Q1 2022 Jackson Financial Inc Earnings Call
<unk> long history of industry, leading service and support.
The first quarter marks 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 toward distribution partners and see how our service enhances their business.
<unk> 2004, we've been recognized by service quality management or.
<unk> for our exceptional customer service.
QM as the independent organization that benchmark 500, leading North American contact center.
We also seek to serve advisers and their clients through our industry leadership and engagement where.
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 were highly engaged in supporting IRI and ACI effort.
Most recently, we continue to support <unk> secure two <unk> legislation was 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 and we believe the focus on more favorable minimum distributions and potential expansion of lifetime income opportunities are positive developments for the media industry.
Turning to page four we reaffirm our 2022 financial targets.
Jackson has returned capital to shareholders each quarter following our board's initial authorization last November .
As of April 29, we have repurchased nine 5 million shares at an average price of just over $38.
This represents over 10% of our shares outstanding at separation.
Our shareholder dividend to a long term view of Jackson's profitable growth and sustainable capital generation, which support future capital returning 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 Marsha, our hedging strategy performed as expected.
Within our risk limits.
The change in our RBC ratio from year end with largely tied to previously disclosed items, including the impact of capital return and the statutory mean reversion rate.
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 will turn it over to Marcia to walk through the numbers.
Thank you Laura turning to our results on slide five our adjusted operating earnings were down from the prior year's quarter.
This was due to higher DAC amortization, resulting from lower comparative separate account return lower limited partnership income and higher expenses.
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 I'll guarantee fees or move 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 nonoperating income resulted in a growing book value, even after returning $192 million to shareholders in the quarter.
Slide six 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 of core amortization, which is 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 first quarter of 2022, there was market driven acceleration of DAC amortization, resulting in $81 million increase in <unk> expense in the quarter on a pre tax basis.
This was primarily due to a negative six 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 <unk> expense, primarily due to a four 6% separate account return in that period, which exceeded the assumed return as.
As a result of the market driven Jack effects was a net negative impact of $111 million on a pre tax basis, when comparing the current first quarter to the prior year first quarter.
In terms of future market, driven that acceleration or deceleration for modeling purposes. We have provided additional details on the mechanics with the calculations within the appendix of this presentation, which aligns with the format in our financial supplement.
With market related effects is expected to change in the first quarter of 2023 with the adoption of <unk> under GAAP accounting and we continue to expect to provide more information regarding L. DTI 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 for $36 million in the current quarter compared to $144 million in the prior year's quarter, creating the 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 from the prior year's quarter negatively impacting the period over period comparisons.
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 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 provided insight about the impact of rising rates to the results of our VA business, both immediately and going forward.
Slide seven takes into account, our healthy VA book and the corresponding impact from the cash surrender value floor or CSP slower on reserves, which is an example of conservatism within statutory accounting.
Our reserves were materially impacted by the slower 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 emerged years into the future.
These interest rate hedge assets are immediately fair valued when longer term rates right.
However, there is a go forward benefit to future hedge spend from operating in a higher rate environment.
This was 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 book and the volume of hedging necessary to stay within our risk limits.
Because we use a mixture of equity futures and shorter dated options to protect our business.
Cost of these instruments is most directly influenced by the shorter end of the curve with the three months Treasury being helpful reference point.
Since the increase in the short end of the curve did not happen until later in the first quarter you 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, our GM WB focused rather than GMI b focus.
And because of this GM WB focus claims payments that result from lower equity markets will emerge years into the future and cannot be monetized immediately the.
The increase in the longer end of the curve that we've seen year to date helps to reduce the hedging payoff 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 Florida reserves and fair value accounting for our interest rate hedging assets.
When reserves are impacted by the PSU floor, and therefore cannot be reduced increases in rates that drive losses on hedge assets do not have a liability 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.
And the immediate benefit, but instead emergence overtime benefiting future capital generation.
