Q4 2022 Jackson Financial Inc Earnings Call
We're looking statements if circumstances are management's estimates or opinion should change today's remarks may also refer to non-GAAP financial measures. The reconciliation of those such measures to the most comparable U S. GAAP figures is included in our earnings release financial supplement and earnings presentation, all of which are available in the Investor Relations page on our website at Jackson Dot.
Com joining.
Joining us today are our CEO , Laura <unk>, our CFO Marcia Watson, our head of <unk> and Chief Actuary steeped in Europe , our president of Jackson National Life distributors, Scott Rowe mine, and President and Chief investment Officer of Ppm, Craig Smith at this time I will turn the call over to our CEO Laura pre scored.
Thank you Liz.
Welcome everyone to our fourth quarter and full year 2022 earnings in 2023 outlook call.
Today, We will review our full year results and our success in delivering on our key financial targets.
We will speak to progress made on our strategic initiatives during our first full year as a public company.
And share our outlook for 2023, including specific financial targets for the year.
But before I dive into our results I want to acknowledge the tragedy that occurred in our hometown area of Lansing, Michigan, just a few weeks ago.
Jackson has deep ties to Michigan State University into the hundreds of Jackson Associates, who are MSU students or alumni.
During this difficult time, we're focused on doing what we can to help our employees our customers and the community we call home.
I am extremely proud of our team and how we've supported each other and our community. During this time just as we do every day.
Turning to 2020 to the.
The hard work and dedication of that same talented team enabled us to achieve many milestones.
We delivered strong financial results and provided industry, leading service to our distribution partners and their clients and.
And we continued to demonstrate our ability to operate through volatile markets and successfully managed risk throughout 2022, including in the fourth quarter.
With respect to the macroeconomic impacts on our business early in the year, we stated that the positive impact of rising interest rates would be an emerging benefit and we saw that develop over the course of the year.
We managed through significant equity market volatility protected our statutory capital.
And met or exceeded each of our four key financial targets.
As we look ahead to 2023, we believe our financial strength and our leadership in the annuity industry position us for another successful year.
Moving on to our results net income for the full year 2022 was $5 7 billion.
Primarily due to adjusted operating earnings and the benefits of higher interest rates throughout the year.
Our pre tax adjusted operating earnings excluding notable items were.
Was $1 8 billion and reflects the profitability of our retail annuity business.
We delivered strong operating margins, despite lower equity markets in 2022.
Margins that benefited from a double digit decline in operating expenses, primarily driven by lower variable compensation and a decline in asset based commissions.
With over 200 billion in retail annuity account value our scale and continued focus on operating efficiency position us well to deliver long term profitability.
Jackson solid operating company results contributed to our strong capital generation and financial flexibility.
Our 2022 operating company RBC ratio was 544%.
Total adjusted capital was $7 billion representing.
Representing a $400 million increase from year end 2021, after remaining $600 million to the holding company in early 2022.
We start 2023 with significant capacity for both continued investment in our business and capital returned to shareholders.
Therefore, we expect to distribute $600 million from Jackson National Life Insurance company in March.
Consistent with our historical performance and subject to market conditions, we expect to continue to generate excess capital at our operating company that will support our balanced approach to capital management.
Our focus continues to be on maintaining a strong capital position.
Ongoing investment in our business and a consistent approach to returning capital to shareholders.
In 2022.
We delivered capital return to shareholders of more than $480 million, including $283 million in share repurchases and $199 million in dividends.
Our balanced approach to capital management supports our outlook for future profitability and continued capital return.
Yesterday, we announced our board's approval of our shareholder dividend, which was up nearly 13% and represented our second consecutive annual increase.
This increase is reflected in our first quarter shareholder dividend of approximately $50 million and highlights our commitment to long term shareholder return.
We strengthened our competitive position with the successful sales expansion of our registered index linked annuity or <unk> combined with timely and disciplined pricing actions.
Traditional variable annuity sales for Jackson in the industry are below historical levels, reflecting the decline in equity markets and shifting product preferences, and a rising interest rate environment.
Should that trend persist, we will continue to rely on our experience operating profitably throughout product cycles.
In the current competitive environment, our fixed and fixed index annuity offerings provide modest incremental new sales as we maintain our pricing and investment discipline, while our <unk> offerings continued to be a source of sales growth and distribution expansion.
