Q3 2022 Jackson Financial Inc Earnings Call
Yeah.
[music].
Hello, and welcome to the Jackson Financial Inc. Third quarter 2022 earnings call. My name is Alex and I'll be coordinating the call today, if you'd like to ask a question at the end of the presentation that you can press star one on your telephone keypad.
If you'd like to withdraw your question you May press Star two.
I'll now hand over to your host Liz Werne head of Investor Relations. Please go ahead. Good morning, everyone. Before we begin 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 risks uncertainties and assumptions discussed in risk factors in man.
Once discussion and analysis of financial condition, and the company's 2021 Form 10-K, and 2022 second quarter 10-Q could cause actual results 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.
A reconciliation of non-GAAP financial measures to the most comparable GAAP measures is contained in the appendix to the presentation.
With us today are Jackson, CEO , Laura preschool, our CFO Marcia Watson, our Vice chair Chad Myers, the precedent of Jackson National Life distributors, Scott remind our head of a L M and chief Actuary, Steven Yours, and the President and CEO of P. P M. Craig Smith at.
At this time I'll turn the call over to Laura.
Thank you Liz.
Good morning, and welcome to our third quarter earnings call.
Today, we will discuss our results are continued capital return to shareholders and our recent sales and distribution initiatives.
Overall, our third quarter results continued to demonstrate Jackson's resiliency through periods of market stress.
Through the first nine months of the year, we navigated ongoing volatility across markets and a decline in the broader equity markets of approximately 25%.
Building on our track record of effective risk management and operating profitability.
Looking toward the end of the year, we remain confident in delivering on our 2022 capital return targets and in the long term profitability of the business.
Net income for the third quarter of 2022 was $1 5 billion driven largely by the positive impact of rising interest rates.
This contributed to growth in book value. It also further reduced our financial leverage which remained well below our target range of 20% to 25% over the past two quarters.
For the nine month period net income was $6 4 billion and adjusted book value reached 12 4 billion.
We reported solid underlying operating results this quarter.
Pretax adjusted operating earnings excluding notable items were $480 million.
This is in line with the second quarter, despite market pressure on annuity account values.
Jacksons operating efficiency remains a key contributor to profitability and reflects our culture of expense discipline.
During the third quarter, our disciplined risk management approach and are healthy in force book drove solid capital generation at our operating company.
As anticipated rising interest rates were a benefit in our operating RBC increased significantly from the second quarter of 2022.
The value of our hedging strategy is even more visible in volatile market environment preserving the economics of our book as well as statutory capital.
We remain balanced in our approach to capital management, maintaining a strong capital position and investing in our business, while deliberately and consistently returning capital to shareholders.
We are well positioned to meet our financial targets for 2022.
Through the first nine months of the year, we've returned approximately $400 million to shareholders through dividends and share repurchases.
Our long term confidence in the sustainability of our capital generation is reflected in our quarterly shareholder dividend.
Which will be 55 per share for the fourth quarter.
We view our dividend as a differentiator and an important component of our capital return strategy.
Market volatility has also impacted the dynamics of annuity activity.
Excluding the business reinsured to Athene, our annuity net flows for the third quarter were flat as variable annuity net outflows were largely offset by the combined positive flows on <unk> fixed annuities and fixed indexed annuities net flows were positive for the first nine months of the year.
At $400 million.
Our third quarter <unk> sales were $562 million up from $490 million in the second quarter.
Jackson continues to see <unk> contributing to new and re engaged adviser relationships.
As we mentioned last quarter Jackson is well positioned during this period of market uncertainty. Thanks to our mix of retirement product solutions and award winning service.
We recently took pricing actions across our full annuity product spectrum as a result of rising interest rates and Jackson's focus on providing consumer value.
We seek to provide flexibility and the solutions, we structure for our policyholders with a prudent approach to pricing and product design.
This approach has served us well over the long term.
Leading to an overall sustainable value proposition for our policyholders and a healthy profitable book of business for our shareholders.
Our product and channel diversification provides solutions that serve advisors and their clients through a range of market conditions.
Jackson's variable annuity sales of $2 9 billion, representing a quarterly decline that is consistent with industry trends.
We remain committed to traditional variable annuities as a valuable consumer option that provides choice and customization.
Our fixed and fixed index annuity sales are growing while continuing to reflect our pricing discipline.
With our launch last October our Riley product adds to the array of product offerings that address the needs of consumers.
In October we announced our growing distribution relationship with Halo, a technology platform, serving the registered investment advisor or RIAA market.
After a successful first year of offering fee based FAA and <unk> through Halo, we expanded <unk> access to retirement solutions by adding variable annuities to the Halo platform.
Our eyes remain an underserved channel and annuities provide a long term retirement income and savings solution that can complement existing portfolios.
