as well as Tim Arnold, who heads our Colonial Life and Voluntary Benefit Lines; and Mark Till, who heads our Unum International Business.

Now I’ll turn to Rick for his comments.

Richard McKenney: Thank you, Matt. It’s good to be here with all of you this morning, and we appreciate you joining us. Three quarters of the way through 2023, our year has shaped up to be a good one, and we have a number of favorable trends that set up for a continuation of positivity. Specifically for our business, the macro picture remains favorable. A strong employment atmosphere, higher interest rates, and a benign credit environment are all positives. In this environment, it is also clear that our teams continue to execute against our plans to protect more people and deliver on our core business results. They are highlighted by exceptional core premium growth, strong sales levels, solid margins and consistent performance from our investment portfolio, all resulting in record levels of capital.

The third quarter was also a milestone quarter in that we expect the premium deficiency reserve has been fully funded with our current quarter contribution. As we said at our Investor Day, completing this in 2023 will mean that we don’t expect contributions required to back our long-term care business for the next five years. With ongoing strong capital generation from statutory earnings, this provides a capital picture going forward that provides ample flexibility. It is with that confidence that we have increased our share repurchase authorization to $500 million for 2024. The third quarter was also our first reserve assumption update filed under long duration targeted improvements. While net impacts are muted, especially given that we cannot incorporate the sharp increase in interest rates, this new accounting guidance introduces dynamics that will impact go-forward quarterly GAAP earnings, most notably in the Closed Block.

We’ll get into the GAAP assumption review further throughout our discussion, but the steps we have taken and continue to take to de-risk and strengthen the Closed Block have improved its position. And as we have reiterated, the GAAP accounting does not impact views on our capital and capital deployment plans. In addition, we expect around $3 billion in statutory reserves over our best estimate at year-end. As we look to the details of the third quarter for our business, we had another very strong quarter of performance. From the top line to the bottom line to capital generation, we continue to deliver on very strong trends of growing a growing customer base and profitability. Starting with the top line. In the third quarter, earned premium growth exceeded 6%.

This is a level we have not seen in several years and included growth across all core operation products from solid sales as well as generally stable persistency that remained within our expectations. We are pleased with the premium growth across the core segments, including 6.5% in Unum US, over 12% in International and nearly 2% in Colonial Life. Colonial Life continued to see momentum building in sales and premium growth aided by success in agent recruiting and the positive customer reception we’re seeing for our gathered platform. All-in-all, we expect to meet our Colonial Life premium target in 2023 and continue to be optimistic for higher growth rates in the future. Current and future premium growth is fueled by sales, which continued to grow on top of strong prior year results.

Core operations sales grew nearly 2%, highlighted by 8.5% in Unum US and close to 5% at Colonial Life. Underlying UK results were also good, absent very high sales comparable in the year ago quarter. We are also pleased with the robust year-to-date levels of growth the UK business has brought to the franchise. The growth scene in our top line is amplified by the success we’ve seen in key technology initiatives, such as HR Connect and Total Leave, where we continue to differentiate creating and maintaining deep connections with both existing and new employers and their employees, who evaluate high-quality digital experience backed up by the knowledge of our team and the AI tools we are equipping them with. Our success is also a result of the breadth of our team’s strong execution, providing operational excellence and taking care of employees at time of need.

Employers are putting increasing value on our service and offerings. Our discipline in pricing and customer engagement, combined with our consistent execution translates to solid product returns as we continue to see attractive margins across our lines. Consolidated ROE was a very healthy 12.7%, and our before tax operating earnings and return on equity in our core operations were well above the top end of our most recent outlook ranges. In total, after-tax operating earnings of $381.7 million increased 15% from the same time last year. Looking to our balance sheet, our investments continue to perform very well. We have de-risked our balance sheet, increased the credit quality profile of our portfolio and are well positioned for future market cycles.

