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spk03: Good morning, and thank you for attending today's Jackson Financial first quarter 22 earnings call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Liz Werner, head of investor relations. Liz, you may proceed.
spk05: Good morning, everyone. Before we start, we remind you that today's presentation may include forward-looking statements which are not guarantees of future performance or outcomes. A number of important factors, including the risks, uncertainties, and assumptions discussed in Risk Factors, Management Discussion and Analysis of Financial Conditions and results of operations and business financial goals in the company's 2021 Form 10-K could cause actual results and outcomes to differ materially from those reflected in the forward-looking statement. In this presentation, management will refer to certain non-GAAP measures which management believes provide useful information in measuring the financial performance of the business. A reconciliation of non-GAAP financial measures to the most comparable GAAP measures is contained in the appendix to the presentation. With us today are Jackson CEO, Laura Prescorn, our CFO, Marsha Watson, and our Vice Chair, Chad Myers.
spk07: Good morning, and welcome to our first quarter earnings call.
spk04: This morning, we'll review our first quarter performance, reiterate our financial targets, and speak to current market trends. This quarter, Jackson once again demonstrated its ability to navigate volatile markets from a business and capital management standpoint. Our solid operating results reflect the underlying profitability of our healthy in-force annuity book and our ability to deliver sales growth in choppy markets through product and distribution diversification. Adjusted pre-tax operating earnings, excluding notable items, were $463 million for the first quarter, up from the first quarter of 2021. Overall sales increased over the year-ago quarter as lower variable annuity sales were offset by an increase in institutional sales, coupled with growth in two of our newer product initiatives, RILA and Defined Contributions. Total retail annuity assets of $242 billion were up slightly from the first quarter of 2021, but down 7% since year-end due to poor equity market performance in this year's first quarter. In addition to the equity market volatility experienced during the quarter, we saw a dramatic increase in interest rates. While higher interest rates are a clear long-term economic benefit to our business through lower hedging costs, This can cause some near-term headwinds to our statutory RBC position, which Marshall will explain in more detail. Over the course of the first quarter, we once again took advantage of multiple paths to returning capital and returned a total of $192 million to our shareholders. This consisted of $52 million in shareholders' dividends and $140 million in share repurchases. representing approximately 4% of Jackson's outstanding shares, including a $28 million repurchase from Apollo. We remain active buyers of our shares and view Jackson's shares as attractively valued. We are on track to reach our targeted capital return of $425 to $525 million for 2022. We ended the quarter with nearly $1 billion in holding company cash and cash equivalents and have received board approval for a second quarter dividend of 55 cents per share. Focusing on retail annuities, we saw sales of over $4.8 billion, an increase from the first quarter of last year despite significant market volatility. These strong sales reflect our focus on diversification and contributions from our recently introduced RILA offerings, our recent entry into the defined contribution market, and our continued leadership in the variable annuity market. We continue to gain traction with our RILA products with sales nearly doubling from the fourth quarter of 2021. We've seen momentum building since the launch and we expect further sales growth as product approvals are received from additional distribution partners. RILA has been a stable source of growth for the annuity market overall as it provides a valuable solution to financial professionals and their clients. Early estimates from LMROS point to another quarter of increased RILA sales, which now accounts for nearly 15% of annuity sales for the industry. In the first quarter, we saw a return to positive net flows for variable annuities. While recent equity market uncertainty led to a slowdown in VA sales, the market impact resulted in an expected and offsetting decline in VA surrenders. This decline in surrenders directly benefits our VA assets and fee income. The industry and Jackson have been responsive to increasing interest rates with enhancements to VA living benefit features providing more attractive products to retirees. As we've mentioned previously, our variable annuity products are unique in the investment freedom they offer, and we are focused on providing a comprehensive fund collection to meet a range of advisor and client needs. Looking beyond the current period, we believe the opportunities for annuities to meet the retirement income and saving needs of Americans will remain robust. According to LIMRA, Early estimates of March industry annuity sales reached a monthly record of close to $26 billion, the highest monthly level since Limerick began collecting data in 2014. The monthly growth was largely tied to an uptick in fixed and fixed-indexed annuities, which we view as a response to rising interest rates and market volatility. While we offer both fixed and fixed-indexed annuity products, we continue to see our best opportunity for growth seen in the RILA space given its capital efficiency and its favorable risk profile in the context of our large variable annuity block. Expanding distribution remains a strategic priority for Jackson, and we recently announced the addition of a new advisor relationship, Producers Choice Network, or PCN. PCN is a subsidiary of Raymond James and provides advisory annuity products to over 6,500 financial professionals, and fee-based registered investment advisors. We believe our advisory channel is well-suited to provide annuity solutions to their clients. Jackson's focus on quality service delivery and technology-driven solutions for ease of business