Q4 2021 Jackson Financial Inc Earnings Call
[music].
<unk> financial incorporated fourth quarter 2021 earnings call. My name is Bailey and that'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star followed by one on your telephone keypad.
I would now like to pass the conference over to Liz Werner head of Investor Relations. Lisa. Please go ahead. Your line is now open 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 managements discussion and analysis of financial condition and results of operations and business financial goals in the Companys registration statement on form 10, and management's discussion and analysis of financial condition and results of operations and the Companys. Most recent third quarter 10-Q could cause actual results and outcomes to.
Differ materially from those reflected in the forward looking statements.
In this presentation management will refer to certain non-GAAP measures, which management believes provide useful information and measuring the financial performance of the business.
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 <unk>, scoring our CFO Marcia Watson and our Vice Chair Chad Myers at this time I will turn it over to Laura.
Good morning, and welcome to our full year and fourth quarter earnings call.
This morning, we will discuss our accomplishments for the full year in the quarter as well as our outlook for the future.
Looking back on 2021, we've successfully transitioned to operating as a public company.
Executed on our business strategies and delivered on our commitments to shareholders.
2021 was a momentous year for Jackson and throughout our transition we maintained a leading market position exceeding $19 billion in annuity sales through a network of over 580 distributors.
We believe our diversified annuity offerings and dedicated distribution support and service sets us apart from competitors and positions us for the future.
This year, we are pleased to once again be recognized by service quality measurement group the independent organization benchmarks over 500, leading customer contact centers across North America.
Jackson received four awards for service efforts in 2021, including highest customer service for the financial services industry.
These awards reflect the hard work and leadership of our operations team and Jackson's continued commitment to serving financial professionals and their clients.
We remained focused on managing profitability risk and capital.
And are on track to reach our capital return target ahead of schedule.
Yesterday's announcements included an increase to both our shareholder dividend per share and our existing share repurchase authorization.
Today, we will provide our outlook for capital return to shareholders, which has been reset to a calendar year basis for 2022.
We look to our future with confidence and remain committed to our business and building a track record of delivering on our financial targets last quarter I commented on the hard work and collaboration of our colleagues to position Jackson for success as an independent company.
The Jackson culture, and a long tenured leadership team continue to serve us well.
Turning to slide three.
Our focus on execution is highlighted in Jackson's full year financial results.
In 2021, both net income and adjusted operating earnings reached a three year high.
I will speak to adjusted operating earnings, which excludes both hedging related volatility as well as the guarantee benefit fees intended to address hedging costs.
For the full year 2021, adjusted operating earnings of $2 4 billion exceeded the prior year by over $500 million.
These results include the benefit of limited partnership returns that were well above our long term assumption as well as the incremental impact of other notable items.
Adjusting for all notable items, our full year pre tax adjusted operating earnings increased 22% from the prior year.
Of note our retail annuity segment accounted for nearly two thirds of total growth in pre tax adjusted operating earnings.
Later in the presentation, we provide insight into notable items for greater transparency into the strength of our underlying core business.
The solid growth of our business combined with effective risk management resulted in healthy statutory capital generation and we ended the year with total adjusted capital of $6 6 billion and an RBC ratio of 580% at our operating company Jackson National Life insurance.
We finished 2021 and a strong regulatory capital position consistent with the health of our annuity book and the favorable market environment.
Since our separation you've seen that we've promptly returned excess capital to shareholders. Following our first dividend and share repurchase program authorization announced four months ago.
Under our initial share repurchase program, we opportunistically pursued both open market purchases and a private share repurchase transaction with Prudential plc and athene.
In 2021 total share repurchase activity with $211 million were approximately $5 8 million shares.
Importantly, we continue to view our stock as attractively valued and share repurchases are a good use of shareholder capital.
As we enter 2022.
We expect to deliver on our targeted capital return to shareholders ahead of schedule.
Our initial target with a total capital return of $325 million to $425 million in the first 12 months as a public company, taking us through September of 2022.
Our revised target represents an increase in capital returned to shareholders and a shift to a calendar year basis.
For the calendar year 2022, we're targeting capital return of $425 million to $525 million or 27% increase at the midpoint of the previous target range.