In addition, we continue to build out our interest rate hedging program and sold a portion of our shorter duration bonds in the LTC portfolio, extending duration for cash flow matching purposes. The results across the board continue to support and strengthen our already robust capital position, with statutory earnings over $500 million, our holding company liquidity ended at $1.2 billion and our RBC was 470%, both at levels well north of our targets. The capital generation provides tremendous flexibility to pursue our strategy and continue to return capital to shareholders through dividends and share repurchase. The new Board authorized share repurchase program I mentioned supports our greatly accelerated capital deployment strategy heading into next year.

Beginning in the first quarter of 2024, we expect to begin repurchasing shares at a rate that we have not seen in many years. The path we are on has us well positioned for earnings per share growth towards the upper end of our outlook and capital metrics well in excess of our targets. Underpinning strong financial results is our — is in our purpose that drives us to protect more people, meeting the needs and exceeding the expectations of our customers. Our digital first and disciplined approach is capitalizing on the favorable trends in the operating environment as we advance our market-leading positions. Our formula for creating shareholder value is straightforward, grow our high-margin businesses at an accelerated pace, drive greater certainty around our Closed Block and effectively return capital to shareholders.

We have made excellent progress on all three of these areas through the first nine months of 2023. Now let me turn it over to Steve for details of the quarter. Steve?

Steven Zabel: Great. Thank you, Rick, and good morning, everyone. The third quarter was another very good quarter for the company, as we saw the continuation of our strong first half operating performance, particularly across all of our disability product lines. Disability results in the third quarter were highlighted by strong sales and underwriting performance across the board, including benefit ratios of 57.5% for Unum US Group disability, 45.4% for Unum US individual disability and 67.4% for Unum UK, all below our long-term expectations. Sales were strong across most areas of the company, specifically with our various disability products performing very well. Consolidated sales grew 1.8% across our core operations, highlighted by 8.5% growth in Unum US and 4.7% growth in Colonial Life.

While the third quarter is a relatively small quarter for sales, we are pleased with the growth path that we are on, and are positioning for our biggest sales quarter in the fourth quarter. Core operations premium grew at a healthy rate of 6.1% in the third quarter, as we continue to see tailwinds from natural growth. Natural growth continued to exceed our historic levels, but fell below the 5% mark that we experienced for the past few quarters. Persistency was generally improved from 2Q results and within our expectations. Year-to-date, core operations earned premium grew 4.9%, just below the top end of our full year outlook of 3% to 5%, which we now expect to exceed. As I review our results by segment, I will describe our adjusted operating income results and benefit ratios, excluding the impacts from the annual GAAP reserve assumption updates in the third quarter of 2023 and 2022.

Starting with Unum US, adjusted operating income increased 27.4%to $357.8 million in the third quarter of 2023 compared to $280.8 million in the third quarter of 2022. Results finished above prior year, primarily due to favorable benefits experience and long-term disability and higher premium income, partially offset by higher operating expenses. The group disability line reported another robust quarter, with adjusted operating income of $170.1 million compared to $130.7 million in the third quarter of 2022, with the increase driven by higher earned premium and a strong benefit ratio of 57.5%. The improvement from second quarter was driven by lower average claim size, coupled with continued strength in both recoveries and incidents. Looking ahead to the fourth quarter, we expect the benefit ratio in the low 60% range.

Results for Unum US Group Life and AD&D increased compared to the third quarter of last year, with adjusted operating income of $52 million for the third quarter of 2023 compared to $28.2 million in the same period a year ago. The benefit ratio decreased to 73.3% compared to 78% in the third quarter of 2022, due to lower COVID-related mortality and lower average claim size. Adjusted operating income for the Unum US supplemental and voluntary lines in the third quarter was $135.7 million, an increase from $121.9 million in the third quarter of 2022. The increase was driven predominantly by improved voluntary benefits results. The voluntary benefits loss ratio of 39.1% was favorable to the prior year, primarily due to lower benefits in both the disability and life product lines.