Beyond our initiatives to develop differentiated products and expand distribution. We are actively engaged with our peers and industry trade groups to support legislation like the Riot Act and secure two point now to increase access to valuable retirement solutions for all Americans.
Jackson's role as an industry leader is consistent with our long term commitment to the market.
Annuities are our primary business and our strong culture of execution has positioned us well for navigating future change in evolving markets.
As I mentioned earlier, we are confident and comfortably reaching our 2022 financial targets.
We expect to be at or above the midpoint of the targeted capital return range and maintain one of the lowest levels of financial leverage among our peers.
Our holding company cash position with nearly $800 million at the ended the quarter and we are above our 500% to 525% targeted range for adjusted RBC under normal market conditions in.
In October <unk>.
Our commitment to maintaining a strong capital position was recognized by a M. Best when they changed Jackson's long term issuer credit rating outlook from stable to positive.
At this time I will turn the call over to Marcia to review our financial results in more detail.
Thank you Laura turning to our results on slide five lower equity markets in the quarter led to a decline in our adjusted operating earnings from the prior year's third quarter.
Lower fee income from reduced separate account assets under management as well as lower levels of limited partnership income were partially offset by lower deferred acquisition cost amortization expense and lower Commission expense.
<unk> of commissions are asset based and partially offset the market impact to fee income, which helps dampen earnings volatility through market cycles.
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 are moved below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings.
In the third quarter strong net income resulted in a higher adjusted book value, even after returning $88 million to shareholders in the quarter.
This reduced our leverage ratio to 17, 5%, which compares favorably to the industry and rating agency expectations.
Similar to last quarter. We've included additional portfolio details in the appendix of our earnings presentation that provide portfolio breakdowns on both GAAP and statutory basis, excluding the assets reinsured to athene.
<unk> investment portfolio remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis.
Along with an up in quality bias and structured securities and commercial mortgage loans.
Furthermore, our earnings were not impacted by credit losses and impairments as these were minimal in the quarter.
In the second quarter, we provided preliminary estimates of the impact of long duration targeted improvements or L. DTI adoption on shareholders' equity as of the transition date of January one 2021.
As of the transition date, we estimated a reduction of equity and a range of $2 billion to $4 billion.
Given continued increases in interest rates, we now see the impact moving toward a positive balance sheet impact as of the end of the third quarter.
For a more transparency we've included a slide in the appendix that provide some helpful directional guidance for the change in the <unk> driven shareholders' equity impact from movements in various market factors.
Yes.
As a reminder, we completed our annual assumptions review process in the fourth quarter and disclose the results and our full year earnings release. This processes, a thorough and comprehensive look at our assumptions and models that we perform every year.
We are still completing this year's review, but we would note that it has been in line with our typical process, which historically has taken new experienced data into account as it develops.
Slide six outlines the notable items included in adjusted operating earnings for the third quarter, starting with limited partnership income.
The third quarter of 2022 included lower levels of limited partnership income compared to the same periods in the prior year.
Results from limited partnership investments, which report on a one quarter lag were $54 million lower in the current quarter than they would have been had returns matched the long term expectation.
Comparatively in the third quarter of 2021 LP income was well above the long term expectation with benefit of $98 million to earnings, creating a comparative pre tax negative impact of $152 million.
Additionally, there were market related impacts to DAC amortization expense in the third quarter of 2022.
Operating DAC amortization has multiple components, which are outlined on page 16 of our appendix.
The market related impact on deck includes both the current period return impact as well as the impact from the drop off of historical returns from the mean reversion formula as you move through time. The current period return impact was driven by a negative four 5% separate account return in the quarter, which was below the assumed return.
In the prior year's third quarter. The current year return impact was also unfavorable due to a negative 2% separate account return in that period, which was also below the assumed return.
The stronger negative return in the current period drove a higher level of DAC acceleration expense of $72 million relative to prior year at $24 million.
Looking at the drop off return impact this was a drag of $39 million per quarter in 2021, while in 2022, it was a benefit of $50 million per quarter.
This explains why there was a comparative benefit in the current quarter from market driven deck. Despite the weaker separate account return figure compared to the prior year period.
Considering both components the market driven deck effect was a net positive impact of $41 million on a pre tax basis, when comparing the third quarter of 2022 to the prior year period.
In terms of market driven that acceleration or deceleration for modeling purposes for fourth quarter. We have provided additional details on the mechanics of the calculation within the appendix.
This market related effect is expected to change in the first quarter of 2023 with the adoption of <unk>, which adopts a more level lies amortization methodology.
In addition to the notable items the third quarter of 2022 had a lower effective tax rate than the prior year's quarter third quarter 2021 pretax operating earnings were higher than the current year quarter, which meant that in the case of tax benefits that were similar on a dollar basis in these two periods the curve.
