Alex Scott: Hi. First one I had is on Wealth Solutions and wanted to know if you could just help us think through sensitivity to the shorter end of the curve on interest rates. And I know you guys use the forward curve in your guide, so that’s helpful. But just help us think about sensitivity, particularly to rate cuts and if they’re greater than expected or if it ends up being fewer rate cuts this year.
Rob Grubka: Well, look, Alex, I guess where I’d start with it is, part of how we got to the participant behavior that we’ve seen was certainly driven by alternatives in the market that was exacerbated, is maybe the right word for the different value that was either perceived or promoted to a participant on what might be available outside of plan. Now, participants aren’t sitting around necessarily trying to figure out how sensitive their behavior is going to be for short engine changes and what the Fed decides and how that plays itself out. Again, I think we’re at a place where we’re given a guide around our best view of participant behavior given the environment we’re in. As you’re saying the environment is going to change.
How sensitive it is, honestly, it’s very hard to sort of quantify in any meaningful way for you. I think what we’re trying to do, and to Heather’s point around diversity of the business and the actions that we’re taking, we’re — we feel like we’re at a inflection point. You went through a change in yields and markets and impacted the general account that is going to allow us and put us in a position to continue to grow the fee row of the income statement faster. And as we do that, continue to drive diversity of how we earn money, how we make money moving forward, and then importantly continue to support the dividend approach and the free cash flow approach that we have overall. And this all factors into what is that mix of general account?
What are the new solutions and services we’re trying to provide? Heather talked about retail wealth as an area that we want to continue to invest in. We’ve got a lot of different ways to continue to drive growth and serve participants as an effective way as possible. But I’m dodging your — specifics of your question because it’s a really hard one to answer, but those things are going to factor in and we’ll be able to give insight as it occurs quarter-to-quarter.
Alex Scott: And just, sensitivity on like the specific net investment income and exposure to floaters. I mean, we can see sort of the gross exposure to floaters, but it’s a little hard to tell on the crediting rate side, like how much of it actually flows through to earnings.
Rob Grubka: Alex, maybe — we’ve been — let me just come at a high level and then you can maybe be more specific so I can make sure I’m hitting it. But look, we’ve been tactical in our approach around investment strategy and what we’ve been doing in this sort of rate environment to be thoughtful as participants are leaving the general account. You would imagine we’re sitting there thinking about the cash that we have available in the general account. And so taking advantage of floaters and the shorter end of the yield curve is something that was smart to do financially, but also wise to do from a risk perspective. And so we’ve done some of that on the edges. But is that getting your question?
Donald Templin: Well, Alex, maybe — this is Don, I might add that sort of — floating rate sensitivity is embedded in our — in the sensitivities that we show around the interest rate changes. So on our slide 2023 — or 23, that has guidance and assumptions, it’s incorporated in there.
Alex Scott: Understood. And if I could maybe sneak one more in. I just wanted to see if you could update us on the commercial real estate portfolio. And I know you provided the slide, which is very helpful. Is there any other color you can give to us just around how much is maturing in 2024 and progress or comments on how that will unfold and if you expect any headwind to cash flow?
Matt Toms: Yeah, no. And thanks for the question. Actually a real pillar strength in our opinion, as far as our positioning within our balance sheet broadly, but within commercial real estate very specifically. When we step back and look at our positioning in office relative to peers, 14% in office relative to the ACLI peers at 21%. And also the diversity of that portfolio, $12 million average loan size across 450 loans. We start from a position of strength and we also start from a position of strength from CM1 to CM2 to go into detail, 71% CM1. This is a differentiated portfolio relative to the market. It’s very diversified. I think the stats speak for themselves. We provided more detail in the materials. You’ll see that I think will drive to the point specifically. But overall, we feel very confident in our commercial real estate portfolio. Clearly a difficult environment for office. We think we’re well positioned.
Operator: Thank you. Our next question comes from the line of Michael Ward with Citi. Please proceed with your questions.
Michael Ward: Thanks. Maybe just quick color on that last question. Curious about the deed in lieu that you mentioned, where it sounds like that’s like kind of when you take the keys back. Any comment on like how much of that you’ve done and maybe the capital impact of it?
Matt Toms: Yeah, no, let me maybe build on a little bit. And we put a call out in the presentation. I think you’re referencing a $16 million unpaid balance. And just to put that in the context of our balance sheet of $37 billion, that’s meant to be a statement of strength. If we look at the guide forward as far as losses, and you look historically as far as our loss rates, very low, mid-single digits loss rate. We feel very confident with the portfolio even going through the CML component of office, that we will continue to likely under deliver what the market does as far as losses and what our long term planning assumption is. So that $16 million is a non-accrual, as you referenced, but really don’t anticipate any meaningful losses.
Michael Ward: Got it. Thank you. That’s helpful. And then maybe just on the Health guidance. Curious if you can speak to benefit focus and if you can kind of call out the contribution from that within Health. Just kind of want to try and figure out the organic sort of guide there.
Rob Grubka: Yeah, this is Rob. So on benefit focus, and as we’ve alluded to in the conversation here, incredibly excited about the strategic opportunity that continues to present. As we talked about a quarter ago, brought down what we said the adjusted operating earnings would be. That played out as a little bit lower in the fourth quarter. As you do the step back, what I would say is focus in on the fee row within the health business to capture the bulk of the momentum that we see from a revenue perspective in that business. We’ve also talked about sort of the patience required because of the longer sales cycle in that business. I would hone in on — the strategic piece here is also getting exposure to the Health business and the health market and healthcare market in a bigger, broader way.
So things that we’re in flight with and going to continue to talk about as we move forward is how does we — how do we influence healthcare spend, the efficiency of it, the effectiveness of it, for both participants as well as employers. So this is the thing that — in an HR department, they’re going to spend most days of the year talking about healthcare, what’s going on, how do we influence it? How do we bend the cost curve, be more efficient, more effective, and drive better outcomes for their employees? And we think we’re in the sweet spot to bring those things together as you look at the totality of our business in health, but then importantly, how do we connect in with the wealth business and bring benefits and savings together? We’re really excited about what that can bring to us.
So coming back to your question, under where we wanted to be, but really excited about where we’re going and how that’s going to translate into growth. And as Don and Heather touched on the net promoter score, effectiveness of open enrollment was a big reason why we continue to spend and invest in that business throughout the year, regardless of where the revenue was going. And that’s just playing this thing in the strategic way, in a smart way, as we think about the future.
Operator: Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Heather Lavallee for any closing remarks.
Heather Lavallee: To summarize a few key messages. We remain focused on executing our plan, profitably growing each capital-light business, and delivering an outstanding experience for our customers. Our commercial strengths continue to grow, supported by our robust pipelines across Workplace Solutions and Investment Management. We are confident in achieving our EPS growth and cash flow generation targets in 2024 and beyond. Thank you and we look forward to updating you on our progress throughout the year.
Operator: Thank you. That does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