The individual disability benefit ratio of 45.4% was unfavourable to the prior year, mainly driven by higher average size of submitted claims, but still favorable to our expectations. Turning to premium trends, Unum US results included strong year-over-year premium growth of 6.5%, supported by a declining rate of natural growth. Sales trends for Unum US were also solid, with sales increasing 8.5% year-over-year in the third quarter. Persistency for total group of 89.8% remained stable in the third quarter, with similar stable results within most of our supplemental and voluntary lines. Now moving to Unum International. The segment continued to show strong trends in its underlying earnings power, with adjusted operating income for the third quarter increasing to $36.8 million from $24.9 million in the third quarter of 2022.

Adjusted operating income for the Unum UK business improved in the third quarter to GBP28.4 million compared to GBP23.3 million in the third quarter of 2022. The reported benefit ratio for Unum UK decreased to 67.4% in the third quarter compared to 78.7% in the same period a year ago. As you may recall, a portion of our policies in the UK have an inflation rider, which are backed by inflation-linked gilts. The inflation-linked benefits are capped, but the income we receive from linked gilt is not, which does increase earnings levels in periods of very high inflation. This inflation benefit has dissipated from recent highs. Without this impact, in the third quarter, Unum UK adjusted operating income was in the mid-20 million pound range, reflecting another quarter of strong underlying claims performance.

So then looking ahead to the fourth quarter, we expect underlying earnings at a similar level, with the inflation benefit at or maybe slightly below third quarter levels. International premiums continue to show strong growth. Unum UK generated premium growth of 9.9% on a year-over-year basis in the third quarter, while our Poland operation grew 27.3%. UK sales in the third quarter were GBP18.2 million, down from third quarter 2022 sales of GBP 30.9 million, which did include a higher-than-normal amount of large case sales. Unum Poland sales in the third quarter were nearly twice the year ago period. So then moving to Colonial Life. Adjusted operating income for this segment was $102.9 million in the third quarter compared to $117.9 million in the third quarter of 2022.

The decrease was driven primarily by higher DAC amortization due to increased lapses. The benefit ratio of 49.1% increased from 48.7% in the year-ago period, but did remain within our expectations. Colonial premium income of $431.2 million finished 1.9% higher than the prior year, primarily driven by higher sales, partially offset by lower persistency compared to the year ago period. Momentum has been building for Colonial top line growth throughout the year and with the year-to-date premium growth just under 1%, we are positioned to meet our growth outlook for the segment of 1% to 3% for the full year. Sales in the third quarter of $121.3 million increased 4.7% from the prior year, with sales across all product lines. So then in the Closed Block segment, adjusted operating income, excluding adjustments related to the Closed Block individual disability reinsurance transaction was $34.2 million compared to $42.1 million in the third quarter of 2022.

The decline was driven primarily by higher long-term care benefits experience and a lower long-term care earnings trajectory post assumption update, which I will describe in more detail in a moment. So quickly wrapping up my commentary on the quarter’s financial results, the adjusted operating loss in the corporate segment was $41.5 million compared to a $49.5 million loss in the third quarter of 2022, primarily driven by higher net investment income and lower expenses. For the fourth quarter, we expect the segment’s operating loss to remain generally consistent with this level. So reflecting on these results as well as those from the first and second quarter, the first nine months of the year have been very strong and we continue to have confidence in our ability to grow our full year operating earnings per share towards the upper end of our expected range of 20% to 25% over historically reported results.

Now let me dive into the assumption update and provide additional details on updates made to LTC, including the LDTI dynamics that Rick did mention earlier. We completed our annual review assumption in the third quarter with a generally modest impact on financial results. This resulted in a net increase in reserves of $177.2 million or approximately $139.3 million after tax. While most product lines saw changes, this year’s assumption updates were highlighted by favorable adjustments in our group disability line and for Colonial Life. For group disability, since last year’s GAAP reserve review continued high levels of performance and investment in our operations give us confidence that current recovery trends are sustainable, leading to $121 million favorable adjustment before tax.

For Colonial Life, favorable claims experience as well as lapse trends drove reserve releases of $80.7 million before tax. In addition, with two prior updates to our group disability GAAP recovery assumption in both 2021 and 2022, and the continued favourability we are seeing, we made an update to our statutory reserve recovery assumption, which led to a statutory reserve release of $205 million pre-tax, an incremental source of capital that further boosts our strong financial position. Moving to LTC. The GAAP assumption updates resulted in an increase in reserves of $368.1 million before tax, reflecting strengthening of lapse and mortality assumption in the older age population within the active life reserve, which was partially offset by a refresh of our premium rate increase program.