interactions positions us well within this channel. Last month, an independent industry survey showed Jackson leads the industry in the number of variable annuity advisor relationships. We place a high value on our distribution partners and seek to maintain our long history of industry leading service and support. The first quarter marked a milestone since the beginning of the pandemic with our wholesalers back to meeting in person at full force. Meeting face-to-face enhances advisor engagement and builds productive relationships for Jackson and our distribution partners. We see tangible results from our commitment to our distribution partners and see how our service enhances their business. Since 2004, we've been recognized by Service Quality Management, or SQM, for our exceptional customer service. SQM is the independent organization that benchmarks 500 leading North American contact centers. We also seek to serve advisors and their clients through our industry leadership and engagement, where we are at the forefront of advocating for regulatory change that can result in greater consumer access to retirement solutions. As with many of our peers, we're highly engaged in supporting IRI and ACLI efforts. Most recently, we continue to support Secure 2.0 legislation, which passed in the House, and are pleased with its focus on retirement savings and income. While the legislation still needs to get through the Senate, we believe the focus on more favorable minimum distributions and potential expansion of lifetime income opportunities are positive developments for the community industry. Turning to page four, we reaffirm our 2022 financial target. Jackson has returned capital to shareholders each quarter following our board's initial authorization last November. As of April 29th, we've repurchased 9.5 million shares at an average price of just over $38. This represents over 10% of our shares outstanding at separation. Our shareholder dividend points to a long-term view of Jackson's profitable growth and sustainable capital generation, which support future capital return to shareholders. Importantly, our risk management discipline allowed us to navigate volatile markets and maintain a strong balance sheet. We are within our targeted range for both adjusted RBC and financial leverage. Our adjusted RBC range of 500 to 525% reflects solid capital at our operating company and excess capital at our holding company. Our holding company cash position and relatively low leverage provide capital flexibility and a clear line of sight to near-term capital returns. As you will hear later in the call from Marcia, our hedging strategy performed as expected, staying within our risk limits. The change in our RBC ratio from year end is largely tied to previously disclosed items, including the impacts of capital returns and the statutory mean reduction rates. Our capital position is consistent with our balanced approach of supporting growth and capital return, which we first introduced at the time of our separation. At this time, I'll turn it over to Marcia to walk through the numbers. Thank you, Laura.
spk06: Turning to our results on slide 5, our adjusted operating earnings were down from the prior year's quarter. This is due to higher DAC amortization resulting from lower comparative separate account returns, lower limited partnership income, and higher expenses. As a reminder, we believe Jackson has taken a conservative approach to the treatment of guaranteed fees within our definition of adjusted operating earnings, as all guaranteed fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings. In the first quarter, adjusted operating earnings combined with positive non-operating income resulted in a growing book value even after returning $192 million to shareholders in the quarter. Slide 6 outlines the notable items included in adjusted operating earnings for the first quarter, starting with a market-driven acceleration of DAC amortization. As we previously highlighted, the amortization of DAC is a key item for our results given our annuity-focused balance sheet, and operating DAC amortization has multiple components. For clarity, our financial supplement reports these components as core amortization, which is driven primarily by our pre-DAC gross profit slip period, and any market-related acceleration or deceleration, which results from the pattern of separate account returns over time, as well as the DAC impact from our annual assumption review, which occurred in the fourth quarter. In the first quarter of 2022, there was market-driven acceleration of DAC amortizations resulting in $81 million increase in DAC expense in the quarter on a pre-tax basis. This was primarily due to a negative 6.2% separate account return in that period, which was below the assumed return. In contrast, in the first quarter of 2021, there was a deceleration of amortization resulting in a pre-tax $30 million reduction in DAC expense primarily due to a 4.6% separate account return in that period, which exceeded the assumed return. As a result, the market-driven DAC effect was a net negative impact of $111 million on a pre-test basis when comparing the current first quarter to the prior year first quarter. In terms of future market-driven DAC acceleration or deceleration for modeling purposes, we have provided additional details on the mechanics with the calculation within the appendix of this presentation, which aligns with the format in our financial supplement. This market-related effect is expected to change in the first quarter of 2023 with the adoption of LDTI under GAAP accounting, and we continue to expect to provide more information regarding LDTI impacts later in the year. Additionally, we would note that the first quarters of both 2021 and 2022 included strong limited partnership income, which is reported on a lag and can vary significantly from period to period. Limited partnership income in excess of long-term expectations was $36 million in the current quarter compared to $144 million in the prior year's quarter, creating a comparative pre-tax negative impact of $108 million. In addition to the notable items, the first quarter of 2022 had a higher effective tax rate than the prior year's quarter, negatively impacting the period over period comparison. First quarter 2021 