Required capital Cow, which is the denominator in the RBC calculation and 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. Our go forward benefit on the volume of hedging required when longer lease life 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 staff under GAAP accounting the impact of increasing rates is more consistent between the media and go forward impact.
<unk> 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 noticed that and we would also expect to see a reduction in the expected impact from <unk> implementation of phase five.
Slide eight illustrates the reconciliation of first quarter 2022 pre tax adjusted operating earnings of 418 million to pretax 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. Our net hedge result was a gain of $782 million in the first quarter.
As we've noted net income include 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.
She has to accept the resulting gap below the line.
Utilities.
Starting from the left side of the waterfall chart, you see a robust guarantees.
Thank you 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 best which provides stability to the guarantee fee stream and protects our hedge budget when markets declining.
As previously noted I'll guarantee fees are presented in nonoperating income to align with the hedging and liability movements.
During the quarter as a result of rising interest.
Great.
This was more than offset by a $1 8 billion derivative movements, which were all.
So driven by higher interest rates.
Now, let's look at our business segments, starting with retail annuities on slide nine where we continue to see healthy sales trends.
We are pleased to have had strong levels of retail sales, which included defined contribution sales were $540 million.
We generated positive net flows for variable annuities fixed and fixed indexed annuities and <unk> 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 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 rattler 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 <unk> and a traditional living benefit variable annuity as well as capital efficiency through Raila account value growth alongside our large healthy influence traditional variable annuity block.
Looking at pretax 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 <unk>.
Railing 12 months.
We have built up $305 million of account value on Ryan lessens our launch in October .
Because of the early age of our railroad books surrender activity would be minimal such that sales lead to an immediate buildup in account value.
We have a similar dynamic on a fixed annuity and fixed index annuity book These.
These account values are minimal after taking into consideration the business reinsured to athene, but they did also grow during the period due to positive net flows.
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 is broader than just GAAP earnings as 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 $23 million. During the first quarter of 2022 was up from $10 million in the prior quarter due to the lower interest credit in the current period.
Going forward the earnings should largely tracks with account values.
Lastly, our closed life and annuity blocks 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.
12 summarizes our capital position as of the first quarter as Laura noted, we delivered $192 million of capital returned to shareholders. During the quarter, which is a strong start to our targeted capital return for calendar year 2022.
And to returning this capital to shareholders, we've maintained cash and liquidity of nearly $1 billion at the holding company, 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.
Excess over that amount provides us with a substantial cash buffer to support our capital return beyond our 2022 targeted return.
Our total GAAP 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 <unk>.
Jackson National Life Insurance Company reported a total adjusted capital position of $5 4 billion down from $6 6 billion as of year end.
This was the result of a $600 million remittance to book life in March hedging losses from higher rates that weren't fully offset due to Florida out reserves I mentioned earlier as well as an increase in non admitted deferred tax assets.
Our estimated adjusted RBC ratio as of first quarter is within the 500% to 525% target range and is down from 611% at year end.
The majority of movements accounting for nearly 70 RBC points resulted from three notable items.
The first is the previously disclosed change in the mean reversion parameter MRP, which was effective January one 2022.
One of the go forward benefits from higher interest rates as a reduced MRI.
Our fee impact in future years for example, if rate stay at or near current levels. We would not expect an MRP impact in January of next year.
Tax related items, primarily increases in non admitted deferred tax assets for a second negative impact.
As a reminder, we expect to realize the benefits of our growth statutory deferred tax assets over time, but.
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.
We'll 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.
Thank you Marcia.
While current market volatility presents challenges that impacted this quarter's results and has continued into the second quarter, our experienced 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.
Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
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We will pause here briefly ask questions already.
Our first question is what the Thomas Gallagher of Evercore Thomas Your line is open.
Thank you.
First question is more of a mark to market expectation for hedging as we think about two Q.
I heard everything you said about Q1 and the differential with what happened to it.
Interest rates and the Florida reserves, but if I look at at least so far what's happened quarter to date into two Q.
I would imagine the equity hedge.