Yesterday's announced dividend and an additional $300 million in authorized share repurchase capacity is supported by an approved capital distributions from our operating company.
These announcements allow jackson to maintain its balanced approach to capital return.
Based upon current shares outstanding are first quarter dividend will be approximately $50 million consistent with our fourth quarter dividend.
Turning to slide four.
I'll review, our progress on each of our financial targets.
As I mentioned, we're on track to complete our 12 months targeted capital returned to shareholders earlier than projected.
The combination of shareholder dividend and opportunistic share buybacks allowed for our swift execution relating to this target.
Our holding company cash and liquid assets are in excess of our previously stated minimum cash requirement of $250 million.
We had over $600 million at the holding company as of year end 2021, and that is after returning $261 million to shareholders in dividend and share repurchases.
Our risk based capital ratio at both the operating company and on an adjusted basis is also ahead of target.
For 2022, we're maintaining a 500% to 525% adjusted RBC target.
Which includes excess holding company liquidity.
We believe this RBC target along with a 20% to 25% leverage ratio is most appropriate for our business mix.
Now, let's turn to the fourth quarter financial and operating highlights on slide five.
Our fourth quarter adjusted operating earnings of $7 48 per share reflect continued growth in fee income tied to strong account value growth as well as certain notable items in the quarter.
Similar to last quarter, we benefited from outperformance in our limited partnership investments.
We also benefited from a claims recovery as well as market driven deferred acquisition cost amortization and our annual assumption unlocking, which Marshall will cover in more detail.
As I mentioned last quarter, the market driven that volatility will change next year with the adoption of the GAAP accounting standard referred to as Lv Ti.
Excluding notable items for the 2020 in 2021 fourth quarters adjusted pre tax operating earnings increased 30%.
Importantly, our pretax retail annuity fee income increased 17% this quarter compared to the year ago quarter.
This top line momentum is largely the result of the account value growth, which benefits both earnings growth and our OE.
We expect retail annuities to drive further profitability and growth as we benefit from an increasingly diverse set of products and expanding distribution network.
Retail annuity account values for 259 billion at 2021 year end up nearly 13% from the prior year end.
This in force business provides a level of profitability and scale that supports our business growth plans and capital return targets.
Our fourth quarter annuity sales were at their highest level for the year at $5 billion up modestly from the prior year's quarter.
Looking ahead, we expect sales momentum for Jackson and the industry to continue.
For the 2021 full year Jackson's variable annuity and <unk> sales grew 15% over the prior year due to momentum in investment only variable annuity sales as well as the rollout of our <unk> product suite called Jackson market linked pro.
Our strong fee based advisory sales were also at a record level of $1 3 billion up from $1 billion last year, highlighting our ability to broaden the annuity market.
Looking at the annuity sales survey results.
From the secure retirement Institute, we see positive future trends.
For the industry overall.
Third highest year ever.
All annuity category saw growth, including fixed fixed index ex <unk> and variable annuities.
Last year's industry wide traditional variable annuity and <unk> sales combined were 125 billion, a 27% increase driven by the strong <unk> market and a reversal of declines in traditional variable annuity sales.
This is a helpful backdrop for Jackson and advisers attribute this strong demand to the need for balancing protection and growth amidst rising inflation, along with proactive tax planning.
Last quarter, we mentioned our entry into the defined contribution market with our alliance Bernstein partnership and we look forward to continued opportunities in this market.
We believe our expertise as a provider of lifetime income solutions will increase in value as retirement plan sponsors look to address income protection and longevity risk for their plan participants.
These opportunities are more episodic and future sales will be provided in our financial supplement.
Our product expertise and innovation, along with best in class operational and distribution support strongly position us for future growth.
As I mentioned earlier, we actively deployed capital in the fourth quarter and ended the year in a strong capital position.
Our adjusted RBC at year end was 611% ahead of our 500% to 525% target.
As a reminder, the adjusted RBC considers both the capital position of our operating company and excess holding company liquidity.
Finally in December we refinanced the term loan with a $1 6 billion senior debt issuance and are at the mid point of our financial leverage target range.
At this time I will turn the call over to Marcia to provide more details on our fourth quarter financial results.
