Jackson Financial Inc.

Hello everyone and welcome to the Jackson Financial Inc 2Q24 earnings call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypads. I'll now hand over to our host, Liz Werner, Head of Investor Relations to begin. Liz, please go ahead.

Good morning everyone and welcome to Jackson's second quarter 2024 earnings call. Today's remarks may contain forward-looking statements which are subject to risks and uncertainties. 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 page of our website at investors.jackson.com. Joining us today are our CEO, Laura Prescorn, our CFO, Don Cummings, the President of Jackson National Life Distributors, Scott Romine, our Head of Asset Liability Management and Chief Actuary, Steve Benioff, and the President and Chief Investment Officer of PPM, Craig Smith. At this time, I'll turn the call over to our CEO, Laura Preeskorn.

Laura Preeskorn Good morning, everyone. As we moved through the second quarter, our operating trends and strong capital levels supported positive financial results and sustainable capital return. Today, we look forward to discussing our second quarter results and progress through the first half of 2024. Beginning on slide three, we achieved positive net income and solid operating earnings growth in the second quarter of 2024, driven by increased fee income from higher average annuity assets under management and higher net investment income. The benefits of a favorable equity market and strong annuity sales contributed to growth from the second quarter of 2023 and from the first quarter of this year. We continue to see successful retail annuity sales across all product lines, demonstrating our continued focus on execution. Jackson provides a range of annuity solutions to advisors and their clients, and in the second quarter of 2024, we saw strong demand for registered index-linked annuities, or RILAs, and traditional variable annuities. Total retail annuity sales grew 36 percent from the second quarter of 2023 and 15 percent from the first quarter of this year. Variable annuity sales benefited from rising equity markets and the opportunity for equity growth available through our commitment to investment freedom. Our second quarter variable annuity sales of $2.7 billion represented a return to a level we last saw in the third quarter of 2022. We continued to build momentum in RILA sales, reaching a record $1.4 billion in the second quarter with an increasing share of new and reactivated advisors selling RILA as their leading annuity solution. demonstrating that RILA continues to be a source of diversification and a product of choice for our financial professionals. We expect Jackson's sales momentum to continue as we focus on providing the best solutions to U.S. retirement savers through our product innovation, strength in distribution, and best-in-class service. Our traditional investment-only variable annuity and RILA products were once again recognized in Barron's annual 100 Best Annuities Guide published in late July. I'm proud that these products were highlighted across three categories for offering exceptional value for policyholders. Preliminary data from industry trade organization, LIMRA, shows the overall U.S. annuity market is expected to set a new sales record in the first half of 2024. According to their recent forecast, Sales of traditional VA are expected to exceed $40 billion in 2024, up more than 15% from 2023, and sales of Ryla are expected to exceed $50 billion in 2024, up approximately 8% from 2023. We're excited about the growth the industry is seeing across product lines as more Americans seek solutions offering guaranteed lifetime income. Critical to this continued growth is a focus on enhancing the digital experience for financial professionals and consumers to strengthen understanding of an annuity's value to a confident and secure retirement. Jackson has a long history of investing in technology, which we believe has contributed to our competitive cost structure and exceptional service delivery for financial professionals and their clients. We are a leader in digital connectivity through data exchanges and integrations within the annuity industry ecosystem. This allows us to connect to an advisor's platform of choice, making annuities more accessible for financial professionals and their clients, and making it easier to do business with Jackson. With a variety of educational tools and information available, Jackson.com serves as a platform for financial professionals to build their practice support their clients, and optimize annuities in their current books of business. The platform also serves clients, helping them to plan their journey more easily toward financial freedom. As an example, we have enhanced the capabilities within our digital ecosystem, a one-stop platform for financial professionals. This digital experience, initially available for our RILA products, allows advisors to illustrate how a RILA could fit within a client's portfolio to meet their specific needs based on customized market scenarios. We have seen substantial growth in activity for this platform, with second quarter 2024 visits up nearly 75% compared to the second quarter of 2023. The success of our RILA digital ecosystem experience has led to stronger sales lead generation contributed to new advisor relationships and furthered our sales momentum. Approximately one-third of our RILA sales this quarter came from producers utilizing our RILA digital ecosystem, clearly demonstrating that financial professionals are relying on our industry-leading technology to provide clients with better information and service. Jackson also plays a leadership role in the Insured Retirement Institute's Digital First for Annuities initiative, helping to establish industry-wide data standards and embracing innovation to ensure financial professionals and clients experience a streamlined and modern approach to retirement planning. We look forward to continuing this important work to enhance the overall digital experience and simplify integration of our products within the industry. Turning back to slide three, during the second quarter of 2024 and excluding the impact of its distribution to JFI, Jackson National Life's total adjusted capital grew by $321 million and for the first half of the year increased by $681 million. Our more stable capital generation continues to reflect the success of Brooke Re. Importantly, This stability supports our balanced approach to capital management, which includes our commitment to shareholder return, maintaining and strengthening our balance sheet, and funding growth through new business and other strategic opportunities. Capital return in the second quarter was $144 million through a combination of common share repurchases and common share dividends. Yesterday, we also announced our board's approval of a $750 million increase to our common share repurchase authorization and a third quarter common stock dividend of 70 cents per share. The expanded share repurchase authorization has no time limit and provides flexibility for capital return into the future. We believe this announcement highlights our commitment to future profitability, capital generation, and long-term shareholder value. You can see our record of consistent capital return on slide four, which totals $1.5 billion since separation, including repurchases of 25% of our common shares at separation. Slide five shows we are on pace to achieve our full year targets for the fourth year in a row. For the second quarter of 2024, Our estimated RBC ratio is between 550% and 570%, well above our minimum of 425%. The greater stability of capital generation will continue to support our approach to more frequent capital distributions than our prior practice of an annual dividend to our holding company. Following this approach, our statutory capital at the end of the second quarter was approximately $4.7 billion after the $250 million distribution from our main operating company, Jackson National Life, in June. At this time, I'd like to turn the call over to our CFO, Don Cummings.