pre-tax operating earnings were higher than the first quarter this year, which meant that the tax benefits that were similar on a dollar basis in the two quarters led to a smaller reduction to the effective tax rate in the current period. Adjusted for both the notable items and the tax effects, earnings per share was up 6% from the prior year's quarter primarily due to the reduction in diluted share count resulting from our buyback activity. With the increase in interest rates in the first quarter, we've provided insight about the impact of rising rates to the results of our VA business, both immediately and going forward. Slide 7 takes into account our healthy VA books and the corresponding impact from the cash surrender value floor, or CSD floor, on reserves, which is an example of conservatism within statutory accounting. Our reserves were materially impacted by this floor both at the beginning and end of the first quarter. Before I go through the items in the table, it is important to note that while rates were up across the yield curve in the quarter, anticipated Fed actions should further increase the short end of the yield curve. Starting with hedging cash flows, our interest rate hedges are focused on protecting us from downward moves in rates, which would increase the present value of claims payments that emerge years into the future. These interest rate hedge assets are immediately fair-valued when longer-term rates rise. However, there is a go-forward benefit to future hedge spend from operating in a higher-rate environment. This is due to the fact that interest rates are a key driver of hedging expenses, both in the cost of the hedging instruments used to protect our books and the volume of hedging necessary to stay within our risk limit. Because we use a mixture of equity futures and shorter-dated options to protect our business, the cost of these instruments is most directly influenced by the shorter end of the curve, with the three-month Treasury being a helpful reference point. Since the increase in the short end of the curve did not happen until later in the first quarter, we did not receive a meaningful benefit in our first quarter hedge spend. If the Fed continues to raise rates as expected through the balance of the year, we would anticipate further increases in the three-month rate to benefit us through lower put option premium expense and improved cost of carry on any futures contracts. This benefit should begin to emerge in the second half of this year. The volume of hedging required is positively impacted by the longer end of the curve, which is up materially. Our VA living benefits are GMWB-focused rather than GMIB-focused. and because of this GMWB focus, claims payments that result from lower equity markets will emerge years into the future and cannot be monetized immediately. The increase in the longer end of the curve that we've seen year-to-date helps to reduce the hedging payoffs needed to offset the corresponding long-duration liability impact of equity shocks. When you consider the statutory impact of higher rates, It is important to note that Jackson is impacted by the combination of floor-dot reserves and fair value accounting for interest rate hedging assets. When reserves are impacted by the CSC floor and therefore cannot be reduced, increases in rates that drive losses on hedge assets do not have a liabilities reduction offset leading to lower statutory total adjusted capital in the current period, which is the numerator of the RBC ratio. However, the reduced hedge spend discussed earlier is not an immediate benefit, but instead emerges over time, benefiting future capital generation. Required capital, or CAL, which is the denominator in the RBC calculation, can potentially immediately benefit the RBC ratio when rates rise, partially offsetting the negative immediate impact of declining capital. Taking all of these items into account from an RBC ratio perspective, we have a near-term negative impact when longer rates rise, a go-forward benefit on the volume of hedging required when longer rates rise, and a go-forward benefit on the cost of hedging instruments when short-term rates rise. I will touch on this again later in the presentation when I walk through the components of the current quarter change in our adjusted RBC ratio. As a contrast to stat, under gap accounting, the impact of increasing rates is more consistent between the immediate and go-forward impacts. Because BAS 157 reserves are sensitive to rate movements and are not subject to a floor, there is an immediate liability reduction offset to hedge losses from rising rates. As shown on slide 17 in the appendix of the presentation, because we don't hedge rates assuming a direct correlation between risk-free rates and equity returns, we would expect rate increases to be a net positive for below-the-line hedging results, which supports GAAP net income. Going forward, GAAP results will benefit from the same reduced hedging costs we noted for STAT, and we would also expect to see a reduction in the expected impact from LVTI implementation as phase 5. Slide 8 illustrates the reconciliation of first quarter 2022 pre-tax adjusted operating earnings of $418 million to pre-tax income attributable to Jackson Financial of nearly $2.4 billion. This provides an illustration of how rising rates benefit GAAP earnings right away, as I just discussed. As shown in the table, the total guaranteed benefits and hedging results, or net hedge results, was a gain of $782 million in the first quarter. As we've noted, net income includes some changes in liability values under GAAP accounting that we consider to be non-economic and therefore will not align with our hedging assets. We focus our hedging on total position and choose to accept the resulting gap below the line volatility. Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $764 million in the first quarter, providing significant resources to support the hedging of our guarantee. These fees are calculated based on the benefits, which provides stability to the guarantee fee stream and protects our hedge budget when markets decline. As previously noted, all guarantee fees are presented in non-operating income to align with the hedging and liability movement during the quarter as a result of rising interest rates.