Thank you Laura looking at our results on slide six we continued to generate healthy levels of adjusted operating earnings as largest mentioned are <unk> focused business mix benefited from higher average separate account balances driving higher fee income.
As a reminder, we believe Jackson has taken a conservative approach to the treatment of guarantee fees within our definition of adjusted operating earnings as all of the fees are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings.
In 2021 strong adjusted operating earnings combined with positive non operating income resulted in a growing book value, even after returning $261 million to shareholders in the fourth quarter.
Slide seven outlines the notable items included in adjusted operating earnings for the fourth quarter, starting with a market driven deceleration of DAC amortization.
To provide a little more background the amortization of DAC is a key item for our results given our annuity focused balance sheet.
Operating deck amortization has multiple components for.
For clarity our financial supplement reports these components as core amortization, which was driven primarily by our <unk> gross profit for the 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 fourth quarter of 2021, there was market driven deceleration of DAC amortization, resulting in a $66 million reduction of <unk> expense for the quarter on a pretax basis.
This was primarily due to a five 9% separate account return in that period, which exceeded the assumed return.
In the fourth quarter of 2020, there was a deceleration of DAC amortization, resulting in a pretax $238 million reduction in <unk> expense, primarily due to a 13, 1% separate account return in that period, which significantly exceeded the assumed return.
As a result, the market driven deck effect was a net negative impact of $172 million on a pretax basis when comparing the current fourth quarter to the prior year fourth quarter.
In terms of future market, driven that acceleration or deceleration for modeling purposes. We have provided additional details on the mechanics of the deck amortization calculation within the appendix of this presentation, which aligns with the format of our financial supplement.
As Laura noted this is expected to change in the first quarter of 2023 with the adoption of <unk> under GAAP accounting.
We continue to expect to provide more information regarding L. DTI impacts later in the year.
<unk>, we would note that the fourth quarters of both 2020 and 2021 included strong limited partnership income, which was reported on a lag and can vary significantly from period to period.
Limited partnership income in excess of long term expectations was $106 million in the current quarter compared to $70 million in the prior year's quarter, creating a.
The comparative pre tax benefit of $36 million.
The current quarter also includes an $80 million pre tax benefit from the recovery of claims on previously reinsured fixed and fixed indexed annuities.
When these policies are reinsured to a third party. They are no longer included in Jackson's income. However, in the event that a claim occurs and the beneficiaries elect to keep the funds at Jackson the policy effectively returns to us.
The $80 million reflects an adjustment to include the portion of these claims related to periods prior to the fourth quarter of 2021.
Consistent with prior years, we completed our annual assumption unlocking in the fourth quarter.
This led to a $38 million pre tax benefit to earnings which was mainly reflected in the retail annuity segment from an increase in the variable annuity DAC balance due to the lapse assumption update.
The prior year's annual assumption unlocking was a negative impact of $152 million.
In addition to the notable items the fourth.
Fourth quarter of 2020 had a lower effective tax rate in the fourth quarter of 2021 impacting the period over period comparison.
The effective tax rate in the fourth quarter of 2020 included a one test about partnerships. Additionally.
Additionally, fourth quarter of 2021 pretax operating earnings were higher than fourth quarter, 2020, 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 the earnings per share was up 30%.
The prior year's quarter, primarily due to the strong growth of our fee focused business.
Slide eight shows the same analysis, but on a full year basis. The overarching explanation is largely the same but there was also an earnings per share impact from a higher weighted average diluted share count and full year 2021 compared to prior year.
This was primarily due to debt restructuring in the equity investment from Athene in June of 2020, which resulted in additional shares that were only partially reflected in full year 2020, due to waiting but fully reflected in 2021.
Earnings per share in 2021 after adjusting for these items was up 22% compared to full year 2020.
Slide nine illustrates the reconciliation of fourth quarter 2021 pre tax adjusted operating earnings of 817 million to pretax income attributable to Jackson financial of $672 million.
As shown in the table the total guaranteed benefits and hedging results or net hedge result was negative $381 million in the fourth 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 the economics of the business as well as the statutory capital position and choose to accept the resulting gap below the line volatility.
I would also note that the $309 million net hedge loss was modest when compared to pre tax adjusted operating earnings of nearly $2 8 billion.
Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $753 million in the fourth 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 and protects our hedging budget when markets decline.
As previously noted I'll guarantee fees are presented in nonoperating income to align with the hedging and liability movements.
The main driver of the negative fourth quarter hedge result was the $1 7 billion loss on freestanding derivatives, which were driven by losses on equity hedges, resulting from higher equity markets during the year.
As a reminder, net reserve an embedded derivative liabilities for guaranteed benefits are defined by both fast 157, which calculates the embedded derivative liabilities using current market inputs.
And Sop <unk>, three dash, one, which calculates the insurance contract liabilities using longer term assumptions, making them less sensitive to current market inputs.
This quarter's $532 million benefit from reserve movements is primarily the result of Fas 157, accounting for the higher equity markets over the fourth quarter.
This accounting for equity market movements is a good example, among others.
Where our hedging approach and the GAAP treatment of liabilities are not aligned because our equity hedges will fully mark to market as you see here, while the reserves are not fully sensitive to the economic impact of market movements.
We've included a slide in the appendix, which shows the key macroeconomic drivers of the GAAP net hedge result, and how changes in these macro items may lead to non economic gains or losses.
Due to the lack of alignment between our hedging approach and GAAP accounting.
Now let's switch.
Gears and look at our business segments, starting with retail annuities RTL sales driven this quarter by growth both in variable annuities without living.
Benefits.
Sales of elite access our investment only.
Variable annuity increased 45% from the prior year's quarter and sales of other variable annuities without one.
Lifetime benefit guarantees were up 23% over the prior year period.
While sales without lifetime benefits increase from 27% in the fourth quarter of last year to 37% in the fourth quarter of this year. We expect this percentage may vary over time based on market conditions and customer demand.
We continue to focus on growing our fee based advisory business and sales of these products were up 19% from the prior year's quarter.
Furthermore, our full year fee based advisory sales of $1 3 billion were at record levels.
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 <unk> product midway through the fourth quarter, and we reported $108 million of sales in the partial quarter.
We view this as an important product launch capturing the economic diversification benefit between <unk> and a traditional living benefit variable annuity as well as capital efficiencies through Raila account value growth alongside our large healthy enforced traditional variable annuity block.
Looking at pre tax adjusted operating earnings on Slide 11, we are up from the prior year fourth quarter.
In addition to the notable items I detailed earlier.
This was the result of higher separate account assets as the fourth quarter 2021 variable annuity ending account value was up 13% from the fourth quarter 2020, ending account value primarily due to strong returns.
As a reminder, we have investment freedom on our variable annuity products, allowing both policyholders and Jackson to more fully capture the benefits of rising equity markets.
While fixed annuity and fixed indexed annuity account values are minimal after accounting for the business reinsured to Athene. They did also grow during the period sales remained low with a block has low surrender activity given the business with recently issued meaning sales largely contribute directly to positive net flows.
We will have a similar dynamic on <unk> sales going forward given our recent entry into this market with our October launch such that the $108 million of sales in the quarter contribute to positive net flows.
Our other operating segments are shown on slide 12.
We temporarily suspended institutional business for new sales starting in early 2020, as we began the separation process and this largely continued throughout 2021.
This led to significant outflows as existing business has run off throughout the year with account values declining from $11 1 billion a year ago to $8 8 billion as of the end of 2021.
Now that we have completed our separation we have re engaged in the market during the fourth quarter with $432 million of sales.
We would note that the value of the institutional business goes deeper than just GAAP earnings.
It provides diversification benefits as cost effective and helps to stabilize our statutory capital generation.
Our pre tax adjusted operating earnings for the institutional segment of $27 million during the fourth quarter of 2021 was up from $12 million in the prior year's quarter.
Due to spread compression in the prior year period.
Going forward the earnings should largely track the account values.
Lastly, our closed life and annuity blocks segment reported higher pre tax adjusted operating earnings per time.
Slide 13 summarizes.
This is a robust capital position as of the end of 2021.
As Laura noted this strong position has given us the confidence to update our capital return target to $425 to 525 million.
Two.
Following.
Following the announcement of our share repurchase program and dividend in November .