We reached one $8 billion in our first full year of <unk> sales and expect these products to remain a steady source of new sales in the future.
With $15 7 billion in total annuity sales, we remain a market leader with the capacity to offer a range of products to meet the needs of financial professionals and their clients.
Our competitive strength is not built on price competition, but on our consistent presence in the market a compelling.
Retirement value proposition strong distribution relationships and our award winning customer service.
We never explicitly target market share and see our long term market, leading position as an outcome of successfully competing on capabilities.
Over the past year, our distribution strategy included a focus on strengthening our presence among independent registered investment advisors.
Our eyes are an emerging market for Jackson in the industry and we ended 2022 with nearly 1100 RIAA firms selling agreements.
Providing access to more than 10000 investment advisor representatives.
We established three new outsourced insurance desk or OID distribution partnerships in 2022 further increasing access to our fee based annuities.
These new relationships signify Jackson's ongoing commitment to diversifying and expanding our distribution opportunities.
Jackson recently announced that we've been added to I capitals insure Tech platform, Simon which provides wealth management firms with increased access to our suite of annuities and product education tools.
This platform gives financial professionals increased flexibility to deliver better outcomes as they support the evolving portfolio needs of their clients.
We place high value on our distribution partners and seek to maintain a level of service and support that continues to set Jackson apart from others.
On past calls we've shared our history of industry recognition and we're pleased to announce we've once again been recognized by the independent organization service quality measurement or S. QM with several awards, including highest customer service in the financial industry for 2022.
Beyond our strategic initiatives to develop differentiated products and expand distribution.
Jackson also seeks to serve financial professionals and their clients by supporting regulatory changes intended to improve americans' retirement options.
This past December .
Jackson supported two pieces of legislation passed by Congress to enhanced retirement savings opportunities and allow annuities to help Americans meet their retirement needs.
Both the <unk> Act and secure two point all create opportunities for financial professionals to help their clients better prepare for retirement.
The <unk> Act directs the FCC to create a new registration form for Raila products easing of regulatory burden on insurers, allowing for more innovation and choice within the <unk> market and providing consumers with a clearer understanding of the risks and benefits of these products.
Now that the <unk> past Jackson will continue to be a leading voice within the industry to ensure the surcease new registration form is appropriately tailored to benefit consumers.
<unk> regulatory barriers and enable innovation within the <unk> market.
Secure two point now builds upon the 2019 secure act expanding opportunities for employees to plan for retirement and presenting income annuities as a valuable solution.
Key highlights of the act include required minimum distribution exceptions for lifetime income annuities, and allowing the use of annuity payments as offsets to required minimum distributions for non annuity balances.
This legislation encourages retirement savings and creates new opportunities for Jackson and others to deliver annuity retirement solutions to Americans planning for a more secure retirement.
Our team's relentless efforts allowed us to meet or exceed each of our four key 2022 financial targets.
We consistently returned capital to shareholders through share repurchases and paid regular shareholder dividends in our first full year as a public company.
We also ended the year with approximately $675 million in holding company cash and liquid securities.
Well above our $250 million minimum.
And we had an adjusted RBC ratio above our targeted range.
Leverage was below our 20% to 25% range, which we believe was prudent as we enter 2023.
I'll now 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 comparative equity market levels in the fourth quarter led to a decline in our adjusted operating earnings from the prior year's fourth quarter the.
The decline was driven by lower fee income from reduced separate account assets under management.
As well as lower levels of private equity and other limited partnership income.
These impacts were partially offset by lower deferred acquisition cost for DAC amortization, lower general and administrative expenses and lower Commission expense.
A portion of commissions are asset based and partially offset the market impact of 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 all guarantee fees are reflected below the line with no assumed profit on guaranteed benefits included in adjusted operating earnings.
Year end 2022, adjusted book value was up from year end 2021, due to full year non operating net hedging gains and healthy adjusted operating earnings.
Adjusted book value was down from the third quarter of 2022, due primarily to net hedging losses in the recent quarter as well as the return of $86 million to shareholders.
We maintained a year end leverage ratio of 18, 3%, which was below our long term targeted range of 20% to 25% and compares favorably to industry into rating agency expectations.
Similar to last quarter. We've included additional portfolio details in the appendix of our earnings presentation that provide breakdowns on both U S GAAP and statutory basis.
Excluding the asset reinsured to third parties.