spk07: This was more than offset by a $1.8 billion gain on net reserve and embedded derivative movements, which were also driven by higher interest rates.
spk06: Now let's look at our business segment, starting with retail annuities on slide 9, where we continue to see healthy sales trends. We are pleased to have had strong levels of retail sales, which included defined contribution sales of $540 million. We generated positive net flows for variable annuities, fixed and fixed indexed annuities, and RILA as well. Our sales without lifetime benefits increased from 31% in the first quarter of last year to 33% in the first quarter of this year, and we expect this percentage may vary somewhat over time based on market conditions and consumer demand. Growing our fee-based advisory business remains a focus for us, and while sales of these products were down 22% from the prior year's quarter, we continue to see significant long-term growth potential from this business. Our total annuity market share highlights our consistent presence in the market, our strong distribution relationships, and disciplined approach to pricing and product design. We expect these attributes to support the growth of our recently launched Ryla product, for which we reported $199 million in sales in the current quarter. We view this as an important product launch, capturing the economic diversification benefit between a Ryla and a traditional living benefit variable annuity, as well as capital efficiency through RILA account value growth alongside our large, healthy, enforced traditional variable annuity block. Looking at pre-tax adjusted operating earnings on slide 10, we are down from the prior year's first quarter. This was primarily the result of the notable items I detailed earlier. While earnings were down, we received a benefit from a modest increase in variable annuity account value from the prior year due to positive market returns over the trailing 12 months. We have built up $305 million of account value on RILA since our launch in October. Because of the early age of our RILA books, surrender activity would be minimal such that sales lead to an immediate buildup in account value. We have a similar dynamic on our fixed annuity and fixed indexed annuity books. These account values are minimal after taking into consideration the business reinsured to a theme, but they did also grow during the period due to positive net flow. Our other operating segments are shown on slide 11. We re-engaged in institutional sales late last year, and this continued in the first quarter of 2022 with $975 million in sales and $316 million of positive flows. We see the value of the institutional business as broader than just gap earnings as it provides diversification benefits, is cost effective, and helps to stabilize our statutory capital generation. Our pre-tax adjusted operating earnings for the institutional segment of $23 million during the first quarter of 2022 was up from $10 million in the prior year's quarter, due to the lower interest credit in the current period. Going forward, the earnings should largely track the account values. Lastly, our closed-life and annuity block segment reported lower adjusted operating earnings compared to the prior year, reflecting lower levels of limited partnership income. absent future M&A activity, the earnings for this segment should trend downward as the business runs off over time. Slide 12 summarizes our capital position as of the first quarter. As Laura noted, we delivered $192 million of capital return to shareholders during the quarter, which is a strong start to our targeted capital return for calendar year 2022. Since returning this capital to shareholders, we've maintained cash and liquidity of nearly $1 billion at the holding companies, which is substantially above our minimum liquidity target. As a reminder, the minimum liquidity target is meant to provide a cushion for holding company expenses. The excess over that amount provides us with a substantial cash buffer to support our capital return beyond our 2022 targeted return. Our total gap leverage was at 21.2% at quarter end, down from 22.9% at year end, and within our 20 to 25% target range. We believe that this range provides us the financial flexibility to navigate potential market volatility, as well as the future accounting impact of LBTI. Jax National Life Insurance Company reported a total adjusted capital position of $5.4 billion, down from $6.6 billion at the year end. This was the result of the $600 million remittance to Brook Life in March, hedging losses from higher rates that weren't fully offset due to Florida out reserves mentioned earlier, as well as an increase in non-admitted deferred tax assets. Our estimated adjusted RBC ratio at the first quarter is within the 500 to 525% target range and is down from 611% at year end. The majority of the movement, accounting for nearly 70 RBC points, resulted from three notable items. The first is the previously disclosed change in the mean reversion parameter, or MRP, One of the go-forward benefits from higher interest rates is a reduced MRP impact in future years. For example, if rates stay at or near current levels, you would not expect an MRP impact in January of next year. Tax-related items. As a reminder, we expect to realize the benefits of our growth statutory deferred tax asset over time. But because of the admissibility rules, we cannot admit all of that in our current reported capital position. Lastly, our adjusted RBC position was reduced by the $192 million returned to shareholders during the quarter. The remaining decline from year-end was primarily due to hedging results, which included both the higher hedging costs resulting from elevated equity market volatility and the immediate negative impact of higher rates mentioned earlier. However, as noted, higher rates are a benefit to future hedging costs and would provide a partial offset to any negative impact from potential future equity market declines. It is important to note that our hedging performed as expected during the quarter keeping us within our risk limits throughout this period of volatility. In summary, we are within our adjusted RBC ratio target range, continue to operate within our target leverage range, and have robust holding company liquidity. And with that, I will turn it back to Laura.