We completed $211 million of share repurchases and paid $50 million.
Dividends by the end of 2021.
After returning this capital to shareholders, we continued to maintain cash and liquidity of over $600 million at the holding company above our minimum liquidity target.
Our total GAAP leverage was at 22, 9% at year end within our 20% to 25% target range.
We also refinanced one of our two term loans with a $1 $6 billion senior debt issuance in December .
Jackson National Life Insurance Company reported a total adjusted capital position of $6 6 billion down slightly from $6 8 billion as of the end of the third quarter.
This was the result of the Florida reserves issue, we have discussed before.
For which led to hedging losses on equity derivatives with rising markets that were not fully offset by reserve releases.
However, the higher equity markets led to a reduction in required capital our Cao.
Increasing our year end RBC ratio to 580%.
This was up from the estimated RBC of above 525% as of the third quarter, continuing the growing RBC trend we've seen throughout 2021.
This means that through the lens of the operating company only and without considering excess capital at the holding company, we are above our 500% to 525% adjusted RBC target.
On an adjusted basis the year end RBC ratio was 611%. We would also note that Jackson National Life Insurance Company received approval from the Michigan Department of insurance and financial services for our combined dividend and return of capital payment to Jackson to direct parent Brook life of $600 million, which is expected to.
Occur in the first quarter of 2022.
Brook life expects to pay a $510 million ordinary dividend to its ultimate parent Jackson financial.
Subsequent to the receipt of the $600 million from Jackson in the first quarter of 2022.
This will support our new capital return targets, while maintaining a healthy level of capital at the operating company.
We will also have an adjusted RBC ratio above our target level.
So in summary, it was a successful quarter and year, we continue to increase our RBC ratio refinanced one of our term loans operate within our target leverage range and we have ample holding company liquidity.
With our robust capital levels, we are well positioned for the future.
And with that I will turn it back to Laura for closing remarks.
Thank you Marcia.
Looking back on 2021 Jack.
Jackson's ability to execute has led to many significant accomplishments first the successful transition to becoming a separate public company, resulting from the tremendous internal collaboration and hard work of our employees.
Second ending 2021 in a position of balance sheet strength, while returning capital to shareholders and meeting our financial targets.
And lastly, we continued to expand and diversify our product offerings and distribution channels.
In 2022, we intend to maintain our balanced approach to capital management investing in the growth of the company, while delivering on our targeted capital returned to shareholders.
Jackson has long been a leader in the retirement income and savings solutions market.
For over a decade, we've been one of the largest annuity writers with the disciplined and client.
Thank you for joining our call and at this time, we'd like to open the line for questions.
Thank you.
I would like to ask a question. Please press star followed by the sudden each comeaux from Jefferies. Please go ahead. Your line is now open.
Great. Thank you I.
I wanted to start with.
The 600 million dividend that you are taking out of the operating company in the first.
I expect going forward or is there anything on <unk>.
Unusual about that nominal amount of capital that's coming out.
Thanks for the question.
First the dividend sure.
Yes, I think it was.
Pretty normal course.
No.
So maybe.
The average run rate, we've seen over time, but it reflects the.
But really 2021 and.
And two that we had hadn't paid a dividend.
And to the prior year, so that all combined together too late.
$600 million level.
Okay, and then I think you said five tenants coming out of Brook life going to the going to <unk>.
About the remaining $90 million.
The other 90 million is.
We will eventually make its way up to the holding company over the course of the year in connection with some financing transaction or financing arrangements between the entities. So that is it's just something that timing wise happens.
Semi annually with surplus note activity and so that will eventually get up there to the holding company before the end of the year.
Got it and then my last one is just on kind of the macro environment, we're sitting here with the market down 8% to 10%.
Can you just talk.
Talk a little bit about the moving pieces in your RBC calculation and what we should expect as we think about first quarter.
Sure.
We have certainly worked through many types of market conditions over time, and our hedging has performed as expected.
I'll turn it over to Marcia to share more specific remarks.
In terms of.
The capital statutory position.
Certainly the market down.
That's going to be something that could translate into increased reserves or capital requirements, but on the other on the other hand, we have had an increase in rate.
That would work in the opposite direction tend to.