Thank you, Laura. I'll begin on slide six with our second quarter results summary. Adjusted operating earnings of $410 million were up 45 percent over the second quarter of last year and 23 percent over the first quarter of this year. This significant growth in earnings was primarily due to higher fee income from growth in variable annuity assets under management and higher earnings on spread products. Spread earnings benefited from gains in net investment income primarily driven by the growth of our RILA block as well as higher portfolio yields. The investment portfolio supporting our spread products has continued to perform well. The appendix of our earnings presentation provides breakdowns on both GAAP and statutory bases, excluding the assets reinsured to third parties through funds withheld agreements. This information includes insights into our highly rated and diversified commercial office loan portfolio. which is less than 2% of the investment portfolio. Jackson remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis, excluding funds withheld assets. Before turning to notable items in the quarter, I want to highlight the growth in book value since year end. Our adjusted book value attributable to common shareholders ended the second quarter at $11.5 billion, or $150.35 per diluted share, an increase of over 10% from year-end 2023, driven by our strong operating performance and common share repurchase activity. Slide 7 outlines the notable items included in adjusted operating earnings for the second quarter of 2024. Reported earnings per share were $5.32 for the current quarter. Adjusting for 37 cents of notable items and the difference in tax rates from our 15 percent guidance, earnings per share were $4.87 for the current quarter compared to $3.54 in the prior year's second quarter. This strong earnings improvement was primarily due to the growth in assets under management and spread income benefits noted earlier, as well as the reduction in diluted share count from common share repurchase activity. Notable items for the quarter also included a 31-cent benefit from a payout annuity reserve release due to death. This was a one-off item in the current quarter that we do not expect to repeat. Turning to slide eight, we've included a waterfall comparison of our second quarter 2024 non-GAAP pre-tax adjusted operating earnings of $473 million to GAAP pre-tax income attributable to Jackson Financial of $311 million. We continue to see greater alignment between adjusted operating earnings and GAAP income following the establishment of Brooke Rea at the beginning of this year. Although our net hedge result was a loss of $201 million in the second quarter of 2024, For the first half of the year, we reported a net hedge gain of $226 million. The hedging results include a robust guaranteed benefit fee stream that is derived from the benefit base rather than the account value, which provides stability to the guarantee fees even in periods when markets decline. During the second quarter of 2024, the net hedge result included a loss on freestanding derivatives of about $1 billion. primarily due to losses on interest rate hedges in a quarter where interest rates were up across the yield curve, as well as losses on equity hedges in a rising equity market environment. Changes in net market risk benefits, or net MRB, benefited from these same equity market and interest rate movements, providing a $516 million offset to the freestanding derivatives lost. It is important to note that in addition to market and interest rate impacts, there will be an MRB increase in each period as time passes due to the collection of fees. The reserve and embedded derivative loss of $278 million during the second quarter primarily reflects losses on RILA reserves resulting from higher equity markets. The RILA business provides a natural equity risk offset to our guaranteed variable annuity business which results in hedging efficiencies that increase as the RILA block grows. The change in the net MRB, fees collected during the period, as well as the reserve and embedded derivative movements, should be viewed collectively when comparing to freestanding derivative losses that come through in our hedge results. The deferred acquisition costs, or DAC, amortization reported in the net hedge result is associated with the non-operating portion of DAC as of the transition date to LDTI. This non-operating DAC will continue to run off over time, and the amount of quarterly amortization will decline from the current level over time. To summarize the results of our hedging program, we've included a subtotal in the table on slide eight that excludes DAC amortization as this expense is not an element of our hedging program or driven by current period activity. The net impact of guarantee fees, freestanding derivatives loss, market risk benefits gain, and reserve and embedded derivative movements was a $65 million loss in the second quarter of 2024. We believe this result demonstrates that our hedging program continues to be effective in reducing the volatility of our results and is working as expected