Josh Shanker: Okay, thank you very much for that.
Operator: Our next question will come from Wes Carmichael with Wells Fargo. You may now go ahead.
Wes Carmichael: Hey, good morning. Just wanted to follow up on capital a bit. Max, I know you said that your first priority is to deploy that within the subs on organic. But to the extent that there’s not that opportunity, I just wanted to get your thoughts around potential M&A and given that you’ve got pretty significant excess at the holdco and subs.
Max Broden: Yeah. We — if you think about what our track record, you have seen what we have done historically. Aflac has not been an acquisitive company. This is a company that is built selling one policy at a time. We’ve done a number of, I would call it, tuck-in acquisitions in the United States to broaden our product portfolio. And we do feel that we are in a good spot in terms of the products that we have to offer in our go-to-market strategy. So at this point, I don’t see that we have any holes that need to be filled using M&A.
Wes Carmichael: Got it. Thanks. And then maybe just a follow-up on the middle market loan book away from commercial real estate, it seems like that’s — the book yield now is near 11%. So just wondering if you’re seeing any terms and any collateral deterioration. And if interest rates remain high for a year or so, like, do you expect defaults within that portfolio?
Brad Dyslin: Yeah. Thank you. So far, we have been extremely pleased with the performance of the middle market loan portfolio. It is, frankly, performing better than we expected, given where we are at this point in the cycle. There are several reasons for that. And then ultimately, it boils down to fundamentals, underwriting and then how we’ve chosen to build the portfolio. We have a very small average loan size. We have maintained a discipline around only first-lien secured structures. We’ve kept leverage at a very modest level. We have maintained our use of strong covenants. And then ultimately, it’s about good businesses, good companies with sound business plans that are seeing good top line growth and have the margins and cash flow, avoiding cyclical companies, and that’s really played out.
We have built this as our primary below-investment grade portfolio. So we do expect to incur some losses. But relative to the outsized yields we’ve received, they are really quite modest. And as I said, it is doing better than we expected at this point in the cycle. Going forward, we’re going to have to wait and see just how the macro environment does. It does look like we’ve got the possibility of a soft or at least a soft-ish landing. And then how quickly rates turn around is something that we’re going to watch very closely.
Wes Carmichael: Thank you.
Operator: Our next question will come from Joel Hurwitz with Dowling & Partners. You may now go ahead.
Joel Hurwitz: Hey, good morning. So RBC is strong at over 650%, well above your 400% target. Can you just talk about plans in managing that down towards the target?
Max Broden: So obviously in the US, we are seeing some growth, and we’re seeing some growth in lines of business that are driving a little bit more new business strain. And that’s why we have, in the pandemic, we wanted to run with a little bit more capital and then coming out of the pandemic, we see a little bit higher strain associated with that growth that we are starting to see and expect to see come through. That has led us to run with a little bit higher RBC than what — than the 400%. But we are at a point in time now where I would expect us over the next couple of years to really get down to that 400% level long term.