Reduce requirement in the statutory framework, so I think those things.
Working kind of in opposite directions right now obviously, we will keep an eye on how things go but just to reiterate what Laura said around the hedging I mean these types of movements are are not outside of the bounds of things that we've worked through before they are well within the <unk>.
Wayne just sensitivities that we routinely watch.
Preparing for in terms of how we arranged our risk limits and our risk appetite so were.
Sure.
We really like our position is actually.
Holding up quite well during this period of time, we'd note that.
Hedging can become more expensive when we have higher volatility like this.
But again we have.
<unk> strong.
Of fees.
The support that hedging budget with our benefit fees being based on the benefit base rather than the asset under management, So thats a very stable.
The fee income stream that supports our hedging. So I think we are we feel like Brazil.
Well within range there.
Okay. Thank you.
Thank you Sidney the next question today comes from Ryan Krueger from Cape VW. Brian . Please go ahead. Your line is now open.
Thanks, Good morning. Thank.
Thank you first question is when you think about the $425 million to $525 million capital return target for 2022 can you talk about the <unk>.
Extent to which you would expect that to be funded from ongoing capital generation from the business first is some use of existing excess capital.
Yes, good morning, Ryan Thanks for the question.
In general we are targeting cash return that is supportable by the business and has a balanced mix between.
Dividend and share repurchase.
<unk> that this updated target is now based on a calendar year basis, and we certainly view it to be sustainable for a normal course.
Marcia additional remarks.
Yes.
Well.
Focusing on here is looking at how the business performed last year, what does that make available to in order in order to be able to fund a return so it's not necessarily tied directly to how the businesses or not.
Getting ahead of ourselves in terms of how the business is going to perform over the over the current year.
Sure.
Bill and that that 425 to 595.
Yes.
Good targets that we're comfortable with for this year.
Okay got it and then just a quick one I guess, how should we think about the timing of when.
Last quarter, you had talked about $7 2 million.
Diluted shares come into the share count, but only some of that came in in the fourth quarter, how should we view the timing of that coming forward.
That will come in overtime and I think it will depend upon kind of market conditions and the way in terms of the pattern and the timing.
Is it perfectly predictable.
<unk> at this point in time, but that will come in and kind of gradually over the next couple of years.
Okay got it thank you.
Thank you Ryan.
The next question today comes from Tom Gallagher of Evercore ISI. Tom. Please go ahead. Your line is now open.
Good morning, just first question on hedging costs can you remind us.
How much youre spending annually on hedging costs I think you've mentioned in the past it's below your guaranteed fees.
But can you just give some quantification of that $2 billion annually as a $2 5 billion annually you are spending on hedging.
And then if we look at what's happened in the environment in Q1, you had.
Two offsetting.
Movement.
Interest rates rising a lot, but then you will fall spiking.
I presume.
Youre using more shorter term hedges.
<unk> is the.
Probably the overwhelming influence on hedge cost, but can you comment on if we remain in a Q1 environment for a while what what impact would you see it having on hedge costs and would you still expect those to be below guaranteed fees.
Good morning, Pam Chip do you want to take that sure yes.
Tom what we've what we've.
What we disclosed in the past is.
If you look at the guarantee fees it tends to run broad broad range $2 5 billion or so year in terms of the guarantee fees we collect.
It's very much dependent on in terms of the market.
How much of that we're spending.
Yes, I think as we look at.
Last year.
You can expect we spent less than that because we have a very low vol year.
They came through in capital formation.
We're partway through the quarter. So it's really too early to say exactly what's going on this quarter other than hedging cost would be up.
Again, probably no big surprise, there, but with the VIX running around 30, you can expect that we would have increased hedging costs.
Whether it's Bob Feeser.
We are at or above or wherever.
Exactly sure at the moment.
Yes.
Quarter, four fully done yet but.
But I think it's very much within as Marshall mentioned within the range of what we've seen historically.
So we would expect to have that kind of performance accuracy and historically with respect to.
The interactions of how things are going.
Thank you.
The benefits from.
Yes, some higher rates again as mentioned there is there is good offset there.
The quarter.
Quarter to date.
As we're talking about.