Period has a larger reduction to the effective tax rate.
Adjusted for both the notable items and the tax effects earnings per share was down from the prior year's quarter, primarily due to the reduced fee income, resulting from lower average assets under management.
Slide seven illustrates the reconciliation of our third quarter pre tax adjusted operating earnings of 404 million to pre tax income attributable to Jackson financial of $2 billion.
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.
As we show in the appendix slide which covers the gap below the line impact from macroeconomic factors under the current GAAP rules.
Higher interest rates and lower equity markets are a combination that leads to significantly positive net hedging results.
As shown in the table the total guaranteed benefits and hedging results. Our net hedge result was a gain of $774 million in the third quarter starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $771 million in the third 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 hedge budget when markets declined as previously.
MS. Li noted all guarantee fees are presented in non operating income to align with the hedging and liability movements.
There was a $253 million loss on freestanding derivatives, which was driven by losses on interest rate hedges in the rising rate environment. This.
This was partially offset by gains on equity hedges in the quarter due to declining equity markets.
There was a gain of $714 million on net reserve and embedded derivative movements, which were also driven by higher interest rates, but partially offset by declining equity markets.
In addition to the net hedge result, net income in the third quarter reflects $868 million of income from business reinsured to third parties.
This benefit was primarily due to a gain on a funds withheld reinsurance treaty that includes an embedded derivative.
And the related net investment income, which do not impact our capital our free cash flow and can be volatile from quarter to quarter.
As Laura noted the high level of net income in the quarter helps to support our adjusted book value and improve our financial leverage ratio.
Now, let's look at our business segments on slide eight starting with retail annuities, where we see continued growth in <unk> and resilient overall net flows in the face of significant market volatility.
Variable annuity sales are down industry wide, which is consistent with prior periods of equity market declines.
While Jackson's VA sales are down as well, we continue to produce significant volumes.
<unk> sales continue to grow providing valuable economic diversification and capital efficiency benefits alongside our traditional variable annuities.
Overall sales without lifetime benefits as a percentage of our total retail sales increased from 34% in the third quarter of last year to 41% in the third quarter of this year.
We expect this percentage to 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 from the prior year's quarter due in large part to market conditions. We are optimistic about the long term growth potential from this business.
Looking at our total annuity market share. The recent decline is in line with the lower variable annuity sales I just mentioned.
We would note that our strength in the market was not built on price competition, but rather on our consistent presence in the market a compelling retirement value proposition strong distribution relationships and our award winning customer service, we have never explicitly targeted market share and we see our long term position as a market leader.
In this space as an outcome rather than a goal.
The product changes Laura mentioned reflect our deliberate approach to updating product offerings as interest rates rise.
Looking at pre tax adjusted operating earnings for our retail annuities segment on slide nine we are down from the prior year's third quarter. This was primarily the result of the decline in limited partnership income I discussed earlier as well as the impact of reduced assets under management on fee income.
Our efficient expense structure has helped support earnings in this declining AUM environment.
As of the end of the third quarter, we have built up over $1 $2 billion of account value on <unk> because of the very early age of O'reilly book minimal surrender activity allows for sales to contribute to an immediate buildup in account value.
We have a similar dynamic on our fixed annuity and fixed indexed annuity books.
Although much of this business is reinsured to Athene the account values remaining at Jackson grew during the period due to positive net flows.
Our other operating segments are shown on slide 10.
For our institutional segment sales for the third quarter totaled $314 million and pre tax adjusted operating earnings of $20 million were essentially flat compared to the prior year period.
We see the value of the institutional business is broader than just GAAP earnings as it provides diversification benefits is cost effective and helps to stabilize our statutory capital generation.
Lastly, our closed life and annuity block segment reported a decline in adjusted operating earnings compared to the prior year, reflecting lower levels of limited partnership income.
Absent future M&A activity the earnings for this segment should trend downward as the business runs off over time.
Slide 11 summarizes our progress on capital return as well as our balance sheet and capital position as of the third quarter.
As Laura noted, we managed our exposure through a challenging market improved our capital position and continued to make progress towards our 2022 capital return goals.
Through the nine months, we returned $396 million to our shareholders, reflecting significant progress toward reaching our 2022 target of $425 to $525 million.
In fact, the strength of our overall capital position has led us to anticipate ending the year at or above the midpoint of our target range.
We have continued to remain active in share buybacks during the fourth quarter was $25 million repurchased through November 3rd.
Also as Laura mentioned yesterday, we announced the approval of our fourth quarter dividend of 55 per share we intend to provide updated cash return guidance beyond calendar year 2022. After our review of yearend earnings results.
Our total financial leverage of 17, 5% at the end of the third quarter was down from 18, 5% as of the end of the second quarter.
We believe that this level provides us the financial flexibility to navigate potential market volatility.
