Jackson Financial Q2 2023 Earnings Report

Good morning, everyone, and welcome to Jackson's 2nd quarter earnings call. Today's remarks may contain forward looking statements, which are These statements are not guarantees of future performance or events and are based upon management's current expectations. Jackson's filings with the SEC provide details on important factors that may cause actual results or events to differ materially. Except as required by law, Jackson is under no obligation to update any forward looking statements if circumstances or management's estimates or opinions should change. Today's remarks also refer to certain non GAAP financial measures.

The reconciliation of those measures to the most comparable U. S. GAAP figures is included in our earnings release, Financial supplement and earnings presentation, all of which are available on the Investor Relations website at investors. Jackson.com. Joining us today are CEO, Laura Prescorne our CFO, Marcia Watson our Head of Asset Liability Management and Chief Actuary, Steve Benares Our President of Jackson National Life Distributors, Scott Romine and President and Chief Investment Officer of PPM, Craig Smith.

At this time, I'll turn the call over to our CEO, Laura Priescorn.

Thank you, Laura. I'll begin with our Q2 results summary on Slide 6. Our adjusted operating earnings of $283,000,000 are up from this year's Q1 as the benefits of higher equity markets are coming through fee income, but earnings are down from the prior year's Q2 As described on the slide. Similarly, our 2nd quarter adjusted book value attributable to common shareholders Was up from the Q1 due to non operating net hedging gains and healthy adjusted operating earnings. We've once again included additional general account investment portfolio details in the appendix of our earnings presentation That provide breakdowns on both U.

S. GAAP and statutory basis, excluding the assets reinsured to 3rd parties or funds withheld assets. The information in the appendix provides helpful insight into our highly rated and diversified commercial mortgage loan office portfolio. As you can see, Jackson remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, Excluding funds withheld assets. Slide 7 outlines the notable items included in adjusted operating earnings for the 2nd quarter.

Results from limited partnership investments, which report on a 1 quarter lag, were $23,000,000 lower in the current quarter Then they would have been had returns matched our long term expectation. Similarly, in the Q2 of 2022, Limited partnership income was also modestly below the long term expectation, creating a comparative pretax negative impact of $12,000,000 The current quarter also included a $25,000,000 pretax allowance for reinsurance losses With no similar item in the prior year's Q2, bringing the total year over year comparative pretax impact to negative $37,000,000 In addition to the notable items, the Q2 of 2023 benefited from a lower effective tax rate as compared to the prior year's quarter. 2nd quarter 2022 pretax operating earnings were higher than the current year quarter, meaning that in the case of tax Benefits that were similar on a dollar basis in these two periods, the current period had a larger reduction to the effective tax rate. Adjusted for both the notable items and the tax rate difference, earnings per share were $3.54 for the current quarter Compared to $4.52 in the prior year's Q2. This reflects the previously flagged increase in VA fixed option crediting rates Due to the regulatory minimum requirement as well as the change in income from operating derivatives resulting from higher short term interest rates.

Once again, we saw positive sequential trends as the earnings per share, excluding notables, in the Q1 of this year was $3.18 Slide 8 illustrates the reconciliation of our Q1 pretax adjusted operating earnings of $305,000,000 to pretax income attributable to Jackson Financial of $1,500,000,000 Net income includes some changes in liability values under GAAP accounting that will not align with our hedging assets. We focus our hedging on the economics of the business as well as the statutory capital position and choose to accept the resulting GAAP non operating volatility. For example, the market risk benefit or MRB calculations reflect the impact of interest rates from both the changes in the discounting of future cash flows, Which we consider in our hedging, as well as the impact of rates on assumed future equity market returns, which we do not explicitly hedge. Because of this dynamic, movements in interest rates will have a larger MRB impact than the associated hedging assets. This means that when interest rates rise, you would expect the net hedge result to be a positive.

And when interest rates decline, you would expect it to be negative, All else being equal. As shown in the table, the total guaranteed benefits and hedging results, Our net hedge result was a gain of $1,100,000,000 in the 2nd quarter. Starting from the left side of the waterfall chart, you see a robust Guaranteed benefit fee stream of $781,000,000 in the quarter, providing significant resources to support the hedging of our guarantees. These fees are calculated based on the benefit base rather than the account value, which provides stability to the guarantee fee stream, protecting our hedge budget When markets decline. Consistent with our practice, all guarantee fees are presented in non operating income to align with the hedging and liability movements.