with the establishment of Brooke Rea. Non-operating results also included $71 million in gains from business reinsured to third parties. This resulted from a loss on a funds withheld reinsurance treaty due to the change in the associated embedded derivative value netted against 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 adjusted book value. Furthermore, these items do not impact our statutory capital or free cash flow. Our segment results begin on slide nine and focus on the healthy new business profile of our retail annuity segment in the current quarter. illustrated by growth of 36% from the second quarter of last year and 15% from the first quarter of this year. Our RILA product continues to gain momentum with second quarter sales reaching a record level of $1.4 billion, supporting further diversification in our top line growth. Going forward, we expect continued growth in our RILA business to be supported by our recent launch of a living benefit, as well as the recent availability of one of Jackson's base RILA products in New York. Sales of variable annuities grew from the second quarter of last year and the first quarter of this year, driven by products without lifetime income benefits, including Elite Access, our investment-only variable annuity. The gross sales we are generating in RILA and other spread products translated to $1.4 billion of non-variable annuity net flows in the second quarter of 2024, which has grown materially over time. These net flows provide valuable economic diversification and hedging efficiency benefits. Importantly, our overall sales mix remains efficient from the standpoint of new business strain. Looking at second quarter 2024 pre-tax adjusted operating earnings for our segments on slide 10, higher equity markets and a continued positive environment for spread products has driven solid growth in our retail annuity segment compared to both the second quarter of last year and the first quarter of this year. Jackson's earnings power is supported by the growing level of assets under management as healthy separate account returns combined with growing non-variable annuity net flows have built our AUM up to $247 billion, an increase of 9% from the second quarter of last year. Importantly, The positive separate account performance has offset our overall net outflows, including the impact of slightly elevated surrenders of variable annuities coming out of their surrender charge period by nearly $13 billion in the first half of 2024. For our institutional segment, pre-tax adjusted operating earnings were up from the second quarter of last year due to higher spread income. We have seen increased new business activity in 2024 with over $600 million in second quarter sales and what we believe to be a strong start to the third quarter to date. Our closed life and annuity blocks segment reported higher pre-tax adjusted operating earnings compared to both the second quarter of last year and the first quarter of this year due primarily to improved mortality trends. Slide 11 summarizes our strong 2024 capital and liquidity position. The profitability of our enforced business, including the variable annuity-based contract, provided substantial capital generation of $321 million during the second quarter. Consistent with our prior guidance for smaller periodic distributions from Jackson National Life, $250 million was distributed to JFI during the second quarter of 2024. After accounting for this impact and the related reduction in deferred tax asset admissibility, Jackson's total adjusted capital, or TAC, increased slightly and ended the quarter at $4.7 billion. Our company action level required capital, or CAL, is also much more stable following the formation of Brooke Rea. This stability was apparent in our second quarter 2024 results, with estimated CAL slightly higher, reflecting growth in RILA assets and normal investment portfolio activity. Our estimated RBC ratio range of 550 to 570% remains well above our 425% minimum. We are pleased with Brooke Reeve's second quarter performance. which is operating as expected and remains well capitalized. Our holding company cash and highly liquid asset position at the end of the quarter was over $500 million, which continues to be above our minimum buffer. The extraordinary dividend from Jackson National Life this quarter is consistent with the goal of reducing the RBC volatility that occurred from our past practice of sizable annual dividends. We believe our robust capital position across operating companies provides a strong financial base for future operating company dividends. As Laura mentioned earlier, we received board approval for a $750 million addition to our existing common share repurchase authorization. As a reminder, there is no time limit on this authorization, which positions us well to reach our 2024 financial targets and future share repurchase activity. Overall, I am incredibly pleased with our second quarter results, which demonstrate positive momentum in sales, earnings, capital generation, and holding company liquidity. I'll now turn the call back to Laura.