Moving on to statutory capital our primary operating company Jackson National Life Insurance Company reported a total adjusted capital position of $9 5 billion up from $8 7 billion as of the second quarter.
Our healthy book of business continues to generate strong based contract cash flows.
When looking at our variable annuity guarantee results the combined impact of reserve movements hedge asset results and guarantee fees, where in overall boost to total adjusted capital importantly, despite the heightened volatility our hedging spend was in line with the guarantee fees collected this quarter.
As I discussed last quarter interest rates are a key driver of hedging expenses both in the cost of the hedging instruments used to protect our book, which is driven by short term rates.
And the volume of hedging necessary to stay within our risk limits, which is driven by longer term rates.
The increases in both ends of the yield curve benefited hedging expenses in the current quarter and has also allowed us to begin to increase the duration of our equity hedges.
The statutory required capital our Cal was essentially unchanged during the quarter as the negative impact from the equity market decline was broadly offset by the benefit to Cal from higher interest rates, considering both attack and kill movements. The estimated operating company RBC increased significantly from the SEC.
Quarter, which was already at a very healthy level of capitalization at the regulated entity and.
In addition to the healthy cash flows from the business.
The RBC gain in the third quarter was further supported by benefits within VM 21 for movements in interest rates, which were not as limited by the cash surrender value floor as they were earlier in 2022.
The increase in operating company RBC under the circumstance, we have seen in recent quarters as a testament to the overall resiliency of our in force business and the effectiveness of our risk management.
As we stated last quarter and adjusted RBC target for normal market conditions is not intended to be an official barometer of Jackson's excess capital our ability to return capital to shareholders.
While current levels of capitalization are an important input into our capital return considerations.
Long term capital planning is also influenced by the expectations of future earnings on our healthy enforced block at the end of the third quarter. The adjusted RBC ratio was up significantly and above the normal market target range.
This was due to the increase in the operating company RBC exceeding the $88 million reduction in the level of holding company cash to support capital returned to shareholders.
Yes.
Our holding company cash position is nearly $800 million and continues to be well in excess of our minimum buffer.
At quarter end this excess cash position represents between one and two years of holding company expenses and current level of shareholder dividends and it provides significant flexibility should the current stress environment persist.
In summary, we are pleased to have greater clarity on our full year capital return expectations, a growing level of RBC, a significant excess holding company cash position and a strong balance sheet with leverage below our target range.
And with that I will turn it back to Laura.
Thank you Marcia.
Slide 12, clearly depicts our consistent approach to shareholder capital return.
Our total cash return since completing our separation now exceeds $650 million at the end of the third quarter, and we anticipate ending 2022 at or above the midpoint of our target range.
In summary.
The third quarter demonstrated the continued resiliency of both our business and our balance sheet.
It also marked the completion of our first full year as an independent public company.
In mid September our associates were recognized for their collective accomplishments in celebration of this milestone.
Our team's commitment to excellence and our strong momentum position us well for the remainder of the year as we build on the successes of the quarter.
We are optimistic about the future of our business as our focused strategy and resilience continued to power us forward to deliver value for all stakeholders.
And with that I'll now open up the call for questions.
Thank you as a reminder, if you'd like to ask a question that you can press star one on your telephone keypad.
If you would like to withdraw your question you May press Star two.
Please ensure you're on mute locally when asking your question.
Our first question for today comes from Sunny to come off from Jefferies.
Your line is now open.
Great. Thank you and good morning.
Just wanted to start on the RBC, obviously, it's good to see a strong and improving RBC, despite challenging equity market, but there hasn't been a fair amount of volatility in the RBC This year.
On an absolute basis, and I would say relative to your peers. So have you given any thought to strategies that you could pursue to try to smooth out.
The RBC so feels like every time you guys report earnings the stock is up or down a ton based on what the RBC is any kind of transparency I think would be would be helpful to the volatility, but just any thoughts on that.
Yes good.
Good morning, and thanks for the question Sidney.
We had mentioned in first quarter and second quarter that the rising rates would initially be.
An impact a negative impact and then in the second half of the year, we would expect to see the benefit to come through so we're in that point in the year, certainly and I'll turn it over to Marcia to talk through the more specifics around the drivers sure. Thanks.
So I think I understand the question about the volatility.
The way, we look at it though is that RBC volatility.
Not inconsistent with the ability to have stable cash return and that is a priority for us.
Steve obviously volatility as being a reasonable trade off or a very high return business and we manage that short term volatility within our risk tolerances. So as I said before and I think again in the prepared remarks here.
We don't see the 500 525 adjusted RBC.
Measure directly of distributable capital and it's not a minimum that would impede our ability to return capital.