There was a $1,900,000,000 loss on freestanding derivatives, primarily the result of losses on equity and interest rate hedges in the quarter Where the S and P had a total return of nearly 9% and interest rates were up across the yield curve. Movements in net MRB liability provided a $2,600,000,000 gain that more than offset the freestanding derivative movements, Due in large part to these same equity market and interest rate increases. Unlike the statutory framework, The GAAP reserves for variable annuity benefits do not have a minimum requirement and can become negative, switching from a liability to an asset position. This happened during the Q2 as the strong economic profile of our in force book led to a market risk benefit net asset of approximately $1,500,000,000 Non operating results also include $118,000,000 of gains This was primarily due to a loss on a funds withheld reinsurance treaty That includes an embedded derivative as well as the related net investment income. These non operating items, which can be volatile from period to period, are offset by changes in accumulated other comprehensive income, or AOCI, in the funds withheld account related to reinsurance, Resulting in a minimal net impact on Jackson's adjusted book value.

Furthermore, these items do not impact our statutory capital Our segment results start on Slide 9 with retail annuities. Variable annuity sales are down industry wide compared to a year ago. But for Jackson, VA sales have stabilized over the past 3 quarters, And we remain an industry leader in that market. Our total annuity sales are supported by Ryla fixed and fixed index annuity sales, Which are up meaningfully from the Q2 of 2022. Overall, sales without lifetime benefits As a percentage of our total retail sales increased to 43% in the Q2 of this year, up from 38% in the Q2 of last year.

We expect this percentage to vary somewhat over time based on market conditions and consumer demand. When viewed through a net flow lens, the gross sales we are generating in Ryla and other spread products translated to nearly $600,000,000 of non VA net in the Q2 of 2023. In addition to partially offsetting net outflows and variable annuities, These net flows provide valuable economic diversification and capital efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business strain. Looking at pretax adjusted operating earnings For our retail annuity segment on Slide 10, although we are down from the prior year's Q2, we show positive underlying trends as demonstrated By the AUM growth in all of our annuity product categories.

Higher equity markets are benefiting our variable annuity count value And strong net flows are driving growth in Ryla fixed and fixed index annuity account values. Furthermore, the positive momentum Laura mentioned For our enhanced Ryla suite positions us well for the future as we enter the Q3. Our other operating segments are shown on Slide 11. For our Institutional segment, sales for the Q1 totaled $304,000,000 And account values were $8,900,000,000 Sales outpaced surrenders in the current quarter and pretax adjusted operating earnings were essentially Flat from the prior year. Lastly, our Closed Life and Annuity Block segment was also relatively stable compared to the prior year.

Under LDTI, we will now have some additional volatility in this segment due to the quarterly experience update for future policy benefits. While this figure can be positive or negative in any given quarter, we would expect it to net to a small number over time. You can see this in our financial supplement where the last five quarters ranged from a loss of $16,000,000 to a gain of $36,000,000 And on a cumulative basis, totaled to a gain of only $15,000,000 Slide 12 summarizes our Q2 capital position. As Laura mentioned, we returned $100,000,000 to our shareholders in the 2nd quarter And remain committed to reaching our full year capital return target of $450,000,000 to $550,000,000 We were active in share buybacks during the Q2, which totaled 1,400,000 shares or $47,000,000 As of the end of the Q2, we had $439,000,000 remaining on our share repurchase authorization. Our variable annuity book continues to be in a very favorable position as measured by the projected cash flows of the block, Which was further improved by the equity market and rate movements in the Q2.

As we've discussed in the past, this has led to a flooring out of Statutory reserves at the cash surrender value minimum reserve, which can create an asymmetry between these reserves and hedging assets. We experienced flooring during the Q2 as equity markets and interest rates rose, which drove losses on hedges with minimal offset by reserves released. The strong future cash flows embedded in the book still remain. However, statutory rules limit the ability To reflect the full economic value in our current results due to the conservatism in the CSV floor. This flooring impact contrasts with the large reduction in our MRB liability in the quarter, which as discussed earlier, flipped into an asset position as there is no minimum floor concept in GAAP accounting.

In the quarter, we saw a further negative impact to TAC of approximately $400,000,000 due to an increase in non admitted deferred tax assets, Which now totaled $2,000,000,000 The RBC ratio benefited from a reduction in required capital or CAL That resulted from higher equity markets, higher interest rates and the sale of limited partnership assets from Jackson National Life Insurance Company To JFI. Earlier in the year, we decided to take actions to manage our limited partnership exposure down to a level more in line With our investment mix prior to our funds withheld reinsurance agreement. We have taken this approach multiple times in the past To manage our limited partnership exposure given the strong underlying returns and have been successful with the execution. We expect to sell these investments in coming quarters, but given the excess liquidity at the holding company level, We utilized our financial flexibility by moving these investments out of J and L IC, allowing for more efficient investing at the operating company. Unlike previous quarters where the CSV floor effect was most impactful to reserves, as 2023 progressed, we began to materially flooring within our required capital level as well.