You kind of rebalancing hedges, we do have as you mentioned shorter shorter dated hedges. So we are subject to roll the raw cost of those and are experiencing higher.
Higher premiums that we'd have to pay pay for options.
But I would also just keep in mind that a good chunk of our hedging book is off of futures. So.
In some respects as interest rates start moving up on the short end futures Terry.
Start to reduce somewhat.
So that will be a little bit of tailwind eventually once the fed starts raising rates and I think the other thing I'd mention is just that keep in mind since we our focus historically has been on.
More.
Sustaining of shocks and risk limits that way as opposed to an immunization strategy of GAAP earnings we don't tend to be as responses to the market and maybe some others might be so as we see a lot of chop in the market, we're not rebalancing hedges maybe as.
As quickly or as.
<unk>.
Kind of a knee jerk reaction as you might have to if we did if we operate a different way so that does mitigate a little bit of the cost because we're not we're not getting whipsawed as much as you might otherwise get.
Got you. Thanks. Thanks, Thanks, Chad that was helpful.
Next question I had is just on.
Would you still.
And I think should need sort of alluded to this question, but I'll ask a follow up with with equity markets doing what theyre doing in hedge cost doing what theyre doing.
Just a broader question would you still expect to generate.
Statutory capital or call at RBC.
Positive RBC capital.
And <unk> type of environment or is it.
Is it.
You need to close the books before you make but.
Determination on that because I ask because.
I've thought about the Florida reserves being a meaningful positive.
In terms of.
Not needing to build reserves and an equity market correction quarter.
So that should give you some dry powder to generate RBC.
But any any any thoughts on that.
Well I think you may have hit it on the head earlier when he said, we probably need to close the books really know.
That's something obviously, we'll be watching as we move through the year, but a lot of factors come into play there and I think we just.
We just need to kind of.
See how things play out in the calculation.
Okay and then.
Just a follow up on that.
Any can you give some quantification for <unk>.
When you would start to build reserves again based on equity market correction territory levels.
I just wanted to get a sense for how much kind of embedded margin is in there to think about.
What point, you would start to build reserves again.
I don't have the.
Exact level.
In my head right now, but I know that where we had gotten to at the end of the year, we had significant flooring.
Pretty deep into the tail.
So even going into some of those scenarios that makeup the Cte 98 for the capital requirement.
Sure in terms of.
Working.
And we're working our way through some of the any kind of market downturn before you would see.
To the.
Impacting the Cte 98.
The eight tail that will come off earlier.
As those tail scenarios respond more quickly than before.
Go into the 70 Cte for reserves, but we do.
With all of the market.
The growth that we saw in 2021.
Okay. Thanks.
Thank you Tom.
The next question today comes from Erik Bass from Autonomous Research Eric. Please go ahead. Your line is now open.
Hi, Thank you and I. Appreciate you mentioned earlier that Youll give more specifics on the Lv Ti impacts later in the year some of the qualitative impacts as we start to hear things from peers I guess specifically.
Please should we expect a significant change from bringing the VA guarantees to fair value.
And then also given your hedging strategy do you expect to GAAP earnings volatility.
Sure. Thanks, Eric.
Yes.
Thanks.
For us by definition the movement.
That will occur in Germany.
This benefit will mean.
And we're moving a portion of those guarantees.
Both type framework with Marvel.
Long term equity growth assumption to a calculation that is going to be tied to current interest rates.
The actual.
Tacked on those reserves will be sensitive to.
Two factors, though.
Well, but I think definitional.
There are increased there that would come.
Come through retained earnings in terms of the implementation effects.
Then as far as volatile.
He is.
If you sort of think first to <unk>.
Operating result.
What we wont see as the market sensitivity and deck amortization that we have today. So I would think in the operating room.
Results, we probably are looking at something less volatile.
Whereas in Nonoperating result, I think because we have.
We have a couple of things that are going to go and maybe different directions. So it's hard to say how it all plays out because it'll be somewhat market dependent but I think the changes will introduce more interest rate sensitivity into the liability given the move to Fas 157.
And probably less sensitivity to the equity movements with respect to our hedging approach.
I think there is a balance there there is also less of a debt offering effects.
All in probably heightened volatility but.
Below the line, but it's really going to be probably pretty sensitive to whatever path.