Jackson's investment portfolio remains conservatively positioned with only 1% exposure to below investment grade securities on a statutory basis.
Furthermore, our earnings were not impacted by credit losses and impairments as these were minimal in the quarter.
Slide six provides an update on the impacts of the new GAAP accounting with adoption of long duration targeted improvements or LPTA.
Starting with total shareholders equity the impact is now expected to be positive as of the end of 2022, largely due to the higher level of interest rates.
While retained earnings are expected to be reduced this was more than offset by an increase to OCI.
This was primarily driven by the re class of nonperformance risk allowance in the fair value calculation of market risk benefits from income to OCI.
Our leverage ratio is anticipated to remain at a healthy level after adoption of L. DTI.
And post <unk> the level of underlying adjusted operating earnings is expected to remain largely intact with a modest increase to the core level of DAC amortization.
Because of the conservative nature of our guarantee treatment that I mentioned earlier, we will not see any impact to adjusted operating earnings from the allocation of guarantee fees.
As we've previously noted adjusted operating earnings will no longer have a deck acceleration or deceleration impact from market returns after el DTI, which will reduce the equity market sensitivity of that figure.
With respect to net hedging results under <unk>, we would expect reduced equity market volatility in this figure as well because going forward all guaranteed benefit liabilities as well as the related equity hedges will fully reflect equity market sensitivity.
We do anticipate more interest rate sensitivity and net hedging results as the fair value approach under GAAP as sensitive to interest rates, both from a discounting and assumed equity market return perspective.
As we have stated in the past our interest rate hedging is focused on the impact of discounting future cash flows.
We do not assume full correlation between interest rates and equity market returns with our interest rate hedging.
Under <unk> the level basis of DAC amortization means that we will no longer need to include a notable item for market driven deck acceleration or deceleration simplifying our earnings per share results.
To assist with modeling we will be publishing our historical financial supplement on our IR website updated for L. DTI on or about March 20.
Slide seven outlines the notable items included in adjusted operating earnings for the fourth quarter, starting with limited partnership income.
The fourth quarter of 2022 included lower levels of limited partnership income compared to the same period in the prior year.
Results from limited partnership investments, which report on a one quarter lag were $62 million lower in the current quarter than they would have been had returns matched the long term expectation.
Comparatively in the fourth quarter of 2021 limited partnership was well above our long term expectation with a benefit of $106 million to earnings, creating a comparative pre tax negative impact of $168 million.
Additionally, there were positive market related impacts to deck amortization expense in the fourth quarter of 2022 of $109 million on a pretax basis when comparing the fourth quarter of 2022 to the prior year period.
Again this notable item will no longer be necessary following the adoption of LPTA.
Lastly, consistent with prior years, we completed our annual assumptions review in the fourth quarter.
This led to an adjusted operating earnings pre tax benefit of $53 million compared to a benefit of $38 million in the fourth quarter of 2021.
The principal driver of the favorable impact in 2022 was in the retail annuity segment.
Where we recorded an increase in the variable annuity DAC balance primarily due to changes in assumed persistency.
There was no meaningful difference in the effective tax rates between the fourth quarter of 2022 in the prior year's fourth quarter.
Adjusting for both the notable items in the minimal tax rate difference earnings per share were down 17% from the prior year's fourth quarter, primarily due to the reduced fee income, resulting from lower average AUM.
The current quarter's earnings per share benefited from a lower weighted average diluted share count relative to the fourth quarter of 2021 due to share buyback activity throughout 2022.
Slide eight shows the same analysis, but on a full year basis. The explanation of the results is largely the same with the exception of a difference between the effective tax rate in the two full year periods.
Earnings per share in 2022 after adjusting for these items were down 12% compared to full year 2021.
Slide nine illustrates the reconciliation of our fourth quarter pre tax adjusted operating earnings of $567 million to the pretax loss attributable to Jackson financial.
Of $945 million.
Net income includes some changes in liability values under GAAP accounting that 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.
And choose to accept the resulting gap below the line volatility.
As shown in the table the total guaranteed benefits and hedging results or net hedge result was a loss of $1 2 billion in the fourth quarter.
Starting from the left side of the waterfall chart, you see a robust guarantee fee stream of $777 million in the fourth quarter, providing significant resources to support the hedging of our guarantees.