<unk> gained.
Ponant would outweigh the interest rate negative mark.
Just looking at this the magnitude of the equity market decline.
And I would expect that whole issue.
Issue with Florida out reserves would actually become a positive into Q.
First first question does that sound Directionally right and second one.
That is right could you share with us some kind of sensitivity and sizing of if there is expected to be in RBC gain in Q.
Good morning, Thank you for the question.
Turn it over to Marcia to get Us started.
Sure Tom.
Thank you.
Kind of what you've outlined makes some sense. There is a sense that we would expect with the market down on that one.
Benefit us on the hedging perspective from our equity hedge position.
Whereas the continued increase in rate for so far into the second quarter.
Continue to kind of repeat some of what we saw in the first quarter around a negative mark on the interest rate hedges.
On balance that probably does favor the equity position as a result.
Of what that would do to the tax position.
I note that there is also going to be impact.
From equity movements and interest rate movements in the period.
Depending upon how the quarter lands, but so far in the second quarter anyway that will flow through to the required capital calculation as well so Barry you may see some.
Again sort of 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.
That far into the tail.
The effects of the reserve flooring, certainly contribute completely to the numerator position in terms of what it does with our reserves, but a little less so although on a limited basis at a five well, but nonetheless.
Lesser extent when it comes to the required capital requirements given the best calculated further in detail.
Got you. Thanks. So this is it.
It's 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 is it too involved it's really determined at this point.
Well there are a lot of moving pieces and it's kind of dependent.
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 the remark.
Remarks earlier that we see some.
Tailwind that will catch up more in the second half of the year around.
<unk>.
Fed actions and what that does to the rates on the short end of the curve and the benefits of that that will play out there in terms of our overall hedge then.
But when it comes to the second quarter just in general I mean, certainly it's true that growing not quite halfway through.
More certainly more to play out there.
But it will it will.
We will have to think too about not just where interest rates land than equity land, but the level of volatility and sort of pass through that quarter as well in terms of what that does to the hedge fund.
We have seen I think slightly lower level of volatility.
In the second quarter so far.
That's kind of moving in a better direction, but.
It's still at a heightened level.
Yes.
That's really helpful and then just relatedly.
If there is a little bit of incremental RBC pressure into Q and you were to dip below that 500 to 525 target range can you just remind us your views John .
Sustainability is.
Buybacks and common dividends, if you were to drop below that.
And at what level, you might have to reconsider capital return plans.
Sure Tom I think a couple of things to put out as a reminder, the we see the 500% to 525% as a as a target range.
I think we communicated earlier in some situations that we don't see.
And of that being a bright line that indicate.
Switch flip then and we would turn things off so we're comfortable to that that also target that we set considering normal market condition. 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.
And again the conditions, we've seen and.
We wouldn't necessarily see an immediate change in our view should we shouldnt get below 500.
Okay. Thanks.
Our next question is with <unk> Kamath of Jefferies Sydney.
<unk> Your line is open.
Great. Thanks.
Just going back to slide 12 can you help us with.
That last bullet just in terms of sizing those two impacts.
Cost of hedges from market volatility and then.
The negative impact on interest rates can you just help us sort of dimension.
Or quantify the those two impacts.
Certainly this is marcia.
I'd say there.
Roughly similar in size not until that heavily one way or another in terms of how those feeds right into the results for the period. They were both they are both impactful.
But the level of volatility that we had in the us.
Neither that transfer.
Translated to in terms of our hedge spend being higher is it something that was significant but both of these are kind of let's say similar five I think in terms of what they what they impacted in the quarter.
Got you and then I guess, when we think back to that slide where you talked about the benefit from higher rates I think with slide seven.
Is there any way that you can help us size kind of the impacts of some of these things.
There is 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.
I don't know that I'd quantify it right now probably depends upon the path and so forth, but I think one of the I guess give a little bit of flavor into the component parts.
One of them.
Let's just back up and say I guess, our equity hedging you know consistent both futures and options. So we definitely would see as rates go up.