spk04: Thank you, Marsha. While current market volatility presents challenges that impacted this quarter's results and has continued into the second quarter, Our experience managing through many different market environments has prepared us for today. We remain committed to maintaining profitable growth, meeting our capital return targets, and delivering value to shareholders. At this time, we'd like to open up the call for Q&A and turn it over to the operator.
spk03: If you'd like to ask a question, on your telephone keypad. Please press star followed by two. Again, to ask a question, press star one. If you're using a speaker phone, please remember your question. We will pause here briefly as questions are registered. Our first question is with Thomas Gallagher of Evercore. Thomas, your line is open.
spk02: Thank you. First question is more of a mark-to-market expectation for hedging as we think about 2Q. I heard everything you said about Q1 and the differential with what happened to reserves. But if I look at at least so far what's happened quarter to date into 2Q, I would imagine the equity hedge gain component would outweigh the interest rate. Looking at this, the magnitude of the equity market decline, and I would expect that whole issue with Florida out reserves would actually become a positive in 2Q. First question, does that sound directionally right? And second one, if that is right, could you share with us some kind of sensitivity and sizing of if there is expected to be an RBC gain in 2Q?
spk01: Good morning, Tom. Thank you for the question. I'll turn it over to Marcia to get us started.
spk06: Sure, Tom. So I think kind of what you outlined makes some sense there in the sense that we would expect with the markets down that that would benefit us on the hedging perspective from our equity hedge position, whereas the continued increase in rates so far into the second quarter would continue to kind of repeat some of what we saw in the first quarter around negative marks on the interest rate hedges. On balance, that probably does favor the equity position result in terms of what that would do to the tax position. I note that there's also going to be impacts from equity movements and interest rate movements in the period or depending upon how the second quarter lands, but so far in the second quarter anyway, that will flow through to the required capital calculation as well. There you may see some, again, weight towards the equity movement in terms of an increase in the required capital requirement on a net basis. It would be partially offset by benefits from higher rates, but the flooring doesn't have as much of an impact at the you know, that far into the tail.
spk07: So the effects of, you know, the reserve flooring certainly contribute completely, although on a limited basis, it applies well, but on a when it comes to the required capital requirements, given that that's calculated further in the tail.
spk02: Gotcha. Thanks. So Is it fair to say you add all that up? And again, with the caveat being if the markets were to close where things are today, would you expect to have positive RBC build in the quarter? Or is it too involved to really determine that at this point?
spk06: Well, there are a lot of moving pieces, and it's going to depend, you know, on factors and how they play in together. I think all considered, we would probably anticipate some additional pressure on the RBC in the second quarter. But I know, you know, as we remarked on earlier, that, you know, we see some, you know, tailwinds that will catch up more in the second half of the year around the effects of Fed actions and what that does to the rates on the short end of the curve. and the benefits that will play out there in terms of our overall hedge spend. But when it comes to the second quarter, just in general, certainly it's true that we're only not quite halfway through, so certainly more to play out there. But we'll have to think too about not just where interest rates land and equities land, but the level of volatility and the path through that quarter as well in terms of what that does to the hedge spend. We have seen, I think, slightly lower level of volatility in the second quarter so far. So that's kind of moving in a better direction, but still at a heightened level.
spk02: That's really helpful. And then just relatedly, if there is a little bit of incremental RBC pressure in 2Q and you were to dip below the 500 to 525 target range, do you just remind us your views on, you know, sustainability of all five acts and common dividends, if you were to drop below that, and at what level you might have to reconsider capital return plans.
spk06: Sure, Tom. I think, you know, a couple things to put out as a reminder. You know, we see the 500 to 525 percent as a target range. I think we communicated earlier in some situations that we don't see the end of that being a bright line that indicates a switch flips and we would turn things off. We're comfortable too that that's also a target that we set considering normal market conditions. These conditions have been somewhat unique and we would take that into account as well, but I don't think we see anything at this point. that would change our capital return plans for the year, given the market volatility and conditions we've seen. And we wouldn't necessarily see an immediate change in our view should we dip below 500.
spk02: OK, thanks.
spk03: Our next question is with Sunit Kamath of Jefferies. Sunit, your line is open.
spk10: Great, thanks. Just going back to slide 12, can you help us with that last bullet, just in terms of sizing those two impacts, the higher cost of hedges from market volatility and then the negative impact on interest rates? Can you just help us sort of dimension or quantify those two impacts?