Just generally speaking I think we this is a business that we're managing over the long term not quarter to quarter and it's supported by a healthy book of business. So while we manage the volatility in the RBC over time, which is kind of a natural consequence to the market sensitivity in our business <unk> got it.
Good history of strong.
Cash returned to shareholders, both before as a private company and more recently as a public company.
We're comfortable.
While we have volatility and market driven volatility.
Comfortable with that level of volatility because of our framework our risk framework because of our hedging strategy.
The strength of our balance sheet.
And just would want to avoid spending.
And destroying value.
If it's not.
Economical and really in the best interest of the shareholders.
Okay, and then I guess on your comment about the year end assumption review just wanted to confirm.
First of all that that you guys don't have a big exposure to <unk> and.
So the industry study that has affected some of your peers. This year and then sort of relatedly. The other product that has been getting some attention.
Particularly with respect to lapse rates, so just curious.
How is your lapse rate experience been versus your expectations and maybe how does it compare to some of the industry studies that are that are out there.
Sure. Thanks, So yeah Youre right.
<unk> with secondary guarantees our exposure is minimal.
Now approximately a $1 billion of reserves for the kind of base contract and guarantee combined either GAAP or stat basis, So definitely not a not a material block at all for us.
With respect to VA lapse.
As I mentioned previously at this last year at this time and then earlier in the remarks, we have a really comprehensive process around our assumption review. So certainly lap VA lapse assumption is one that gets a lot of focus and we have a ton of experience data to help support those.
Setting those assumptions our processes to make adjustment.
Adjustments every year in response to any emerging experience. So that's number one and keeps us from having opportunity for a larger changes as you're catching up to experience. Because we are just kind of keeping up to it regularly.
<unk>.
Not seen anything significantly different this year and throughout 2022 actual lapse rates have kind of been reduced.
We would expect them to with market.
Pay down the money Thats on the guarantees of I think the behavior has generally been in line with what our dynamic lapse assumptions would assume.
So naturally we will make tweaks as we go through and complete the process to reflect the latest experience we have.
When you think about how we compare to industry I would say a couple of things while we take advantage of opportunities to look at all of the industry study data that we can.
We can get and will participate in our studies in order to have access to that.
The other key thing is really that we are of course, along with other subject to the.
<unk>.
Standard projections testing within the statutory framework to ensure that as a whole our assumptions are not more aggressive than what would what the reserving and capital requirements would be under the prescribed assumptions and we've historically never had to set up any additional reserves as a result of that test so I think that.
Indicates our assumptions are quite reasonably aligned or or or in some cases, maybe more conservative than what what those prescribed assumptions would require.
Got it and then just maybe if I could sneak one more in on <unk> I think you are.
Alluded to this a little bit in your prepared remarks, but maybe we could flush it out a little bit more one of your company sorry, one of your competitors talked about.
Pretty sizable hit to operating earnings from the adoption of <unk> and I think the <unk>.
Impact of sort of felt in the attributed fees.
And so I know you guys treat your VA guarantee fees differently than some of your peers, but I just wanted to get a sense. If you think just based on that different treatment does that mean that you would have potentially less of an impact from.
<unk> L. DTI in terms of your earnings are.
Any additional color on that would be would be helpful. If you can provide it.
Yes.
Sure.
<unk>.
The main impact to our operating earnings for LPTA really will be driven by DAC and that will be.
Absence of market sensitivity that we have today.
But when you think about the fees.
We have.
As noted before we've taken what we think is a conservative approach by putting the full amount of guarantee fees.
Below the line under our LTI development work.
You have to reassess those attributed fees under the LTI framework and that has resulted in.
Continuation of the of the situation, we had three <unk>, which is that our attributed fees in aggregate are less than the guarantee fees that we collect.
So we will be having no dependent.
On the fees that will be included in operating income to support the gap MRV liability as a consequence, we will be able to make no change to our adjusted operating earnings definition with respect to guarantee fees and kind of continue that conservative approach.
Got it thank you so much.
Thank you.
Our next question comes from Nigel Dally of Morgan Stanley Nigel Your line is now open.
Great. Thanks, and good morning, I wanted to touch on the capital return targets. Obviously, good to hear that you expect to be at or above the midpoint of your expected range for 2022, how should we be thinking about free cash flow generation for 'twenty three assuming no year end actuarial review surprises were at similar level, but your reasonable goal is that likely to be a little depressed.
The market declines that we've seen this year.
Hi, Nigel Marcia here.
As we said we will we will have that finalized and come back. After we've looked at our year end results, but I think where we sit today, we would kind of reiterate what we've said in the past that our return target of $425 525 that we established for 2022 is in line. What we think is a reasonable long term.
<unk> kind of level of capital return.
So at this point, we've got nothing more specific to kind of define for 2023, yet but I.
I think thats just helpful context.
Okay and then just.