These fees are calculated based on the benefit base, rather than the account value, which provides stability to the guarantee fee stream protecting our hedge budget when markets declined.
As previously noted all guarantee fees are presented in non operating income to align with the hedging and liability movements.
There was a $3 9 billion loss on freestanding derivatives, which was driven by losses on equity hedges in a quarter, where the S&P was up over 7%.
There was a gain of $1 1 billion on net reserve and embedded derivative movements, which were also driven by higher equity markets.
The assumptions review produced a benefit of $367 million to non operating earnings. In addition to the benefit to adjusted operating earnings I noted earlier.
This was mainly due to an overall decrease in the guaranteed minimum withdrawal benefit or <unk> reserves, driven principally by changes in GM WB utilization in mortality assumptions.
Surely offset by changes in assumed persistency.
In addition to the net hedge result.
Net income in the fourth quarter reflects a $157 million of losses from business reinsured to third parties.
This was primarily due to a loss on a funds withheld reinsurance treaty that includes an embedded derivative as well as the related net investment income.
These non operating items, which can be volatile from period to period are offset by changes in <unk> within the funds withheld account related to the reinsurance transaction, resulting in a minimal net impact on Jackson's adjusted book value.
Furthermore, these items do not impact our statutory capital or free cash flow.
It is important to note that while the net hedging result was a loss in the fourth quarter. It was a benefit of $2 4 billion when looking at the full year.
Now, let's look at our business segments, starting with retail annuities on slide 10.
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 and total annuity sales are supported by <unk> fixed and fixed indexed annuity sales, which are up meaningfully from the fourth quarter of 2021.
Overall sales without lifetime benefits as a percentage of our total retail sales increased from 37% in the fourth quarter of last year to 43% in the fourth quarter of this year.
We expect this percentage to vary somewhat over time based on market conditions and consumer demand.
When viewed through a net flow lens. The gross sales we are generating in <unk> and other spread products translated to over $650 million of non VA net flow in both the third and fourth quarters of 2022.
In addition to partially offsetting that outflows in variable annuities. These net flows provide valuable economic diversification and capital efficiency benefits.
Our overall sales mix remains efficient from the standpoint of new business strain.
Growing our advisory business remains a focus for us and while sales of these products were down from the prior year's fourth quarter due in large part to market conditions, we remain optimistic about the long term growth potential from this business.
Laura's comments regarding distribution expansion illustrate our continued commitment to this space.
Looking at pre tax adjusted operating earnings for our retail annuity segment on slide 11, we are down from the prior year's fourth 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.
During 2022 are efficient and variable expense structure has helped to support earnings and a declining AUM environment.
Going into 2023, you would note that our retail annuity segment will see a negative impact to adjusted operating earnings from the increase in the minimum guaranteed interest rate payable on the portion of variable annuity assets. The policyholders have invested in the fixed option.
This minimum is reset annually based on the five year Treasury rate, which was up in 2022.
This rate increase was effective the first of this year and is expected to add $30 million to $40 million of interest credited expense to our quarterly results.
It is important to note that we will get an offsetting benefit from higher rates over time on our invested assets as they are reinvested at higher yields.
At the end of the fourth quarter, we have built up nearly $1 $9 billion of account value on <unk> because of the early age of our Raila book minimal surrender activity allows for sales to contribute to an immediate buildup in account value.
Our other operating segments are shown on slide 12.
For our institutional segment sales for the fourth quarter totaled $908 million in account values were up to $9 billion.
Pretax adjusted operating earnings of $17 million were down from $27 million in the prior year period as higher interest credited and increased losses on operating derivatives were partially offset by higher net investment income.
We remain committed.
Committed to our institutional business the value of the business is broader than what has exhibited through GAAP earnings. Since 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 fourth quarter decline in adjusted operating earnings compared to the prior year, reflecting lower levels of limited partnership income, partially offset by lower deaths and other policy benefits, resulting from the continued decrease in the size of the closed blocks.
Absent future M&A activity the earnings for this segment should trend downward as the business runs off over time.
Slide 13 summarizes our year end capital position in.
In a year that included a 20% decline in the S&P 500, and a dramatic increase in interest rates our business remains strong.
As we have mentioned, we returned $86 million to our shareholders in the fourth quarter, which put us above the midpoint and our full year target of $425 million to $525 million.
We remained active in share buybacks during the fourth quarter, which totaled $1 1 million shares or $38 million.