Thank you, Don. Our second quarter results demonstrate we continue to benefit from our stable capital position and market leadership. We look forward to the second half of 2024 and providing further updates on our growth, product initiatives, and continued capital generation. As always, I'd like to acknowledge our talented Jackson team. Their dedication to our purpose in providing long-term solutions to Americans planning for their financial futures is our greatest strength. The opportunity to work alongside our associates is ever rewarding as we continue to deliver against our strategic and operational goals while supporting our communities and each other. At this time, I'd like to turn it over to the operator for questions.

Thank you. Of course, if you'd like to ask a question, please press star followed by one on your telephone keypads. If you'd like to withdraw your question, please press star followed by two. preparing to ask your question please ensure you are muted locally as a reminder that's star followed by one on your telephone keypads now our first question comes from Sunit Kamath of Jefferies Sunit your line is open please go ahead I just wanted to start with the capital generation if we look kind of year to date I think you're a little over 600 million which is you know pretty

Well, in excess of, I guess, your billion plus that you've talked about before. I just was hoping you could unpack that. How much of that was maybe the better market versus, you know, better investment spreads? Because even if I think about the market impact, the growth seems just a lot higher than that. So I just wanted to understand what's going in there. Please. Thanks.

Hey, Sumit. It's Don. I'll take that question. First of all, just a reminder on our billion-dollar capital generation guidance. That was based on performance under normal market conditions. So as we look at the performance in the first half, we've obviously had a strong tailwind from the equity market performance to reach that $680 million. So we are a bit ahead, but we continue to feel very comfortable with that billion-dollar guidance and growth in statutory capital. I would say that the business that we're writing today is fairly capital efficient. And as we see attractive opportunities going forward to diversify our mix of business, that could change the magnitude of required capital related to organic growth. But overall, just to answer your question, I think the main delta from the billion dollars is really that that was a more normal market environment as opposed to the strong growth that we've seen in the first half of the year.

Maybe just to follow up on that, because I think the markets through the second quarter were up like 14% if you just use the S&P. And obviously, the growth off of the run rate in capital generation is well above that percentage-wise. So is it just the positive operating leverage that you're getting, and that's what's giving you higher capital generation? Because it does seem to be coming in higher than the overall market. Thanks.

Yeah, so it is a combination. So obviously, our portfolio is pretty heavily weighted toward variable annuity business. So within Jackson National, you're going to see the higher variable annuity AUM driving our fee income. So that's a significant component. The other thing that I would remind you of is that we did have strong growth in RILA sales. So as we continue

uh to bring on assets for that business we're seeing you know higher spread based earnings as well got it and then my follow-up is just on uh just how where we sit today obviously you know first half of the year was pretty good but now volatility has spiked um you know interest rates have been pretty volatile as well um i guess how should we think about the capital generation um in jl and ic And the reason I ask is my thought was or my understanding was that most of the hedges are now in brookery, which means the capital generation of JNLIC might be a little bit more tied to the markets. But I just wanted to get your thoughts based on that, as well as just where we sit today in terms of the volatility. Thanks.

Yeah, so maybe I'll address the volatility point first, Sunit. So, you know, the recent market pullback that we saw in the last few days, our hedging program continued to perform as expected with brookery in place. And I think there are a couple of things that contribute to that. So first of all, just reminding everyone that, you know, our hedging program is now aligned more with the economics post the brookery transaction. So that makes it easier to manage with less rebalancing needed, you know, given that we've got a much more predictable hedge target. And our hedge target is really just our MRB position on a modified gap basis. So that is certainly contributing to the positive results at J&L. And we do have some hedges at J&L for business that was not seeded over to Brookry. But you're right in that we would continue to see most of the performance at J&L being driven by our base contracts. And there is a little bit of sensitivity to market results there and the impact on variable annuity AUM. And then again, as I said earlier, the growth in spread products.