spk06: Sure, Suneet. This is Marcia. I'd say, you know, there are, you know, roughly similar in size, not tilted heavily one way or another in terms of how those two played into the results for the period. They were both impactful. You know, with the level of volatility that we had and the need that that translated to in terms of our hedge spend, you know, being higher is something that was significant, but both of these are kind of, like I say, kind of similar size, I think, in terms of what they impacted in the quarter.
spk10: And then I guess when we think back to that slide where you talked about the benefit from higher rates, I think it was slide seven, is there any way that you can help us size kind of the impacts of some of these things? You know, there's the immediate impact, which we obviously saw in the quarter, but then you have this go-forward impact that looks positive across the board. But just order of magnitude, is there any help that you can give us with that?
spk06: I don't know that I'd quantify it right now because it probably depends upon the path and so forth, but I think one of the ... I guess to give a little bit of flavor is the component parts. One of the ... Let's just back up and say I guess our equity hedging consists of both futures and options, so we definitely would see as rates go up, the potential for what is currently a cost in terms of our futures carry. potentially even change signs and become a positive in the period given where the short end of the rates may end up. As we move through the year, I think that's a significant item that could, number one, diminish from a negative to something more neutral. Then when it comes to options, I think key input to the cost of options is going to be interest rates and volatility, two important items there. As rates go up, that's certainly helpful to the extent that volatility settles down as well, then that would compound the benefits that we would get there in terms of the cost of our hedging when it comes to the options component.
spk10: My last one is just on From your supplement, you know, you show your statutory operating earnings of a billion, statutory net income of $1.7 billion in a quarter. Just wanted to understand the difference between the two. And then what is sort of a sustainable level of stat earnings that you guys think that you can produce on a quarterly basis?
spk06: Well, let me start with the first part there. I mean, I think, you know, the difference between the operating earnings and the net income on a stat basis is going to be bringing in things like realized gains and losses is probably the primary difference item. So I think that, you know, keeping in mind that that's realized, not necessarily the unrealized component, which is going to, you know, be A big portion of the interest rate hedge losses over the period would have been unrealized in nature given that we used swaps and swaptions there more so than that treasury futures. That's probably the biggest contributor to the difference there on the stat side would be the incorporation of realized gains and losses.
spk10: On the sustainable stat earnings?
spk06: Yeah, I mean, I think in the past we've said, you know, I mean, this is obviously going to depend, you know, period to period, but on an annual basis we've talked about earnings that kind of approximate, you know, 700 to 800, 900 billion, a million in a year, excuse me, and I would say the key place to look there would just be the projections that we had out in Form 10 that give you a sense of how earnings might evolve over a five-year period under different stresses because it's certainly going to be market sensitive.
spk10: OK. All right. Thanks.
spk03: Our next question is with Alex Scott of Goldman Sachs. Alex, your line is open.
spk08: Hey, thanks for taking it. The RBC ratio, I mean, when I triangulate what the overall, including holding company cash RBC ratio suggests for the operating company, you know, I come out to around 450 RBC, which, you know, is still above a lot of yours. And I just wanted to find out, like, what is the process like with the regulator and getting extraordinary dividends? Because the reason I think people are a little more sensitive here has to do with, you know, more limited ordinary dividend capacity. And so when we get to the end of the year, I mean, what are sort of the requirements on the regulatory end to get an extraordinary dividend? Like, does that need to be up? you know, above a certain level, you know, how do I think through the way that conversation goes at the end of the year if the RBC ratio has been, you know, gotten higher or maybe it's even gotten a little lower?
spk01: Jeff, do you want to talk through that process?
spk02: Sure. So in terms of extraordinary versus ordinary dividends, I would say going back historically, Most of our dividends over the last decade or so have been extraordinary in one form or another, be it at the Jackson National Operating Company or at Brooklife, the immediate parent flowing up to the ultimate parent. So it's a wall. In the example you're using, 450 on a regulatory basis, that's 900 because they're looking at it a different lens than we are. And we've never really had any issues getting extraordinary dividends out in, you know, normal course with a well-capitalized company, which we certainly are. So, you know, I don't think that's a particularly gating issue for us.
spk08: Okay. And then the second question was just, you know, these scenarios that everybody provides, I mean, it's kind of crazy that we have to ask you for it now, but You know, we're all trying to understand what a, you know, significantly higher rate environment combined with, you know, a materially lower equity market, what the net of that means. If we think through the cash flow scenarios, and we're all trying to sort of look at the different ones and maybe scratch one from another and add it to another scenario, and it's I was just interested in if you could help us think through that. Have you updated that kind of scenario and looked at it yourselves? Could you even help us think through if it's directionally positive or negative when we think through the net of those two things?