Yesterday, we announced the approval of our first quarter dividend of <unk> 62 per share or nearly 13% increase over the prior year and a 24% increase from our initial dividend established following separation.
We also announced a $450 million increase to our existing share repurchase authorization.
When combined with the $106 million that remained at the end of 2022. This gives us $556 million of capacity to use in 2023 and beyond.
As of February 20, <unk>, we had repurchased $16 million of shares in 2023, leaving $540 million of that total amount remaining as of that date.
Moving on to statutory capital our primary operating company Jackson National Life Insurance Company reported attack position of $7 billion down from $9 5 billion as of the third quarter.
The higher equity markets during the quarter led to hedging losses and related deferred tax asset admissibility impacts, which were not fully offset by reserve releases.
Because we consider the impacts to both tax and statutory required capital or cow when structuring our hedging it is not unusual to see reductions in Tac when equity markets rise.
Cal was meaningfully reduced in the fourth quarter, primarily due to the strong equity markets I just discussed.
Considering both the Tac and the Cal movements, the operating company RBC increased from the third quarter to 544%.
In addition to our operating performance. The RBC ratio also benefited from the annual review and update of models and assumptions, which was a benefit to both GAAP and statutory results.
This is now the third straight quarter of operating company RBC ratio growth, despite challenging macroeconomic circumstances, which is a testament to the overall resiliency of our in force business and the effectiveness of our risk management.
Importantly, despite the heightened equity market volatility our hedging spend was in line with the guarantee fees collected this quarter.
As I discussed throughout the year 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 higher level at both ends of the yield curve benefited hedging expenses in the current quarter and has also allowed us to increase the duration of our equity hedges.
Our holding company cash position is approximately $675 million and continues to be well in excess of our minimum buffer.
At the end of the year, the adjusted RBC ratio, which includes the excess over that buffer was up to 577% and continues to be above the normal market target range.
This improved position was due to the increase in the operating company RBC <unk>.
Feeding the reduction in the level of holding company cash to support capital returned to shareholders and holding company expenses.
Lastly, our total financial leverage of 18, 3% at the end of the fourth quarter was up modestly from 17, 5% as of the end of the third quarter and still below our long term targeted range of 20% to 25%.
We believe that this level provides us the financial flexibility to navigate ongoing market volatility.
Given the strong position, we intend to refinance all or a portion of our upcoming November debt maturity.
Slide 14 depicts our consistent approach to shareholder capital return, which has been steady since we began our dividend and share repurchase program in the fourth quarter of 2021.
Despite the challenging market environment since our separation our total cash return as a Standalone company was nearly $750 million as of year end 2022.
This also illustrates our balanced and flexible approach to returning capital, which includes our dividend payments as well as public and private market share repurchase transactions.
In summary, we had a strong fourth quarter and full year, demonstrating the continued resiliency of both our business and our balance sheet.
We are especially proud to have met or exceeded each of our four 2022 key financial targets.
And are excited to start 2023 from a position of strength.
Now I will turn it back over to Laura to give more detail on our outlook for 2023 and provide our key financial targets for the year.
Thank you Marcia.
Turning to slide 17.
We are initiating a 2023 RBC target for our operating company rather than a holding company adjusted RBC as disclosed at the time of separation.
With our separation and initial capitalization now complete it's more appropriate to focus on operating company RBC, a key metric for determining dividends to our holding company and one that is more comparable to our peers in the industry.
At the operating company, we view, 425% as a minimum RBC level in normal operating conditions and look to hold excess capital above that point to provide resiliency.
A target operating company RBC ratio of 425% to 500% is consistent with our risk management practice and is aligned with rating agency expectations.
Generally speaking, we expect to hold excess capital above 425% at the operating company level.
Capital exceeding the upper end of our target range of 500% would likely be held at our holding company for maximum flexibility.
Moving to slide 18.
We also aim to maintain a holding company liquidity buffer that is two times our annual fixed expenses.
Again this has been our practice since separation and as another point of consistency and sustainability for Jackson.
We expect to be well above this minimum level in 2023, as we remain prudent in the uncertain economic landscape.
For tank capacity for investing in new business and prepare for our $600 million debt maturity coming up in November .
While we intend to refinance this debt maturity the expected upstream of $600 million from the operating company in March ensures we have the flexibility to opportunistically manage access to credit markets in 2023.