Okay. Thanks. Thank you. As another reminder, if you'd like to ask a question, please dial star followed by one on your telephone keypads now. Our next question is from Tom Gallagher of Evercore ISI. Tom, your line is open. Please go ahead.

Good morning. A couple of questions on hedging and brokering. So, Don, I was following your comments, and it sounds like the $200 million plus derivative loss was largely offset by the fees you're collecting, the guaranteed fees you're collecting. I think you said it was a net of $64 million. for brookery in the quarter. Um, so my question is, can you just comment on what are the actual hard assets that are currently capitalizing brook? Um, you know, how does that compare to the 64 million and just, can you mention your capital levels there? Do you have a buffer over what you target?

Yeah, thanks, Tom. So first of all, just a reminder. So the components of the hedge gain or loss in the quarter, which we displayed on slide eight of the earnings material, those are for JFI on a consolidated basis. And there's not a direct read across to Brookry, but generally I think you can use that as kind of an informational proxy. Brookry follows a modified gap structure. It's not going to be the exact same numbers, but kind of directionally a good indicator. In terms of just some stats on Brookry, just to remind you of what we previously disclosed. So we funded Brookry on day one with $700 million of cash and investments. And on day one, we had an MRB that was in an asset position. And through the first half of the year, we've seen you know, a bit of growth in Rookery's equity. So everything with Rookery, you know, with two quarters behind us is operating as we expected. And, you know, we continue to be comfortable with that structure.

Gotcha. And so the 64, I could compare to the 700 million or, you know, is the net the net reserve position that's an asset large enough where it's not going to be, you know, a 10% type swing in your capital there, that it would be much smaller. Maybe if you could comment on that.

Yeah, so the 65 wouldn't be relative to the $700 million of hard assets because, again, there's a couple of components to Brookree's equity. It's the hard assets that we put in in addition to the MRB assets. and that's going to be significantly higher than the $700 million. We provide some disclosures in our financial supplement on the consolidated JFI MRB position, but again, that's not a direct read-across for Brookery. It gives you an idea of the magnitude of the assets that we've got in Brookery.

Okay, and then my last question is just, If I look back a few years ago when you were still using a different hedging approach, I think the duration of most of your derivatives were around three months. And then there was a period where as rates began to move higher, you started lengthening that out. Can you comment about average duration of your hedging approach? instruments and also roll risk. If we get into an environment where the market becomes a lot more volatile, how should we think about roll risk on your hedges? Thanks.

Yeah, so I'll make a couple points and maybe ask Steve to just chime in on some of the specifics around the duration of our hedges. But, you know, because Brooke Ray's hedging program is more aligned with the economics, it's much easier for us to manage and actually requires less rebalancing than our historical approach under the old statutory framework. So we feel, you know, comfortable that that's working as we kind of designed it and as we expected. I'll let Steve just chime in on in terms of, you know, the duration of the hedges that we're using and that sort of thing.

Yeah, Tom, in terms of focusing on interest rates as part of the modified GAAP move, we really increased our interest rate protection as part of that framework. And so we do have some pretty significant north of $30 billion of interest rate derivatives. Those are more tied to the longer end of the yield curve. So 10, 20, 30-year part of the yield curve. So we've got some pretty good protection there that's tied to liability. In terms of on the equity side, we both have a combination of futures. But importantly, we do still have a significant put option portfolio that's there for retail-type events. It worked really well in recent periods. Market volatility picked up. Having those puts in place serves us well. And those will vary from three to six to nine months. We try to stagger the maturities a little bit on the put options as well. So we feel pretty comfortable that our hedging is pretty resilient for the foreseeable future. In terms of the role risk, you know, we're pretty diversified across multiple indices. You know, we've ramped up to seven different equity indices that we're using right now. So we want to make sure we're lined up well with the liabilities we offer on our platform. And one of the benefits that we are getting, you know, with respect to managing the collateral, the counterparty risk, is Briolet does provide a nice offset to our VAs. We're seeing about a 30% reduction in our kind of our external hedging needs. And so that does help with managing liquidity and the role of the overall risk management program. Got you.

Thanks for the call.

Thank you. As a final reminder, if you'd like to ask a question, please dial star followed by one on your telephone keypads now. At this time, we have no further questions. I'll hand back over to Laura Priestcorn for any closing or final remarks.

Thank you. Your participation in today's call is appreciated. We thank you all for joining us this morning. Take care.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.