As of the end of June, almost all of the 10,000 Scenarios used in VM 21 were floored at the cash surrender value, which is further into the tail than we have ever experienced. This impacted statutory results because we increasingly had very little reserves or required capital to release. However, this also means that we were building latent capital, not just within TAC, but in the RBC ratio as well. As of the end of the second quarter, we had cushion for potential declines in equity markets and interest rates that limits This cushion, along with the significant downside protection from our hedge portfolio, positions us well for stress scenarios. As we discussed last quarter, when dealing with the CSC floor, We can protect the upside exposure in the book through call options.

As markets continued to rise during the Q2, These positions became increasingly more in the money, providing substantial payoffs to help protect our TAC and RBC ratio. This moneyness in the call option portfolio at the end of the second quarter gives us an improved RBC profile for further upside moves in equity markets During the second half of the year, should they occur. During the second quarter, our hedge spend was within the guarantee fees collected. This continues to be a tailwind going into the Q3 due to higher levels of interest rates as well as lower levels of volatility compared to much of the first This has allowed us to purchase options at more favorable prices and with longer durations. Our holding company asset position at the end of the Q1 was nearly $1,500,000,000 Including nearly $1,000,000,000 of cash and highly liquid assets, which continues to be well in excess of our minimum buffer.

This was supported by our preferred issuance during the Q1 that helped to effectively prefund our $600,000,000 senior debt maturity coming in November, Which we intend to retire at that time. Following that retirement, we have no debt maturities until 2027. I will now turn it back over to Laura for closing remarks.

Hey, thanks. Good morning. My first question is, can you Quantify, if there was not the required the requirement for variable annuity reserves to be floored at cash surrender value, What the magnitude of the impact of that would be? In other words, like how

higher or how much lower would your reserves be or how much higher would your capital be That dynamic did not currently exist.

Thanks. And then on the alternative asset sale to the holding company, do you have any expectation on The timing of now selling those assets to 3rd parties and I guess has there already Been a process that's underway to do so?

Got it. Thank you.

Thank you. Could you help us with The quarter over quarter decline in required capital, I'm just curious like how much of it was driven by the equity markets being higher versus How much of it was driven by the lower capital requirements on the LP sale? And maybe relatedly, if you hadn't done the LP sale, would you Still been in that sort of 425 percent to 500 percent RBC?

Okay. Got it. And then I guess on the Michigan thing, can you give us a sense For how long you've been talking to them about this issue? Is this something that you started this year? Or has it been sort of an ongoing conversation?

Just any color there would be helpful.

Got it. Okay. And then maybe just a bigger picture question. When we talk about RBC, you have this really wide range, Which is I think wider than most companies, even VA companies use. And we're always trying to estimate kind of where you land within that range.

And In some ways, it feels like there's some reluctance on your part to be more specific or provide more specificity on the components of RBC, Even though we get a lot of that information from your peers. And so I just maybe wanted to understand Why you take the approach that you've taken? Clearly, it has an impact on the stock. It's very important. I think some additional specificity would be helpful, but I wanted to just Get your logic behind that.

Thanks.

the statutory framework. And we have just

Yes. I mean for what it's worth, I would Encourage you to maybe think about providing a little bit more specificity. I think the long term view makes sense 100%, but My guess is most companies have the same view of the business, but just more color, sensitivities, that kind of thing, I think would be very helpful. Thanks.

Yes.

Hi. First question I had is on the RBC and comments you made And yes, CTE98, I mean it sounded like even in the tail scenarios That you're floored out at the surrender value. I mean that's sort of surprising just given The tail is supposed to be worst 2% of scenarios. I would think that would be a nasty enough outcome that the guarantee would have some value beyond just The surrender value on the policies. Relatedly, my understanding is the NAIC is considering changing that model that's Producing those scenarios and that there's been some field testing going on.

So I was just interested if you guys have participated in that field testing, If you think that will still be the case under a new model that potentially introduces more Rayvol. And is what you're communicating basically suggestive of you're really you're not having to hold a whole lot of capital Against the VAs at all right now because of that dynamic with none of the scenarios Putting you beyond the surrender floor.

Got it. That's all. Very helpful. And maybe if I step away from some of these RBC dynamics and accounting and Go back to your comments of your economic view of the cash projections has obviously benefit a lot from higher equities and higher rates. I think that's something that we haven't really had any disclosure on since around the time that you all became a standalone public company.

So I'd Be interested, I mean, can you provide any detail around that? Can you help us think through what that looks like now? And if that's the Way to look at the true economics, it would be beneficial for us to understand where it's at and maybe help us Value the company properly outside of some of these headaches on RBC with surrender flows and so forth?

Got it. Okay. We'll stay tuned. Thank you.

Thank you. Your participation and interest are appreciated. We thank you for joining us this morning. Take care.