It is important to note that under current GAAP, our LTC reserve update reflects locked-in interest rate assumptions as of year-end 2020. As such, the LTC assumption updates do not reflect changes in interest rate margins since the LDTI adoption date of January 1, 2021. Thus, unlike prior years, changes in interest margins cannot offset changes in liability assumptions for reporting — financial reporting purposes. As an example, using a 4.5% 30th year treasury yield as our long-term expectation for new money in setting reserving levels, it would have nearly offset the entire LTC assumption update impact. Furthermore, consideration of today’s long-term rates would indicate additional margins. While interest margin is no longer reflected in our GAAP reserve analysis, we will still see the benefit of higher earned portfolio yields compared to the locked-in discount rates as interest margins in earnings over the life of the block.

The assumption updates also impacted both the future lifetime loss ratio expectation or net premium ratio and the buffering effects of periodic experience volatility. The new reserve basis includes an increase of future expected benefits. As a result, the net premium ratio or NPR for the block is now in the low to mid-90s. In addition, we will experience less quarterly buffering, driving increased quarterly volatility. These dynamics can be seen in our third quarter results. The quarterly LTC interest-adjusted loss ratio was 105.3% compared to the new net premium ratio in the low to mid-90s. This elevated interest adjusted loss ratio was due to claims incidents remaining at a higher level, higher than expected levels, but were favorable compared to the second quarter.

While the overall claims experience in this period was improved from the second quarter, less of the unfavourable impact was buffered in the third quarter. Given the increase in NPR to the low to mid-90s, we expect GAAP earnings in the Closed Block to be in the $30 million to $40 million range per quarter going forward compared to prior expectations of $45 million to $55 million. To be clear, this assumption update does not impact our plan for capital deployment or lower our expectations of significant margins between our statutory reserves and best estimate of approximately $3 billion at year-end. We remain on track to fully recognize the premium deficiency reserve by year-end without contributing additional capital into Fairwind in the fourth quarter, as we have benefited from actions taken to de-risk the block in today’s higher rate environment.

And from a subsidiary perspective, First Unum holds a greater proportion of reserves impacted by the underlying assumption updates. As a result, we do expect an increase to our asset adequacy reserve in that entity in the fourth quarter. Therefore, we expect to reallocate $200 million to $300 million of expected capital contributions from Fairwind to First Unum for the full year 2023. Importantly, while this changes the geography of our planned capital contributions, it does not impact our overall capital deployment plans of contributing $800 million to $900 million to LTC for the full year, followed by no further contributions as we detailed at our outlook meeting in February. Moving now to investments. We continue to see a good environment for new money yields and risk management.

Purchases made in the quarter were yet again at levels above our earned portfolio yield, which was 4.45% for the first nine months of 2023. In addition, our interest rate hedge program for LTC is performing as expected. Since inception of the program last year, we’ve now entered into nearly $2.6 billion of treasury forwards, including hedges entered into since quarter-end. Given favorable market conditions, we have expanded the horizon of the hedged cash flows from five to seven years. In addition, we took the opportunity to further de-risk the balance sheet by selling over $700 million of shorter duration bonds in our LTC portfolio and reinvesting these proceeds in higher credit quality, higher yielding and longer-duration bonds that better match our liability profile.

While this was capital neutral, it did generate after-tax GAAP realized losses of $35 million in the quarter. While these are prudent risk management and economic decisions, the benefits are not reflected in the current GAAP treatment of interest margins. So to round out the investment discussion, miscellaneous investment income increased in the third quarter to $24 million compared to $18 million a year ago as alternative investment income increased. Income from our alternative invested assets was $22.6 million within our longer-term expectation of $20 million to $25 million. So I’ll wrap up my commentary with an update of our capital position, which remains very strong. The weighted average risk-based capital ratio for our traditional US insurance companies is approximately 470%, and holding company liquidity remains robust at $1.2 billion.