Attention for what it is.
Currently our cost in terms of our future Terry to potentially even change signs and become a positive.
In the period in the period, given where the short end of the rates may end up so as we move through the year I think that's.
That's a significant item that could number one kind of diminished from a negative something more neutral, but even change around and become a positive item.
And then when it comes to options I think.
Key inputs to the cost of options is going to be interest rates and volatility two important items. There. So as rates go up that's certainly helpful.
The extent that volatility settled down as well then that would compound the benefits that we would get there in terms of our of our hedging.
The cost of our hedging when it comes to the option component.
Okay and then just my last one is just on.
From your supplement you show your statutory operating earnings of a 1 billion statutory net income of $1 7 billion in the quarter just wanted to understand that 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.
Well, let me start with the first part there I mean, I think the difference between 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 items.
Matt.
Keeping in mind that that's realized not necessarily the unrealized component, which is going to be a big portion of the interest rate hedge losses over the period would have been unrealized in nature.
Given that we use swaps disruptions there more so than that treasury futures.
So that's probably the.
Our biggest contributor to the difference there on the SaaS side with Visa Inc.
Corporation of realized gains and losses.
And on the sustainable Stat earnings.
Yes, I mean, I think in the past we've said.
This is obviously going to depend period to period, but on an annual basis, we've talked about.
Earnings kind of.
Approximate.
708.
800, $900 billion 1 million in the year excuse me and I would say the key place to look there would just be the projections that we have out in the form 10 on that gives you a sense of how how we how earnings might evolve over a five year period under different stresses because it's certainly going to be market sensitive.
Okay alright. Thanks.
Our next question with Alex Scott of Goldman Sachs. Alex Your line is open.
Hey, Thanks, Hey, Kevin.
The RBC ratio.
Brian .
Overall included in holding company cash RBC ratios.
Media operating company.
I'd come out there.
450 RBC.
A lot of years.
And I just wanted to find out what.
Process wise.
The regulator and given extraordinary dividend.
The reason I think we're a little more sensitive here.
As to deal with.
More limited ordinary dividend capacity and so when we get to the end of the year.
Alright, and sort of and requirement on the regulatory and to get an extraordinary dividend does that need to be.
Above a certain level.
How do I think through the way that conversation goes at the end of the year. If the RBC ratio has been higher or maybe it's even gotten a little lower.
Jeff do you want to talk through that process 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 North Brook like immediate parent flowing up to the ultimate parent.
While well worn conversation with the regulator.
Yes, I would keep in mind too that the way the regulator looks at.
Talk about an example, youre using $4 50 on a regulatory basis Thats 900, because theyre looking at a different.
In less than we are.
Yes.
We've never really had any issues.
Getting extraordinary dividends out.
Normal course, with well capitalized company, which we certainly are.
Yes.
I don't think Thats, particularly a gating issue for us.
Okay and then the second question was.
Yes.
The scenario that everybody got.
Got it great and then we have to add right now but.
We're all trying to understand what a significantly higher rate environment combined with.
Hey materially lower equity market, what the net of that meeting.
Both scenarios and we're all trying to sort of look at the different one.
One from another and added to another scenario.
Okay.
Right.
Thank you.
If you could help us think through that have you updated that kind of scenario and looked at it yourself.
Deep and help us thank you.
Directionally.
Positive or negative when we think through the net of those two things.
Sure Alex Yes, I understand the complexity of trying to mix and match.
Items, because theres a lot of interaction. So appreciate that that challenge there I guess I would say when you think to what the assumptions were that we had in our form 10 disclosures any projections that we have there.
We had.
Those are based off of rates and the forward curve.
As of the end of 2020, and we assumed a 7%.
Equity total return on an annualized basis.
If you look at kind of where things are starting from that point to the end of the first quarter.
Rates are clearly up materially relative to what we would have assumed those projections.
And we would have.
Got to a point of rate.
