Elias Habayeb: So yes, if you look about variable investment income, there’s 2 components to that portfolio. One is tied to alternatives, and the second is tied to where liability management activity fees on commercial mortgage, prepayments as well as call and tender activity. So on the first one on alternatives, we continue to believe that long-term expectation is 8.5%. It’s going to be market-driven. It’s been depressed. But given what the recent performance is, there could be a recovery in that space. With respect to the other component of variable investment income, that’s really going to depend on what happens to M&A activity and liability management exercise. So our view is what we’ve experienced in the last few quarters sort of on the bottom end. What we experienced on 2021 is at the top end, and we do expect it to revert to somewhere in the middle at some point.
Operator: The next question comes from Alex Scott with Goldman Sachs.
Alex Scott: First question I had is on individual retirement. Just looking at net flows on the surface, first quarter in a while, you’ve had outflows. Can you talk about the dynamic with surrender rates? I think you said they had moderate. Maybe just thoughts on as we sit here today with current rate levels, how much could that moderate. And what do you think is a reasonable level of fixed annuity flows in this kind of environment?
Kevin Hogan: Yes. Thanks, Alex. It is true that overall net flows in the Individual Retirement business were negative, but that is largely weighted in the separate accounts, which have a different dynamic relative to earnings contributions. And again, similar to Group Retirement, we kind of look beyond net flows at the sources of earnings. I think what’s important is in the general account in Individual Retirement, we actually had $400 million of positive flows. And let’s take a look at the second quarter in sort of perspective, right? I mean the premiums and deposits were nearly $10 billion, which is a very, very strong quarter for us. It’s up 42% year-over-year. And frankly, one of the benefits of our business model with the multiple products and channels is that we don’t have to rely on any one product or channel.
And we mobilized our capital where the risk-adjusted returns are the most attractive. On the fixed annuity side, the first quarter sales of fixed annuity were remarkably high, and that was kind of an industry issue. You saw the whole industry was down 24% from the first quarter to the second quarter. And I think that reflects the nature of where interest rates and credit spreads were in the first quarter and pent-up demand, especially in the bank channels. We never really expected that level of activity to continue. In the second quarter, there’s a lot of operational work to get through from the pipeline of the first quarter, and we also had very attractive opportunities. We knew in the pension risk transfer pipeline as well as continuing tremendous demand for the index annuity product.
In terms of surrenders, they did creep up a little bit in the quarter, but they remain aligned with our expectations. We continue to see growth in the general account. And if interest rates stay about where they are, I think that the reality is, is that many of the advisers have been through their book over the last year of this higher interest rate environment. And a lot of the people that may have made reinvestment decisions have likely already initiated action. So as long as these surrenders remain within our expectation, that’s what’s most important to us. And I’ll just reiterate that where the new business margins are right now, we’re very comfortable with our position in Individual Retirements, including fixed annuities, which, as you know, has long been an important part of our strategy and continues to be.
Alex Scott: That’s really helpful. Second question is just in the Life Insurance business. We’ve heard from the industry this quarter, I wouldn’t say concerns, but a little bit of pressure around older age mortality and just a pull forward of mortality still occurring. Would be interested if you’re seeing any of that, if maybe there’s dynamics between the portfolio you have versus maybe what the industry has and. Just thinking through, you did separate a fair amount of universal life going back to the Fortitude separation. So anything nuanced around your book of life in that industry theme?
Kevin Hogan: Well, Alex, we have repositioned our portfolio over the last number of years, as you pointed out. And we feel really good about the product suite that we now have. And our second quarter mortality actually showed a bit of improvement and continues to be within our pricing expectations. LDTI does help reduce some of the volatility that historically we saw, particularly in the term area. And so that may be something reflective of reporting, but we did see a modest improvement. We haven’t seen any trends in mortality that suggests a change to our long-term assumptions. From the beginning of the pandemic, we did believe that there was likely going to be some acceleration of mortality. But the quality of the reporting and cause of death and those type of things make it very difficult to interpret. So we’re now just looking at overall mortality, and we’re comfortable where we are.
Operator: Our next question comes from Erik Bass with Autonomous Research.
Erik Bass: Are there any capital optimization opportunities that you can look at within the business, such as internal reinsurance that could potentially improve returns or capital efficiency over time?
Elias Habayeb: Erik, it’s Elias. So from a capital perspective, we actively manage the balance sheet. And we always look for opportunities to how we optimize it, and we did something last year where we pulled our VA reserves and allow us to optimize capital, and that helped fund some of the new business we did. So this is something we do on a regular basis in how we manage our balance sheet.