spk06: Sure, Alex, yeah, I understand the complexity of trying to mix and match those items because there's a lot of, you know, interaction, so appreciate that challenge there. I guess I would say when you think to what the assumptions were that we had in our Form 10 disclosures and the projections that we had there, we had, you know, that those were based off of rates, the forward curve as of the end of 2020, and we assumed that 7% equity total return on an annualized basis. If you look at where things are from that point to the end of the first quarter, rates are clearly up materially relative to what we would have assumed. Those projections would have assumed we would have gotten to a point of rates that we were well beyond and we would have thought we would have gotten to that highest point at the end of 2025. We're certainly well ahead of where we were Assuming we can be on that basis and on an equity return basis, if you think about the return over that five quarter period through 2021 and the first quarter of 2022, we have annualized return of approximately 18% relative to the 7% assumption that we would have baked into those projections. I think while we didn't have an official update on those items, I think if we look at Where we sit today, logically, we would think both factors of rates and equities, despite the fact that equities have come down some this year, would be favorable relative to what we disclosed in our Form 10. So hopefully that provides a little bit of frame of reference when you're looking at our last set of disclosures there and thinking about how they may have changed moving forward to kind of the current position.
spk08: Thank you.
spk03: Our next question is with Eric Base of Autonomous Research. Eric, your line is open.
spk11: Eric Base Hi. Thank you. I was hoping you could provide some more color on how the cost of hedging moved over the course of the quarter and where it sits today.
spk06: Marcia Anderson Sure. Marcia again. Thanks for that, Eric. So we definitely saw higher hedging costs over the quarter. I think that's consistent with what we've said in the past, that under periods of high volatility, we spend more. In some cases, that leads to spending more than the guaranteed fees that we collect in the period. But if that's necessary, that's what we do in order to protect the balance sheet. So I think what we saw transpire in the first quarter of the year was exactly that elevated cost of hedging. We did spend a greater amount than what we had taken in in terms of guaranteed fees over the quarter for this period. Similar to what we've seen in the past, we've had other periods like that where volatility is particularly high. Then naturally when volatility settles down the way it typically does after some period of time, that relationship can reverse and we would then
spk11: know expect to be in a position where you know our hedging our hedging budget would be fully covered by the um by the fees that we collect got a nice just curious i mean as you mentioned earlier kind of for hedging costs think of the three-month treasury which has started to move up so i'd assume that's a positive from where you ended the quarter and equity volatility is still high but um i don't know if that's kind of where it sits relative to your normal expectations. So I'm wondering, as we sit today, are you in a better position than you were in the first quarter?
spk06: Yeah, I think we are. The movement up in the short race, as you noted, happened pretty late in the first quarter, so not enough time to kind of be much of a benefit for that quarter. But, you know, as you say, in place now as we've moved into the second quarter, And we've seen a little bit of moderation in the volatility so far in the second quarter, so I think both of those are moving us in a better direction and getting us a better relationship between our hedge costs at least quarter to date relative to our fees.
spk11: Got it. Thank you. And then could you provide a little bit more color on how your hedging performed in one queue? And you said in general it performed as expected, but I wonder if you could give any more color on sort of the pieces in particular. Did you see any impact from basis risk in the quarter given kind of the big moves in the market and some underperformance of active managers?
spk06: Yes. I guess touching on the basis risk point, you know, we do – half period of time where we have, you know, basis risk movements that are, you know, either positive or negative, tend to see a little bit more basis risk in periods with higher volatility. And we did have a little bit of a negative basis risk result in our first quarter. I think not as significant as we've seen in periods past. But we did have a little bit there. We often have, you know, seen though that basis risk over time tends to kind of mean revert. So when we have periods that are negative, we tend to have, you know, periods of positive, you know, that occur as well in the, you know, following periods that allow to kind of mean revert. So that was quite manageable. I think when we just look at how the hedging performed and how we evaluate it, you know, we tend to say that the best way to evaluate our hedge effectiveness is, you know, just through the lens of our risk limits and how the hedging is protecting our business relative to our limits, some of which are on a statutory basis. That is why we sometimes have an additional hedge spend to protect the stats. I think we've referred to that in the past as our macro hedge to protect our stat sensitivities against the risk limits that are set out in a statutory framework.
spk11: Thank you. And if I could sneak in one last one, just given the increase in interest rates, are you considering making any changes to your hedging program to lock in some of the benefit?
spk06: I mean, I think what we would say, you know, is our main focus when we're setting our interest rate hedging position is, you know, just the risk profile of the business. So we don't typically, you know, make tactical moves or make bets on them, you know, direction of travel with rates or equity data. We'll just be updating and resetting our hedge positioning as needed, the way we would typically do in a dynamic fashion when we look at the risk profile of the business. With respect to interest rate risk, a lot of that is really connected to how much we might think we have benefit payments to make in the future, which is really, on a first-order basis, driven by what the equity markets do. And then that kind of like has a follow-on to determine how much hedging we need on an interest rate basis. So we're going to be, you know, focusing on those as usual and making adjustments as we need to.