A numbers question just on the tax rate.
Correctly to 15% guidance range clearly below that.
15% is still a good number to be normalizing tool should we expect that to continue to be somewhat below that range.
Yes.
Stable future.
Well I think for the coming quarter I think we probably would have a continuation of a trend that's more similar to what we've been experiencing the last couple of quarters.
We move into next year with Lv Ti and Youre thinking about operating profits under that without the market sensitivity in DAC I think we'll end up with just a bit more of a stable picture in terms of how operating income emerges, which will probably alleviate some of the tax rate variability.
We've seen.
But I think for as a placeholder I wouldn't probably have any newer guidance than the 15% at this point.
That's great. Thanks.
Thank you. Our next question comes from Tom Gallagher of Evercore ISI your.
Your line is now open.
Good morning.
Following this quarter's results are your variable annuity statutory reserves floored out at zero again or do you still have a considerable amount of reserves maybe give some quantification. If you do still have reserves that you'd be able to release.
To the extent that equity markets.
Ended up strong in <unk> when you had more.
Arc to market derivative losses, I'm, just trying to understand what that dynamic is going to look like in Q4.
We did end the quarter with reserves.
Reserves up compared to where we would have been earlier in the year.
Largely driven by the equity performance.
And what that meant for our separate accounts in the second quarter. So we are sitting.
As we enter Q4 with <unk>.
With a higher level of reserves in place then we would've had kind of an.
Earlier periods of this year or last year.
Can you give some dimension of that.
From a sizing perspective, I just wanted to get a sense for whether it's.
It would potentially be large enough to offset the.
Mark to market derivative losses in Q4 to the extent that equity markets moved up a lot higher or.
Even even held their games from where we are now.
Yeah.
Yes at the end of the <unk>.
Third quarter, we had about $1 billion of reserves in excess of the cash surrender value.
On the on the VA block.
That's helpful. Thanks.
And then did I did I hear you correctly that you said you've made some changes to your hedging including increasing duration of equity hedges any any color on how you think how you either have been changing.
That portfolio and as you.
With interest rates, where they are.
Are you thinking about adding more interest rate protection up here.
And any any color for what you've done on the equity side as well thanks.
So I think first on the <unk>.
The duration question, so with respect to the purchases we've made for equity option.
The higher level of interest rates does make.
Our longer dated option is more economical so we've been able to kind of shift as options have expired and we had to rebalance.
Taking the opportunity in this higher interest rate environment, yes, too to kind of extend the maturity a bit on some of those so that we have a little bit more stable coverage in that regard and have a little bit less roll activity that we need to do.
And then on interest rate hedging.
We're always kind of looking at interest rate hedging with respect to kind of the cash flow profile and the risk profile of the business. So that is something that will just automatically.
The adjusted over time, just based on the position, we're in and Thats really kind of a second order thing because initially its the equity movements in the market that kind of defined with the <unk>.
Expected level of benefit payments will be in the future that needs to be discounted and thats, what kind of gives rise to the interest rate risk. So as we move through time and either equity movement changed the kind of profile there of those future payments or the interest rate.
Level are themselves different that's going to just dictate natural adjustments that we're going to make.
But there will always be just with the lens toward keeping us within our frame.
Framework and making sure that we're protected.
Against any of the sensitivities that we're looking at.
Two to be in compliance with any of our risk limits.
That's that's helpful and just one quick follow up the last time I checked it looks like most of your equity options were about where three months have you. So.
When you're talking about extending duration have you been going six months or a year.
Color on that.
Hey, Tom This is Steve.
Many of our put options that we started to kind of starting to Q2 and into Q3.
There are roughly one to two years in duration.
So quite a bit longer in the trades, we've historically done in Alaska.
Five six years with low rates.
Okay. Thanks, a lot for the color.
Thank you. Our next question comes from Erik Bass Autonomous Eric Your line is now open.
Hi, Thank you I was just hoping you could talk a bit about your appetite for growing fixed annuity FIA sales.
In this environment.
Good morning, Eric.
We certainly have been paying attention to the rising interest rates and had taken opportunity for pricing actions across our entire annuity spectrum, which does include fixed in our fixed indexed annuity offerings as well so we have.
<unk> seen an increase in sales in those products.
But our prudent pricing certainly looks to strike a balance between.
And our profitability targets and good consumer value. So we're happy to see the increase in sales and we will.
Continue to monitor rates and be disciplined in our in our private pricing going forward.
Yeah.
Got it. Thank you I guess strategically do you.
Does it benefit you at all or would you like to see a more balanced mix between spread based products, including <unk> FIA fixed annuities in institutional with your traditional VA is over time or are you really agnostic and we will just sell what the market.
It's kind of bearing in what.
Where there is policyholder demand.
Yes.
Distant with our with our full annuity product offering.