This capital flexibility offers confidence in our ability to maintain a healthy capital position.
And meet our commitments of capital returned to shareholders.
Slide 19 covers our updated capital return target for 2023.
The strength of our operating company combined with a high level of liquidity at our holding company and our confidence in future profitability provides the foundation for this target.
Pro forma for the $600 million expected remittance from the operating company, we expect to have more than $1 billion of excess liquidity above our minimum buffer at the holding company and a year end operating company RBC ratio adjusting for the remittance.
Of nearly 500%.
We've increased our 2023 capital return target range to $450 million to $550 million, including share repurchases and shareholder dividends.
We view our shareholder dividend as an important component of our capital return strategy, representing our continued confidence in our long term capital generation.
Turning to our leverage on slide 20.
We start the year with a healthy ratio of 18, 3%.
Importantly, we expect this ratio to remain healthy after the implementation of LD Ti.
As noted we also expect a high level of cash at the holding company and significant flexibility regarding the upcoming debt maturity in November .
Going forward, we will no longer communicate a leverage target range.
This was an important data point when we were working to go public capitalize our operating entity and build an appropriate capital stack.
Following the refinancing of all or a portion of the November debt maturity, we're comfortable with our dollar level of debt and do not see a near term need to expand on this level.
With no additional maturities until 2027 move.
Movements in our leverage ratio will be driven by changes to adjusted book value rather than an explicit attempt to manage the figure on our end, making a target ratio less meaningful.
Our intention going forward is to conservatively manage leverage consistent with rating agency expectations.
Finally, slide 21 summarizes each of the 2023 financial targets detailed.
But before we open up for questions I want to revisit a few of the key strengths, we outlined for investors at separation.
At that time, we shared our culture of execution and philosophy of maintaining strength across a wide range of capabilities, including.
Product pricing and design distribution support and expense discipline.
We stated that our in force business and future growth allowed for continued capital generation and we introduced an experienced senior leadership team with years of working together within the company.
Those core strengths were the driving force behind our strong performance last year and those same strengths will help us continue to meet Americans long term retirement savings and income needs.
I'd like to thank Jackson associates for their outstanding contributions to an outstanding year.
I am proud to be a part of a team that focuses so well on serving each other our customers and our communities and I look forward to our continued success together.
With that let's open it up for questions.
Thank you if you would like to ask a question. Please press star one on your telephone.
Pat now.
Do you change your mind. Please press star followed by 1000, plus your question. Please ensure that your line is muted locally and please limit yourselves to one question and a follow up.
Our first question today comes from Tom Gallagher from Evercore ISI. Please go ahead, Tom Your line is now open.
Good morning.
First question is just a follow up on the comment you made about minimum we said on the general account crediting rate.
The $30 million to $40 million a quarter increase in interest expense just wanted to understand how you think about your NII uplift.
Based on what you would expect there would you expect most of that to be offset by higher.
Net investment income just just any any perspective on that would be appreciated.
Sure Tom It's Mark I'll take that and thank you for the question.
I think well what that is.
Another sort of element.
On the statutory framework and the way our product is filed with the timing item where that gets reset at one point in the year.
Each year, so I think what we would see what we would have seen somewhat in 2022 already as an uplift in our portfolio yields as rates were higher and we were able to reinvest and then that we would expect to continue since R. R.
Lenny investment yield.
<unk> significantly higher than our portfolio yield so I think all in it will.
Totally offset or whatever that will be offset with additional investment income some of that I think possibly already started in 2022 and then we will naturally continue in 2023.
Our efforts.
Turnover and are reinvested at higher yields.
That's helpful. Thanks, Yes, Hey guess, what we'll probably see just given the one time immediate nature of the reset is if I just think about it sequentially.
Q4 to Q1 earnings then we will go down, but then youll, you'll get more of a gradual.
Benefit over the course of the year or is that a good way to think about the timing related to that.
Yes, that's right.
Okay. Thanks, and then.
Any just for a follow up question.
Anything you could tell us about with the actuarial review in Q4, any any meaningful adjustments made there.
And then just relatedly.
Curious, how youre policyholder utilization trends have been working since we had the big equity market correction in <unk>.
Has there been a change on utilization and how if you have seen a change how would that compare to your reserving assumptions. Thanks.