Capital metrics again benefited in the third quarter from the strong statutory results, with statutory after-tax operating income of $532.7 million, which includes the impact from the LTD statutory reserve release described earlier. This brings year-to-date statutory after-tax operating income to $1.1 billion, which will enhance dividend capacity in 2024. Our strong cash generation model drives our ability to return capital to shareholders and in the third quarter we paid $71.4 million in common stock dividends and repurchased 1.5 million shares at a total cost of $74.8 million, an increase to the pace of share repurchase from the first half of the year. As Rick mentioned, the pace will increase again in 2024, as our Board recently authorized a new share repurchase program of $500 million beginning on January 1, 2024.

As planned, we contributed $200 million of capital in the Fairwind in the third quarter, bringing the full year total to $600 million. Our expectation is that this amount is sufficient to fully recognize the premium deficiency reserve in 2023 without additional capital contributions. Given the impact of our LTC best estimate assumption changes on the First Unum block, as described earlier, we plan to contribute $200 million to $300 million of capital to First Unum. In total, our 2023 capital contributions to support LTC will total $800 million to $900 million, consistent with our expectations coming into the year. Full recognition of the premium deficiency reserve is expected to result in significant excess margin of approximately $3 billion over our updated estimate for the entire block and supports our plans of not contributing capital for LTC in the coming years.

Our focus in 2023 has been completing the accelerated recognition of the PDR as outlined in our February outlook meeting. Considering our position today with a strong year-to-date earnings, robust capital position and clarity on our premium deficiency reserve balance, we’re pleased with our ability to put the PDR funding behind us and to increase free cash flow available for deployment in 2024 and beyond. Now I’ll turn the call back to Rick for his closing comments and I look forward to your questions.

Richard McKenney: Thank you, Steve. So there’s plenty to discuss this quarter, but I would like to reiterate before we get to questions that in total, the strength of the franchise, the strength of the balance sheet and the strength of the capital generation provides tremendous opportunity as we look to the last quarter and into 2024. So the team is here to respond to your questions. So I’ll ask Brianna to begin the Q&A session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Suneet Kamath with Jefferies. Your line is open.

Suneet Kamath: Thanks. Good morning. Just wanted to start on LTC. Can you just talk a little bit more about what changed in terms of the assumptions and how your new assumptions compare to what you’re using on a statutory basis?

Steven Zabel: Yes, this is Steve. I can take that question. So as I said in my comments, really the vast majority of the financial impact of those changes. It was related to the strengthening of the assumption for both mortality and lapse, specifically for the older age population. It also was more focused too on those policies with richer benefits. And so what we’ve seen over the past few years is that, that experience set for those older age policyholders. We practically doubled the data that we have over the past several years. The other thing that we had to work through, obviously, was the impact of COVID. And as you’ll recall, we had a lot of volatility in our experience during the COVID years, both in claimant mortality as well as incidents, but what we did see were trends in what we saw in our active life terminations.

We wanted to really wait until we got the stability over that period of volatility. And then we also looked at some outside industry information. And between really those three dynamics, we thought that this was the right time to go ahead and adjust those assumptions. So those are really the major kind of benefit assumptions that were changed. And then we also updated our rate increase program as part of this assumption can change.

Suneet Kamath: And then how do those compare to what you have on — what you’re using under stat?

Steven Zabel: Yes. It’s kind of hard to compare. But I think a good indicator of that is our view of the premium deficiency reserve and really the needs of the recognition there really did not change as we went through the GAAP assumption review.

Suneet Kamath: Got it. And then I guess as we think about First Unum and that $200 million to $300 million contribution, I guess I was a little surprised it was going into AAT, because you guys have done so much hedging there. So can you just kind of maybe explain that a little bit more what’s causing that increase within First Unum?