The growth in <unk> sales certainly.
It's where we see our best opportunity.
We've mentioned before we get the economic offset with the riot sales to our two RBA.
Sales. So we're happy to continue to see momentum in the in the wireless sales.
We will continue to be consistent and have our annuity offering.
Has <unk>.
<unk> across the entire spectrum.
Thank you if I could just ask one last one.
Marsha touched on this I think.
Our prepared remarks, but can you just talk a little bit about why required capital was flat this quarter and I guess, just looking back to first quarter equity markets were also down 5% in rates also up 80 basis points.
In that quarter. So I guess what was different now is it just a different starting point.
Yes. It is primarily a different starting point largely related to where we stand with the degree of.
Cash value floor impact because that does often kind of impact.
Impact us far into the tail, even within the Cte 98 calculation that defines the required capital for VA. So it isn't just the different starting point and as.
As things played out this year, having come in for instance, this quarter excuse me having come into the quarter in a different position than we came into the first quarter. We just saw more kind of liability response.
It wasn't inhibited by the cash value floor impact and so we ended up with a pretty offsetting impacts between the equity decline and the interest rate rise for the quarter kind of just balancing each other out pretty well to keep us.
Overall level of required capital that was consistent with how we entered the quarter.
Got it.
Hey, Eric This is Steve just to add one more thing one thing.
We dealt with the deal up in the first quarter was the mean reversion parameter.
The decrease which would've come through an account that was reported.
Obviously, thats, a one time a year look and.
What are the things we can keep on saying as rates continue.
To move up.
Going to benefit us and things are tracking right now with I guess two months left in the year.
You flip the cost of the new year that meet emerging parameter does it look like.
And that drop that we experienced at the beginning of last year beginning of this year and shift that shifted to a positive picture.
Got it thank you I appreciate that.
Sure.
Thank you. Our next question comes from Alex <unk> of Goldman Sachs. Alex Your line is now open.
Hi, good morning.
First of all I had was I just wanted to come back to the comments about operating earnings you made I think is part of that conversation you mentioned that attributed fees under <unk>, you expect to be actually lower than the actual fees that you're earning on the riders.
I just wanted to make sure I understood that correctly, because I think I think all of your peers. So far have said that attributed fees or higher every one of the company is actually included in operating and the operators going down, but even the company that had operating earnings does not changing they said on their call that attributed fees were <unk>.
Higher than actual fees so.
This would be something that I think is very unique and differentiated about you. All if that's true. So I wanted to sort of unpack that a little bit and understand that comment.
Sure Alex this is.
That is correct that is the way.
The results are coming through for us under <unk> I mean, I think it's a combination of a few different factors.
Our book of business is.
Than some others in terms of either the nature of guarantees.
And even the <unk>.
I agree with but over which they were written so that calculation of attributed themes is going to be defined by the conditions at policy issue and so take into account.
Evel guaranteed fees as we price too I think we've historically said that we've been generally not a price leader we've been kind of taken a conservative approach in nature that we were really pricing.
Disciplined manner.
To cover kind of tail type scenarios. So we feel like our pricing has been solid in that.
Generated the level of fees that we charge and then when you go to calculate the attributed fees one of the things that is differ.
Different for some companies that may have had heavier.
Concentration of benefits that would have been previously or currently under Sop <unk> three to echelon and shifting over to.
That's 157 under the LDC changes that would be <unk>.
And in death benefits, which we have as well, but I think our block wouldn't have any significant exposure to GMI b, having being more predominantly GM WB.
A lot of that is already under Fas 157. So I think maybe just there are differences in the books of business and product mix and just the level of profitability I guess, our strength of the.
Fees to cover off the requirements under GAAP.
Got it okay.
After you bought some thought.
The other question I wanted to ask you.
As I've looked at the last few quarters and tried to follow what you're saying I've realized I really don't know what your hedge target is on your variable annuities.
It doesn't sound like it's market neutral just based on what you are saying about volatility under all DTI and so forth.
Wanting to retain more economics.
I think based on the last few quarters is clearly not statutory accounting.
Could you maybe just.
Just try to help me think holistically like how do you hedge your variable annuities what is the target like what is this risk framework that you talk about like what is that target.
Oh.
I'll start off.
And then probably have Steve jump in as well, but the way we look at the hedging is.
Our economic view is focused on the underlying cash flow. So it's not a market consistent type, which would be more in line with GAAP.
We are looking at the cash flows of the business.
And so that is in a sense more aligned with statutory as statutory is mortgage cash flow base.
Type of a view, but statutory has various statutory specific limits any nuances to that to that framework, which required us to potentially.
Sometimes be doing additional hedging to protect that.
And we do have the statutory element to two are considerations for hedging as we've talked about before kind of more of an economic view cash flow based economic view.