<unk> market or kind of economic factors play out period by period.
Got it. Thank you that's very helpful color and just one follow up there do you have a sense of.
Thank you bifurcate some of the guarantees between fair value and <unk>.
S&P accounting.
Thank you.
Yeah.
All companies I think you would see the.
Death benefits.
Income and assets as well, but thats benefits would be applicable to us since we have a minimal amount of the <unk> business.
Those will move.
And then we do bifurcate, our GM WV today.
A good portion of that is already under our past 157.
It's only really the portion that would be projected to develop after the benefit basis exhausted, where you would have.
<unk> III reserve component today that would need to change.
But the change got it thank you guys.
Okay, perfect. Thanks, and if I could sneak in one last one do you intend to provide an update to the different distributable cash flow scenarios that you had included in our form 10 is that something you would do in the 10-K or at a later date.
It's not something we planned at the moment.
But we recognize we will have a lot of heightened disclosures coming in 2023 in connection with the <unk> changes. So we will certainly be looking at the overall package of disclosures and.
Have you always to consider things that we think add greater understanding.
It isn't the macro front over the past.
Tier.
Yes.
Helpful I think to see how those develop.
Sure. Thank you.
Thanks.
Sure.
Thank you.
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The next question today comes from Goldman Sachs. Please go ahead. Your line is now open.
Hi, Thanks for taking the question.
First one I had for you is just on the amount of capital you are distributing.
And sort of going back to the methodology I think.
Talked about previously.
Being the 50% of excess capital generated over 400 RBC.
When I think through this 100 million is higher is that should I think about that as maybe you're you're shifting the way you think through that methodology or are you generating 100 million more at this point then than you expected.
Can you help us think through that or are you hitting high enough RBC ratios, where that methodology doesn't really make sense anymore. Given I think inherently that methodology would cause the RBC to go up over time and at some point it doesn't need to go up anymore.
Sure.
I'll take that I guess.
First I'd say, we're we've maintained our view on the 40% to 60% of excess capital generation as a guide.
That's the part I, probably would emphasize as a guide we wouldn't be doing.
That calculation in each period and having that directly.
Indicate the amount of returns we do view it as.
A useful guide and we also recognize that capital return.
Our excess capital generated in that in that way is not necessarily going to be stable every period.
Have a.
A key focus of our hedging program to help stabilize distributable earnings, but we do have market sensitivity.
No.
What we've done here is really just look at the business as it performed very well over last year.
Getting a fresh view now that we're kind of on the other side of the merger.
And with all of that in mind in our own.
Kind of view of the business in the near term as well as long term felt comfortable that we could increase to the 425 to 525 target for 2022.
Got it.
Makes sense.
Yes, my follow up here.
As we have this targeted RBC ratio, that's lower than where you are.
A decent amount.
But I think just based on that methodology of 40 to 60.
And I think and please correct me if I'm wrong, but I think that kind of methodology would actually cause upward momentum to continue on the RBC ratio. So maybe the more interesting number I guess from my point of view would be instead of.
The minimum.
Sort of the maximum RBC like how high would you let it get before you change that methodology, then maybe returning something closer to a 100% of excess capital generation.
Well I think we would always have the flexibility to go outside of that as I said, the 40 to 60 range, we wouldn't view the 40 or the <unk>.
<unk>.
Mexico is there anything there so we certainly would have the.
The capability, if we've generated sufficient capital and we have considered all of our balanced use of capital across new.
New business investment.
Capital return being one of the component parts as well and maintaining our balance sheet strength and the like.
On balance the right answer for shareholders was to return that we would certainly be open to going higher.
To whatever level made sense under the circumstances. So that really is just kind of the guide and circumstances will always come into play with consideration of the opportunities in front of us and what makes the best sense for the shareholders.
Got it thank you.
Thank you.
There are no further questions registered so I would like to pass the conference back over to see lower price corn for closing remarks, Laura. Please go ahead.
Thank you well. Thank you all for joining us today, and we look forward to your participation in our next quarterly call.
That concludes today's Jackson financed incorporated fourth quarter 2021 earnings call. Thank you for your participation you may now disconnect.
Okay.
Okay.
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