We were well beyond than we would've thought we would have gotten to that point at the end of 2025.
Certainly well ahead of where we were.
Assuming we can be on that basis and on an equity return basis.
Do you think about the return over that five quarter period through 2021 in the first quarter of 2022.
Annualized return of approximately 18% relative to the 7%.
Assumption that we would have baked into those projections.
<unk>.
While we didn't have an official update on those items I think as 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 youre looking at our last set of disclosures there and thinking about how they may have changed.
Moving forward to kind of the current position.
Okay. Thank you.
Yes.
Our next question is with Erik bass of Autonomous research.
Eric Your line is open.
Sure.
Alright. Thank you so 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.
Sure.
Again, thanks for that Eric.
So we definitely saw a higher hedging costs over the quarter I think thats 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 guarantee 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.
So we did spend.
A greater amount than what we had taken in in terms of guarantee 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.
Volatility, particularly high and then naturally when volatility settled down the way. It typically does after some period of time.
That relationship can reverse and we would then.
<unk> to be in a position, where our hedging our hedging budget would be fully covered ivy.
By the fees that we collect.
Got it.
Just curious I mean, as you mentioned earlier kind of for hedging cost think of the three months Treasury, which has started to move up so I would assume that the positive from where you ended the quarter in equity volatility is still high but.
I don't know if thats kind of where it sits relative to your to your normal expectations.
I guess I'm wondering as we sit today is are you in a better position than you were in the first quarter.
Yes, I think we are the movement up in the short rates as you noted happened pretty late in the first quarter. So not enough time to kind of need much of a benefit for that quarter.
But.
<unk> been in place now as we move 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.
Got it. Thank you and then could you provide a little bit more color on how you are hedging performed in <unk> and <unk>.
In general it performed as expected, but wondering 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.
And the big moves in the market and some under performance of active managers.
Yes, I guess touch on the basis risk point.
We do have periods of time, where we have you know.
Basis risks movements that are.
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 that is not as significant as we've seen in periods past, but.
But we did have a little bit there.
We often.
Have seen though that basis risk over time, it tends to kind of mean revert. So when we have periods goes negative you tend to have periods.
Positive that occur as well.
Following periods that allows a kind of mean revert.
That was quite manageable I think when we just look at how the hedging performed and how we evaluate it.
We tend to say that the best way to evaluate our hedge effectiveness is just through the lens of our risk limits and how the hedging is protecting our business relative to our to.
Our limit.
Some of which are on a on a statutory basis and so that that is why we sometimes have an additional hedge spend to protect the debt I think we referred to that in the past is our macro hedge.
To protect our stat sensitivity against the risk limits that are that are set out in a statutory framework.
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.
No I mean, I think we would say is our main focus when we're setting our.
Our interest rate hedging position is just the risk profile of the business. So we don't typically.
Make tactical Lu with our mixed up on them.
Direction of travel with rates are or equity Jaeger. So, we'll just be updating in resetting our hedge positioning as needed. The way we would typically do in a dynamic fashion when we look at the risk.
The risk profile of the business.
With respect to interest rate risks that a lot of that is really connected to.
How how much we might think we have benefit payments to make in the future, which is really on a per server basis, driven by what the equity markets do and then that kind of has.
As a follow on to determine how much hedging we need on an interest rate basis. So we're going to be focusing on those as usual and making adjustments as we need to.
Got it. Thank you I appreciate the comments.
Our next question is let's Ryan Krueger K B W.
Brian Your line is open.
Hi, Thanks, Good morning, I guess first can you help us think about how far away you reserved.
I guess, not being floored anymore or or maybe like what the.
What the dollar amount would have been as the benefit from an offset standpoint.
Forward.
Sure Riley. Thank so we didn't we haven't quantified I guess.
What would our results have been if they werent floor, but we have.
We ended the quarter pretty Florida out so as we move through the quarter.
We may have generated a little bit of <unk>.