spk11: Got it. Thank you. Appreciate the comments.
spk03: Our next question is with Ryan Krueger of KBW. Ryan, your line is open.
spk09: Hi, thanks. Good morning. I guess first, can you help us think about how far away your reserves are from, I guess, not being floored anymore or maybe like what the dollar amount would have been as a benefit from an offset standpoint if they weren't floored?
spk06: We haven't quantified what our results would have been if they weren't floored, but we ended the quarter pretty floored out. As we moved through the quarter, we may have generated a little bit of extra reserves as we were going through the quarter when the market was down more significantly in the middle of the quarter. By the end of the quarter, we were back to being floored out again. And the impact, I guess, the difference, I guess, between the floored-out reserve and a maybe unfloored reserve, if you think of it that way, it's pretty significant from a reserve standpoint when that's measured at CT70. But I think what's important to note is under VM21, you know, you have both the CT70 measure and you have the CT98 measure that comes into play as well. We've had periods of time, and I think at the end of the first quarter, we were similar to where we've had some of that flooring even impacting far enough into the tail to have an impact on some of the scenarios that make up the CT98 tail. It's pretty significant flooring that can change primarily with market decline that allows some of that excess or whatever to flow into our results when we when reserves would not go up otherwise as much as they would should we have not been floored out under a market drop scenario.
spk09: Got it. And then, I guess, when you calculate CTE98, do you project all of your future hedging costs within that? Or just can you give any more color on how you go about that? Because I think some companies have taking different approaches there, and some companies have implicit CDHS to try to match interest rate moves more. So if you could give any color on how you go about that.
spk06: Sure. Our CDHS is focused on our core equity hedging and macro hedging, which might be done for equity purposes or, in our case, also the interest rate hedging. is not considered within the CDHS. With the calculations under VM21, you have to actually do a blend of projection basis that includes only your in-force hedging and then another one that includes benefits from rebalancing with your CDHS. You blend those two results together. Our calculation would do that with respect to all of our core equity hedging, which would be reflected in there. future rebalancing of an interest rate hedge position within our CT90 or CT70 calculations.
spk09: Thank you. That's helpful.
spk03: Our next question is with Alex Scott of Goldman Sachs. Alex, your line is open.
spk08: Hey, thanks for taking the call. I just had a follow-up on the cash flow scenario question. You know, I was thinking about the equity piece, and I hear that equities move higher since that projection was done. Could you help us think, though, about the direction of equities? Because, yes, they're higher, but they reach a much higher level. And I think your living benefits do have ratchets in them, right? So the benefit base would have gotten marked higher. before or at least on some of the policies before you know the decline so i think maybe using that equity scenario and thinking it's better like is that like should we definitely think that that's the case or is there maybe a negative offset from like the fact that equities went off but it's a basic remark and then they come down you see what i'm saying yeah yeah understood um
spk06: Yeah I mean it's true that some of the benefits would have maybe an annual step up feature if the market performance at that point warranted an increase. So to the extent that you have market up and then down and you happen to have policies that reach an anniversary during the high market level period, then they can have certain increases to their benefit base that would be a partial offset to overall rising equity level results. But I think it's just a partial offset. It wouldn't certainly be a full offset or a more than offsetting impact at all because you have the benefits of the base contract which are helped, you know, are underlying, you know, asset fund management and our fee revenues there are going to be helped by the market going up. So that's, you know, kind of underpinning results as well. But I think the, so I take your point that I think that given the strength of the market growth since we did those Form 10 disclosures and the fact that the market was up pretty steadily through 2021. I think we didn't have the kind of extreme situation that you would need with like maybe an enormous market up and then a giant drop in order to be able to have a significant impact from policies that may have had ratchets in the middle of that period at the top of the market.
spk02: I would just add to that, too, that when the ratchets happen, you also ratchet up the fees at the same time. And so what we see through time is that we don't actually spend all the fees over a long period of time. And so you'd actually expect a net benefit going forward from that net ratchet.
spk08: Got it. Okay. Yeah, that's all really helpful. I mean, to the extent you guys could update those cash flows at some point, I mean, I hear you on all the non-economic noise at RBCs. I'd love to see sort of the economic view again with the cash. Anyway, thank you.
spk07: Certainly.
spk03: That concludes our Q&A session, so I would like to pass the conference back to the management team for any closing remarks.
spk01: Thank you. We thank everybody for joining us today and look forward to your participation in our next quarterly call.
spk04: Thank you.
spk03: That concludes the Jackson Financial Inc. first quarter 22 earnings call. Thank you for your participation. You may now disconnect your line.
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