Steven Zabel: Yes. Probably the way to think about it is our First Unum block tends to be mostly individual policyholders. They are higher, richer benefits. And so when we looked at our assumption review and we had to overlay that across the different blocks, it did have a little bit of an outsized impact on those policyholders within First Unum. We do continue to be very pleased with our hedge program within the First Unum block. It provides a really good protection against downside scenarios. We’ve seen that play out as we’ve gone through our asset adequacy review. But given these new assumptions, we do think we’re going to need to strengthen the asset adequacy reserve going into year-end, and so we are going to put a little bit more capital down into that legal entity.

Suneet Kamath: Okay. Got it. Thanks.

Richard McKenney: Thanks, Suneet.

Steven Zabel: Thanks, Suneet.

Operator: Our next question comes from Tom Gallagher with Evercore ISI. Your line is open.

Thomas Gallagher: Thanks. A couple more on long-term care. Steve, how much was the offset on increased future rate assumptions that you just referenced? That was my first question.

Steven Zabel: Yes. The offset was we made an adjustment to our rate increase assumption of about $900 million. And just to kind of put that into context, we’ve achieved over $4 billion of rate increase approvals over the years. So we think that’s a very reasonable amount. We clearly have great relationships with regulators, and we’ve had quite a bit of success over the years. So I feel very confident about our ability to execute on that going forward.

Thomas Gallagher: So you’re assuming an incremental $900 million of future rate increases versus your prior. Okay. Got you. And the next question is just the portion of your long-term care block that gets recognized immediately versus the higher — in terms of higher loss ratio cohort versus the better part of the block that gets smooth. What does that mix look like?

Steven Zabel: Yes. The way to think about it is that you go through the liability assumption review, and kind of reset your thinking about the needed economic reserve there. And then you do need to let it go through the mechanics of LDTI. And so what’s going to happen there is there’s going to be a portion of it that really gets buffered away into the reserve amount. There’s going to be a portion that you’re going to recognize in the current period. Now that portion that gets buffered is going to impact your net premium ratio, which is an indicator of your go-forward loss ratio. And so if you kind of break that down to the numbers, we had about $900 million net of liability change or some impact of assumption change. We buffered about $500 million of that into the reserve.

That resulted in about a 7% increase in the net premium ratio, which that’s going to impact our go-forward earnings. And that’s why we’ve kind of reforecast what the margins are going to look like on LTC and then about $400 million or the exact number is $368 million fell through to the bottom line and was reported in third quarter earnings. I think the other thing that’s important about the dynamics here is we implement these GAAP assumption changes as of the beginning of the quarter. So it was really effective 7/1, and so that go-forward expectation of the loss ratio was really in effect during the third quarter. So when you think about what our reported loss ratio was in the third quarter, the starting point was really that new net premium ratio, which was in the low to mid-90s.

Thomas Gallagher: Got you. That’s really helpful. If I can sneak in one more. Just if rates were to stay where they are now into 2025 at the long end of the curve, how much — and I think now you have $1.6 billion PDR, if I’m keeping score correctly, of the $1.6 billion, how much would become redundant? Would that be all of it or most of it? And is it fair to assume that even if it technically is redundant, that you’d probably leave it in Fairwind, considering your ultimate goal of risk transfer? Thanks.

Richard McKenney: Yes, Tom, it’s Rick. Let me address that. When you talked about where interest rates are today and take you back around the PDR and the dynamics around interest rates, as we’ve talked before and it’s a three-year look back rolling average. And so spot rates today are clearly have moved up even more throughout the year. So the money that we’ve put in there today is predicated on that three-month or three-year rolling average. As it rolls two spot rates, if interest rates stay where they are, a significant amount of those reserves become redundant over time. So it’s not going to happen. It’s going to happen on that same three-year trajectory. That those reserves would, in that scenario, turn into capital. We’ve got that capital down.

And we think that although we have the ability to move it around to other parts of the entity for other purposes, we would like to keep a lot of it there to make sure that we can live up to our five-year no more capital going into our Fairwind entity. And I think that’s the clear message there. So although we have the ability to giving shorty to investors around not needing to put more money behind long-term care we think has shareholder value. So that’s our intent going forward.

Thomas Gallagher: That’s helpful. Thanks, Rick.

Operator: Our next question comes from Joel Hurwitz with Dowling & Partners. Your line is open.