Sure Yeah, I'll take you through some of the high points on the assumption review I mean, just as a reminder, we've shared in the past that our approach is to look at.
Really all the assumption types across all of our product types each year, so that we're able to.
More gradually change.
Changes over time, and do that kind of incrementally with with experience right as it emerges.
So if we focus on variable annuities.
The most material.
Business product line.
Okay.
Key assumptions, there are always going to be around things like lapse.
Utilization of the benefit and mortality those are the key ones.
With our VA business being so significant we have.
Pretty enormous bank experience data.
As always increasing each year with the new data as we collect it. So I think what we saw as we went through the process. The normal process. This year are to bringing that new experience data and take a look you'll probably see a little bit of a trend toward.
Pretty modest, but a slight trend towards a little more efficient utilization of the benefits of that something we've been seeing kind of over the past couple of years and I think it's moderated.
But maybe just a slight increase there in terms of efficiency.
Overall, I think our mortality were pretty immaterial changes and I think our persistency, we had some slight updates there we're really didn't see anything in any of those categories that was a.
A step change or anything like that away from what we've been seeing in our experienced data. So far so really it was pretty routine updates, bringing in another year of experience data.
And then if we think about.
So far what we've experience than in 2022 with the market turmoil I believe as we have been we monitor our experience.
Routinely all through the year.
Separate from this deep dive.
<unk> annual process that we do and I think what we've seen there has generally been lining up with what we would anticipate our assumptions have dynamic element to them so that when the market does.
We automatically reflect within our assumptions.
Related impacts policyholder behavior, and I think what we've typically seen in 2022 and I think it's thoughtful through what we've watched kind of an unusual period in 2020 after that Colgate market.
Period.
What we saw was a behavior that was relatively in line with what our dynamic.
Functions would have assumed.
That's very helpful. So essentially tracking in line with with no no real deviations relative to what your longer term assumptions or is that is that fair.
That is right yes.
Okay. Thank you.
Thank you. Our next question comes from Alex Scott from Goldman Sachs. Please go ahead, Alex Your line is now open.
Hi.
Thanks for taking my question.
So the first one I had is just on the RBC and I know you provided a 500% pro forma but I just wanted to see if you could opine on.
The.
The impact you expect in <unk> from the mean reversion point change as well as.
What kind of impact you get throughout the year from just sort of normal course statutory net income generation in a normal market.
Sure.
Sure Alex Thank you for the question.
So yes, we did indicate that if we looked at our year end position pro forma for the $600 million distribution out of the operating company, including the related impact to the DTA Levy.
Close to the 500% level at the operating company looking ahead to the MRP change as you noted that is going to go up 25 basis points effective at the beginning of the year.
What will note about that is obviously, that's a different direction than what we saw in both 2021 and 2022, where we had a 25 basis point decrease in each of those years, so that certainly favorable movement for us, but one thing to point out is that the impact of that benefit is not going to be static and it's going to.
Depending on the position of the book at the time, including the attack and Cal levels themselves as well as.
How those are impacted by the cash surrender value floor. So we would naturally expect when the cash value floor is more biting the impact of the change that could be favorable would be a little bit less so because of the fact that your Florida out we don't have the ability to reflect the full the same way you might if you didn't have cash flow.
Or is that so that's something to keep in mind as we go forward well in.
Tend to I talked through the.
Movements and the impact quantification.
Quantification when we when we go through our Q1 earnings.
Got it okay.
A follow up I had is just on the comments you made on the hedge budget I mean, it's something we've been focused on because I think one thing that's unique about your portfolio has got a little bit shorter duration equity hedges or equity options on it than some other folks who look at so maybe a little more exposed to volatility and I think there were comments about protecting.
The hedge budgets I just wanted to understand like what are you doing there I mean is that some kind of volatility protection and when I think about all of those things in aggregate.
How much pressure is there on budget from just persisting sort of higher volatility than maybe a normal period.
Well I'll start off and maybe.
And maybe Steve can add some additional commentary I think we view our fee the fees that we collect on our guarantees is providing us a budget, which.
Which we can.
Through our hedge activity.
Overall, we typically would like to be able to stay within that budget. There are times when we might have to go over and we would do what made it at the time to protect.
Statutory position.
In this period I think we shared that consistent with the last couple of quarters. We've been generally in line with those fees. So thats been a good outcome. Despite the fact that we've been in a higher volatility environment, which.