Extra reserves as we are going through the quarter when the market was down more significantly in the middle of the quarter, but by the end of the quarter, we were back to being Florida out again.
And the impact I guess the difference I guess between the Florida out Reserve then maybe on Florida Reserve. If you think of it that way, it's pretty significant from a reserve standpoint, when that's measured at <unk> 70.
But I think what.
What's important to know is under <unk> 'twenty. One you have both the Cte 70 measure any of the Cte 98 measure that comes into play as well.
We've had periods of time and I think it's that ended the third quarter.
Similar to where we've had some of that flooring, even impacting far enough into the tail to have an impact.
Impact on some of the scenarios that makeup the Cte 98 tail.
So it's pretty significant borrowing that that can change.
Primarily with market declines that allows.
Some of that sort.
Our excess or whatever.
To flow into our results when we.
When reserves would not go up otherwise as much as they bled should we have not been floored out under our under our rate excuse me under our market dropped scenario.
Got it and then I guess in your when you calculate Cte 98 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 some companies have.
Taking different approaches there and some companies have.
TBA, Jeff, but try to match it just moves more just if you could give any color.
Thanks.
Sure on THF is focused on our.
Kind of core equity hedging and <unk>.
Macro hedging which might be done for equity purposes or in our case also the interest rate hedging is not considered within the CHS. So with the calculations under beyond 'twenty. One you have to actually do a blend of projection projection basis that includes only your in force hedging and then another one that <unk>.
Cleveland benefit from rebalancing with the CBA Jess you blend those two results together, so our calculation would do that with respect to all of our.
Core equity hedging would be reflected in there so we're not capturing.
Future rebalancing of an interest rate hedge position within our Cte 90, or CD 70 calculation.
Thank you that's helpful.
Our next question is with Alex Scott of Goldman Sachs.
Alex Your line is open.
Hey, thanks for taking the call.
A follow up on the cash flow question.
Yes, I was thinking about the equity piece.
And I hear you that been equities move higher.
That project.
Sure.
Could you help us think though about quite good traction of equities.
Yes, they are higher but they reached a much higher level.
Great. Thank you living benefits.
Right.
The benefit base, putting gotten mark buyer before.
Policy before.
The decline.
Maybe using that equity scenario and better.
We definitely think that that.
Or is there may be.
A negative offset from.
The fact that equities went up.
Mark and then they come down.
Thanks.
Yes, yes understood.
Yes, I mean, it's true that some of the benefits would have maybe an annual.
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 anniversary during the high market levels period, then they can have certain yes.
<unk> increases to their benefit base.
That would be a partial offset overall rising.
<unk> level, a result, but I think it's just a partial offset it would certainly be a pull off that are more than offsetting impact at all because you have the benefits of the base contract which are.
Which are helped helped our underlying asset under management and our fee revenue there are going to be helped by the market.
Right.
So that's kind of underpinning our results as well, but I think the.
If I take your point, but I think that given the strength of the market growth since we did the form 10 disclosures.
<unk>.
And the fact that the market was up pretty steadily through 2021, I think we we didn't have it.
Kind of extreme situation that you would need with like maybe an enormous market up and then giant drop in order to be able to have a significant impact from policies that may have had ratchet in the middle of that period at the top of the market.
And I would just I would just add to that to that.
When we when they ratchet happened you also ratchet up at the same time.
So what we see through time is that we don't actually spend all fees for long period of time.
And so you would actually expect that the net benefit going forward from from that ratchet.
Got it okay. That's all.
Really helpful.
Good update those cash flows at some point.
And all of the non economic noise RBC I'd love to sort of the economics to you again.
Alright, thank you.
Certainly.
That concludes.
<unk>, our Q&A session I would like to pass the conference back to management team for any closing remarks.
Thank you we thank everybody for joining us today, and we look forward to your participation in our next quarterly call. Thank you.
That concludes the Jackson Financial Inc. First quarter 2002 earnings call. Thank you for your participation you may now disconnect your lines.
[music].
Okay.
Yeah.