Primary view and then we have a statutory overlay if needed in terms of the macro hedge if there is additional hedging needed to protect that capital, but we're also that in either case on an economic basis or a statutory basis doing kind of like M&A immunization strategy, where we're trying to exactly match movement.
Either both in the economic your stat.
We recognize there can be some degree of volatility around there and we're trying to strike a good balance between the amount that we spend on hedging.
Not overspending in destroying value by.
Taking our immunization approach and having some leeway in there and that leeway is really what.
Guided by our risk framework and our ability to make sure that we're staying within our risk limits under under stress.
Yes, and then I'll just add in Dallas.
Yes.
These are about volatile quarters and continue to perform pretty well in terms of how the hedging is coming through in our strategy is consistent its not something thats adjusted over time it doesn't change with markets. It's very strategic it's I would say, it's not a tactical hedging approach where if anywhere.
The bulk rates are where you will take a view on where rates will go it's really dictated by our framework and our profile that dictates the types of hedges will do and obviously rates have gone up quite a bit this year, we're benefiting from that.
Earlier, one of the things that comes through us.
And able to extend the duration of.
Some of our equity trades, which is.
That's helpful.
That's real risks and kind of rebalancing the books and we have to deal with for many years now. So we are seeing the benefits of higher rates coming through in terms of the <unk>.
Volume of hedging you have to do and then obviously the costs associated with those trade as well.
Got it yes, I think maybe it's just an issue of being on the outside looking in it makes it very difficult I mean, if there's any point something you're able to disclose the surround that hedge target and help us think through that a bit more.
Zinc.
Maybe help us understand that the stories potentially not as volatile as it seems.
And then from the outside so anything you can do to help with that over time would be great.
I appreciate it thank.
Thank you.
Okay.
Thank you our final question for today comes from Ryan Krueger of Stifel. Ron Your line is open.
Yes.
Hi, good morning.
I guess I had a couple of questions on hedging also first could you give us any sense of where your hedge costs annual hedge costs are running at.
Now that you are putting on hedges.
Better rate environment relative to your peer.
Guarantee fees.
Hi, Ryan for the third quarter and kind of our run rate that we're at currently has our hedge cost fairly in line with our guarantee fees that is it's important to note that we are still in a high volatility environment. So that is something that is.
A factor in and of itself that will increase the cost of hedging and has been a benefit we've been benefiting as Steve said earlier with regard to higher interest rates I think as we go forward at.
At least in the near term with rates being.
More elevated level, if we see volatility kind of subside then I think we have.
Certainly expect to find ourselves in a situation where we would.
B as we've oftentimes in the past and where our hedging costs could be below.
Got it thanks and then.
Last question is on interest rate hedging.
I understand that your comment on how you view interest rate hedging relative to long term potential claims.
But.
The 1% to two duration one to two year duration on equity hedges still exposes you to a lot of rollover risk over the long term versus the long duration of the liabilities.
Why not do increased interest rate hedging to protect the actual cost of the equity hedges because I think thats still one of the biggest variables in your and your long term cash flows and given how much more attractive rate environment as it would seem like that would reduce some of the long term role risk on hedging costs.
Yes.
Yes, Ryan I think it's a good question I mean, if you go back to.
I think that's going way back to pre global financial crisis, you would've saw spy trades in the three to five year kind of duration rate and so we have moved them up from where we're at.
Shorter durations to as I mentioned in one to two years.
We still have.
The one thing that we saw.
In that time period was higher interest rates, we have that today, but we have very little volatility.
At that point in time growth I think bulk of implied laws were sub 18% for long duration trades, we're not there today the volatility still elevated so seeing some benefits at the rates right. So thats, allowing us to extend our trade a little further out so would we like to maybe get a little longer.
The ideal, but again, we've dealt with the role risk for 10 plus years now so it's something we're good at and so we are benefiting from a slightly longer durations and the other thing too is I.
I think there's only so far as you want to go out in terms of trade.
As Marshall mentioned, we do get assumption updates our experience comes in we have a very large market experience.
Every time, we kind of update that we're seeing emerging experience coming slowly over time so.
I don't know if you can necessarily want to lock in on a 10 year duration trade because if I gave you are saying I think I know what policyholder behavior experience is going to be for the next five years and I don't think anybody can be that precise on it I think we take a view on it obviously, but.
We're adjusting our experience so it's kind of a balancing act between.
Sure.
Not too far out and letting experience emerge at the same time.
Yes.
Okay got it thank you.
Yeah.
Thank you we have no further questions for today, so I'll hand back to lower please cohen for any closing remarks.
Thank you we appreciate your participation in our call and your interest in Jackson and thank you for joining us this morning.
Thank you all for joining today's call you may now disconnect.
Okay.
Yes.
Okay.